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European Commission Orders Illumina to Divest Grail

This story has been updated to include a response from Illumina and comments from Canaccord Genuity Analyst Kyle Mikson.

NEW YORK – Illumina must unwind its acquisition of Grail, the European Commission said in an order handed down Thursday.

The order includes certain principles that Illumina must follow. "First, the dissolution of the transaction must restore Grail's independence from Illumina to the same level enjoyed by Grail prior to the acquisition," the EC said in a statement. "Restoring Grail's independence will remove the harm to competition resulting from Illumina's ability and incentive to delay or disadvantage Grail's rivals."Grail must also be "as viable and competitive" as it was before the acquisition, the EC said, and the process must be done within "strict deadlines and with sufficient certainty."

In a statement issued Friday afternoon, Illumina said that under the terms of the order, it will have 12 months to divest Grail, with the possibility for a three-month extension.

"Consistent with the previous interim measures orders, Illumina is required to continue funding Grail until any divestiture," the firm said. "In the instance of a capital markets transaction, Illumina must capitalize Grail at the time of the transaction with two-and-a-half years of funding based on Grail's long-range plan."

"That's certainly over $1 billion and possibly close to $2 billion," said Kyle Mikson, an analyst at Canaccord Genuity. In the second quarter, Illumina reported operating expenses for Grail of at least $190 million and cash and cash equivalents of $1.55 billion. Mikson noted that Illumina still must pay an approximately $460 million fine. "They don't have that much cash on hand. Illumina will have to raise that money in some way," Mikson said, possibly through issuing stock or debt.  

Illumina said it will be able to retain a stake in Grail of up to 14.5 percent and reestablish the royalty arrangement it previously had in place with Grail.

Illumina will be able to choose the method of divestment, such as a sale or an initial public offering, but must submit a plan to be approved by the EC. It must also abide by "transitional measures" to ensure that Illumina and Grail keep operating separately, which replace interim measures that have been in place since October 2022.

"Illumina will lead the divestiture process and, with the assistance of financial and legal advisors, has already begun the preparatory work necessary for divestment, if needed," the firm said. The firm said it is "committed to resolving all issues regarding Grail in a timely manner, with the objective of achieving the maximum value for shareholders and the best outcome for Grail." However, it also noted that it believes that winning legal appeals in both the US and Europe could allow it to keep Grail.

"Today's decision restores competition in the development of early cancer detection tests," Didier Reynders, commissioner in charge of competition policy, said in a statement. "These tests could represent a breakthrough in our fight against cancer. By ordering Illumina to restore Grail’s independence, we ensure a level playing field in this crucial market to the ultimate benefit of European consumers."

The order comes just over a year after the EC announced that it would not let Illumina keep Grail, citing an incentive to cut off or disadvantage Grail's rivals from accessing key next-generation sequencing technology, for which Illumina is the primary supplier.

Illumina unveiled its plan to acquire Grail in late 2020, in a deal valued at $8 billion. The decision brought scrutiny from both the EC and the US Federal Trade Commission. Illumina forged ahead with the deal before either investigation concluded, and in July 2023, the EC fined Illumina €432 million ($479 million) for jumping the gun and closing the acquisition.

The FTC has also ordered Illumina to unwind the deal, overruling its own administrative law judge, who ruled that it was not necessary to do so.

Illumina has challenged the EC's jurisdiction to review the deal and in July 2022 lost its bid to halt the initial investigation. The company has appealed that decision and has claimed that if it wins the appeal, it will be allowed to keep Grail.

The amount of cash Illumina may need to provide Grail in the case of an IPO is even higher than some Wall Street analysts had expected.

"Today's ruling noting that Grail had to be as viable as it was pre-acquisition… we interpret this as Grail's cash balance to be similar to pre-acquisition, which was [approximately $670 million]," Evercore ISI analyst Vijay Kumar wrote in a note to investors on Thursday.

In a Thursday note, Canaccord Genuity's Mikson predicted that cash outlays could be more than $1 billion.

The EC said that if Illumina does not comply with the new restorative measures, it can impose periodic penalties of up to 5 percent of average daily revenues. Failure to comply can also lead to fines of up to 10 percent of worldwide revenues.

In Friday afternoon trading on the Nasdaq, shares of Illumina were down 1 percent at $129.13 and down approximately 6 percent from where they were on Thursday morning.