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JP Morgan Downgrades Illumina to Neutral on Grail Deal

NEW YORK – JP Morgan said on Monday afternoon that it is downgrading Illumina from an 'overweight' to a 'neutral' rating following Illumina's announcement earlier in the day that it plans to acquire cancer diagnostics company Grail for $8 billion in stock and cash. The investment bank also lowered its December 2021 price target for Illumina from $390 to $280.

"Although the deal will allow Illumina to more fully participate in the $60 [billion] cancer early-detection [total addressable market], considering uncertainties around the pace of market penetration and revenue generation, a lack of operational synergies, significant near-term dilution ($3.25 to $3.75 dilutive in first full year), and potential distraction/dilution from the core business recovery next year … we find it hard to get excited about the acquisition," JP Morgan analyst Tycho Peterson wrote in a note to investors. He added that Illumina was already expected to benefit from Grail's growth through its part-ownership, royalties, and a supply agreement.

Peterson acknowledged that Grail's validation data for early cancer detection are "somewhat promising" but said that the hurdles for regulatory approvals and guidelines are high and that many competitors exist, including Guardant Health, Freenome, and Thrive. "[W]e remain to be convinced that the fuller participation in cancer early detection (a market that has yet to be developed) justifies the $8 [billion] valuation and cost of significant near-term dilution (as well as commercialization uncertainties)," he wrote.

In afternoon trading on the Nasdaq, Illumina's shares were down around 9 percent at $267.93.