Illumina Grail Acquisition!

Last September, Illumina announced that it was acquiring Grail for $8 billion. What made the deal interesting is that Illumina was actually the entity that founded Grail in the first place.

It incubated and spun out Grail, and then it invested in its Series A round back in 2016. Illumina’s investment in Grail was joined by an impressive list of investors at the time like ARCH Venture Partners, Bezos Expeditions, Google Ventures, and Bill Gates. It made perfect sense. Illumina, as the world’s dominant provider of next-generation genetic sequencing equipment, “created” Grail, a company whose goal was to develop a multi-cancer screening test that uses genetic sequencing to detect cancer early. Brilliant, right?  It launched a company that will provide a service that requires Illumina’s sequencing technology… Basically, Illumina created a company that will need to buy a lot of its own products. Very smart.  

Even better is that Grail has been successful in its endeavors. It quickly became one of the most promising startups in the diagnostics and screening industry, and by mid-2020, it was valued at $3.8 billion after its Series D raise.

After the raise, there were talks of a possible initial public offering (IPO), which would have been logical given the progress that Grail had made.  But Illumina, hungry for even more growth, saw the opportunity to expand its business into the diagnostics market. Its move to make a large acquisition didn’t come as a surprise after its failed attempt to buy Pacific Biosciences (PacBio), which it abandoned last year due to opposition from the Federal Trade Commission (FTC).  

That also didn’t come as a surprise. Had Illumina acquired Pacific Biosciences, it would have essentially become a monopoly in the next-generation sequencing industry, controlling both long- and short-read genetic sequencing technology. FTC opposition was expected, but I don’t blame Illumina for giving it a shot. It may have even been part of the plan. I believe that Illumina knew the PacBio deal was never going to go through.  

But by trying and conceding to the FTC, it gained somewhat of a bargaining chip that it could use in the future. It conceded on PacBio in order to be in a position to politely ask for fair treatment on a future deal. Perhaps Grail was the target all along…  Illumina also knew that a Grail acquisition would come under scrutiny. 

After all, Illumina sells the next-generation sequencing equipment to all of Grail’s competitors. One could argue that if Illumina owns Grail, it could give Grail an unfair competitive advantage.  It could give the latest and greatest sequencing technology to Grail months, perhaps years in advance. Grail could become the Illumina of the cancer screening and diagnostics industry as a result.  

And again, not surprisingly, both the FTC and the European Commission raised concerns about the potential acquisition and put the deal under review. Normally what happens in these situations is that Illumina would wait for the reviews to be completed, receive the green light, and then complete the deal. But that’s not what happened!

Illumina just closed the deal on August 18 without approvals. It’s an unusually bold move, and one that will certainly raise the ire of both the FTC and the European Commission.  Many have derided the move and believe that it will end up in failure. I don’t see it that way at all. It was a calculated move, and the reality is that Illumina holds all the cards. It can’t lose.  The terms of its agreement with Grail expire on December 20. In other words, if it didn’t close the deal by then, the deal would be entirely off. 

And there is no way that the FTC and European Commission reviews would have been completed by then. Illumina had to move.  What most don’t see is that Grail is worth a lot more than the $8 billion price tag agreed upon back in September 2020. That was a year ago, and Grail is the golden goose – a decacorn in the making.  If the deal fell through, the future price in 2022 would have been billions of dollars higher.  So Illumina closed the deal. And it got out in front of the criticism by stating that Grail will be held as a separate operating entity.

In other words, it won’t be merged or integrated with Illumina until regulatory approvals have been given. This also implies that Illumina is keeping the deal “clean.” That way, it will be easy to spin Grail back out for an IPO or sell it to a group of private investors if it doesn’t gain the deal approvals it needs.  Illumina will pay out all of the private investors in Grail now at an $8 billion valuation and own 100%. If it has to sell Grail to private investors or conduct an IPO, it will be at a higher valuation.  

In either case, Illumina wins. After all, Grail will continue to use Illumina’s technology regardless of whether or not it is owned by Illumina.  And it will walk away with a multibillion-dollar profit to boot. And if Illumina succeeds in the acquisition, it wins as well. This is smart corporate strategy from the time of spinning out Grail to now.  

And the best part? The world is going to benefit from the technology that Illumina and Grail have produced. Lives will be saved and extended, and there will be far better outcomes as a result.