Illumina Makes Audacious Move by Completing Grail Acquisition Without Regulatory Approval

It’s damn the torpedoes and full speed ahead for Illumina. Recognizing that it had no chance of securing the necessary regulatory approval in time to make the hard closing deadline and staring a $300 million termination fee in the face, Illumina did the unthinkable by completing the deal without clearance from regulators in the U.S. or Europe. Close-now-get-approval-later is a highly dangerous strategy that could blow up in the San Diego-based genetic testing giant’s face.

The Illumina Acquisition of Grail

On September 21, 2020, Illumina announced that it had signed a definitive agreement to acquire Grail, the liquid biopsy firm it spun off in 2016 for $8 billion, including $3.5 billion in cash and $4.5 billion in shares of Illumina common stock. The acquisition agreement also provided Grail shareholders payments of 2.5 percent off the first $1 billion of Grail-related revenues and 9 percent off revenues above $1 billion per year over 12 years.

While the price was high—too high in the eyes of many investors—the deal strongly bolsters Illumina’s position in early cancer diagnostics. Grail, which was itself getting set to go public, has just launched a highly touted blood-based screening test called Galleri that uses methylation sequencing for ultra-early detection of over 50 different types of cancers. Illumina’s president and CEO described Galleri as being “among the most promising new tools in the fight against cancer,” and said that the acquisition would help Illumina “transform cancer care using genomics and our NGS platform.” Illumina, which currently owns 12 percent of its former spinoff, is also the supplier of the sequencers that Grail uses for performing its genomic tests. Bringing the two companies back together would put the testing and sequencing under one roof.

The Regulatory Hurdles

Of course, it was these very advantages that caused the regulatory problems with which Illumina is currently struggling. Soon after the deal was announced, the U.S. Federal Trade Commission (FTC) expressed concerns over the new cancer genomics powerhouse’s potential to dampen competition. But while Illumina was probably prepared for potential opposition from the FTC, it didn’t expect a deal forged in the U.S. to encounter regulatory turbulence in Europe.

The company’s rude awakening was served up in April 2021, when the European Commission (EC) Directorate-General of Competition announced that it planned to review the Grail acquisition under controversial new guidance that enables the Commission to demand notification of deals even when no such notification is required by the member states. “The combined [Illumina/Grail] entity “could restrict access to or increase prices of next-generation sequencers and reagents to the detriment of Grail’s rivals active in genomic cancer tests following the transaction,” according to a Commission statement.

Illumina challenged the Commission’s jurisdiction. But the Commission had time on its side and delayed its investigation in what Illumina described was an “attempt to run out the clock” before the deal closing deadline. Meanwhile, the Commission’s opposition enabled the FTC to temporarily stand down by securing federal court approval to postpone legal action to block the deal pending resolution of the situation in Europe.

Illumina Hurls Down the Gauntlet

But Illumina decided that it wasn’t going to wait for the regulators to come around. On August 18, the company announced that it has gone ahead and acquired Grail, which it will hold as a wholly-owned company that will operate independently while the EU reviews the deal. “The stakes here are high because, simply put, this deal saves lives,” Illumina CEO Francis deSouza told investors.

Truer words were never spoken. The stakes are indeed high, especially for Illumina. In addition to opposing the deal, the Commission is now investigating whether to impose a fine of 10 percent of Illumina’s consolidated annual turnover for closing without approval. Illumina may well go to court to challenge not just the fine but the Commission’s jurisdiction over the deal. Of course, litigation is never a sure thing. And even if Illumina prevailed in court, it would still face potential opposition from the FTC. One way or another, Illumina may end up having to wind down the acquisition, resulting in a massive distraction and waste of money, time and energy.

Here’s a summary of the key new M&A diagnostic deals announced or closed in August 2021:

MERGERS, ACQUISITIONS & ASSET SALES