Following days of speculation, Illumina Inc. said today it will acquire liquid biopsy startup Grail Inc. for $8 billion in cash and stock, bringing back into the fold a company it spun out in 2016. The deal gives Illumina a major stake in the race the race to develop a less-invasive way to diagnose cancer. Since spinning out, Grail has raised nearly $2 billion from big-name investors with promises of a blood test for early cancer detection and is hoping to introduce its liquid biopsy as a laboratory-developed test (LTD) as early as next year.
Investors seemed less than thrilled with the news, perhaps due to the high valuation for a company with no marketed products. Illumina (NASDAQ:ILMN) shares were down 8.59% to $270.13 at market close on Sept. 21.
Under the definitive agreement, Grail stockholders will receive $3.5 billion in cash and $4.5 billion in shares of Illumina common stock, subject to a collar. Illumina presently owns 14.5% of outstanding shares of Grail and about 12% on a fully diluted basis. In addition, Grail stockholders will receive future payments based on a tiered single digit percentage of unspecified Grail-related revenues.
The transaction has been approved by both companies’ boards. It is expected to close in the second half of 2021, pending regulatory approvals.
Grail’s minimally invasive, next-generation sequencing (NGS)-based blood test would allow cancer to be detected earlier than is possible today. The company’s methylation-based technology identifies patterns in methyl groups, which control gene expression, in cell-free DNA present in the blood. Abnormal methylation patterns are associated with cancer. In 2019, the U.S. FDA granted Grail breakthrough device status for the test, paving the way for expedited regulatory review.
‘Transformative for cancer detection’
In March, Grail reported results from a sub-study within its more than 15,000-patient Circulating Cell-free Genome Atlas study showing its test detects 43.9% of stage I to stage III cancers across 50 cancer types, with a higher detection rate of about 67.3% in a prespecified set of 12 of the deadliest cancers in that stage range. The company anticipates its liquid biopsy assay could be particularly helpful in detecting the most aggressive cancers, which shed a lot of genetic material into the bloodstream.
Ahead of launching as an LDT, Grail plans to have results from its first interventional study, PATHFINDER, a multicenter clinical trial of about 6,200 U.S. adults. The Menlo Park, Calif.-based company is recruiting adults age 50 and older for screening in the primary care setting and following them for 12 months through any ensuing cancer treatment.
“This combination will be transformative for cancer detection,” Francis deSouza, Illumina’s CEO, said on a morning conference call. “The acquisition will enable Grail to leverage Illumina’s global commercial, clinical and operations capabilities, accelerating their mission and allowing us to impact more people faster than they might have done already.
The proposed acquisition comes less than two weeks after Grail filed a preliminary prospectus to go public. The company did not make clear how much it hoped to raise.
Illumina’s surprise bid for Grail comes on the heels of its $1.2 billion pitch for genomic analysis company Pacific Biosciences, which was scotched in January over FTC opposition.
In recent years, the San Diego company has also made moves to gain a foothold in diagnostics. Last year, it partnered with Seattle-based Adaptive Biotechnologies Corp. to develop distributable in vitro diagnostic test kits for Adaptive’s Clonoseq and Immunoseq Dx assays. And in May, Illumina joined other investors in raising $70 million for Gingko Bioworks, with the aim of creating large-scale NGS testing for COVID-19.
“Over the last four years, Grail’s talented team has made exceptional progress in developing the technology and clinical data required to launch the Galleri multi-cancer screening test,” deSouza said. “Galleri is among the most promising new tools in the fight against cancer, and we are thrilled to welcome Grail back to Illumina to help transform cancer care using genomics and our NGS platform.”
Cowan analyst Doug Schenkel questioned whether Illumina is the best company to be acquiring Grail. “Over the past two decades, Illumina has demonstrated it has a great ability to out-innovate competitors with technological advancements that enable huge strides in genetic understanding – this was true first in microarrays and then next generation sequencing. Illumina’s success as a dominant player in this industry segment is rooted in technological innovation and unique commercial outreach that targets customers that utilize these tools,” he wrote. “That said, there are things Illumina has demonstrated that it is not great at (at least not yet) – this includes developing clinical products that are commercialized by Illumina.”
Morningstar’s Julie Utterback had similar reservations. “Admittedly, the market opportunity looks very large for a testing technology that could screen the global population for early-stage cancers if it were added to annual screening requirements for most adults,” she wrote. “However, Illumina management previously described this market as being pursued by dozens of life science players, and although Grail appears to have a first-mover advantage (potential launch in 2021), competitive tests could siphon off market share and pricing in the long run.”
During the call, deSouza said the acquisition aligns “with our strategy to extend into the clinical market, the fastest-growing opportunity in sequencing.”
With Grail poised to bring products to the market in 2021, “we believe this is the right time to bring the Grail team into Illumina so that we can help to commercialize and accelerate adoption,” he added.
Illumina will continue to deliver sequencing systems and consumables to a broad array of markets and remain committed to sequencing innovation. At the same time, its strategy aims to pick very specific applications where it can provide its own solution. Cancer detection offers the largest opportunity, deSouza said.
He surmised that over the next 15 years, early cancer detection could potentially be the largest genomics application in terms of addressable market size. And with Grail “pioneering the market, they’re sort of leading the way and creating the market.”
DeSouza underscored the deal’s clinical synergies, noting it will be easy to add cancer screening to oncology therapy selection and disease diagnosis when talking with potential customers. “We’ll be able to immediately scale up the number of conversations Grail is having around the world.”
Asked by J.P. Morgan Chase’s Tycho Peterson why Illumina didn’t just up its investment in Grail, rather than buy it outright, deSouza stressed that and other benefits.
“Plugging them into our commercial conversations with population sequencing efforts, for example, signing them up in our clinical labs around the world, rather than wait for them to build up their own clinical lab, plugging into our regulatory expertise in countries around the world. All of those things are things that we can do when they’re part of Illumina that, frankly, we wouldn’t be able to do as well, even if we were a 30%, 40% owner of Grail.”
The liquid biopsy space is generating lots of buzz and raking in investment dollars. In July, Thrive Earlier Detection Corp. scooped up $257 million in series B funds to finalize the design of its first product, Cancerseek, conduct a trial to support FDA approval and gear up for commercialization. Combined with $110 million from a 2019 series A round, the company has raised a total of $376 million to date.
Earlier this year, Redwood City, Calif., startup Karius Inc. raised $165 million in a series B financing to advance its cell-free DNA liquid biopsy in area of infectious disease detection, identification and treatment.
Other recent investments include Rarecyte Inc., which tallied $22 million in a December 2019 series F round aimed at expanding global sales of its instruments and consumables platform in clinical research markets. Hong Kong-based Lucense Diagnostics Pte. Ltd. reeled in $20 million in series A funding, while Oncocell MDx Inc. snagged $22.2 million in a series B round.
And Caris Life Sciences, of Irving, Texas, is developing a liquid biopsy for early cancer detection based on its recently launched NGS-based assay, MI Exome. The assay covers all 22,000 DNA genes in the human genome and detects DNA point mutations, insertions or deletions and number alterations. It also identifies some 250,000 exonic, intronic and intergenic single nucleotide polymorphisms.