Illumina Spin-off Notes

May 18, 2024 Update

On May 9, 2024, gene sequencing company Illumina (ILMN) announced that it will spin off blood cancer test maker Grail. In December 2023, Illumina had announced that it would divest itself of Grail (but didn’t specify whether the divestiture would happen through spin-off, capital markets transaction or asset sale) following a legal battle against U.S. antitrust regulators. In 2020, Illumina agreed to buy part of Grail for $7.1BN. Neither the  U.S. Federal Trade Commission nor its European counterpart approved the deal, but Illumina ignored the regulators and closed the acquisition In July 2023, Illumina was fined a record 432 million euros ($471 million) by the European Union for closing its takeover of Grail before securing EU antitrust approval. Both agencies have ruled that Illumina must unwind its deal and appeals have gone against Illumina. As such, Illumina has made the decision to halt further appeals and proceed with a divestiture. European regulators have determined that Grail must capitalize Grail with 2.5 years of funding and that Grail must be as competitive after the divestiture as it was before the acquisition.

Illumina is a leading provide of gene sequencing machines the related products that are needed to run them. Grail uses machines to conduct blood tests that can detect multiple types of cancer quicker than conventional testing (sometimes referred to as liquid biopsy). Analysts believe the cancer blood test market could eventually be a $50BN market. What is interesting is that Illumina previously founded Grail and spun the business off the business in 2016 (while retaining a small stake). But in 2020, it decided that it wanted to buy back the business, and this triggered the antitrust concerns.

Illumina’s currently has a market cap of $17.6BN and enterprise value of $18.8BN. Analysts expected Illumina to generate revenue of $4.9BN in 2024 and $5.4BN in 2025. According to its Form 10, Grail generated 2023 revenue of $93MM and negative $523MM adjusted EBITDA.

I think this situation looks pretty interesting. I don’t know what Grail is worth, but Illumina acquired it at an implied valuation of $7BN. Consensus expectations are for Illumina to generate $3.90 in 2026. As such, it’s trading at 28x 2026 earnings. This doesn’t seem like an unreasonable multiple to pay for the market leader in the gene sequencing industry. And then on top of that, you are getting a potentially valuable spin-off.