Price of Illumina’s Grail fail extends to board
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Robert Cyran
NEW YORK, Dec 19 (Reuters Breakingviews) -The cost of Illumina’s ILMN.O hubris keeps growing. It finally conceded to divesting Grail after buying the cancer-testing business in defiance of trustbusters. Not only has the unit’s value plummeted in the interim, but Chairman John Thompson and Chief Executive Francis deSouza already have paid for the botched strategy with their jobs. Other board members deserve to, as well.
Grail was created by the $21 billion gene sequencing company in 2016 after fortuitously discovering it could spot tumor fragments in blood tests. Illumina spun it out in 2017, bringing in cash from outside investors. In 2020, it reversed course and agreed to pay a whopping $7.1 billion for the shares it didn’t own, completing the transaction the following year without approval from trustbusters.
Most of that value has been vaporized. Illumina recorded $7 billion in combined operating losses and goodwill writedowns, which acknowledge having overpaid. Grail is still growing quickly, with revenue doubling annually. If the top line reaches $200 million in 2024, it might be worth $1 billion using the same multiple of 5 times at which rival testing firm Exact Sciences EXAS.O trades.
The deal damage is more extensive, however. European Union authorities fined Illumina about $470 million for moving ahead with the acquisition without their blessing. And if Illumina opts to take Grail public, the EU has mandated that it support the company with two-and-a-half years of funding. Considering it already has chalked up $500 million in operating losses this year, the sum involved probably would exceed Grail’s value.
This whole episode was an unforced error rooted in arrogance. Illumina’s former management and board decided its legal case was strong enough to buy Grail without permission, and that it could unwind the deal for more than it paid if so required. Both assumptions were spectacularly wrong.
Pushy investor ValueAct Capital holds a stake in Illumina, but hasn’t said publicly what it wants, while billionaire Carl Icahn is aiming to replace “legacy-conflicted” directors with his own slate. Seven of them have been around throughout the Grail decision-making process. To prevent any further capital destruction, a broader boardroom shakeup would be a worthwhile addition to the Grail-fail tab.
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CONTEXT NEWS
Gene-sequencing company Illumina said on Dec. 17 it would divest cancer-test maker Grail either through a sale or capital markets transaction, with an aim to finalize terms by the second quarter of 2024.
Illumina agreed to buy the shares of Grail it didn’t own for $7.1 billion in 2020 and completed the acquisition in 2021 without securing approval from U.S. or European antitrust authorities.
In July, the EU fined Illumina 432 million euros for going ahead with the deal, and in October ordered Illumina to divest Grail.
Editing by Jeffrey Goldfarb and Sharon Lam
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