MA Report 22.08.2021

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Illumina closes acquisition of Grail for $8 billion

Illumina Inc. Overview
Illumina is a US based, public company, founded in 1998, with the current CEO Francis DeSouza. The company specializes in biotechnological products with genetic variation and biological functions. Its client focus are research centers in genes, pharmaceutical companies, university centers and diverse organizations in biotechnology research. Some examples are : Broad Institute, Foundation Medicine and Ancestry.
In its strategic investments, Illumina holds two Variable Interest Entities (VIE): Helix holdings and Grail. In 2015, the company had 50% of “voting equity ownership” for Helix and became the primary beneficiary. This led to consolidation of the income statements for Illumina, on behalf of Helix. In contrast, Illumina did not become Grail’s primary beneficiary (therefore, no consolidation in income statements). Illumina decided to acquire Grail in 2020 and had planned to close the deal in the second quarter of 2021.

Grail Overview
Grail is a private US based company founded in 2015, with the current CEO Hans Bishop. The company specializes in pharmaceutical and biotechnological products able to detect 50 different early stage cancer using a special test called the “Galleri test” (.aka. liquid biopsy). In November 2020, Grail achieved a commercial partnership with the National Health Service (NHS) in the UK for trailing the Galleri test. This test is currently conducted through on a number of patients aged from 50 to 79 years old who are under observation over a three-year period, with expected results for the year 2021.

Deal Structure
– The vertical merger consisted of either cash, shares of Illumina and/or contingent value rights (CVR).
– Grail stockholders were to receive cash consideration of $3.5 billion (including Illumina stockholders) and $3.1 billion excluding Illumina.
– Illumina was to spend $0.4 billion cash to cover the tax withholding requirements.
– Base stock consideration was to be fixed at 11.3 million shares if volume weighted average share price stayed above $399, otherwise it was subject to a collar.
– Due to the February 2021 “amendment to the agreement and plan of merger”, former Grail employees were given net settlement equities for the withholding tax obligation, resulting in a decrease in the number of shares.
– The CVRs given were to enable the receipt of future payments for 12 years ( 2.5% payment is expected for first $1billion revenues per year (for 12 years) and 9% payment if revenue surpasses $1billion).

Table 1: Deal Structure – Exhibit A Net Consideration (unaudited)

Deal Purpose & Synergies
– The deal would be able to save a number of lives and gather the necessary resources provided by Grail and its multi cancer detection tests, and Illumina’s efficient resources as global leader in DNA sequencing.
– The deal would ensure a more affordable Galleri test for Grail, as it is currently not covered by insurance and costs $950.
– Per past experience with Illumina entering different markets, the deal should drop prices, expand reimbursement, increase the number of providers and provide more accessibility for testing.

Deal Conflict
– Prior to the deal close on the 18 August 2021, the European Commission claimed there would be a conflict of interest, due to Illumina being the sole provider for “DNA sequencing”, preventing competition for other rivals.
– This conflict opened a full-scale investigation with the European Commission.
– Illumina claimed that there were no legal impediment in the US, leading to the closure of the deal before the end of the investigation from the EU commission.
– EU watch dog will decide whether to clear or block the deal on November 29 2021.
– The reason for closing the deal, according to CEO Francis deSouza of Illumina was to “accelerate availability of the GRAIL test by many years in the EEA and globally” in order to save more lives.
– The deal caused the US Federal Commission to also file complain to block the deal due to similar competitive reasons.
– The violation of such European rule could create a 10% fine on the company’s revenue.

Sources
– https://www.reuters.com/business/healthcare-pharmaceuticals/illumina-eu-antitrust-sights-overpremature-8-bln-grail-deal-2021-08-20/
– https://www.reuters.com/business/illumina-closes-71-bln-deal-cancer-test-maker-grail-amidregulatory-hurdles-2021-08-18/
– https://www.reuters.com/business/healthcare-pharmaceuticals/eu-antitrust-regulators-investigateillumina-grail-deal-2021-07-22/
– https://www.wsj.com/articles/eu-opens-probe-into-illuminas-decision-to-close-grail-deal-despiteantitrustconcerns-1162945454

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