Is Illumina Worth The Risk?

By John Kehoe, Equity Analyst

When searching for potentially rewarding investments within the biotech industry, it is helpful to consider companies that are capable of exploiting a window of exclusivity with their products that helps to limit their competition. This desire to limit competition applies in virtually all aspects of American enterprise, but it is especially significant in the biotech and pharmaceutical industries because patents and windows of exclusivity are extremely common with the approval of new drugs and medicine. Some companies strive to limit their competition even further by purchasing the suppliers of their rivals, and seizing control of multiple layers within their market sector. The FTC (Federal Trade Commission) enforces antitrust laws and policies that prohibit companies from manipulating the market through the use of monopolization tactics such as the methods just described, yet corporations still attempt to work around these laws.

A recent bout between the FTC and a U.S life science company, Illumina ($ILMN), has investors confused about the company’s future. Illumina has announced its intention to complete an $8 billion merger with one of its “suppliers”, Grail, and the FTC is concerned that this potential merger is likely to affect the ability of other companies’ to continue their research and development in blood testing while still using Illumina’s services. If Illumina were permitted to merge with the healthcare company Grail, any other company that manufactures blood tests requiring genetic sequencing from Illumina would be left out of the transaction and Grail would be the only provider of these tests. The approval or dismissal of this merger will greatly impact the future value of Illumina’s stock.

Illumina

Illumina has found much of its recent success through its involvement in genomic sequencing, more specifically NGS (Next-Generation Sequencing). Sequencing can be used to determine “the order of nucleotides in small targeted genomic regions or entire genomes”, and it is extremely valuable in the research and diagnosis of diseases. In simple terms, DNA is extracted from a patient’s blood and analyzed in a machine in order to determine the differing sequences of nucleotides. This can help identify certain variants that could be important for one’s medical care. This process can be used for cancer research, microbiology research, complex disease research, and in the study of reproductive health. Genome sequencing was even used to help explain the spread of Covid-19 and will likely be used in the development of further treatments. Sequencing is continuing to grow in importance as new cancer cases are expected to reach 24 million by 2030 and NGS has the potential to change the future of oncology and provide patients with personalized medicine.

Illumina completely dominates the sequencing industry as their “instruments and consumables make up over 75% of the market”. This market dominance allowed Illumina to report $3.239 billion of total revenues during the 2020 fiscal year. As the use of sequencing will likely increase in the future, the world’s leader in DNA sequencing technology will presumably see great returns in the future, but Illumina has their sights set on an even greater goal.

Grail

Grail is a biotech company that was founded in 2016. Its goal is to develop an early cancer screening test and establish new technologies for cancer detection. It ironically was created by Illumina and other investors in 2016, but in 2017 Ilumina’s ownership in Grail was decreased to under 20% after private investors put forth over $1 billion. Since their partial departure from Illumina, Grail mainly has worked towards the development of their product Galleri. Galleri is a first-of-kind multi-cancer early detection test. Grail has made great strides in the development of this test and, as of June 2021, has begun selling its multi-cancer blood test in the U.S. This test takes advantage of a massive market and has enormous potential to grow its company. This undoubtedly promising future is what led Illumina to offer $8 billion to re-acquire Grail in September of 2020.

Trouble with the FTC and EC

The merger between Illumina and Grail has been halted by the FTC, which has filed an administrative complaint and authorized a federal court lawsuit. The FTC claims that this potential acquisition would diminish innovation and efforts by other cancer-test makers, thus lowering the eventual quality of these tests resulting from the lack of competition.

A key aspect of any blood-based screening test (MCED) is a sequencing platform that can be used to analyze these tests. If Illumina were to be the sole owners of both the only MCED test and the dominant sequencing platform, no other company would have any incentive to develop an improved test. The FTC describes this in their complaint by stating,” As the only provider of a critical input into MCED tests, Illumina possesses multiple means of foreclosing or disadvantaging rivals to Grail”.

This lawsuit has turned into a long and convoluted affair. After the FTC’s original complaint and lawsuit, the European Commission also launched an investigation into this acquisition. This spurred a response from Illumina to sue the European Commission to stop their investigation on the grounds that they have no jurisdiction over Grail because Grail has no business activity i Edit date and time n Europe. While both the issues concerning the European Commission and the FTC remain unresolved, investors are uncertain about the future of Illumina and its potential ROI.

Is there still value?

Illumina’s share price gradually has increased over the past year with slight dips during the times when lawsuits were waged. When considering investing in Illumina, the question at the forefront of one’s mind must be whether the merger between Illumina and Grail will be approved. Sadly, this result will take more time as both the FTC and EC must come to an agreement, and the trial with the FTC is set to begin on August 24, 2021. It would be very difficult to predict the outcome of this lawsuit with complete accuracy, but it is worth noting that the FTC is unable to wage a monopoly-seeking case and instead has to rely on the complaint that this merger stifles innovation. This will likely be difficult to argue in court due to the fact that all MCEDs are still in a pre-launch phase. That being said, it is still a gamble to assume the court will lean one way or the other.

Although the risk of Illumina’s inability to merge with Grail obviously is an important investment consideration, the massive upside that exists if Illumina wins the approval of this merger is quite significant. This merger would increase Illumina’s portfolio and their total addressable market. It would grant them firm control of the NGS oncology industry for the foreseeable future, which is expected to grow at a CAGR (compound annual growth rate) of 27% to $75 billion in 2035. Illumina also has plans to, “leverage its global scale, manufacturing and clinical capabilities to support GRAIL’s commercialization efforts”, which would further increase the total addressable market for these products.

Also, even if Illumina is unsuccessful in completing its acquisition of Grail, it still should be a relatively low risk investment. The entire reasoning behind the current lawsuits and investigations by the FTC and European Commission is due to Illumina’s utter dominance in the NGS industry. The market size of Next-Generation Sequencing is projected to grow at a CAGR of 19.2% until 2026. Illumina is the clear favorite to dominate this market sector and should see gradual growth regardless of the outcome of its trials.