Illumina (ILMN) Rises on Conclusion of GRAIL Divestment

Zacks Equity Research
·5-min read

Following three years of nonstop regulatory hassles, Illumina ILMN finally gave up on GRAIL, leading to the successful completion of its spin-off yesterday. Following the announcement, shares of Illumina rose 1.5% at yesterday’s close and also edged up 0.1% during the after-hour trading session.

With the divestment now complete, GRAIL will start trading publicly on Nasdaq from Jun 25 under the ticker symbol "GRAL." Illumina will continue to operate its legacy business independently under the ticker symbol “ILMN” on Nasdaq.

Financing and Distribution Details

Post divestment, Illumina will maintain a minority share of 14.5% in GRAIL. The separation of businesses was achieved through the distribution of the remaining 85.5% of the outstanding shares of GRAIL to holders of Illumina common stock. In addition to retaining their shares of Illumina stock, ILMN shareholders received one share of GRAIL common stock for every six shares of Illumina stock held as of the close of business on the record date of Jun 13, 2024.

GRAIL, as a new-age cancer research company, will continue to grow its business, leveraging Illumina’s sequencing technology, end-to-end workflows and a suite of services.

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ILMN's GRAIL Battle at a Glance

Illumina formed GRAIL in early 2016 and spun it out as a standalone company in the same year. In 2020, the company announced plans to reacquire GRAIL to merge their potential for early cancer detection and improve outcomes. In August 2021, Illumina forcefully closed the $7.1-billion GRAIL-acquisition deal before obtaining the EC’s regulatory clearance. Since then, the acquisition has been subject to rigorous legal and regulatory proceedings both in the United States and the European Union.

In December 2022, the European Union unveiled details of a planned order that would force Illumina to unwind its $7.1 billion acquisition of GRAIL, fearing the deal would hurt consumer choice. While Illumina appealed the planned order, it also considered options for the next step if the EU indeed forced it to divest GRAIL. However, in July 2023, the European Commission adopted a final decision confirming Illumina’s breach of the EU Merger Regulation, acquiring the right to exert decisive influence over GRAIL and exerting such influence during the pendency of the Commission’s review. On this ground, the company was fined approximately €432 million, which represented the maximum fine of 10% of the company’s consolidated annual revenues for the fiscal year 2022.

In October 2023, Illumina declared that it would divest GRAIL if the company was not successful with either its European Court of Justice jurisdictional appeal or in a final decision of the Fifth Circuit. Finally, on Dec 17, 2023, Illumina formally announced that it would divest GRAIL after the U.S. Court of Appeals for the Fifth Circuit issued its decision that the acquisition would indeed threaten competition in the cancer detection tests market. The company did not pursue further appeals of the Fifth Circuit's decision and proceeded with the divestiture of the early cancer detection company, as previously stated.

On Jun 3, 2024, Illumina finally announced that its board of directors had approved the spin-off of GRAIL, less than a month after the company publicly filed a Form 10 registration statement with the U.S. Securities and Exchange Commission.

Sigh of Relief for Investors

Throughout this long battle, Illumina faced significant financial penalties, operational restrictions and increased costs to fight against governmental and regulatory authorities. In fact, the situation worsened in early 2023 when celebrity investor Carl Icahn, holding a 1.4% stake in Illumina, argued that the company's takeover of GRAIL had cost shareholders about $50 billion since the closing of the deal. Per Icahn, the company could lose $800 million in operating costs annually if the GRAIL deal did not materialize. ILMN’s share price started to plunge following this as a huge set of investors took out money from the stock.

With the divestment now over, we expect the stock to soar again to its potential high on the assumption that the company will start to focus on its legacy and highly competitive gene-sequencing product line.

Share Price Performance

Over the past year, shares of Illumina have plunged 43.3% compared with the industry’s 6.8% decline. However, as discussed above, a significant turnaround is expected soon.

Zacks Rank and Key Picks

Illumina currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader medical space are Hims & Hers Health HIMS, ResMed RMD and Medpace MEDP. While Hims & Hers Health sports a Zacks Rank #1 (Strong Buy) at present, ResMed and Medpace carry a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks Rank #1 stocks here.

Hims & Hers Heath stock has surged 169.4% in the past year. Estimates for the company’s earnings have increased from 18 cents to 19 cents for 2024 and from 33 cents to 35 cents for 2025 in the past seven days.

HIMS’ earnings beat estimates in three of the trailing four quarters and missed in one, delivering an average surprise of 79.2%. In the last reported quarter, it posted an earnings surprise of a staggering 150%.

Estimates for ResMed’s fiscal 2024 earnings per share have remained constant at $7.70 in the past 30 days. Shares of the company have declined 15% in the past year compared with the industry’s fall of 0.7%.

RMD’s earnings surpassed estimates in three of the trailing four quarters and missed in one, the average surprise being 2.8%. In the last reported quarter, it delivered an earnings surprise of 10.9%.

Estimates for Medpace’s 2024 earnings per share have remained constant at $11.29 in the past 30 days. Shares of the company have surged 81.2% in the past year compared with the industry’s 5.4% growth.

MEDP’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 12.8%. In the last reported quarter, it delivered an earnings surprise of 30.6%.

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