Illumina sets aside $453M to prep for potential EU fines over Grail acquisition

DNA sequencing giant Illumina said it has set aside nearly half a billion dollars to prepare for potentially hefty fines levied by the European Commission after the company closed its deal to acquire Grail nearly one year ago this month without waiting for the approval of international competition watchdogs.

That includes $453 million in what the company described as “legal contingencies” logged in the second quarter this year—or prior to the EU General Court's ruling in mid-July that the commission's antitrust probe, which Illumina had challenged, could indeed continue.

They also came ahead of the commission officially alleging that Illumina had breached its so-called standstill regulations, requiring mergers to wait for final approval. If found guilty of violating those rules, fines could reach up to 10% of Illumina and Grail's total annual revenue. 

In its second-quarter earnings report, Illumina also earmarked another $156 million to be put toward settlements for patent cases with the Chinese DNA sequencer maker BGI Group. According to BGI's affiliate company MGI, both sides agreed to drop their litigation while Illumina will make a net payment of $325 million in return for patent licenses.

That combined $609 million in rainy day money dragged Illumina's quarterly income into the red. 

The company, incorporating figures from Grail, posted a total net loss of $535 million including R&D and operating expenses, after raising about $1.2 billion in revenue. Sales were up just 3% compared to the same three months in 2021, which had seen $187 million in net income. Without the legal contingencies, Illumina would have collected about $30 million in operating profits.

“Our second quarter results were impacted by macroeconomic challenges that we expect to play out over the next couple of quarters,” CEO Francis deSouza said on a call with investors. 

That includes global supply chain pressures for other pieces of equipment that have delayed some users' plans for expanding their laboratories, while other customers have pulled back on spending altogether and trimmed down their inventories of Illumina products, deSouza said, adding that he expects them to return in 2023.

“But in the end, their demand and their activity levels are going to match what we are seeing from the data we get from monitoring their instruments,” he said. “And there the activity, and therefore the demand, continues to be very robust.”

“The activity levels that we're monitoring on the high- and mid-throughput instruments reflected a growth rate in runs that are greater than 15%.”

Illumina and Grail recently passed another one-year anniversary: the launch of the latter's Galleri screening test, designed to detect the evidence of as many as 50 different cancers from a single blood draw.

Galleri began its commercial rollout in June 2021 after years of research and about $2 billion in venture capital funding. The test is designed to screen people who may already have an elevated risk for cancer, such as adults over the age of 50.

Currently managed as an owned but wholly separate subsidiary—pending the final decisions of antitrust regulators—Grail tallied $12 million in revenue for the quarter, compared to an operating loss of $187 million. However, deSouza said that in Galleri's first 12 months on the market it “delivered the fastest ever first-year revenue ramp of a cancer screening test.”

Despite that, the company is tampering its financial expectations for the remainder of 2022. Illumina's forecasts for Grail's full year revenue shrank to between $50 million and $70 million, down from the $70 million to $90 million it predicted earlier this year. 

Meanwhile, for its core DNA business, Illumina is now projecting revenue growth in the range of 4% to 5%, down from the 14% to 16% it estimated (PDF) at the end of 2021's first quarter. 

But as to how Illumina and Grail will proceed if European regulators order the companies to be split in two? DeSouza said the company is still working on that plan. 

“There's obviously a set of nodes on the decision tree that would lead us to either spinning out Grail because the regulatory process doesn't go our way, or contemplate other forms of exits,” he said on the investor call. 

To make sure Grail has the money it needs to complete its cancer-testing mission, it could receive investments from Illumina—which previously owned a percentage of the company following its birth as a spinout from the DNA sequencing giant in 2015—plus potential backing from other shareholders.

“That's going to be a combination of Illumina, but other shareholders and people who would inject capital both at the time of divestiture, and then over time as well,” deSouza said. “How would we set it up to be successful, and what's the path for it to continue to be successful? Obviously, those are not decisions that we're making today, but those are some of the considerations that would go into it.”