An $8 billion valuation turned out to be a pipe dream, how long can Grail survive after being dragged down by Illumina?

On September 9, 2020, Grail (GRAL.US) applied to list on the Nasdaq. On September 21 of the same year, sequencing giant Illumina announced its acquisition of Grail for $8 billion, causing Grail to cancel its IPO plan. The title of "pan-cancer early screening $8 billion unicorn" for Grail originated from this deal.

However, after 3 years of struggle, Illumina announced the divestiture of Grail on December 17 last year. This former unicorn finally made its delayed debut on the US stock market 4 years later and officially landed on the Nasdaq on June 25 this year, only to witness a "nearly 20% drop on the first day" for investors.

Observations from the Zhitong Finance APP show that on June 25, after the US stock market opened, Grail's stock price quickly plummeted to a low of $15.19, marking a maximum decline of 18.46% for the day. It slowly began to climb back up after the midday session, even narrowing the decline to 4.62% at one point. However, it failed to stabilize towards the end of the day, ultimately closing down by 8.75% at $17, with a market value of $528 million, shrinking by over 90% from the initial $8 billion valuation.

The Rocky Journey of a "Unicorn"

The dawn of global cancer early screening began with the leading company Exact Sciences. As the most well-known cancer early screening company globally, Exact Sciences has seen its market value grow nearly 50 times in 10 years, gaining favor from the capital markets. Exploring its development trajectory, investors may find the "golden key" to the outbreak of the domestic cancer early screening industry.

According to the Zhitong Finance APP, as the core product of Exact Sciences, the Cologuard technology successfully overcame the shortcomings of traditional cancer early screening techniques, opening up a new model for cancer early screening in the United States. Compared to traditional colorectal cancer early screening techniques, Cologuard has clear advantages. Its screening sensitivity for various stages of colorectal cancer patients is higher than FIT (fecal occult blood test), and compared to colonoscopy, Cologuard has the advantages of home testing, non-invasiveness, and being close to colonoscopy, quickly gaining market and user favor after entering the US medical insurance system.

With the explosive growth of this "hardcore" product Cologuard, Exact Sciences soared after FDA approval. According to the company's annual report, Exact Sciences achieved operating revenue of $454 million in 2018, a year-on-year increase of 70.86%. The company's total market value also surged from $4.363 billion in 2014 to $11.935 billion in 2019.

Inspired by Exact Sciences' success, many companies sought to excel in cancer early screening, with Grail being one of them. However, its fortunes were clearly not as smooth as Exact Sciences'

In fact, Grail was born with a golden key: backed by the sequencing giant Illumina, stepping into the tumor early screening trend, holding liquid biopsy technology, and attracting many star investors to "give money" for investment. In January 2016, Grail was initially established with a $100 million investment from Illumina; in November 2017, it completed a $900 million Series B financing round, with investors including Johnson & Johnson, Amazon, and McKinsey; in May 2018, Grail completed a $300 million Series C financing round, with investors including Hillhouse Capital, Sequoia Capital, Ally Bridge Group, and 6 Dimensions Capital.

With a blockbuster script in hand, Grail's multi-cancer early detection business quickly took off. From a technical perspective, Grail's pan-cancer early screening adopts the ctDNA testing route, only requiring the extraction of peripheral blood from subjects, testing the cell-free DNA (cfDNA) in the blood, and analyzing the content and characteristics of ctDNA in cfDNA to determine whether the subject has cancer and the type of cancer. Its core product, Galleri, can screen over 100,000 CpG sites covering more than 50 cancer types and over 1 million methylated regions.

The large sample demand and long follow-up time inevitably lead to Grail bearing huge R&D expenses. Data shows that Grail's R&D expenses in 2018 and 2019 before reaching a merger agreement with Illumina reached $223 million and $167 million, respectively.

Based on a large amount of clinical data, the U.S. FDA finally approved Grail's global first pan-cancer blood test product, Galleri, for listing in June 2021, as a prescription test for early screening of high-risk cancer populations. As of the first quarter of this year, Grail has sold over 180,000 commercial tests and conducted clinical trials involving 385,000 people.

Based on Grail's outstanding strength in the multi-cancer early screening market, Illumina attempted to strengthen its competitiveness in this new field through acquisition. In August 2020, just 12 days after Grail submitted its prospectus, Illumina unilaterally announced a merger agreement with Grail.

However, it was precisely because of Grail's outstanding strength in the multi-cancer early screening field that regulatory authorities initiated antitrust investigations into the transaction. In March 2021, the U.S. Federal Trade Commission filed a lawsuit against Illumina in the U.S. District Court for the District of Columbia; in July of the same year, the EU regulatory agency initiated an investigation into the acquisition transaction. After 3 years of back and forth, Illumina was ultimately defeated and announced the divestiture of Grail on December 17th last year

Behind the $8 Billion Valuation Shrinkage

Compared to the $8 billion valuation before its initial public offering (IPO) in 2021, it is clear that Grail's current situation is "beyond hope." Some market views believe that the significant decline in the valuation of its parent company in the past has affected Grail's valuation, while others think that the company's own profit issues have lowered market expectations.

From the perspective of its former parent company Illumina, the purpose of its acquisition of Grail in 2021 was to increase the company's revenue from that time to offset the pressure on the revenue side of its core sequencers. However, the results clearly did not meet expectations.

According to the information from the Wise Finance APP, in Illumina's 2021 fiscal year when it acquired Grail, the financial report showed that Illumina's revenue in Q4 2021 was $1.198 billion, a year-on-year increase of 26%; the annual revenue for the same period was $4.526 billion, a year-on-year increase of 40%.

However, just one year later, in Q4 2022, Illumina's current revenue dropped to $1.083 billion, with a quarterly net loss of $140 million. The demand for sequencers in the entire genetic sequencing market has become saturated and competition has intensified. For example, in 2022, Huada Genomics received orders to produce a large number of sequencers for nucleic acid testing, and the patent dispute between Illumina and Huada ended with Illumina being found to have infringed, which was also one of the important reasons for the 24% year-on-year decline in Illumina's core sequencer revenue in Q4 2022.

With the setback in its core business, Grail, which was previously hoped to perform well, failed to live up to expectations. According to Illumina's 2022 financial report, Grail only achieved $55 million in revenue for the full year of 2022. With such a commercial situation below expectations, Illumina had to make a goodwill impairment provision of $3.914 billion.

As is well known, in the second half of 2021, hot money began to exit the global pharmaceutical market in large quantities, ushering in a financing winter. Investors turned to a more conservative investment logic for the pharmaceutical market, with a heavier emphasis on profit indicators. As the market's expectations for a Fed rate cut remain uncertain, the capital winter in the pharmaceutical market has not yet dissipated. Therefore, investors are paying more attention to Grail's profitability relative to its future prospects.

However, as mentioned earlier, the large sample demand and long follow-up time for its core product mean that Grail needs to bear huge research and development costs. Looking at Illumina's investment in Grail in 2022, the R&D expenditure for the period reached $330 million, while sales and administrative expenses were $296 million. Yet, Grail's investment efficiency did not improve. According to the Wise Finance APP, Grail achieved total revenue of $93 million in 2023, a 68% year-on-year increase, but the operating loss for the period was as high as $1.5 billion, or $797 million excluding the impact of goodwill impairment In Q1 this year, although Grail's revenue increased by 36% year-on-year to reach $27 million, the operating loss still amounted to $227 million.

Furthermore, according to Grail's forecast, the core product Galleri is expected to obtain certification and be included in medical insurance around the second half of 2026, requiring an additional investment of nearly $1 billion during this period. With the lack of financial support from Illumina, coupled with the current uncertain interest rate outlook, the financing market sentiment remains unstable. With Grail's current total cash reserves of only $200 million, it will be quite challenging to survive this year