"King of Early Cancer Screening" Ends Corporate Drama with Long-Delayed IPO

This article is based on publicly available information and is intended solely for informational exchange. It does not constitute any investment advice.

45 Months After Submitting IPO Application, Global Leader in Multi-Cancer Early Detection Grail Finally Goes Public on US Stock Market, Set to Begin Trading on June 25.

The reason for the delay in going public is entirely due to the "complicated disputes" with its parent company, Illumina. Illumina once intended to acquire Grail to strengthen the company's core competitiveness in the early screening field, but unfortunately, this acquisition was opposed by antitrust authorities in Europe and the United States. Ultimately, under a record-breaking fine of $476 million imposed by the EU, Illumina had no choice but to abandon the acquisition of Grail. In the end, Illumina will retain only 14.5% of Grail’s shares, while the remaining 85.5% will be distributed free of charge to Illumina’s shareholders.

Four years ago, early cancer screening was the absolute focus of the capital market, and GRAIL was undoubtedly set to become the most dazzling new star in the capital market. Today, the stock price of Exact Sciences, the leader in early screening in the U.S. stock market, has fallen nearly 70%. Will GRAIL, going public at this time, still win the favor of investors?

01 Three Years of Extreme Tension

GRAIL was incubated by Illumina but was "sold" in 2017.

In January 2016, Illumina, the undisputed giant in the global gene sequencing field, decided to enter the early cancer screening market by investing $100 million to establish Grail. Backed by sequencing giant Illumina, standing at the forefront of early tumor detection, and armed with liquid biopsy technology, Grail has been surrounded by an aura of brilliance since its inception.

In the B-round financing one year later, Johnson & Johnson, Amazon, McKinsey, and Tencent came to learn the news; in the C-round financing, Hillhouse, Sequoia, Ally Bridge, 6 Dimensions Capital, Industrial and Commercial Bank of China, and others entered the market. In the four years following its establishment, GRAIL has cumulatively raised approximately US$900 million.

After securing sufficient cash flow, GRAIL began attempting to become independent by repurchasing its shares from Illumina for $278 million. At that particular point in time, Illumina was the biggest beneficiary of GRAIL’s independence, not only earning a profit of $144 million through the transaction but also no longer needing to invest in GRAIL's R&D or bear the risk of failure.

However, Illumina's delight lasted only three years before it began to regret its decision. With the completion of Phase I of the CCGA (Circulating Cell-free Genome Atlas) program, Grail became one of the most sought-after unicorn companies in the United States. Consequently, in 2020, Illumina announced once again that it would repurchase Grail at a staggering price of 80 billion US dollars. Over the span of three years, Grail’s valuation had increased several folds, and naturally, Grail’s shareholders were more than willing to exit at this opportune moment.

Ultimately, Illumina, Inc. acquired GRAIL, Inc. for a total of $8 billion, including $3.5 billion in cash and $4.5 billion in stock. Illumina, Inc. secured the future, while GRAIL shareholders walked away with substantial financial gains. However, this seemingly win-win acquisition drew the attention of regulatory bodies in both the United States and the European Union.

Figure: Grail Development History, Source: Guolian Securities

In March 2021, the U.S. Federal Trade Commission (FTC) filed a lawsuit with the U.S. District Court for the District of Columbia, seeking a temporary restraining order and preliminary injunction against Illumina to block its transaction with Grail. The FTC argued that Illumina's acquisition of Grail would create a monopoly, reducing competition and innovation in cancer detection. In July of the same year, the European Union also vetoed the acquisition on the same grounds and took similar measures.

Faced with difficulties, Illumina did not back down but chose to give a "strong" response in August 2021 by directly announcing the completion of the $8 billion acquisition of GRAIL.

In this statement, Illumina explained its actions, stating that there are no legal obstacles to acquiring Grail in the United States. It is addressing the FTC's administrative review and will continue to abide by the final outcome reached in the U.S. court. Regarding the EU’s review, Illumina argued that Grail has no operations in the EU, so the European Commission does not have jurisdiction to review the acquisition. The merger of the two companies does not exceed the EU’s merger regulations and does not violate any relevant laws and regulations of EU member states.

But the "tough" stance did not yield satisfactory results. In April last year, the FTC once again rejected the acquisition deal between Illumina and Grail. In July, the EU fined Illumina €432 million. Despite Illumina's dissatisfaction with the ruling, the aforementioned outcome ultimately ended in failure.

This three-year-long "tug-of-war" eventually ended with Illumina's complete defeat.

02 M&A "Sequela"

After the failed acquisition of GRAIL, Illumina became the ultimate payer.

The €432 million fine was the largest penalty ever imposed by the European Commission for violation of merger control regulations at that time. However, in fact, this was only a small part of the cost paid by Illumina for acquiring Grail.

In August 2021, when Illumina made the final acquisition decision, its market value reached $75 billion. By early December 2023, before the end of the "tug-of-war," its market value plummeted to around $15 billion, marking an 80% decline—a truly dismal outcome.

Apart from the sharp drop in stock price, the $8 billion acquisition price, Grail's R&D and operating expenses, and the "breakup fee" required by the EU for Illumina to pay Grail for two and a half years of operation, the actual amount paid by Illumina is likely to exceed $10 billion. So what did Illumina buy? Only 14.5% of Grail's equity remains.

In terms of personnel, this incident caused a major upheaval in Illumina's management. Starting from March 2023, billionaire investor Carl Icahn, known as the "Wolf of Wall Street" and acting as a shareholder of Illumina, wrote several open letters accusing the company’s then-management and board of being reckless and irrational in the acquisition of GRAIL, thereby harming shareholders' interests. These open letters became a symbol of the proxy war between Carl Icahn and Illumina’s management.

In the months of confrontation that followed, "Wall Street Wolf" Carl Icahn eventually emerged victorious. In May 2023, Illumina held a shareholders' meeting where Chairman John Thompson was successfully removed; former CEO Francis deSouza resigned from his position and board seat in early June, and the CTO, CMO, and General Manager for China all stepped down in September 2023.

Instead, the new CEO, Dr. Jacob Thaysen, took over, followed by the appointments of a new Chief Financial Officer and Chief Strategy and Corporate Development Officer. After the Grail debacle, Illumina has effectively become a different company.

03 Does Grail Have a Future?

Multi-cancer early screening is considered the ultimate product in cancer early detection, and GRAIL, which focuses on multi-cancer early screening, is undoubtedly the king of early detection.

The market for early tumor screening is aimed at the entire population, and the huge population base determines that GRAIL's market prospects are very broad. At the same time, with the deepening of research on tumors, people have gradually realized that compared to developing treatment plans, intercepting tumors in their early stages of occurrence and development can greatly improve patient survival rates. Moreover, gene sequencing technology has always been considered as potentially the final piece of the puzzle for solving the issue of early tumor screening.

Therefore, a large number of tumor NGS companies have entered the field of early tumor screening, attempting to address this clinical need. GRAIL is both a pioneer and a dedicated player in this space.

By the end of 2016, GRAIL launched the CCGA program, which aimed to assist in early diagnosis by extracting and sequencing cell-free DNA from both patients and healthy individuals to compare the differences between the two groups. This was the first formal research initiative carried out by GRAIL and was divided into three distinct sub-studies. The three sub-studies were progressive in nature: CCGA-1 primarily focused on discovering detectable targets directly associated with tumors; CCGA-2 expanded the cohort and delved into algorithm training and validation; CCGA-3 further clinically validated the outcomes of the first two phases, ultimately leading to the final product.

Following the CCGA, Grail subsequently launched three prospective clinical studies: STRIVE, SUMMIT, and PATHFINDER. Starting with healthy subjects, these studies further validated the product's algorithm through long-term follow-up. These prospective trials required the inclusion of large sample sizes and demanded significant time and financial investment.

Based on a large amount of clinical data, the FDA ultimately approved GRAIL's Galleri, the world's first multi-cancer blood test, for market release 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 more than 180,000 commercial tests and conducted clinical trials involving 385,000 people, providing crucial data support for the accuracy and feasibility of multi-cancer detection, while continuing its push to obtain the world’s first multi-cancer early detection certification.

Despite the commercialization of the first pan-cancer early detection product, GRAIL remains in significant financial losses. In 2023, GRAIL achieved total revenue of $93 million, representing a 68% year-over-year increase, but its operating loss reached $1.5 billion. Excluding the impact of goodwill impairment, the loss amounted to $797 million. In the first quarter of 2024, GRAIL's revenue was $27 million, up 36% year over year, while its operating loss stood at $227 million, with no signs of profitability yet.

Figure: Grail Revenue Data, Source: Jindian Research Institute

In order to obtain the world's first multi-cancer early detection approval, the spending must continue. GRAIL estimates that obtaining regulatory approval and inclusion in health insurance will most likely occur in the second half of 2026, which is expected to require nearly $1 billion in investment during this phase. After being spun off from Illumina, can GRAIL sustain itself? This might be the biggest question for investors.

The东风of pan-cancer early screening has also swept into the Chinese market. In June 2020, Genetron Health and Burning Rock Biotech went public on NASDAQ. At that time, Genetron Health's IPO price was $16, with a market value of $1.414 billion; Burning Rock Biotech's IPO price was $16.5, with a market value of $1.68 billion.

As time passed and circumstances changed, Genetron Health completed its privatization in April 2024, officially delisting from NASDAQ. The valuation at the time of privatization was only $126 million, a mere 8.9% of its IPO market value. Although Burning Rock Biotech has not delisted, its stock price has also been disappointing, with its current market value standing at just $69 million. It had previously received a delisting warning from NASDAQ due to its excessively low share price.

As China's pan-cancer early screening encounters a comprehensive cold spell, can GRAIL, whose IPO was delayed by four years, carve out a path to success? Ultimately, it may all depend on whether pan-cancer early screening can finally achieve commercial implementation.

       Title: "The King of Early Screening" Palace Drama Ends, a Heavyweight IPO Four Years Late is Coming