GRAIL, Inc. (ILMN) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Illumina investor conference call. [Operator Instructions] I now like to hand the conference over to your speaker today, Mr. Brian Blanchett for introductory remarks.

Good afternoon, everyone, and thank you for joining on such short notice to discuss our acquisition of GRAIL. If you've not had a chance to review today's press release, it can be found in the Investor Relations section of our website at illumina.com. Participating for Illumina today will be Francis deSouza, President and Chief Executive Officer; Sam Samad, Chief Financial Officer; and Charles Dadswell, General Counsel. We are also pleased to welcome Hans Bishop, GRAIL's Chief Executive Officer. Each leader will share some remarks and then we will open the call for some questions. This call is being recorded, and the audio portion will be archived in the Investors section of our website. It is our intent that all forward-looking statements made during today's call will be protected under Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties. Actual events or results may differ materially from those projected or discussed. All forward-looking statements are based upon current available information, and Illumina assumes no obligation to update these statements. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Illumina files with the Securities and Exchange Commission, including Illumina's most recent Forms 10-Q and 10-K. With that, I now turn the call over to Francis.

Thanks, Brian. Good afternoon, everyone, and thank you for joining us on such short notice. Today, we announced that we have reacquired GRAIL. While GRAIL is now a wholly-owned subsidiary of Illumina, we will hold GRAIL separate and independent until the European Commission finishes its review. We made the decision to acquire GRAIL and hold it separate until we received regulatory approval, because it's becoming clear that we will most likely not have a decision from the regulators before the agreement expires in December. The stakes here are high, because simply put, this deal saves lives, and we feel a moral obligation to ensure that the deal has a full review. Cancer kills 10 million people annually worldwide and 600,000 people in the U.S. Detecting cancer earlier saves lives. But today, the majority of cancers are found too late when outcomes are often fatal. Current guideline recommended screenings are critical. But in the U.S., they cover only 5 cancers and only screen for a single cancer at a time. And cancer is responsible for nearly 71% of cancer deaths have no recommended early detection screening. GRAIL's revolutionary Galleri test has the potential to reduce cancer mortality, detecting more than 50 cancers across all stages, 45 of which don't have any recommended screening in the U.S. And because it can be cheaper and more effective to treat an early-stage cancer than a late-stage cancer, GRAIL's test can result in enormous savings in the health care system. Right now, GRAIL's multi-cancer early detection test is available in the U.S. to those able to pay $950 out of pocket. We want to provide the financial support, expertise and scale to get it widely distributed and covered by insurers. We estimate that with Illumina's acceleration, the Galleri test can conservatively save 10,000 additional lives in the U.S. and additional lives in the EU over the next 9 years. Reuniting Illumina and GRAIL is the fastest way to make this test available to everyone, everywhere. We will continue to work with the regulatory bodies in the EU and the U.S. on this acquisition. In Europe, we are in a Phase II review with the European Commission, and we'll we likely receive a decision in Q1. In addition, we are challenging the EU's jurisdiction to review the merger of these 2 American companies because GRAIL has no existing or firm plans for business in Europe, and we look forward to receiving a decision from the General Court of the European Union in early 2022. As proof of our commitment to and respect for the EC process, we will hold GRAIL separate and independent with no integration of operations until the EC review is completed. There is no impediment to closing in the U.S. We will continue to work with the FTC on their administrative review of this deal and any associated legal processes. Illumina scientists first discovered the potential to detect cancer from genomic signals in blood in 2013. We recognize the enormous potential this could have to save lives, and staffed a team to work on it immediately. We spun GRAIL out in 2016 to raise almost $2 billion for the necessary large clinical studies. The GRAIL team, many of them former Illumina employees, succeeded beyond our expectations and commercially launched the Galleri test in June this year. Reuniting GRAIL with Illumina now is the fastest way to make this test globally available and accessible. After integration, we will leverage Illumina's capabilities to make this test available in doctors' offices everywhere, covered by insurance. For example, GRAIL will benefit from Illumina's scale in procurement and manufacturing, large-scale genomic testing labs, commercial reach across 140 countries and expertise in market access that has helped get coverage of genomic testing for over 1 billion people around the world. These capabilities will expedite scaling and coverage of the test. This deal has the potential to not only benefit thousands of people, but also benefit the industry as a whole. Our vertical acquisition of GRAIL is pro-competitive and will accelerate the development of all types of early cancer detection tests. GRAIL and Illumina are not competitors and have no overlap in product offerings. We have shown that our entry into clinical testing markets like NIPT and cancer therapy selection has been pro competitive. After we entered NIPT, for example, the number of providers increased. Costs decreased. Prices dropped and reimbursement expanded. Most importantly, more families benefited from this technology. We plan to do the same thing in the multi-cancer early detection space. Our business model is successful when the industry as a whole expands. We want to increase the number of companies running genetic tests, ours and others. We have a track record of supporting competitors and selling sequencers to enable them. To that end, Illumina has made an open offer available on our website, contractually committing to continue to make all our products available to every oncology customer on the same time line and at the same price as GRAIL. We remain committed to a fair and open cancer diagnostics marketplace. As always, Illumina will continue to innovate in the field of genomics and develop new life-changing innovations and technologies like those that created GRAIL years ago. Now I'll turn the call over to Chuck.

Thanks, Francis. While we respect the legal process in both the U.S. and the European Union, all companies, including Illumina, should be entitled to a timely, fair and predictable process for potential acquisitions to be assessed on the merits of the deal. As Francis mentioned, there is no legal impediment to closing in the U.S. The FTC withdrew its request in federal court for an injunction to prevent the closing. The FTC administrative trial is scheduled to begin August 24 and we expect it to take several weeks with a decision likely issuing in Q1 2022. We look forward to presenting our case during the FTC trial, showing that this acquisition is pro-competitive and life saving. Moving to Europe. On April 29, 2021, Illumina filed a complaint in the General Court of the European Union to annul the European Commission's review of the GRAIL acquisition because neither the European Commission nor any European member state has jurisdiction to review this acquisition between 2 American companies. The General Court has granted Illumina's request to have the case heard on an expedited basis. A hearing date has not been set. However, we anticipate a hearing this fall with a decision by the end of the year or early in 2022. We will continue to work with the European Commission during the pendency of our court challenge and, as in the U.S. process, we will present substantial evidence demonstrating that this acquisition is pro-competitive and should be approved. The European Commission initiated its Phase 2 review on July 22, 2021, and we anticipate Phase 2 being completed in early Q1 2022. While the European Commission reviews the acquisition, Illumina and GRAIL decided that moving forward is in the best interest of patients, shareholders and public health. Illumina is committed to cooperating with the European Commission's investigation until a final decision is reached and is holding GRAIL separate to respect the European Commission's review. Under the hold separate agreement, Illumina and GRAIL will each continue to operate as independent legal entities, and Illumina has committed not to integrate GRAIL until completion of the process ongoing in Europe. We will abide by any outcome ultimately reached by the legal process. And now I'll turn the call over to Sam.

Thank you, Chuck. I'm very excited about the future that GRAIL and Illumina can create together. And I will now highlight a few financial details regarding the acquisition. As a reminder, the merger consideration for GRAIL included stock and cash. In addition, GRAIL shareholders were given the option to elect either a contingent value right or additional shares of Illumina. Excluding Illumina's ownership and including other adjustments, we plan to issue approximately 9.8 million shares and deploy approximately $3.5 billion in cash as part of this acquisition. About half the GRAIL shareholders elected to receive contingent value rights. In addition, GRAIL's cash balance is approximately $500 million after accounting for some transaction-related costs. Please note that more details on the transaction consideration can be found in today's press release. Going forward and starting on our Q3 earnings call, we intend to provide full segment financial reporting for our core business and separately for GRAIL. We will also provide consolidated financial reporting for Illumina Inc. As we indicated on our Q2 earnings call, our core business is incredibly strong, and we are very confident in the Q3 and full year 2021 guidance we provided as it relates to our core Illumina business, excluding GRAIL. We are not providing P&L guidance for GRAIL at this time but intend to do so at a later date. From a cash funding standpoint for GRAIL, the $35 million continuation payments we had been previously providing them up until closing represent a rough approximation of GRAIL's expected monthly operating cash needs for the rest of 2021. And we expect this number to increase in 2022. I will now invite Hans Bishop, the CEO of GRAIL, to say a few words before Francis shares his final comments.

Thank you, Sam. I'd like to reiterate how excited I am that Illumina has now acquired GRAIL. We at GRAIL are a mission-based company with a goal of finding cancer early when it can be cured. Joining forces with Illumina is a huge boost for our mission. It will enable us to achieve scale faster, ultimately preventing more late-stage cancers with the potential to save many more lives, both here in the U.S. and around the world. This is an incredibly exciting time at GRAIL. Having just commercially launched our Galleri test earlier this year, we're already finding early-stage cancers that otherwise would have been missed. We expect adoption to continue increasing and look forward to leveraging Illumina's expertise to expedite regulatory approval and drive broader adoption. With that, I'll hand the call back over to Francis for his final comments.

Thanks, Hans. From helping fight the COVID pandemic to matching cancer patients to therapies, our mandate is to save lives and transform health care by harnessing the power of genomics. Our acquisition of GRAIL supports this mandate and is driven by our belief that life-saving cancer detection tests should be available to as many people as possible as quickly as possible. Illumina and GRAIL are a powerful combination. We envision a future where people around the world can access the Galleri test as part of their normal annual physical examination. Just as now you're able to be tested for early-stage diabetes and high cholesterol, you will soon be able to receive multi-cancer early screening from a simple blood draw in your doctor's office. This will be nothing short of transformational for human health. Now I'll invite the operator to open for Q&A.

[Operator Instructions] And your first question comes from the line of Doug Schenkel with Cowen.

Acknowledging that merged regulatory matters are not my strongest area of expertise, this on the surface seems like a pretty aggressive approach. And simply put, in your prepared remarks, I didn't hear anything that suggested you've heard that the FTC will not ultimately attempt to block this transaction. So to be to the point as much as possible, has the FTC agreed to stand down?

So thanks for your question, Doug. The reason we took the step today, and it's really 2 parts of the step we took today. First, we acquired GRAIL and 2, we kept separate is because we feel the stakes in this deal are so high. Specifically, that over 10,000 lives could be saved by the acceleration that Illumina provides the GRAIL test and making it accessible to everyone. So the stakes here are so high that we want to make sure this deal gets a full review. And as we pointed out, the decisions we're expecting from the review come in Q1. And so it would come after the deal timed out on December 20. And so what this step does is it makes sure that the deal gets the full review and that we get to a decision from the 2 European actions that are in play, but it also respects the European regulatory process, because it keeps GRAIL separate. And so we won't do any integration until then. In terms of the FTC, there is no impediment for us to closing the deal here in the U.S. right now. We are going to continue to work with the FTC on their administrative process and any follow-on process from that. But there is no hurdle for us crossing right now. So again, what we wanted to do is make sure this deal got a review that it deserves, frankly, based on its merits. And as we said, as always, we will abide with any outcome from the legal process.

Okay. Helpful, Francis, but again, to be direct, that's not really my question. My question is, has the FTC said that you can move forward and you're in the clear? And I'm -- based on your answer, I'm guessing the answer is no. So recognizing there is still FTC risk here, how do you assess: a, the risk that the FTC comes back; b, the risk that you're further damaging your relationship with the U.S. government and specifically the FTC, which could impact future strategic endeavors, which have been an area of difficulty for you over the last few years; and c, the risk that you are not just holding back GRAIL but causing distraction and wasted efforts that are ultimately not in the best interest of Illumina shareholders.

Yes. So to be very specific. The -- there are 2 things that are going on to the FTC. One, the FTC has eliminated the hurdle to closing. So they did have -- we had a temporary restraining order with the FTC that they went to court to petition to remove. So the FTC has said there is no hurdle to closing in the U.S. right now. Also specifically what the FTC has said is there is an administrative review process that starts next week. So that's what the FTC has said to us, and we're still marching down that process. So we are using a -- obviously, the full legal process here in the U.S. And again, we will work with the FTC through that process and abide with any outcome of that process. Availing ourselves of the process shouldn't necessarily damage our relationship with the FTC.

And your next question comes from the line of Tycho Peterson with JPMorgan.

Francis, you put out an 8-K this afternoon that the European Commission is going to impose a fine up to 10% of consolidated annual turnover. Can you talk to that aspect? And is there any risk the FTC might do something similar?

Tycho, this is Charles Dadswell. I'm the General Counsel. So where we stand with the European Union is, first and foremost, we respect the process that's ongoing there. We've challenged the European Union in 2 places. The first one is the regulatory process with DG Competition. We believe that -- and we'll continue to work through that process with the European Commission. We expect, as Francis mentioned, that, that process would end in Q2 of 2020 -- excuse me, Q1 2022. The second place that we've challenged them is in the general court in the EU. We've challenged them because we don't think they have jurisdiction over this deal. That case is we don't have a hearing date yet. We expect the hearing date at any time. We expect to have a decision from the general court on whether or not the EU has jurisdiction over this deal sometime in Q1 of '22 as well. As far as the fine that you're talking about, we did put that out in our 8-K, that possibility does exist. If at the end of this conclusion, there is a decision and we will respect that decision. That they, in fact, did have jurisdiction over the deal. There's the possibility that they could find us up to 10% of 1 year's revenue as we disclosed.

And then in terms of the FTC, again, there is no legal hurdle to us closing in the U.S. from the FTC. And so there's no grounds for a fine from the FTC.

And then Francis, the benefits of closing but not integrating, I'm just curious, I mean, you could -- obviously, you have done a broader distribution agreement with GRAIL to get the product out there more broadly. So what is the real advantage to having closed if you're actually not going to integrate? Or could you have done broader access another way?

Yes. The path we're on is such that the decision from the review that's happening in Europe won't happen until Q1. This acquisition contract expires in December of this year. And so the advantage of acquiring GRAIL is to make sure that this deal gets the full review that it deserves from the European Commission. So that's the advantage of acquiring them today. To respect the European process, which we do, we want to make sure that we keep -- we hold the company separate and don't do any integration until we get that decision from the European Commission.

And then last one for Sam. I appreciate you're not going to give P&L guidance, but have your spending assumptions changed at all from when you first announced the deal in terms of how we should be thinking about the burn around GRAIL in the back half of the year?

No, not necessarily, Tycho. I think we're still in the same ballpark, but we're going to update these estimates. Obviously, a lot of circumstances have changed in terms of timing of the deal and our inability to integrate at this point. But we will update these assumptions. But I would say materially no significant change from when we announced the deal.

And your next question comes from the line of Puneet Souda with SVB Leerink.

So my first question is really if the General Court of European Union is positive, I think the path is obviously clear, but if that's not the case down the line and the same applies to FTC in some ways, maybe let me ask you the first question on Europe. Would you be able to sell Galleri as a test in Europe if there were some objections to the deal down the line? And would that impact your market opportunity that you are -- that you have anticipated so far?

Yes. So let me talk about the process in Europe. There are 2 decisions that we expect to come out from Europe from 2 different bodies in Q1. One is from the general court where we're challenging the jurisdiction of the European Commission to review the deal. And the second one is from the European Commission on the Phase 2 review. If we are successful in either of those, then we are free to integrate GRAIL into Illumina. So we need one of those 2 decisions to be positive and then we're not only closed, but then we can start the integration. If we don't prevail in Phase 2, then we'll continue down sort of the legal process in Europe and appeal that decision. Right now, GRAIL has no plans to sell their test in Europe. And even if you look at their sort of 10-year plan, they have no firm plans to launch their product into Europe. After -- if we succeed in acquiring them and integrating, we would accelerate those plans. And we do have in our model some revenue that we get out from Europe from launching the GRAIL test in Europe. This is binary though, either we are able to acquire and merge GRAIL and launch the product globally or not. And so it wouldn't be a case where we wouldn't launch the product in some markets.

Okay. And I think the other major question really here is, this is a test that you're offering today at $950 out of pocket. But we've seen, obviously, with single indication test in past, they will require FDA approval. This is a screening test and very likely required, obviously, Medicare and then USPSTF recommendation support. Given all of that, has your thinking changed at all in terms of the timing of obtaining that? And do you expect -- when should we expect GRAIL to have meaningful revenue, which is very likely going to be after those USPSTF recommendations and guideline inclusions that will ultimately drive the commercial payers to pay for this test.?

Yes. So let's go through your questions. One, by -- once we are able to integrate GRAIL. We absolutely will leverage the expertise we have in Illumina in a number of areas, but including, as you said, our regulatory expertise and very importantly, our market access team. And so that will accelerate the plan in terms of making the GRAIL test accessible and reimbursed across the 50 states and around the world. From their current plan -- and we shared some of those ideas with you so far. Our team has a huge amount of expertise in this area. We have helped deliver reimbursement to over 1 billion people around the world for genomic tests across the categories that we're in today. So our team has good expertise in accelerating reimbursement for genomic tests and we'll leverage that. In genomic testing, as you know, whether it's NIPT or cancer therapy selection, even today in the U.S., those are not cleared tests. They are still LDTs. If you look at some of the leading providers in that space. And so getting clearance is not a prerequisite for reimbursement. You can get reimbursement even on LDTs. And we expect that's the path that will probably come to fruition first for the GRAIL test.

Okay. And last one, if I could squeeze in. In terms of the STRIVE trial, you have -- I believe the enrollment is completed there. And in the U.K. NHS trial where you're enrolling, I believe, more than 150,000 patients. Any updates that you can provide on that front? Those are large-scale trials that would be needed in order to gain ultimately major regulatory approvals and reimbursement. And wondering, obviously, one of the key parts of this acquisition was Illumina's presence globally and be able to drive these tests internationally, including in Europe. I'm just wondering, does this impact your position in England, U.K. specifically?

So let's talk to those questions, Puneet. We continue to hear from the GRAIL team as they've talked externally, but there is good progress in terms of -- well, obviously, recruiting for the STRIVE trial, as you said, but also with the NHS. And they are planning to have the test in the first phase available to 165,000 people in the U.K. scaling up to 1 million by the 2023, 2024 time frame and then making it available population-wide. That's a historic deal. It's a historic deal in terms of making a test -- this multi-cancer test available to a population. And it's also historic in terms of the scale of that deal. So it's really exciting to hear the positive progress coming from the -- from GRAIL with the NHS. We absolutely plan to accelerate the global deployment of GRAIL. That's true across the U.S. and leveraging sort of our capability. But we have -- our commercial team has a presence now in 140 countries. So we place products in 140 countries around the world. That is a commercial presence that we will be leveraging for GRAIL. In addition, we have large-scale production labs that run genomic tests. And that's something we can leverage for GRAIL as well. So if you look at their plan today, for the next 5 years, their plan was really as an independent company to be in the U.S., Canada and the U.K. Our plan is to accelerate their entry into Europe but then also more broadly into Asia and Africa and Latin America. And so that's great from obviously a business perspective, but it's also crucial in terms of making this life-saving test available to many, many more people around the world.

[Operator Instructions] Your next question comes from the line of Derik De Bruin with Bank of America.