Please use the sharing tools found via the share button at the top or side of articles. Copying articles to share with others is a breach of FT.comT&Cs and Copyright Policy. Email licensing@ft.com to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be found here.
Michela Tindera About three years ago, a biotech company called Illumina decided to make a big acquisition. [VOICE CLIP OF FRANCIS DESOUZA] Good morning, everyone, and thank you for joining us on such short notice. Michela Tindera That’s Francis de Souza, the CEO of Illumina at the time, speaking on an investor relations call in September 2020. [VOICE CLIP OF FRANCIS DESOUZA] I’m excited to share that earlier this morning, we announced an agreement to acquire Grail and to work together to launch a new era in cancer detection. Michela Tindera This acquisition, valued at $8bn, was presented as a way for Illumina, a company that makes gene sequencing machines to corner a new market in the realm of cancer screening and detection. Now see, Illumina is in its own right a major player in biotech.
Here’s the FT’s US pharmaceutical correspondent Jamie Smyth. Jamie Smyth Illumina is the largest gene sequencing company in the world. It has about 80 per cent market share of the machines which are able to study and sequence people’s DNA. And that is a revolutionary new technology which is really helping to discover drugs that can target new diseases. Michela Tindera And Illumina’s new acquisition, Grail, is a biotech start-up that’s in the process of developing another potentially revolutionary technology. What they’re working on is a test that can screen for lots of different types of cancer by analysing a person’s blood and Grail is called Grail because, well . . . Jamie Smyth It’s like the Holy Grail in oncology to have one simple test which can detect cancer in all the different parts of your body. It would be an incredible thing if it could be proven to work.
Michela Tindera The potential to help people with these tests could be massive, and so could the potential payout. Picture what that could mean for Illumina, a company that would not only have a near monopoly on gene sequencing technology, but also a major cancer screening test. Jamie Smyth If you look at the US, you know, you can have a hundred million people over 50 years of age. There could be huge revenue-generating potential. We’re talking tens of billions of dollars of revenue each year. It could push it up the ranks to be one of the largest companies in the US. Michela Tindera But before Illumina could unlock that potential revenue, they would need to spend a lot of money to bring Grail’s product into the market.
When Illumina acquired Grail, Grail needed help funding really expensive things like its clinical trials that would one day hopefully earn them US Food and Drug Administration approval. Jamie Smyth It’s extremely expensive to try and prove this technology worked, so it needed the money to do that. So Illumina seemed like the perfect benefactor. Michela Tindera This would be just one of many expenses for Illumina, and soon things would start to add up and Illumina would find itself in a balancing act trying to fund this high-risk but high-potential start-up while also trying to keep their shareholders happy. Jamie Smyth It costs a fortune and you’ve got to have a backer that’s prepared to back you all the way. I think investors began to worry that this whole ambitious strategy of buying Grail had just gone wrong. Michela Tindera And then one of Wall Street’s most feared corporate raiders came knocking and launched the biggest proxy battle of the year. [MUSIC PLAYING] I’m Michela Tindera from the Financial Times.
It looked like Illumina could have the chance to strike gold when it switched gears and announced plans to acquire a company with a different business three years ago. But then Illumina’s stock price fell and an activist investor campaign took off. Today, on Behind the Money, we’re looking at whether investors hungry for returns will get in the way of a start-up’s ambitious goals. [MUSIC PLAYING] The relationship between Grail and Illumina begins roughly a decade ago. The scientific breakthrough that was at the heart of Grail’s cancer screening technology actually came from a scientist inside one of Illumina’s labs. Jamie Smyth A scientist, Meredith Halks-Miller, was looking at prenatal tests, and she was doing gene sequencing in these. She was looking at the samples of mothers’ blood to determine if there was any foetal abnormalities. And she started to see a curious pattern of defects in the genes. And she thought, eureka, this can only be cancer. So she continued, she went to her bosses, she said, this looks like it could be an amazing discovery. And they started to work on validating and proving that that’s what it really was.
Michela Tindera This was the beginning of something potentially groundbreaking. Jamie Smyth I think it was a huge discovery because if you look at the cancer screening test that we have right now, like mammograms, they tend to be quite labour intensive and invasive. So if you could just get a single blood draw and check for different cancers at once, well, this could be potentially very powerful. Michela Tindera And that initial discovery was the catalyst for tons of research and money to fly into this field. And in 2017, Illumina spun this new cancer screening company out on to its own. And that company was called Grail. Jamie Smyth They got more than 2 billion of investment from the likes of Bill Gates, Jeff Bezos, the Chinese company Tencent. So these were really high profile investors. And they began to do tests of the product to try and validate it and get it to work. And this actually coincided with a very robust period in the funding environment in the biotech sector. So there was a lot of money sloshing around at the time. Michela Tindera By 2020, the data that Grail was producing for its tests was looking good.
Illumina, Grail’s former home, was taking notice. Jamie Smyth Illumina suddenly got very interested in it and thought this could be a revolutionary technology which fits very well with its gene sequencing business. And so it actually bought back Grail for $8bn and that was a huge sum in 2020. Michela Tindera Illumina announced its plans to acquire Grail in September 2020, but not long after some issues started to crop up that would threaten the future of the deal. Jamie Smyth Illumina came up against this antitrust problem in both the US and the EU. So basically regulators looked at Illumina’s dominant position in the gene sequencing market and they felt that if it was allowed to buy Grail, it would really hamper competition in this emerging area of multi-cancer early detection testing. So both the US and the EU tried to block the deal.
Michela Tindera When regulators get involved in a deal, that’s usually a sign for company executives to pump the brakes. But Illumina did something else. Jamie Smyth Illumina did something which was very unusual. It closed the deal even though, you know, these two regulators, the FTC and the European Commission, had said they had big concerns about this transaction. Michela Tindera So in 2021, Illumina closed this deal and officially acquired Grail, despite what regulators in the US and Europe were telling them to do. Jamie Smyth And of course, what happened is it just got caught up in all this litigation. Both Brussels and the FTC issued divestment orders. They asked Illumina to sell Grail, and that prompted Illumina to launch a major legal fight against these orders. Michela Tindera So Illumina is getting caught up in litigation with regulators about Grail, when meanwhile, a second issue starts to reveal itself. The biotech stock boom that was happening at the height of the pandemic starts to fizzle out. Jamie Smyth When Illumina bought Grail, it was the peak of the biotech market, and so a lot of stocks were quite overvalued. This was during the height of Covid.
Money was rushing in from investors into the biotech sector. But there was this general move out of biotech stocks as the pandemic eased. Michela Tindera And then there’s a third issue. Jamie Smyth So last year, Illumina began to suffer operational problems. So it had two profit warnings. And really, the company began to face tough competition from a crop of early-stage companies. One of them was Ultima Genomics, which announced that it could sequence the genome for a cost of $100, which is about half of what Illumina could do. We also saw BGI, a huge Chinese competitor, enter the US market for the first time after winning a patent dispute with Illumina. And of course, at this time, Illumina’s management are all wrapped up in the antitrust issues so that they were quite distracted from their core business. And so by the end of 2022, we had Illumina announcing a cost-cutting plan and it said it was going to slash 5 per cent of its workforce. Michela Tindera Now, keep in mind Illumina’s 80 per cent market share meant that the company had been able to make their investors a lot of consistent money for many years. These new developments seem to be threatening that. Jamie Smyth As investors began to look at this, you know, they felt that what’s this gene sequencing company doing, buying a sort of niche cancer test company. You know, it’s a distraction from the core business of Illumina, which is actually really profitable.
So investors would get wary. Michela Tindera Meanwhile, the clock was ticking for Grail to get over their own big hurdle — FDA approval. Getting approval from the FDA is a crucial step for any biotech company. In Grail’s case, that approval would open doors to being added to national cancer screening programs. That’s like how doctors advise people over a certain age to get mammograms or pap tests or colonoscopies. Jamie Smyth And then they’re hoping that insurance companies and possibly even US government-run health insurers will begin to cover the tests. And that would really expand the use of these tests to the population, which may need them most. Michela Tindera Getting added to a screening program would also unlock that big money that we heard about earlier. While Grail was working on getting that full FDA approval, the start-up actually began selling its test in 2021, making it available to people in the US with a doctor’s prescription. Because it hasn’t been fully approved by the FDA yet, the test is labelled as a laboratory-developed test. In some cases, these tests have already started helping people. Jamie Smyth I spoke to some patients who had taken the test who were really enthusiastic. One of them, Valerie Caro. You know she was in her mid-fifties. She was reading a book about cancer and these different types of tests.
And she came across the Grail test. She got it and then got a positive signal for cancer in the gallbladder. So she did a follow-up test and underwent surgery. She underwent chemo. She’s in recovery now, but she says this test really saved her life. So she’s recommending others to follow her example and take it. Michela Tindera But Jamie says not everyone feels like Valerie. Jamie Smyth We’ve got a lot of critics out there who say they’re trying to sell these things to the public before they’re fully proven that they actually work. They say they haven’t done enough testing and they haven’t done the right trials yet to really prove that these products should be out in the market. Michela Tindera In Grail’s case. I spoke with the company’s president, Joshua Ofman, back in May. Joshua Ofman We’ve done, you know, a very robust analytical and clinical validation, and that’s really the requirement to have a diagnostic test or a screening test that’s ready for use in patients. We’ve received all the appropriate certifications and approvals needed to do that. Under the lab-developed test pathway. Michela Tindera Ofman also told me that they’re going above and beyond those steps by using the tests they’re selling now to collect even more real-world data. Right now, Grail’s in the process of conducting their largest study yet inside the UK. Jamie Smyth It’s got one of the largest ever clinical trials of the cancer screening test ongoing in the UK with the National Health Service. So they’re going to screen 140,000 people over at least three years. Michela Tindera The purpose of the trial will be to figure out if Grail’s test, along with other more standard cancer screenings, can detect cancer at an early stage. And if patients have a higher chance of successful treatment if they’re found to have cancer.
Jamie Smyth And if that happens, you would then look to see if it gets FDA approval. That would lead to a much wider adoption of this test across the US. Michela Tindera But Grail’s also in a race against time. Jamie Smyth So Grail faces an economic challenge at the minute. Its operating costs are about $700mn a year and its revenues last year were $55 million. So you can see that it’s causing huge losses to move ahead in this development stage. Those currently are being borne by its owner, Illumina. So it is facing severe economic challenges over the last 12 months because its core business of gene sequencing has also suffered somewhat.
And then it’s having to shoulder this burden of investing lots and lots of money in Grail to get it out into the market. Michela Tindera As I mentioned, I spoke with Grail’s president back at the end of May, and I also asked him about how Grail was managing these losses. Joshua Ofman This has been in our plan the whole time. Grail was spun out from Illumina, as you know, and, you know, raised a lot of capital because they recognised that embarking on something that will fully change the paradigm for cancer detection was going to be a long-term investment and was going to take enormous resources and enormous studies. And so this has always been on Grail’s plan to make these types of investments over this period of time.