Illumina Analysts Question Grail Deal's Commercial Opportunity, Hefty Price Tag

Illumina, Inc. ILMN announced Monday a deal to buy privately held Grail, which focuses on early detection of multiple cancers, for $8 billion in cash and stock. 

The Illumina Analysts: Baird analyst Catherine Ramsey Schulte maintained a Neutral rating on Illumina shares and lowered the price target from $335 to $281.

JPMorgan analyst Tycho Peterson downgraded Illumina shares from Overweight to Neutral and reduced the price target from $390 to $280.

Wells Fargo Securities analyst Dan Leonard maintained an Underweight rating and took the price target from $290 down to $250.

Baird Cautious On Grail Deal: Although the deal presents a large market opportunity, the reimbursement landscape remains uncertain, Ramsey Schulte said in a note.

Given the hefty price tag, the analyst said she is cautious on the patience that will be required in the years ahead before any potential meaningful adoption can be seen.

Baird said it is adding Grail to its model, assuming a December 2021 close, with $3.50 of EPS dilution in 2022 and what it views as an optimistic ramp scenario given the uncertain reimbursement landscape and fragmented market.

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JPMorgan Finds It Hard To Get Excited: The deal will allow Illumina to participate in the early cancer detection market, estimated at $60 billion by 2023, Peterson said.

At launch, Grail's Galleri cancer screening test will have an initial addressable market of 52 million lives prior to reimbursement, with test ASPs estimated to start at $1,200, the analyst said. 

The deal has uncertainty around the pace of market penetration and revenue generation, a lack of operational synergies, significant near-term dilution and potential distraction and dilution from the core business recovery next year, he said. 

Even without the deal, Illumina was already positioned to participate in Grail's ramp through its 14.5% stake in the company, HSD royalties, supply arrangement and more, Peterson said. 

Grail's Test Opportunity Unconvincing, Wells Fargo Says: Wells Fargo's bearish stance on Illumina is based on the firm's view that Street sales and earnings forecasts have more potential downside risk than upside potential, Leonard said in a note. 

Illumina's proposed deal to buy Grail carries much higher-than-expected earnings dilution, the analyst said, adding that he doesn't share the company's conviction in the commercial opportunity for Grail's cancer screening test.

ILMN Price Action: After declining 8.6% Monday, Illumina shares were down another 0.67% at $268.33 at the time of publication Tuesday. 

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