Serious plans for Series B

GRAIL expects nearly $1B in financing and plans to fund test development and repurchase Illumina stake

Kelsey Kaustinen
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SAN DIEGO—The first quarter of 2017 saw Illumina announce that GRAIL had received overtures of interest to invest roughly $1 billion for its Series B financing, largely from undisclosed private and strategic investors. GRAIL plans to close the financing round before the end of the first quarter, and means to raise further capital for the financing from other investors, having secured Goldman Sachs as a placement agent in conjunction with the expected investors.
 
“We are honored to have world-class investors who support our goal of reducing global cancer mortality through early detection—especially the invaluable support we received from Illumina during our startup phase—and we look forward to the next phase of our growth,” remarked GRAIL CEO Jeff Huber.
 
Illumina launched GRAIL in early 2016 with the aim of developing a new method for cancer screening from a blood test, using Illumina’s sequencing technology to develop a pan-cancer screening test that measures circulating tumor DNA.
 
GRAIL intends to use the funds from this Series B financing to support continued development and validation of its cancer screening test, including large-scale clinical trials such as the Circulating Cell-free Genome Atlas study, which began in August 2016 and is expected to enroll 10,000 participants. The financing proceeds will also be used to repurchase some of Illumina’s stake.
 
“We founded GRAIL a year ago to enable early cancer detection via a blood-based screening test powered by Illumina sequencing technology,” Jay Flatley, executive chairman of Illumina and chairman of GRAIL, said in a press release. “This raise, when completed, will provide GRAIL the resources to develop its first products and embark on the large-scale trials required to demonstrate the stringent performance requirements of a cancer screening test.”
 
In light of the financing, Illumina intends to accelerate GRAIL’s path to becoming independent. Illumina will modify its supply and commercialization agreement with GRAIL to a market-based agreement, and will no longer have representation on GRAIL’s board of directors. In conjunction with this move, Illumina’s ownership in GRAIL will decrease to under 20 percent, and GRAIL will be regarded as a cost-method investment.
 
“We are very excited about the progress the GRAIL team has made in the last year,” said Francis deSouza, president and CEO of Illumina. “This capital allows GRAIL to take on the significant technology, market and regulatory challenges of developing and validating a blood-based cancer screening test. This outcome maximizes value to Illumina by creating one of our largest customers of sequencing instruments and consumables over time, providing royalties on future GRAIL tests and through appreciation of our ownership interest.”
 
Leerink Partners reported in a note that “GRAIL was initially backed by ARCH Venture Partners, Bezos Expeditions, Bill Gates Foundation, Sutter Hill Ventures and Illumina in its $100 million Series A round, and we wouldn’t be surprised if the same investors participated in this round as well. The initial investment involved $40 million from [Illumina] for 50-percent stake of GRAIL. [Illumina] also stands to benefit from both long-term supply agreements as well as significantly royalty stream longer term.”
 
The analyst firm went on to note that it expects “that the investment will result in EPS accretion of at least $0.22 in 2017E with additional tax benefit as well. Impact to 2017 revenue is likely to be immaterial given that GRAIL’s CCGA trial has started, but others will still ramp. The CCGA (Circulating Cell-free Genome Atlas) trial is expected to enroll 10,000 patients eventually, and [Illumina] has pegged mean GRAIL’s market opportunity at $150B in bull case and $30B in the bear case scenario.”
 
Illumina is also expected to benefit, with Leerink Partners forecasting the capital raise “to be accretive to ILMN’s 2017E EPS by $0.23 cents at least, with additional tax benefit as well as the deal is expected to close in 1Q17 and will essentially eliminate GRAIL’s expense from [Illumina’s] P&L going forward.”
 

Kelsey Kaustinen

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