The European Commission has ordered narrow-moat Illumina ILMN to divest the Grail liquid biopsy assets. Illumina has yet to respond to the most recent order, but in general, we suspect the firm’s new management team will be more open to divesting Grail than the previous team. Our view of Illumina’s narrow moat rating likely will not change if it divests Grail because the firm’s legacy genomic sequencing business forms the foundation of its moat. Also, our $269 fair value estimate may not change until the spinoff is complete and may depend on how a potential divestiture is structured.
Specifically, the value that Illumina investors receive on Grail may hinge on how Illumina decides to complete any potential divestiture, and positively, the EU appears open to several scenarios. For long-term shareholders, we think a quick sale to a competitor may be the most negative divestiture scenario, given weak market sentiment and tax obligations that could cut into the $68 per share of value that we place on Grail. However, if Illumina is able to spin off Grail to shareholders in a tax-free manner, much like Danaher did recently with Veralto, our fair value estimate may remain roughly intact until the spinoff is complete since the intrinsic value of Grail to Illumina shareholders would remain largely the same minus dilution to help fund Grail’s operations. Long-term investors also may appreciate retaining optionality on Grail in that latter scenario. If a spinoff to shareholders is completed, Illumina’s fair value estimate will likely revert to the value of the genomic sequencing business, which we currently estimate at $201 per share or well above recent prices. We continue to view Illumina’s stock as steeply discounted relative to its intrinsic value, both including and excluding the Grail assets. Positively, with a divestiture, Illumina’s intrinsic value may be easier for the market to recognize without Grail’s ongoing losses overshadowing the results of the legacy business.
The author or authors do not own shares in any securities mentioned in this article.
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