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Text |Amino observations.Between technology and competition, biotech companies are always Xi looking forward.
Some radicals are anxious about the second growth curve even before the first curve is ripe. In special times, such rhythm management may be a plus.
After all, any business has a day of maturity and decline. A good rhythm master should be able to estimate the growth ceiling of each business product and wake up the next growth baton before the existing growth momentum is exhausted.
What's more, the opportunity to capture the future is fleeting, so how can there be time to hesitate?Therefore, the layout of new business should be positive. But sometimes, being too aggressive can be counterproductive.
Right now, gene sequencing giant Illumina provides us with a vivid negative teaching material.
Two years ago, despite the opposition of antitrust authorities, Illumina insisted on acquiring Grail, a pan-cancer early screening giantTwo years later, Illumina lost the antitrust battle with a failed arm twist and thigh, and had to strip Grail of it.
The problem is that Illumina pays a terrible price for Grail's in, one out. In the past two years, Grail's operating expenses and fines have approached $1.5 billion, and the goodwill impairment has exceeded $4.7 billion.
The final divestiture proceeds of Grail are unknown, but considering the current market environment and the progress of Grail's business, Illumina's loss is inevitable.
Ironically, as the dust settles on the divestiture of Grail, Illumina shares continue to be the best. It seems that the market is still optimistic about Illumina after **.
Perhaps, this also tells us that after going through a series of hurdles, when the company begins to look back, it will find that it is not necessarily the new business that keeps it growing, but also the old business.
However, companies have an innate mission to find new business. But only by taking every existing business, the deeper it is rooted, the more stable it will be;If there is less anxiety, the movements will not be deformed.
Founded in 1998, Illumina is the world's leading figure in gene sequencing.
But in the past few years, as the penetration rate of the global gene sequencing industry has slowed down, dark horses have emerged, and the life of this big brother has begun to become less easy.
Take, for example, the domestic market. In 2020, in the domestic gene sequencing market, MGI has snatched 126% market share, while Illumina has 586% market share.
The increasing competition is reflected in revenue, which was reported at 32$3.9 billion, compared to $35.5 in 2019$4.3 billion, a decrease of 9 per cent;Net profit was 6$5.6 billion, down 37.7 billion year-on-year58%。This is also the first time in a decade that Illumina's revenue has declined.
Of course, Illumina isn't sitting still.
On the one hand, the company has always dug deep into the moat of its core sequencing business. While establishing a broad ecosystem, we continue to upgrade iterative sequencing equipment to consolidate our competitiveness. For example, the company's latest launch, NovaSeq X, can reduce the cost of sequencing to about $200. In the sequencing industry, cost is competitiveness.
Illumina, on the other hand, is accelerating its downward exploration to find new growth curves. In 2021, it acquired Grail, a global pan-cancer early screening leader, for $8 billion.
Grail was founded by Illumina as an early cancer screening company. However, in 2016, Illumina spun it off internally, retaining only a minority stake, allowing Grail to raise funds to develop the product as an independent company. Five years later, it seems reasonable to reacquire it.
Illumina seems to have higher expectations for Grail than for its basic business. Illumina estimates that the gene sequencing industry will be worth around $25 billion by 2030, and with the Grail merger, the company will be able to compete for $60 billion. At that time, even if the company can only cut part of the cake, it can still contribute a huge increase in performance.
However, to Illumina's surprise, events are moving in the exact opposite direction.
Over the past three years, the acquisition of Grail has brought Illumina only losses but no gains.
First of all, there are huge fines.
In order to complete the deal, Illumina chose to cut the deal before it was approved by the EU and US antitrust authorities.
In the face of wayward Illumina, EU regulators have imposed hefty fines. In July 2023, the European Commission announced a record 4$7.6 billion in fines, and Grail also received a nominal fine of $1,100.
Secondly, there is a huge amount of operational investment.
GRAIL's core pipelines are all in the large-scale prospective clinical stage, and the money burned can be called a "bottomless pit". So far in 2021, total operating expenses have reached 18$700 million.
According to the Grail prospectus, as of the end of June 2022, it had an on-board cash balance of 6$3.3 billion. Obviously, most of Grail's operating expenses are borne by Illumina, the owner of the fund. Considering that the consolidation date of the two parties is August 2021, even if only the operating expenses of GRAIL in 2022 and 2023 are calculated, it has reached 9$800 million.
Then there is the huge goodwill impairment.
Since 2021, the capital market has taken a sharp turn, and Illumina's acquisition can be said to be bought at the top of the mountain. At the same time, due to the limited commercialization income of Grail, it is difficult to fully reflect the value, so Illumina has treated it with goodwill impairment in its financial statements, referring to "Goodwill Impairment of 3.9 Billion US Dollars, a Song of Ice and Fire for Tumor Early Screening Giants". Specifically, the impairment of goodwill in 2022 was 39US$1.4 billion, with a 2023-to-date impairment amount of 8$2.1 billion, for a total of $47$300 million. 
Finally, there is the market capitalization that continues to evaporate.
According to Illumina's vision, the acquisition of GRAIL is an increase in expectations. But in reality, Wall Street is more convinced of solid results.
Prior to the acquisition of Grail, Illumina's net profit margin remained around 20-30%, which is among the highest in the medical device and diagnostics industry, so its market capitalization exceeded $70 billion in 2021.
However, after the acquisition of Grail, Illumina's financial model was affected and fell into a state of loss, coupled with the market downturn, lower underlying business expectations and many other factors, Illumina's stock price went from a peak of 555At $77, the lowest fell to $89, making it one of the worst performing medical companies.
Based on the current stock price, Illumina's market capitalization still evaporates more than $50 billion at its high point.
As the absolute leader in the field of pan-cancer early screening in the world, the value of GRAIL is self-evident. But until it proves itself, Grail doesn't bring anything to Illumina.
At the moment, Illumina can't wait for the point where the value of Grail will be released.
Illumina's marriage to Grail is not regulated.
That's because regulators are concerned that Illumina's acquisition of Grail could prevent Grail's competitors from gaining access to the technology needed to develop competitive blood cancer detection tests. Both the European Union and the United States are vigorously opposed.
That's why Illumina has been working with regulators for the past two years. The sky-high fines mentioned above also come from this. But even after paying the fine, the regulator is still not satisfied.
Eventually, Illumina had no choice but to abandon Grail.
On December 18, Illumina officially announced the spin-off of Grail, which is expected to take place no later than the second quarter of 2024.
Magically, as the news of the spin-off broke, Illumina's stock price jumped 808%。
This doesn't seem to be difficult to understand either. At present, Illumina is still the clear leader in the sequencing business, and even if it is challenged by competitors in the future, the impact will not be too great.
Once Illumina dives Grail, the overall operating margin will recover to around 25%, allowing the market to revalue the company based on its core earnings.
What's more, the spin-off will bring billions of dollars of new liquidity to Illumina, which will help boost its balance sheet, which has deteriorated due to acquisitions.
In addition, Illumina can use the cash to further strengthen the competitive advantage of its core business and focus on innovation by investing in research and development.
In this way, the divestiture of Grail is not entirely a negative impact on Illumina's business development. As a result, the market has responded positively.
Looking back at the development of Illumina and GRAIL over the past few years, it may be difficult to draw conclusions about who is right and who is wrong. After all, Illumina's goals aren't wrong. It's just that it's going in the wrong direction.
For a technology-focused enterprise, business development cannot be achieved quickly, and it is the norm to do it day by day. Once you are too impatient, the end result is not always satisfactory.