Shares of Illumina (NASDAQ: ILMN) are sinking today, down 6.7% as of 11:48 a.m. EDT, after the genomic-sequencing specialist announced that it plans to acquire GRAIL for $8 billion.
Illumina actually founded GRAIL in 2016 but later spun out the company as a stand-alone entity. GRAIL is focused on the development of liquid biopsies: blood tests that detect cancer by identifying fragments of DNA separated from tumor cells.
GRAIL is targeting a total addressable market that could grow to $75 billion by 2035. So why were investors not happy with Illumina's acquisition news? Probably because of the price tag of the deal.
Earlier this month, GRAIL filed for an initial public offering (IPO). Its valuation as it prepared to go public was estimated to be around $1.9 billion. Illumina will spend four times that amount to get a company that doesn't have any products on the market yet and that has no steady source of revenue. The fact that Illumina is investing so much to get a company that it already owned just a few years ago makes the deal even harder to swallow for investors.
The price that Illumina is paying for GRAIL won't matter over the long run -- if GRAIL is successful in developing and marketing liquid biopsy products. GRAIL hopes to launch its first product, multicancer early detection test Galleri, next year for laboratory use only. With Illumina's shares trading at more than 42 times expected earnings, the company will need to deliver some good news soon to convince investors the healthcare stock is worth buying at its premium valuation.
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