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Illumina: EU Orders Grail Divestiture and Shares Remain Undervalued

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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. Find out about Morningstar’s editorial policies.

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Julie Utterback

Senior Equity Analyst
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Julie Utterback is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. Within the healthcare industry, she covers medical technology and service companies. She is also the chairperson of the equity research team’s capital allocation methodology.

Utterback joined Morningstar in 2005 as an equity analyst in the healthcare industry. At that time, she covered medical technology companies, including orthopedic device, medical equipment, and cardiac device firms. In 2010, she joined Morningstar's credit research team, initiating coverage of the entire healthcare industry and generally helping the organization expand and maintain its credit coverage across many industries. She held that senior credit analyst role until April 2019, when she returned to the equity team to cover medical technology and service companies.

Prior to joining Morningstar, Utterback was an equity analyst at State Farm Insurance for several years. She holds a bachelor's degree in finance from the University of Illinois Urbana-Champaign. She also holds the Chartered Financial Analyst® designation.

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