Is it finally time to dump Illumina stock? That’s a question we posed last fall while pondering whether to stay invested in a genomics leader with stagnant revenues and a horrible track record of M&A decisions. One of those was Grail, an acquisition that decimated shareholder value. Illumina was predictably forced to divest Grail and released it into the wild as a spinoff that now trades under the ticker GRAL. Today, we’re going to put our Illumina frustrations on the back burner and focus on the new shares in our portfolio that resulted from the Grail spin-off.
Why We’re Holding Grail Stock
The spin-off terms used simple math. For every six shares of Illumina held, investors were given one share of GRAL which – as of market close – is worth $15.37. This trading debut means we now have an “information statement” to review which provides us with a lots of information about Grail that we weren’t privy to before. We can then gauge the merits of Grail as an independent company and alongside Guardant for comparison.
Now that Grail is a publicly traded company, investors with no dog in the race may be wondering about whether this $500 million company merits a closer look. The thesis on offer is “cancer blood tests” and “early cancer detection,” the idea being that most cancers have dramatically higher survival rates when detected early. A one-and-done test for all cancers at your annual checkup would be handy and effective. It’s why we invested in Guardant (GH), a company working on a single-cancer blood test colorectal cancer screening that was strongly approved by the FDA earlier this month.
When evaluating two companies with similar value propositions, we always choose the leader. Guardant cleared nearly $564 million in revenues last year which dwarfs the $93 million brought in by Grail. Guardant also has better gross margins at nearly 60% vs. Grail at close to 50%. Perhaps the biggest difference between these two firms is the approach being taken to detect cancer. Guardant is biting off the problem in smaller chunks while Grail is going after the whole enchilada.
What Grail Does
Grail sells a test called Galleri which can detect a “shared cancer signal” across more than 50 types of cancer.
With 180,000 tests sold over three years, we’re now able to assess just how lucrative cancer blood tests might be and how much value they’re adding to healthcare. Surprisingly, the Galleri test has not yet been approved by the FDA and it’s not expected to happen for years. Grail plans to complete a premarket approval application submission with the FDA in the first half of 2026 which would be one of the final steps towards having a test that’s legally marketable.
For a product that debuted in 2021, one wonders why it’s taken so long to get FDA approval. Grail was supposed to see FDA approval last year, but now it’s more like two years away. They’re burning upwards of $500 million a year in cash compared to a pro forma cash position of $974 million following the spin-off. Unless they seriously tone down the burn, Grail has about two years of runway before they’ll need to raise capital again by either taking on debt and/or selling shares and diluting existing shareholders.
Single-Cancer vs Multi-Cancer
In the future your smart toilet will analyze your morning tinkle and send a message to your smart fridge which will sort out any beginnings of cancer with a custom smoothie. Prior to that, a single blood test that detects all forms of cancer isn’t too much to ask. Or is it? According to Endpoints News, “the company’s rough public debut shows the industry could be in trouble.” Indeed the $500 million valuation ascribed to Grail today pales in comparison to the $8 billion Illumina paid for the company back in 2021.
Not only did Illumina spit in the face of regulators which cost them dearly, but they may have also bet on the wrong horse. The Endpoints article points to how Exact Sciences (EXAS) has “temporarily scaled back in multi-cancer detection, citing uncertainty over reimbursement.” Contrast that to the cancer-by-cancer approach which Guardant and others take which requires “less investment and has a clearer regulatory pathway.” There’s also a potential concern with false positives.
In a clinical trial of 6,621 people without cancer symptoms, Grail’s test detected a cancer signal in 92 patients. Thirty-five people were ultimately diagnosed with cancer, a potentially life-changing finding. But 57 people had a false positive, according to the company-funded study, the results of which were published last year in The Lancet. False positives can provoke needless anxiety and a diagnostic odyssey.
Credit: Endpoints News
The tests also seem more capable of finding advanced cancers which don’t provide much of an opportunity to save lives. Once you’re in an advanced stage of cancer, it’s usually just a matter of time. Perhaps the way forward is to screen for one cancer at a time which is what Guardant is doing. “We are a multi-cancer company, but just like Keytruda is a $25 billion drug, they started with a single indication,” Guardant told Endpoints.
Grail’s strategy is to put Galleri alongside commonly used existing methods for detecting cancer like mammograms, HPV tests, or even the popular Cologuard test from Exact Sciences. They talk about how “adding Galleri to the five standard of care single-cancer screening tests could result in the detection of an additional 460,000 cancer cases.” Couple that with a dramatic reduction in false positives and Grail estimates that Galleri alongside existing standard of care cancer techniques would reduce the cost to diagnose one cancer by approximately 65%.
This vision sounds promising, but they’ll need to get FDA approval first. We’d be happy to pay a premium for shares of Grail if that external regulatory risk was removed, but it’s not likely we ever would given we already have exposure to the theme with our investment in Guardant.
Some Thoughts on Grail
We ended up with some shares of Grail in our portfolio which we’ll be selling. We’re prone to avoid the company given their past failed acquisition which may have actually slowed progress. Future capital is likely needed based on current burn rates which means they’ll either need to take on debt or give away more equity. It also falls below our market cap cutoff of $1 billion. We’ll be selling our Grail allotment on the next day of trading.
The story of Grail is a reminder that no matter how exciting a solution might be – one blood test to detect all cancers – the proof is always in the revenue growth pudding. If regulatory hurdles are foiling progress then addressing single forms of cancer one at a time might provide an easier path. We’re excited to see where this all ends up and hope that Guardant’s revenue leadership position is a sign of good things to come.
Conclusion
A single blood test to detect all common types of cancer is easier said than done. Guardant’s approach is to support one cancer at a time, while Grail wants to jump right into the deep end with multi-cancer detection that supplements existing techniques. Getting patients in the habit of getting a blood test for a particular cancer is a good start. Then you can start offering an added “menu” of additional tests. When multi-cancer tests become a reality, they’ll intuitively become a standard of care, but only if they can save lives with a reasonable number of false positives.
