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Illumina - Can GRAIL Deal A Death Blow In The War Against Cancer?


The scientific and business communities have joined forces in a war against cancer - will it be a death knell for the dreaded disease?

Illumina's startup venture GRAIL has aspirations of developing an early-detection cancer screening test and unlocking a $20 billion industry.

The new venture faces scientific uncertainties and a growing field of competing researchers.

Despite the significant challenges it faces, management claims that GRAIL possesses key advantages which give it an edge against rivals.

Will investors be able to gain their own edge in predicting the outcome of this scientific endeavor?

Introduction and Significance to Illumina

Earlier this year, Illumina (NASDAQ:ILMN) announced plans to form a separate entity to be among the pioneers in liquid biopsy research with the goal of creating a simple blood test for early detection of all major types of cancer. Illumina is a 52 percent owner of the new venture GRAIL, which has also received well-publicized backing from Microsoft (NASDAQ:MSFT) Founder Bill Gates and (NASDAQ:AMZN) CEO Jeff Bezos, among other notable investors.

The new initiative complements Illumina's core business of DNA sequencing equipment very well, and the company can use this expertise to improve its odds of success in developing its early detection cancer test. Illumina is dominant in DNA sequencing machines with an estimated 75% market share which reaches as high as 90% among premium sequencing devices according to Morningstar estimates. The total addressable market of its core business has been estimated by management to be in excess of $20 billion, which represents an opportunity for significant future growth from the $2.2 billion of revenue Illumina booked in 2015 while holding 75% of the market.

While the future of the business is very promising, expectations are also very high, with the stock's price-earnings multiple near 60. The stock is a high-potential, high-risk investment that appeals strongly to many enterprising, growth-oriented investors. Illumina's dominant core business has been discussed in detail in prior coverage; the analysis today will focus on its new investment in GRAIL and its prospects for achieving the inspiring goals that management has set for it. The company's ambition is to bring a cancer-screening test to market by 2019. With demand for Illumina's DNA sequencing machines already quite robust, any incremental success for GRAIL could contribute significantly to the future growth the company must achieve to fulfill the promising potential its investors envision.

The test GRAIL hopes to develop is a form of liquid biopsy, a new scientific technology that has attracted substantial attention from cancer researchers. Many have been quick to recognize the most optimistic prospects of GRAIL, for which management has estimated a total addressable market size between $20 billion and $200 billion. However, what has been harder to come by is analysis regarding the company's likelihood of capturing this market, its potential future market share, and the challenges that must be overcome before all of this can transpire. The following will set forth an evaluation of why the new field of liquid biopsy is so promising, what challenges face those researching it, and how GRAIL stacks up against the competition within this emerging industry.

Liquid Biopsy Overview & Opportunities

Tissue biopsy has long been the standard in diagnosing and profiling cancer tumors in patients. The method entails extracting a tissue sample from a patient through invasive and sometimes painful surgical procedures. A more patient-friendly alternative has emerged as an alternative and possibly even future replacement. The new method, liquid biopsy, serves a similar purpose as tissue biopsy, but uses blood or other body fluids instead of tissue.

Cancer tumors mutate over time and their characteristics change as the disease progresses from early to more advanced stages. During the process, dying cancer cells give off DNA into the blood stream. Advances in DNA sequencing technologies have made it possible to harvest the enormous amount of information contained in our blood by isolating genetic markers of cancer. This makes diagnosis of cancer through a blood test theoretically possible.

An additional benefit of blood-based liquid biopsy is the ease of obtaining a sample; any doctor's office is surely equipped to draw blood. This is an advantage over the invasive and painful method of tissue biopsy, which often is performed only once on a patient. In contrast, liquid biopsies can be performed multiple times throughout an illness...