What Illumina's and Bristol-Myers Squibb's Latest GRAIL Moves Mean for Investors

By Keith Speights Markets Fool.com

There was a step forward and a step backward last week related to GRAIL, the company seeking to develop a simple DNA blood test to detect most forms of cancer early enough to be effectively treated.

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The step backward came fromIllumina (NASDAQ: ILMN), GRAIL's primary founder. GRAIL repurchased part of the genomic-sequencing leader's stake in the company. Bristol-Myers Squibb (NYSE: BMY), on the other hand, took a step forward by making a significant investment in GRAIL.What do these recent moves mean for Illumina and Bristol-Myers Squibb investors?

Image source: Getty Images.

Letting a child grow up

Illumina formed GRAIL as a separate entity in early 2016. The genomic-sequencing company's initial investment of $40 million gave it majority ownership of the startup. Additional funding for GRAIL came fromARCH Venture Partners,Bezos Expeditions,Bill Gates,Sutter Hill Ventures, and GV.

GRAIL recently completed its second round of financing, raising over $900 million. The company used some of the proceeds to purchase part of Illumina's stake. Illumina now owns less than 20% of GRAIL. As a result, Illumina gave up its spot on GRAIL's board of directors.

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What we're seeing is a parent allowing its child to grow up. That's a good thing for GRAIL -- and for Illumina. Investments in GRAIL contributed to Illumina reporting a lower operating margin in the fourth quarter of 2016. The company's funding of GRAIL diluted adjusted earnings per share last year by $0.27, a little over 8% of Illumina's total adjusted earnings per share.

Illumina hasn't received much in return for its investment in GRAIL yet, although that's to be expected. It couldn't recognize instruments purchased by GRAIL as revenue while it owned a majority interest in the startup. Although Illumina will be able to do so beginning in the second quarter of this year, the amounts involved won't be large because GRAIL has already received most of the instruments the company needs for now.The company anticipates less than 1% of 2017 revenue will stem from GRAIL.

For Illumina's investors, this latest development means less bleeding of cash in the near term. It also adds more to Illumina's cash stockpile. The company still has $100 million authorized for additional stock repurchases, which could potentially be accelerated with the added cash from GRAIL.

Over the longer run, GRAIL could emerge as a significant customer for Illumina -- especially for the new NovaSeq sequencing system. Illumina also retains a large enough stake in GRAIL to profit significantly if efforts to develop an effective DNA test for early cancer screening are successful.

A precision medicine initiative

The size of Bristol-Myers Squibb's new stake in GRAIL isn't known yet. However, the investment is obviously significant enough that the big drugmaker is gaining several perks from the relationship.

Bristol-Myers Squibb is gainingearly access to GRAIL's clinical trial databases. This access could be valuable in helping the pharmaceutical company better understand tumor genomics and therefore develop more effective cancer drugs.

GRAIL and Bristol-Myers Squibb are also forging a research collaboration. Bristol-Myers Squibb will be able to examine data from its clinical studies using GRAIL's analytic tools. This could help the drugmaker fine-tune its research and development priorities as well as develop targeted drugs and companion diagnostics.

Is the GRAIL investment a win for Bristol-Myers Squibb's shareholders? Probably so -- assuming the price tag wasn't too steep.

If GRAIL succeeds in its quest, it could position Bristol-Myers Squibb at the forefront of the race to develop cancer drugs targeted for specific types of cancer.It's not hard to envision Bristol-Myers Squibb leveraging its relationship with GRAIL to pick and choose the best combination alternatives for Opdivo and Yervoy, as well as guide decisions for earlier-stage pipeline candidates.

Still early

No one knows if GRAIL will achieve its goal. The company began its first multicenter clinical study in December to create acirculating cell-free tumor DNA atlas. Although the study will continue for five years, final data collection for the primary outcome measure will wrap up in September of this year.

GRAIL seems to at least be on the right course, though. Illumina shareholders were already rooting for the new company. Now Bristol-Myers Squibb investors can, too.

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Keith Speights has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Illumina. The Motley Fool has a disclosure policy.