Shares of Illumina (ILMN) are under pressure on Thursday after the DNA sequencing giant said it has closed its acquisition of Grail, a cancer diagnostics company. The Federal Trade Commission sued in March to block the deal and the European Union is currently investigating it. Commenting on the news, Citi analyst Patrick Donnelly called the development a "confusing one," while his peer at SVB Leerink downgraded the stock to Market Perform on rising uncertainty.

GRAIL ACQUISITION: Illumina announced on Wednesday that it has acquired Grail, a healthcare company focused on life-saving early detection of multiple cancers, but will hold Grail as a separate company during the European Commission's ongoing regulatory review. Regulators in the EU are reviewing the transaction, but a decision is projected after the deal expires. Grail has no business in the EU, and the company believes that the European Commission does not have jurisdiction to review the merger as the EU merger thresholds are not met, nor are they met in any EU member state. The General Court of the European Union will hear Illumina's jurisdictional challenge later this year. By holding Grail separate while proceedings are ongoing, Illumina is positioned to abide by whatever final decision is reached in these legal processes. There is no legal impediment to acquiring Grail in the U.S. Illumina is committed to working through the ongoing FTC administrative process, and as always, will abide by whatever outcome is ultimately reached in the U.S. courts.

As previously disclosed, the merger consideration for Illumina's acquisition of GRAIL included cash and shares of Illumina common stock, as well as contingent value rights or additional shares of Illumina common stock. Grail stockholders, including Illumina, are entitled to cash consideration of approximately $3.5 billion or, excluding Illumina, approximately $3.1 billion. Illumina is also spending approximately $0.4 billion in cash to cover the tax withholding requirements from net settling shares of Illumina common stock issuable to Grail employees.

"We made the decision to acquire GRAIL and hold it separate until we received regulatory approval, because it's becoming clear that we will most likely not have a decision from the regulators before the agreement expires in December. The stakes here are high, because simply put, this deal saves lives, and we feel a moral obligation to ensure that the deal has a full review," Illumina CEO Francis deSouza said during a conference call.

Asked by Bank of America's Derik De Bruin what would happen if in the end Illumina has to divest Grail, the executive said that, "So you were talking about 2025-ish and maybe even a little after when we would be required to unwind it if we had to. At that time, the options -- we look at the whole spectrum of options, including an IPO. And so it's completely unrelated to the $8 billion. We paid those shareholders out today. We own GRAIL today. We are the shareholder of GRAIL. And so at that point, we'd look to maybe spin out and take public the GRAIL asset, the early screening test asset. And again, at that point, we'd assess what the best option was, but an IPO seems like a good candidate."

ACQUISITION CLOSE 'CONFUSING': Citi analyst Patrick Donnelly noted in a research to investors that in the latest twist in the Grail acquisition story, Illumina announced that it has closed the acquisition despite the regulatory review with the European Commission remaining ongoing,. The analyst sees the deal close development as a "confusing one." He could not find any precedent for an acquirer intentionally closing a deal ahead of regulatory approval particularly in a case where the approval process has been "somewhat contentious with the outcome uncertain." Donnelly sees some risk that Illumina's tactic does not sit well with the regulatory bodies.

RISING UNCERTAINTY: Meanwhile, SVB Leerink analyst Puneet Souda downgraded Illumina to Market Perform from Outperform with a price target of $425, down from $510. The analyst sees significantly tougher comparisons emerging in 2022 in the absence of any new major product cycle or further pricing reductions, at a time when the thesis for Illumina's elasticity of demand is eroding with clinical testing reaching about 45% of sequencing consumables - a trend that will likely only accelerate. Adding to that is rising uncertainty with Illumina's action to close the Grail acquisition, now locking-in significant dilution in 2022 despite a clear line of sight of true integration and an uncertain regulatory process that holds potential to drag into 2025 with material fines and to risk relationships with the regulators, Souda added.

PRICE ACTION: In Thursday morning trading, shares of Illumina have dropped almost 9% to $466.37.