UK Regulator Has “Competition Concerns” Over Illumina-PacBio Tie-Up

Xconomy San Diego — 

Nearly one year after DNA sequencing machine maker Illumina announced plans to acquire smaller rival Pacific Biosciences, antitrust regulators in the UK say the merger could stifle competition in the region and reduce industry innovation.

The Competition and Markets Authority has been eying the proposed $1.2 billion tie-up since April. The regulator’s in-depth review, which concluded this week, was launched in June—around the time Illumina (NASDAQ: ILMN) and PacBio (NASDAQ: PACB) initially anticipated the deal to close.

On Thursday, the CMA released provisional findings from that review, which concluded that “few alternative providers of DNA sequencing systems” would remain were the deal to go through.

“DNA sequencing is a highly concentrated industry and given the strength of Illumina in this market, and the limited number of alternative providers, the removal of an innovative competitor like PacBio is likely to have a significant impact on competition,” said Stuart McIntosh, who chaired the inquiry, in a statement. “This could harm critically important innovation in the systems created to support DNA sequencing and lead to less choice, higher prices or lower quality as a result of the merger.”

Illumina’s share price closed at $290.64 on Friday, falling 8 percent day-over-day; investment activity was also prompted by its third-quarter earnings release after market close Thursday. PacBio’s reduced to $4.71 apiece, less than 1 percent down over the same time but 10 percent below Wednesday’s closing price.

Worldwide, Illumina controls 80 percent of the DNA sequencing industry: In the UK, its share is even higher, at 90 percent, the CMA said. Further, internal documents it reviewed confirmed that the companies consider each other close competitors, and that the acquisition of Menlo Park, CA-based PacBio would “remove a significant competitive threat” to Illumina. The CMA, in the report, said it had identified no way to allay its concerns—such as requiring one or both companies to divest some assets—besides prohibiting the merger.

The San Diego company looks at short pieces of DNA, often referred to as short reads, while PacBio’s gene sequencing system can analyze so-called long reads.

Illumina, in a statement, noted that the findings are preliminary, and that the CMA’s final decision won’t come until December.

“We will continue to work with the CMA to answer their questions and help them understand how the acquisition will benefit researchers and clinicians to further accelerate genomic discovery,” the company said.

The CMA isn’t the only antitrust group taking a close look at the ramifications of the acquisition: Federal Trade Commission staffers are also studying it. Originally Illumina expected to complete the buyout by mid-2019, but it’s now clear that it may not be finalized this year at all.

With regulatory groups scrutinizing the potential impacts of the deal, the companies last month extended the deadline for the finalization of the agreement to year’s end. Under the terms of the extension, Illumina will pay PacBio $6 million per month, or $12 million in total.

However, it’s unclear how confident Illumina is that it will have the deal wrapped up by Dec. 31: The agreement to move out the deadline also gives Illumina the right to unilaterally extend the deadline once more, as far out as March 31, 2020, as long as it shells out up to $34 million more, depending on the length of the additional extension. (Were the merger to fall apart, PacBio would have to pay the money back if it was acquired by another entity or raised $100 million or more in a single financing within two years of the termination.)

If the deal founders on antitrust issues, Illumina could also be on the hook for a $98 million break-up fee.

Another life sciences merger that has been under regulatory scrutiny, however, this week was given a glimpse of light at the end of the M&A tunnel: Roche, which is looking to buy gene therapy developer Spark Therapeutics (NASDAQ: ONCE) for more than $4 billion, appears to have won over the FTC, which has reportedly recommended the deal be OK’d without requiring any asset sales.