After Antitrust Challenges, Illumina and PacBio Throw in Towel on Merger

Xconomy San Diego — 

DNA sequencing machine maker Illumina will have to find another way to “read” long pieces of genetic material as well as short stretches, the genomic giant’s bailiwick. Its $1.2 billion proposal to acquire long-read capability by buying rival Pacific Biosciences ended Thursday following challenges from antitrust regulators.

The deal foundered about 14 months after the companies first announced the plan to combine businesses. San Diego-based Illumina (NASDAQ: ILMN), which has built its business around what’s known as short-read sequencing, argued the acquisition would accelerate innovation in the field.

Although so called long reads have historically been more error-prone than short reads, recent advances have driven down the technology’s rate of inaccuracies. In genetic research, long reads can help determine what’s going on in a DNA sequence when lengthier pieces of genetic material are needed to tell the tale, such as when studying trinucleotide repeats, in which longer repeats may reveal characteristics about the severity of an associated neurological disorder.

“We believe this proposed combination would have broadened access to Pacific Biosciences sequencing technology, significantly expanded and accelerated innovation, and ultimately increased the clinical utility and impact of sequencing,” said Francis deSouza, Illumina’s president and CEO, in a prepared statement released after the public markets closed on Thursday. The statement announcing the end of the deal characterized the decision as a “mutual agreement” by the companies.

Regulators—including the UK’s antitrust group and the Federal Trade Commission—asserted that bringing PacBio (NASDAQ: PACB) within the Illumina fold would hamper innovation and deter competitors by allowing the already dominant company to extend its lead.

“Considering the lengthy regulatory approval process the transaction has already been subject to and continued uncertainty of the ultimate outcome, the parties decided that terminating the agreement is in the best interest of their respective shareholders and employees,” the companies said in the statement.

As part of the dissolution, Illumina is out $98 million, the termination fee it agreed to pay Menlo Park, CA-based Pacific Biosciences in the event of the deal’s collapse under certain circumstances. Other associated payments include $34 million in fees it agreed to pay to postpone the merger agreement’s deadline as the transaction remained under regulatory scrutiny. PacBio had $49 million in cash and investments at the end of the third quarter; Illumina had $1.8 billion in cash and cash equivalents.

PacBio, in its 2018 annual report, said the company’s success was “highly dependent” on its ability to further penetrate the sequencing market as well as the growth and expansion of the market for its products. That year it reported a net loss of $135 million; it also noted that its distributor in China accounted for about a quarter of its total revenue, which was $78.6 million. In addition to Illumina, the company’s competitors include Thermo Fisher Scientific (NYSE: TMO), Roche, and Qiagen (NYSE: QGEN).

SVB Leerink’s Puneet Souda, in a research note, said the termination would not impact Illumina’s long-term trajectory given the company’s ability to “pursue other avenues for long-read sequencing including building the capability internally.”