TThe long and (un)winding road of ‘killer acquisition’ Illumina/Grail

Article
EU Law

Crystal ball gazing into prospective innovation rat races when assessing vertical mergers may soon be all in a day’s work for the European Commission. Innovation was a recurring theme in the Commission’s handling of next generation sequencing (NGS) technology company Illumina’s acquisition of early cancer detection test developer Grail: it was the reason why the Commission claimed jurisdiction over the non-notifiable transaction and the reason why it was prohibited. A decision ordering Illumina to unwind the already implemented transaction is imminent. Meanwhile, Illumina’s appeals on a variety of issues are stacking up and there is still a long way to go before the European courts have their final say.

For now, companies – particularly in the digital, technology and pharma sectors – are well-advised to take account of this ‘innovation factor’ in their preliminary assessment of a potential EU review of their ((traditionally) non-notifiable) transactions.

Background

Illumina announced its acquisition of Grail in September 2020. The transaction was not notified to the European Commission or in any of the Member States because it did not meet any of the relevant notification thresholds within the EEA. Nevertheless, the Commission started an in-depth investigation into the deal following a referral request under Article 22 of the EU Merger Regulation (see our May 2021 newsletter). The General Court rejected Illumina’s appeal questioning the Commission’s competence to do so (see our August 2022 newsletter). In the meantime, Illumina had already completed the transaction, which triggered the Commission to adopt interim measures pending the outcome of its substantive review and, in parallel, to initiate an investigation into potential gun jumping (see our December 2021 newsletter).

Factoring in the innovation factor

The Commission prohibited the transaction on 6 September 2022, finding that the vertical integration of Illumina with Grail could kill the ongoing ‘close’ innovation race between developers of multi-cancer early detection (MCED) tests. According to the Commission, Illumina, as the only suitable supplier of NGS technology to run MCED tests, would be able to foreclose Grail’s competitors by, for instance, refusing to supply NGS systems, increasing the NGS systems’ prices or degrading quality and delay supplies. On top of that ability, Illumina would also have the incentive for this input foreclosure, given the highly lucrative market potential of NGS-based MCED testing. Even if the exact outcome of this innovation race and the future shape of the market for MCED tests are still uncertain, protecting the current innovation competition is crucial to ensure that a variety of MCED tests come to the market.

In contrast to the Commission’s decision, the Federal Trade Commission’s (FTC) challenge to block the same deal was dismissed by a Chief Administrative Law Judge in the United States. Unlike the FTC, the judge was not convinced an actual innovation race would be crushed because of the Illumina/Grail transaction. The judge reasoned that Illumina’s status as the only viable supplier of NGS technology existed before its acquisition of Grail. Therefore, Illumina’s abilities to foreclose Grail’s rivals was not a result of the transaction. The possibility of Illumina harming competition was found to be too speculative – the likelihood of tests, better than Grail’s MCED test, emerging was considered to be unlikely from developers who currently have no sales stemming from MCED tests.

Unsuitable remedies

The remedies offered by Illumina to resolve the Commission’s concerns were deemed insufficient to address the perceived harm to innovation in the area of NGS-based cancer detection tests:

  • First, Illumina’s offer to license some of its NGS patents to NGS suppliers and to introduce a three-year patent litigation stop against its competitor BGI Genomics would not effectively secure the emergence of a credible alternative NGS supplier in the short to medium term. Not only would NGS suppliers need many other Illumina patents to develop an alternative NGS system, the actual switching of providers would also be a long and costly process for Grail’s competitors.
  • Second, Illumina’s offer to conclude standard contracts with Grail’s rivals to ensure their continued access to its NGS systems did not cover all of Illumina’s possible foreclosure strategies and was too complex to monitor.

This is in stark contrast with the FTC’s Chief Administrative Law Judge’s opinion, who deemed the standard contracts effectively constrain Illumina from using virtually any of the tools that will raise rivals’ costs or otherwise foreclose Grail’s alleged rivals, as well as provide for effective monitoring and enforceability mechanisms.

Block and unwind

The Commission blocked the transaction and a decision ordering Illumina to unwind the transaction to restore Grail’s independence is upcoming. Given the interim ‘hold-separate’ measures already in place, the unscrambling of these eggs may be slightly less messy. However, it may still lead to complex situations, given the FTC’s Chief Administrative Law Judge’s differing conclusion. The FTC has already filed an appeal against the judge’s decision.

Conclusion

Preserving innovation competition is high on the Commission’s agenda, particularly when assessing vertical mergers. Companies should therefore factor in the innovation factor when contemplating vertical transactions and consider robust (beyond behavioural) remedies to fix perceived input foreclosure in the innovation process. Given the different outcomes of the Illumina/Grail deal in the EU and the United States, a crystal ball may come in handy in some of these situations.

In the meantime, Illumina/Grail is likely to remain on everyone’s lips for some time to come: see the list of Commission decisions and announced, pending and initiated appeals at the EU courts so far:

 

Commission decision

Appeal

Article 22 full referral (M.10188)

  • Appeal to the General Court (T-227/21) – unsuccessful
  • Appeal to the Court of Justice of the European Union (C-611/22 P)

Interim measures (M.10493)

Gun jumping (M.10483) – ongoing

 

Prohibition (M.10188)

Unwinding – upcoming

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