FTC Trial Seeks to Promote Competition in Cancer-Screening Tests by Unwinding Illumina-GRAIL Merger
The FTC kicked off its trial challenging Illumina Inc.’s completed acquisition of GRAIL Inc. on Tuesday by urging an FTC administrative law judge to undo the $7.1 billion deal, arguing it would harm innovation and boost prices of cancer-screening tests.
The FTC’s bid to unwind the merger of DNA sequencing leader Illumina and GRAIL, a biotech company focused on early cancer screenings could impact the health of both merger enforcement and potential cancer patients.
GRAIL’s multi-cancer early detection (“MCED”) test, Galleri, is the first MCED test to market. According to GRAIL, Galleri uses a simple blood draw to detect early signs of more than 50 types of cancer, many of which are not commonly screened for today. Galleri relies on a DNA sequencing technology called next generation sequencing (“NGS”). And, according to the FTC, Illumina is the only NGS platform capable of meeting the technological demands required by MCED test developers, including GRAIL’s rivals that are racing to develop and launch their own MCED tests.
Illumina formed GRAIL in 2016 and spun it off in 2017. In September 2020, Illumina announced it had agreed to reacquire GRAIL for $8 billion. According to Illumina, the merger will accelerate the development, approval, and adoption of Galleri, which is still years away from wide-scale commercialization. Illumina claims that the merger will also create R&D efficiencies and result in lower prices to consumers.
In March 2021, the FTC commenced an administrative proceeding challenging the merger. In August 2021, the companies closed the merger despite the FTC’s ongoing challenge and in the face of a European Commission investigation.
The FTC asserts that the merger will change Illumina’s incentives to ensure all its MCED customers, not just GRAIL, successfully develop and launch their MCED tests. According to the FTC, this may substantially lessen competition by foreclosing GRAIL’s competitors from obtaining a critical input (Illumina’s NGS technology) on competitive terms. If the merger is not reversed, Illumina would have the means to ensure that GRAIL’s MCED dominates the market and stymie innovative alternatives from GRAIL’s rivals that are all beholden to Illumina’s technology.
In response, Illumina asserts that the FTC’s claims are baseless. Illumina’s argument relies on a number of facts, including that Illumina never fully divested itself from GRAIL. Following the spinoff, Illumina retained a 12% equity stake in GRAIL and entered into a supply agreement that entitled Illumina a percentage of GRAIL’s revenues. Thus, the merger would not create any new incentives for Illumina to put its thumb on the scales to favor GRAIL over its rivals. Illumina argues that no other MCED test has launched, the tests that are in development are highly differentiated from Galleri in material ways, and there is no basis on which to predict that those tests, if they ever launch, would be substitutes from which hypothetical foreclosed sales would likely diver to Galleri. Illumina also flatly denies it would destroy its reputation as a trusted supplier of NGS systems and try to foreclose some of its largest customers.
Both sides claim that the other is putting lives at risk. The FTC claims that patients will be harmed by stifled innovation in the MCED market if the merger is allowed to stand. Illumina claims that undoing the merger will delay Galleri’s commercial development and deprive patients of life-saving early cancer detection tests. Regardless of which side is correct, the stakes are high in this case.
From an antitrust perspective, the FTC’s challenge to this merger is unique because the merger is vertical in nature. Vertical mergers, where a supplier merges with a customer, have not faced the same level of regulatory opposition as horizontal mergers (mergers between two competitors). In fact, this is the first vertical merger litigated by the FTC in decades. It is also only the second vertical merger in 40 years litigated by a U.S. regulator, the other being the Department of Justice’s failed bid to enjoin the merger of AT&T and Time Warner (discussed on this blog here and here).
Another way in which the FTC’s challenge is unusual is that it is challenging a now-completed merger. Although the FTC has authority to challenge a closed merger, such challenges are rare. Indeed, even if the FTC is successful, it can be difficult to unscramble the eggs, so to speak. Here, however, Illumina has announced it will hold GRAIL as a separate company while proceedings are ongoing so that “Illumina is positioned to abide by whatever final decision is reached in these legal processes.”
The trial, which is being conducted remotely due to the pandemic, could run into October. The outcome could send a signal about the future of the direction of vertical merger enforcement by the FTC.
Edited by Gary J. Malone
Tagged in: Antitrust Enforcement, Antitrust Litigation,