Deliberate defiance of government regulators takes gumption, even when those regulators are located an ocean away. However, that’s the strategy that Illumina’s corporate leadership has chosen in announcing that the company has completed its acquisition of Grail even though the European Union (EU) has not and may not approve the deal due to its anti-competitive effects.
The Illumina Acquisition of Grail
On Sept. 21, 2020, Illumina announced that it had signed a definitive agreement to acquire Grail, the liquid biopsy firm it spun off in 2016 and which had announced its own plans to go public just a week earlier. The price: $3.5 billion in cash and $4.5 billion in shares of Illumina common stock. Under the acquisition agreement, which was approved by each company’s board of directors, Grail shareholders, who include Bill Gates and Jeff Bezos, would also get payments of 2.5 percent off the first $1 billion of Grail-related revenues and 9 percent off revenues above $1 billion per year over 12 years.
The deal enables Illumina to expand its position in the early cancer diagnostics market. Grail just launched a highly touted blood-based screening test called Galleri that uses methylation sequencing for ultra-early detection of over 50 different types of cancers. Illumina’s president and CEO described Galleri as being “among the most promising new tools in the fight against cancer,” and said that the acquisition would help Illumina “transform cancer care using genomics and our NGS platform.” Illumina, which currently owns 12 percent of its former spinoff, is also the supplier of the sequencers that Grail uses for performing its genomic tests. Bringing the two companies back together would put the testing and sequencing under one roof.
The Reaction to the Acquisition
Even so, reaction to the announced deal was decidedly lukewarm. Investors were spooked by the high purchase price and the apparent lack of fit. After rumors of the buyback drove Illumina share prices down about 11 percent, announcement of the actual deal caused another decline of 4.5 percent.
Investors weren’t the only skeptics. Regulators, too, had their doubts. The U.S. Federal Trade Commission (FTC) expressed concerns over the new cancer genomics powerhouse’s potential to dampen competition. But the FTC backed off by securing federal court approval to postpone legal action to block the deal pending resolution of the situation in Europe. Of course, the very fact there even was a situation in Europe was the big story.
That situation began in April when the European Commission’s Directorate-General of Competition announced that it planned to review the deal under its controversial new guidance that enables the Commission to demand notification of a deal even when no such notification is required by the member states. “The combined [Illumina/Grail] entity “could restrict access to or increase prices of next-generation sequencers and reagents to the detriment of Grail’s rivals active in genomic cancer tests following the transaction,” according to a Commission statement.
To make things even tougher for Illumina, the EU delayed its investigation making it all but impossible for the deal to get regulatory approval by the closing deadline stipulated in the acquisition contract and leaving Illumina responsible to pay Grail a $300 million termination fee.
Illumina Hurls Down the Gauntlet
Illumina, which has challenged the EU’s jurisdiction over what it contends is a purely U.S. acquisition, has decided not to allow the Commission to “run out the clock.” On August 18, the company announced that it has gone ahead and acquired Grail, which it will hold as a wholly-owned company that will operate independently while the EU reviews the deal. “The stakes here are high because, simply put, this deal saves lives,” Illumina CEO Francis deSouza told investors.
Mr. deSouza couldn’t be more right. The stakes are indeed high. Illumina expects the Commission to respond to the deal’s closing by trying to impose a fine of 10 percent of the company’s consolidated annual turnover. If the EU subsequently rejects the deal, Illumina will likely go to court to challenge the decision. And even if Illumina makes it through the EU and courts, the FTC hasn’t approved the deal and will be free to make its own decision. The end game of all this is that Illumina may have to wind down the acquisition and end up wasting massive investments of money, time and energy.