Enter to open, tab to navigate, enter to select
European Commission prohibits Illumina/ GRAIL merger
Practical Law UK Legal Update w-036-8253 (Approx. 7 pages)
European Commission prohibits Illumina/ GRAIL merger
| Published on 06 Sep 2022 • European Union |
On 6 September 2022, the European Commission announced that it has decided, under Article 8(3) of the EU Merger Regulation, to prohibit the acquisition by Illumina of GRAIL Inc.
Speedread
On 6 September 2022, the European Commission announced that it has decided, under Article 8(3) of the EU Merger Regulation, to prohibit the acquisition by Illumina of GRAIL Inc.
The acquisition would lead to the vertical integration of Illumina, the unrivalled supplier of next generation sequencing (NGS) systems for genetic and genomic analysis, with GRAIL, a customer of Illumina using NGS systems to develop cancer detection tests. GRAIL and its competitors are engaged in an innovation race to develop and commercialise early cancer detection tests and the Commission considers that protecting the current innovation competition is crucial to ensure that early cancer detection tests with different features and price points come to the market.
The Commission found that the acquisition would have enabled and incentivised Illumina to foreclose GRAIL's competitors, who are dependent on Illumina's technology, from access to an essential input they need to develop and market their own tests. As a result, GRAIL's competitors would be put in a disadvantaged position compared to GRAIL.
Illumina offered remedies to meet the Commission concerns, including a licence open to NGS suppliers to some of Illumina's NGS patents, and a commitment to stop patent lawsuits in the US and Europe against the NGS supplier BGI Genomics (China) for three years; as well as a commitment to conclude agreements with GRAIL's competitors, under conditions set out in a standard contract, to ensure they would enjoy continued access to Illumina's NGS systems until 2033.
The Commission decided that these proposed remedies did not adequately address its competition concerns such that it could be concluded that competition would be preserved on a lasting basis. The remedies did not fully remove Illumina's ability or incentives to foreclose GRAIL's rivals and would thus not have prevented the acquisition's detrimental effect on competition.
In July 2022, the Commission announced that it had sent a statement of objections alleging that Illumina and GRAIL breached Article 7(1) of the EU Merger Regulation (the standstill obligation) by implementing Illumina's acquisition of GRAIL while the Commission's in-depth Phase II investigation was still ongoing.
Where a concentration that has been declared incompatible with the internal market has been already implemented, the Commission may, under Article 8(4) of the EU Merger Regulation, dissolve the concentration or take other appropriate measures. The Commission states that it will assess in due course whether and which additional steps will be required. In the meantime, interim measures imposed in October 2021 will continue to apply.
Illumina has already announced that it intends to appeal the Commission's decision.
Background
Illumina, based in the US, is a global genomics company that develops, manufactures and commercialises next generation sequencing (NGS) systems, including sequencing instruments, consumables and related services. Illumina's NGS systems are medical devices used in a variety of applications, including by customers in the oncology space that develop and run blood-based tests that can detect cancer or select appropriate therapies for cancer patients. In Europe, Illumina commercialises its products both directly and via distributors.
GRAIL, also headquartered in the US, is a healthcare company that is developing blood-based cancer tests based on genomic sequencing and data science tools. GRAIL's flagship product is Galleri, a multi-cancer early detection test, whose purpose is to detect around 50 cancers in asymptomatic patients from a blood sample. In April 2021, GRAIL initiated a limited commercialisation of Galleri in the US. GRAIL has two additional pipeline products:
- A diagnostic aid for cancer testing used to confirm a diagnosis of cancer in symptomatic patients.
- A minimal residual disease test, to detect potential relapse in patients after cancer treatments.
Illumina's acquisition of GRAIL does not reach the notification thresholds set out in the EU Merger Regulation, and it was not notified in any member state. However, in April 2021, the European Commission decided to accept referral requests from France and other member states under Article 22 of the EU Merger Regulation (see Legal update, Commission accepts Article 22 referral request to assess proposed acquisition of GRAIL by Illumina). The Commission considered that the proposed acquisition of GRAIL by Illumina would affect trade within the single market and threatened to significantly affect competition within the territory of the member states that made the referral request (Belgium, France, Greece, Iceland, the Netherlands, and Norway), and that a referral was appropriate because GRAIL's competitive significance is not reflected in its turnover.
Illumina's action before the General Court to challenge the Article 22 reference decision was dismissed on 13 July 2022 (see Legal update, General Court dismisses appeal of Commission decision to accept Article 22 referral of transaction that did not qualify for member state merger review).
On 22 July 2021, the Commission announced that it had decided, under Article 6(1)(c) of the EU Merger Regulation, to initiate an in-depth Phase II investigation into the proposed acquisition (see Legal update, Commission opens Phase II investigation into proposed acquisition of GRAIL by Illumina).
Subsequently, on 18 August 2021, Illumina publicly announced that it had decided to complete its acquisition of GRAIL, while the Commission's review of the proposed transaction was ongoing. The Commission opened an investigation to assess whether this constitutes a breach of the standstill obligation under Article 7 of the EU Merger Regulation and, on 19 July 2022, sent a statement of objections (see Legal update, Commission sends statement of objections alleging early implementation of Illumina/ GRAIL merger in breach of the standstill obligation).
On 29 October 2021, the Commission decided, under Article 8(5)(a) of the EU Merger Regulation to impose interim measures to restore and maintain the conditions of effective competition following Illumina's early acquisition of GRAIL (see Legal update, Commission adopts interim measures to prevent harm to competition following early implementation of Illumina / GRAIL merger). The interim measures are intended to prevent the potentially irreparable detrimental impact of the transaction on competition, as well as the possible irreversible integration of the merging parties, pending the outcome of the Commission's Phase II merger investigation. Illumina and GRAIL have lodged actions to challenge the interim measures decision (see CaseTracker, Illumina/ GRAIL (interim measures)).
Decision
The Commission found that Illumina would have had the ability and the incentive to engage in foreclosure strategies against GRAIL's competitors, for example, by refusing to supply its NGS systems to GRAIL's rivals, increasing prices, or degrading quality and delaying supplies. The Commission considered that such strategies would have resulted in a significant detrimental effect on competition in developing and marketing NGS-based cancer detection tests in the EEA.
The Commission also found that GRAIL and its competitors are currently engaged in an innovation race to develop and commercialise early cancer detection tests. While there is still uncertainty about the exact results of this innovation race and the future shape of the market for early cancer detection tests, protecting the current innovation competition is crucial to ensure that early cancer detection tests with different features and price points will come to the market.
In this context, the Commission considered that Illumina would have the ability to foreclose GRAIL's competitors. GRAIL and its competitors rely on Illumina's NGS systems to develop and run their tests. Early cancer detection test developers need high-throughput NGS systems, with a reliable support network and a solid track record. Only Illumina's equipment currently meets these requirements and the Commission found no credible alternatives to Illumina in the short to medium term.
In addition, barriers to entry are significant, in particular due to the risk of intellectual property litigation and the need for GRAIL's rivals to rely on an NGS player that has an installed base of instruments in third party laboratories, can compete with Illumina's ongoing innovation, has a developed and stable technology, and proven reliability of support services over time. Moreover, switching NGS provider would be a long and costly process for GRAIL's competitors, with no guarantee of success.
Illumina would also have clear incentives to foreclose GRAIL's competitors. While Illumina's sales of NGS technology to GRAIL's rivals represent a small proportion of its sales and profits, NGS-based early cancer detection testing is expected to expand rapidly and to become highly lucrative. Based on predictions, by 2035 this market would reach more than EUR40 billion a year on a global basis. Given this enormous market potential and the ongoing close innovation competition in the development of early cancer detection test, the Commission considered that Illumina would have an incentive to foreclose GRAIL's rivals already, despite benefitting from this action only at a later stage. GRAIL's flagship test Galleri, while enjoying a first mover advantage, is not unique, and several players are currently developing cancer detection tests that would closely compete with Galleri in the near future absent the transaction.
Illumina's proposed remedies
Illumina offered remedies to meet the Commission concerns:
- A licence open to NGS suppliers to some of Illumina's NGS patents, and a commitment to stop patent lawsuits in the US and Europe against the NGS supplier BGI Genomics (China) for three years. This commitment aimed at reducing IP related barriers to entry and thereby making it easier for NGS suppliers, in particular BGI, to bring their products to the market.However, the Commission's analysis and extensive market testing indicated that these commitments would not have ensured the emergence of a credible alternative to Illumina for GRAIL's rivals in the short to medium term. The patent licence would have only had a limited impact because the covered patents were due to expire in the short term, and because Illumina has many other patents that competitors would need to develop an alternative NGS system.In addition, other significant barriers hinder the emergence of a credible alternative to Illumina for GRAIL's competitors.Moreover, the commitments did not address the concern that even if alternative NGS systems emerged, switching provider would be a long and costly process for GRAIL's rivals, without a guarantee of success.
- A commitment to conclude agreements with GRAIL's competitors under the conditions set out in a standard contract. The provisions contained in these contracts would be applicable until 2033. This commitment aimed at ensuring that GRAIL's rivals enjoy continued access to Illumina's NGS systems.The Commission, however, considered that these commitments were unlikely to be effective in practice as they did not effectively address all the possible foreclosure strategies that Illumina could engage in. For example, the commitment did not effectively address the risk that Illumina would foreclose GRAIL's rivals by degrading the technical support for its NGS systems.Moreover, the Commission found that it would have been easy for Illumina to circumvent its obligations under the commitments and grant preferential treatment to GRAIL, thereby making it harder for GRAIL's competitors to successfully compete. In addition, the commitments would have been difficult to monitor due to their complexity and the fact that GRAIL's rivals would hardly have been able to detect breaches.
The Commission concluded that the proposed remedies were not sufficient to address the competition concerns whereby emergent competition in blood based early cancer detection tests would be hindered or even eliminated. As a result, the remedies were not sufficient to prevent the harm to innovation in the area of NGS-based cancer detection tests resulting from the acquisition.
Therefore, the Commission has prohibited the transaction.
Comment
This is the first case in which the Commission has blocked a transaction where the applicable merger notification thresholds were not met (both under the EU Merger Regulation and national member state regimes).
Where a concentration that has been declared incompatible with the internal market has been already implemented, the Commission may under Article 8(4) of the EU Merger Regulation, dissolve the concentration or take other appropriate measures.
The Commission states that it will assess in due course whether and which additional steps will be required. Executive Vice-President Margrethe Vestager, in charge of competition policy, commented that she intended to suggest a separate decision ordering Illumina and GRAIL to dissolve the transaction and restore GRAIL's independence.
In the meantime, the interim measures imposed in October 2021 will continue to apply. These provide, in particular, that GRAIL must be kept and run separately, that the parties do not share confidential information, and that the parties and must interact on an arm's length basis. Illumina is obliged to finance additional funds necessary for the operation and development of GRAIL. In addition, GRAIL must actively work on alternative options to the transaction to prepare for the possible scenario in which the deal would have to be undone.
Illumina has already announced that it intends to appeal the Commission's decision. It has stated that, to prepare for the anticipated divestment order from the Commission, it will begin reviewing strategic alternatives for GRAIL in the event the divestiture is not stayed pending Illumina's appeal.
On 30 March 2021, the US Federal Trade Commission (FTC) filed an administrative complaint to block Illumina's acquisition of Grail (see Legal update, FTC Challenges Vertical Merger Involving Cancer Screening Tests). On 1 September 2022, Chief Administrative Law Judge (ALJ) D. Michael dismissed the Federal Trade Commission's (FTC) administrative complaint seeking to block the merger (see Legal update, ALJ Dismisses FTC Complaint Challenging Illumina/Grail Acquisition). The FTC intends to appeal.