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Illumina-PacBio deal, blocked in US, UK, has slim chance, analysts say

Illumina Inc.'s proposed $1.2 billion acquisition of fellow gene sequencer Pacific Biosciences of California Inc. is the latest to fall prey to antitrust authorities' increased scrutiny of large-scale deals in the healthcare industry and is one of the few set to actually face the U.S. Federal Trade Commission in court over the deal.

The FTC joined its U.K. counterpart, the Competition and Markets Authority, on Dec. 17 in unanimously filing to block a deal that could create a monopoly in the sequencing industry, according to the regulators.

Leerink analyst Puneet Souda said the deal is unlikely to be approved, considering two major markets are now against the transaction.

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Illumina CEO Francis deSouza.
Source: Illumina

Despite the deal's gloomy outlook, analysts said Illumina will fare just fine in the long run, thanks to its own technologies and expanding market share.

Per the companies' deal agreement, Illumina may be required to pay a $98 million termination fee to Pacific Biosciences if the deal fails to gain antitrust clearance.

First the CMA, now the FTC

Over a year ago, Illumina announced it was snapping up Pacific Biosciences in an all-cash deal. Illumina, specializing in short-read sequencing, would gain Pacific Biosciences' long-read sequencing capabilities. Short-read sequencing targets a part of the genome to read that specific position's sequence, while long-read sequencing reads full-length DNA.

Acquiring Pacific Biosciences would allow San Diego-based Illumina, the largest sequencing company in the industry, to absorb one of its biggest remaining competitors, analysts said at the time of the deal announcement.

Other sequencing competitors are BGI Genomics Co. Ltd., Oxford Nanopore Technologies Ltd., QIAGEN NV and Thermo Fisher Scientific Inc., which pose limited challenges to Illumina's technology, the Competition and Markets Authority found in its preliminary investigation in October.

Qiagen actually exited the field in October, announcing that it would discontinue its own next-generation sequencers and instead pay Illumina to co-develop sequencing instruments.

The FTC found Illumina's potentially increased presence troubling.

"When a monopolist buys a potential rival, it can harm competition," FTC Bureau of Competition Deputy Director Gail Levine said in the agency's release.

The FTC added that, upon combining, Illumina and Pacific Biosciences might not have an incentive to innovate if they are no longer competing with each other.

"PacBio and Illumina drive each other's innovation," the FTC said.

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Illumina, originally planning for a mid-2019 deal close, has not given up on the transaction. According to Souda, Illumina "strongly disagrees" with the FTC, and will continue to pursue regulatory approval.

"The deal would have benefited the sequencing markets, the industry overall, and ultimately innovation in healthcare with the combination of short-read and long-read technologies," Souda commented in a Dec. 17 note. "The FTC letter now leaves limited options for the proposed acquisition to ultimately be approved."

The administrative FTC trial is slated to begin Aug. 18, 2020.

The future of Illumina, Pacific Biosciences

Regardless, Souda said a deal failure would have "limited to no impact" on Illumina's long-term growth trajectory, a prediction Stifel analyst Daniel Arias agreed with.

During recent earnings calls, Illumina has touted population sequencing initiatives, including the National Institutes of Health's All of Us program and the U.K.'s Sanger Institute Biobank initiative, as adding to its already large market share. According to Illumina CEO Francis deSouza, these programs will drive revenue in 2020 and beyond.

"The majority of the sequencing market centers around the short-read technology from Illumina — which is both fast and economical," Souda added.

The future of the relatively smaller Pacific Biosciences, however, is not as clear. Arias noted that the deal falling through could be harmful to Pacific Biosciences customers, as the company might have needed Illumina's higher levels of R&D cash.

J.P. Morgan analyst Tycho Peterson, already skeptical of the deal closing, speculated earlier in December that an alternative to the acquisition could be a co-marketing agreement or other collaboration between the two sequencers.

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