Out-Law News 5 min. read
12 Sep 2022, 2:33 pm
The EU’s competition regulator has blocked the acquisition of a biotech company by a global genomics business after identifying concerns about how the deal could impact the development and supply of potentially revolutionary cancer diagnostic tools.
The European Commission’s decision concerns Illumina’s acquisition of GRAIL, which completed in August 2021 without prior EU merger approval. Illumina has said that it will appeal the Commission’s decision.
EU competition commissioner Margrethe Vestager said: “In a race with other companies, GRAIL is developing a blood-based early cancer detection test. If successful, these tests will revolutionise our fight against cancer and help to save millions of lives.”
“Illumina is currently the only credible supplier of a technology allowing to develop and process these tests. With this transaction, Illumina would have an incentive to cut off GRAIL's rivals from accessing its technology, or otherwise disadvantage them. It is vital to preserve competition between early cancer detection test developers at this critical stage of development. As Illumina did not put forward remedies that would have solved our concerns, we prohibited the merger,” she said.
Competition law experts at Pinsent Masons said the Commission’s decision was notable for several reasons. One of the reasons for this is because so-called vertical mergers, like with Illumina and GRAIL, which involve businesses at different stages of the supply chain, are generally considered less problematic from a competition law perspective compared to mergers between businesses operating at the same level in the supply chain in direct competition with one another.
Robert Vidal said the decision was also notable because it is the first time that the Commission had used its powers to screen transactions referred to it by national competition authorities where neither the thresholds for notifying the merger to it nor those for notifying the deal to national authorities were triggered. This creates additional complexity and uncertainty for entities seeking comfort on the merger control position prior to completion of a deal, he said.
Tadeusz Gielas said the decision also has implications for public health and policy in the EU and globally, and that the Commission’s reasons for blocking the merger also “signal a strengthening of its focus on innovation-related theories of harm”.
According to the Commission, Illumina is currently the only credible supplier of next generation sequencing (NGS) technology, an essential input into early detection cancer diagnostics being developed by GRAIL and its rivals. Illumina’s potential rivals would face high barriers to entry and costs in developing credible NGS systems of their own, and the Commission does not expect that a credible rival to Illumina will emerge in the short to medium term.
Central to the Commission’s concerns is the belief that the transaction would deter GRAIL’s competitors from innovating and developing their own early cancer testing products that could in the future compete effectively with GRAIL’s offering. This is because acquiring GRAIL would, in the Commission’s view, give Illumina the ability and incentive to foreclose GRAIL’s rivals from accessing Illumina’s patented NGS systems. In turn this would reduce competition, customer choice, and drive-up prices, thus impeding the ability of health authorities to more readily access breakthrough diagnostic tools that can detect a range of cancers in asymptomatic patients, it said. Detecting cancer at an early stage, before the onset of symptoms, can significantly improve survival rates and treatment outcomes for cancer sufferers.
The Commission also found that a range of upstream and downstream behavioural remedies offered by Illumina would not sufficiently address these concerns. For example, Illumina offered to licence only some of its patents that competitors would require to develop credible alternative NGS systems; and, in the Commission’s view, did not address other high barriers to entry for alternative NGS suppliers nor high switching costs for GRAIL’s competitors to use credible new NGS systems that could potentially emerge in competition with Illumina.
The standard contract terms on which Illumina proposed to give GRAIL’s rivals access to Illumina’s NGS systems was also considered not to effectively address possible foreclosure strategies that Illumina could engage in, such as degrading technical support for NGS systems. For instance, Illumina could provide GRAIL with preferential treatment, and compliance with the contract terms would be difficult to monitor.
Vidal said that the market for NGS-based early cancer detection testing is expected to expand rapidly and to become highly lucrative, with predictions that globally it will be worth over €40 billion per annum by 2035. As a result, he said that while GRAIL presently generates no revenue in the EU, the merged entity’s future revenue could grow exponentially – particularly if, by excluding potential rivals now, at the nascent stage of developing competing early cancer detection tests, the merged entity became the future sole or dominant supplier of such diagnostic products.
Illumina’s plans to acquire GRAIL were referred to the European Commission last year for scrutiny by competition authorities in France, Belgium, Greece, Iceland, the Netherlands and Norway. Article 22 of the EU’s Merger Regulation sets out a procedure through which the Commission can review mergers or acquisitions that do not have an EU dimension but that affect trade between EU member states and threaten to significantly affect competition within EU markets where a national competition authority requests it does so.
The application of the Article 22 procedure to the Illumina-GRAIL deal was recently tested before the EU’s General Court. It ruled that the Commission has the power to review any merger that may raise significant competition concerns within the EU, even if the companies involved do not have activities in Europe – or the merger falls below the EU’s turnover thresholds for merger review. Illumina has said it is appealing that decision.
Vidal said that in March 2021 the Commission adopted new guidance on how it intends to apply Article 22 in transactions that do not trigger notification requirements under either EU or member states’ merger control rules. The new Article 22 procedure is intended to ensure that below-threshold ‘killer acquisitions’, primarily in the life sciences and technology sectors, are subject to the EU’s merger control regime. The Commission’s new approach is now being tested before the EU courts.
Gielas said that Illumina-GRAIL is presently the only merger where the Commission applied its new approach to screening below-threshold transactions under Article 22. More recently the Commission accepted an Article 22 referral in the Facebook/Kustomer deal, which it conditionally cleared in January 2022 following an in-depth review. In that case, the deal did trigger the referring member state’s national merger control thresholds.
The Illumina-GRAIL deal led to three separate European Commission procedures. The first concerns its substantive merger review of the deal, which the Commission has now concluded after 17 months. It is now expected to take steps to unwind the merger, subject to any appeals by Illumina.
The second issue concerns the Commission’s decision to impose interim measures aimed at preventing the two businesses from merging into a single entity before its merger review process had concluded – those interim measures are the subject of separate appeals by Illumina and GRAIL to the EU’s General Court, which has still to rule on the matter.
The interim measures remain in place pending General Court judgment and while the Commission considers its next steps for ordering Illumina to divest GRAIL. Illumina may also appeal the Commission’s divestiture decision once it is made.
The third issue concerns alleged ‘gun jumping’, which is where a merger falling subject to approval by the Commission completes without that approval being obtained beforehand. Companies that ‘jump-the-gun’ and implement acquisitions that are subject to Commission review risk serious fines of up to 10% of each party’s global annual turnover. In July the Commission announced its preliminary findings that EU merger rules were breached and the final decision is now awaited. It has been reported that Illumina has set aside $453 million for the Commission’s expected gun-jumping fine.
The Illumina-GRAIL deal has also been reviewed under merger control rules in the US, where the Federal Trade Commission (FTC) was unsuccessful in its efforts to block the transaction. It has, however, filed an appeal in a bid to block the merger in the US.
29 Jul 2022