Court Sides With FTC Finding Illumina-Grail Deal Anticompetitive
Judges also fault agency for not properly considering Illumina’s plan to fix drawbacks
A federal appeals court said the U.S. government was right to challenge Illumina’s ILMN -3.34%decrease; red down pointing triangle purchase of cancer-test developer Grail, but still sent the case back to the Federal Trade Commission for reconsideration.
A three-judge panel found the deal to be anticompetitive, but said the FTC erred in how it considered Illumina’s proposed fix for its drawbacks. The judges ordered the FTC to reconsider its opinion on the troubled deal, which the European Commission has already ordered Illumina to unwind.
Illumina, which makes gene-sequencing products, bid for Grail three years ago as part of a “foundational change in Illumina’s business model.” Owning Grail, which sells a blood test designed for the early detection of cancer, would put Illumina at the vanguard of clinical testing and give it fatter profit margins than it enjoys now, the U.S. Court of Appeals for the Fifth Circuit wrote.
Illumina would advance that goal by cutting off Grail’s rivals from important inputs they need for their own cancer-detection tests, the FTC alleged. Illumina is the only seller of those inputs, which are gene-sequencing machines and the chemicals those machines use. By selling the cancer tests and hoarding the underlying supplies for them, Illumina could illegally achieve a new monopoly in a blockbuster market, the FTC claimed.
The Fifth Circuit judges largely upheld that view, writing that Illumina would have the ability and incentive to “foreclose against Grail’s competitors—even at the expense of some short-term profits—to pursue its long-term goal of establishing itself (via Grail) as the market leader in clinical testing.”
The FTC said the decision marks “an important victory” for its agenda because a key court sided with its view in a vertical merger case. The government challenges vertical mergers less often because they don’t involve direct competitors. When antitrust authorities challenge vertical mergers, they usually argue the combined company would gain a monopoly by withholding supplies or inputs from the rest of the market.
“This decision marks a pivotal moment for those who want to protect open, competitive markets, and a huge win for consumers in the modern economy,” FTC spokesman Douglas Farrar said.
The appeals court also dismissed constitutional arguments that Illumina made, including the claim that the FTC should not be able to prosecute merger challenges via its in-house court.
An Illumina spokesman declined to comment. The company has filed paperwork with securities regulators that would enable it to unwind the purchase of Grail, Illumina disclosed earlier this week.
Illumina still says European authorities were wrong to block the deal. The company says Europe lacks jurisdiction over the deal because Grail doesn’t have any sales in the bloc. Illumina is still pursuing an appeal of Europe’s order to divest Grail.
The decision to purchase Grail has come with a heavy cost. The European Commission fined Illumina 432 million euros, equivalent to about $471 million, for proceeding with the acquisition before that bloc’s competition watchdog had decided whether to approve the deal.
The company’s former chief executive, Francis deSouza, resigned earlier this year following a bruising proxy battle with billionaire activist investor Carl Icahn, who argued Illumina’s ongoing quest to defend the deal is folly.
Nonetheless, Illumina could get another shot before the FTC if the company wants to spend months, if not years, continuing to litigate. Litigation adds to deal costs, and companies often abandon deals when they suffer adverse legal decisions.
The appeals court found FTC commissioners didn’t properly consider Illumina’s proposal to deal with the threat to competition. The company had offered to make its gene-sequencing products available to Grail’s future competitors at the same price and terms as provided to Grail.