Illumina and Pacific Biosciences (PacBio) said today they will “mutually” terminate their planned $1.2 billion merger, a deal threatened in recent weeks by anti-monopoly regulatory agencies in the United States and the U.K.

Illumina has agreed to pay PacBio a $98 million “reverse termination fee,” the companies said, rather than continuing to pursue the acquisition of PacBio it first announced in November 2018.

And according to a regulatory filing from PacBio, Illumina also agreed to pay PacBio a total $34 million it was obligated to pay under the merger agreement, consisting of $6 million on or before today, $22 million on or before February 3, and $6 million on or before March 2. However, up to the full $34 million is repayable without interest to Illumina if, within two years of March 31, 2020, PacBio enters into a “Change of Control” transaction, such as another merger-and-acquisition (M&A) deal, or raises at least $100 million in equity or debt financing in a single transaction.

Should a “Change of Control” transaction occur, PacBio also agreed to repay Illumina the $98 million reverse termination fee.

The companies’ deal was designed to expand the sequencing giant’s offerings with PacBio’s long-read sequencing technologies, with the goal of creating a sequencing powerhouse that combined Illumina’s short-read technologies with PacBio’s long-read sequencing capabilities more suitable for de novo sequencing and sequencing of highly homologous regions of genomes.

“While it is disappointing that the deal will not go through, we see limited to no impact to ILMN [Illumina],” Puneet Souda, managing director, Life Science Tools and Diagnostics, SVB Leerink, wrote in a note to investors that echoed comments he shared with GEN Edge last month.

“Combining the short-read + long-read sequencing data would have been a positive for the industry and the sequencing end-market as a whole, as it would have unleashed applications not accessible today or given access to regions of genomes that are refractory to either technologies,” Souda wrote. “We believe the long-term growth trajectory for ILMN remains intact, even without PacBio, and ILMN holds potential to pursue other avenues for long-read sequencing including building the capability internally.”

Monopoly Concerns

The abrupt halt to the deal came some two weeks after the U.S. Federal Trade Commission (FTC) said it would block Illumina’s planned PacBio purchase. The FTC alleged in an administrative complaint that Illumina was unlawfully seeking to maintain its monopoly in the U.S. market for next-generation DNA sequencing (NGS) systems by eliminating potential competition from PacBio.

The FTC’s action came two months after the U.K.’s Competition and Markets Authority (CMA) on October 24 issued provisional findings concluding that the merger will result in a significant loss of competition between Illumina and PacBio.

Both companies had defended their deal until now.

“Considering the lengthy regulatory approval process the transaction has already been subject to and continued uncertainty of the ultimate outcome, the parties decided that terminating the agreement is in the best interest of their respective shareholders and employees,” Illumina and PacBio said in a statement released after the close of trading on the NASDAQ exchanges, where both companies trade their shares.

The statement included a pointed defense of the deal by Illumina president and CEO Francis deSouza: “We believe this proposed combination would have broadened access to Pacific Biosciences sequencing technology, significantly expanded and accelerated innovation, and ultimately increased the clinical utility and impact of sequencing.”

“We are disappointed that our customers and other stakeholders will not realize the powerful advantages of integrating the sequencing capabilities of our two companies,” added PacBio CEO Michael Hunkapiller, PhD. “With that said, we are confident in the future of Pacific Biosciences as we continue to pursue improved sequencing accuracy and throughput that can be utilized in an ever-expanding number of applications.”

Souda added, however, that the termination of the merger was a setback for potential applications of combined short- and long-read sequencing technology, and thus ultimately for next-gen sequencing (NGS) end-markets.

“Combining the short-read + long-read sequencing data would have been a positive for the end-markets, as it would have unleashed applications not accessible today or given access to regions of genomes that are refractory to either technology,” the Leerink analyst wrote. “Without the necessary capital, R&D investments and strength of the commercial enterprise (that ILMN could have provided) to drive growth in the combined short-read + long-read technologies, we do see this as a missed opportunity for next-gen sequencing end-markets and potential breakthrough applications that could have emerged.”

Oncology, Souda added, continues to be the leading application in sequencing that affects patients’ lives and treatments every day: “Without innovation in a combined short- + long-read technology, the end-markets and ultimately patients might never realize the full potential and the benefits of combined technologies in NGS.”

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