Illumina said that an administrative law judge had ruled in its favor against the U.S. Federal Trade Commission (FTC)’s challenge to the sequencing giant’s planned $7 billion acquisition of Grail—a deal that has seen regulatory challenges on both sides of the globe since it was announced in 2020.

The FTC has not commented on the administrative judge’s decision, which at deadline had yet to be publicly released.

According to Illumina, the judge rejected the FTC’s key argument in fighting the company’s planned purchase of the cancer blood test developer: that the deal would lessen innovation in the U.S. market for multi-cancer early detection (MCED) tests like those marketed by Grail.

The FTC had contended that Illumina is the nation’s only provider of DNA sequencing that is a viable option for MCED liquid biopsy tests. Grail’s Galleri™ test, according to Illumina, can detect more than 50 cancers across all stages—of which more than 45 do not have recommended screening in the United States—and correctly identified the tissue of origin in 93% of positive results, with >99% specificity.

Illumina joined investors that included Bill Gates and Jeff Bezos in committing more than $100 million toward launching Grail in 2016, with the goal of commercializing a simple test that screens for multiple early-stage cancers by measuring ctDNA in the blood.

“Reuniting Illumina and Grail will transform the detection and treatment of cancer by facilitating widespread, affordable access to Grail’s life-saving Galleri test. This decision is a step toward making that vision a reality,” Illumina CEO Francis deSouza said in a statement. “Our mission in bringing Illumina and GRAIL back together is to save many thousands of lives by working to ensure that everyone can find and afford a Galleri test.”

Illumina shares dipped 0.5% in trading today, from $201.64 to $200.62.

Illumina announced its plan to buy Grail in September 2020, saying the deal would accelerate the commercialization of Galleri, which at the time was planned for launch in 2021 as a laboratory-developed test (LDT). While Illumina disclosed the deal as being $8 billion, it still had a stake in Grail, reducing its value to $7.1 billion. As of August 31, 2020, Illumina owned a 14.6% stake in Grail, according to a regulatory filing that was part of a planned initial public offering (IPO), which ended four days later with Illumina’s deal announcement.

Potential for price hikes

In March 2021, the FTC began challenging Ilumina’s purchase of Grail. The agency reasoned that Illumina can raise prices charged to Grail competitors for next-generation sequencing (NGS) instruments and consumables; impede Grail competitors’ research and development efforts; or refuse or delay executing license agreements that all MCED test developers need to distribute their tests to third-party laboratories.

Illumina completed its purchase of Grail in August 2021, despite the FTC challenge and an antitrust review of the deal by the European Union. In July, the EU’s second-highest judicial body, the General Court of the European Union, upheld the EU competition authority’s earlier decision to review the acquisition deal—a decision that Illumina is appealing.

“We don’t believe today’s decision has any bearings on the EC’s decision, which is expected on Sept[ember] 12th,” Puneet Souda, senior managing director, life science tools and diagnostics, and a senior research analyst with SVB Securities, wrote in a research note.

Of greater concern, he added: “We continue to see regulatory uncertainty surrounding the Grail acquisition, which delays realizing cost synergies while the $50B+ MCED opportunity [an SVB Securities estimate] remains years ahead.”

Souda added that Illumina is facing challenges on multiple fronts including a slowdown in demand and supply chain delays that caused second-quarter earnings lower than what analysts had forecasted, and prompted the company to reduce its 2022 revenue guidance to investors.

Illumina lowered its consolidated revenue growth range to between 4% and 5%, down from between 14% and 16%, with GAAP earnings per diluted share now projected to range from $2.33 to $2.53 to a GAAP diluted loss per share of $(2.93) to $(2.78).

Lower revenue forecast

The company also lowered its revenue guidance for Grail, to a range of $50 million to $70 million, from between $70 million to $90 million.

Other factors cited by Souda:

  • Growing competition in both mid- and high-throughput segments.
  • The departure of CFO Sam Samad on July 8 after more than five years, an event that caused a 10% drop in share price when disclosed in June.
  • The lack of EC regulatory support for the Grail deal.
  • The cost of the Grail deal, which has diluted Illumina’s earnings per share “without any clear line of sight to integration,” Souda said.

Illumina has set aside $453 million, recorded in the second quarter, toward the potential that the EU could fine the company up to 10% of consolidated annual revenues because the company closed the acquisition without waiting for a final decision from the EU, in violation of its “standstill” regulations.

The FTC originally sought a federal court injunction stopping the deal from closing. But after the EU challenged the acquisition, the agency pursued an administrative complaint, heard by an administrative law judge who presided over a trial last year.

In its statement announcing the judge’s decision, Illumina asserted that Grail “needs Illumina’s scale and expertise to overcome significant hurdles to the widespread adoption of Galleri,” which it identified as obtaining regulatory approval and insurance reimbursement, as well as scaling production and distribution of the test.

“As we’ve stated from the outset, this transaction is procompetitive, will advance innovation, lower healthcare costs, and save lives,” stated Charles Dadswell, Illumina’s general counsel. “We are pleased that, after considering the evidence, the ALJ has reached the same conclusion.”

The judge’s decision is a defeat for an FTC that under President Joe Biden has stepped up challenges to mergers and acquisitions (M&A) that it deems will advance monopolization in various fields.

“Illumina knocks an activist FTC down a few pegs,” Brad Lonca, CEO of Loncar Investments, tweeted.

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