Illumina (ILMN), Grail Merger Sees Futher Regulatory Challenges

The high voltage drama surrounding the Illumina ILMN-Grail consolidation is showing no signs of drawing to a close. Following the completion of this longstanding and highly-disputed $7.1 billion merger last week without regulatory approvals, investors are currently waiting to see the magnitude of penalty that the European Commission (EC) might impose on the renowned life sciences company.

Following the completion of the merger, the U.S. FTC (Federal Trade Commission) on Aug 18  immediately declared about an administrative trial to begin on Aug 24, 2021. Going by a Reuters article yesterday, the FTC on Aug 24 urged judges to block the Illumina-Grail merger.

FTC and EC Regulatory Knots

Going by the article, FTC’s senior counsel Susan Musser said that Grail and its peer cancer diagnostic testing companies rely on Illumina’s DNA sequencing technology. She apprehended that Illumina’s purchase of Grail would give the company the incentive and ability to foreclose downstream rivals.

Currently, the antitrust lawyers are closely following the FTC trial as a rare enforcement action against a vertical merger in which two companies are not direct competitors. The FTC witnesses here would include representatives from Grail’s competitor companies.

Back in March, the FTC had filed an admission complaint along with a federal court lawsuit to block this acquisition. At that time, the FTC had noted that the merger will diminish the scope of innovation in the U.S. market for MCED (Multi-cancer early detection) tests. The tests can be used to detect varied types of cancer (as much as 50 types).  Along with many of its competitors, Grail is working on developing liquid biopsy tests that analyze a sample of a patient’s blood or other fluid through DNA sequencing.

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Meanwhile, the EC is still closely investigating the matter and might soon come up with a hefty penalty charge. As noted by Reuters, the EC’s vice president Margrethe Vestager said in a statement, “This obligation, that we call standstill obligation, is at the heart of our merger control system and we take its possible breaches very seriously.” Going by a Reuters’ report, breaches can lead to fines of as much as 10% of the aggregate turnover of Illumina.

Illumina’s Stance

Illumina’s attorney recently stated that the consolidation will accelerate the development and adoption of an early cancer-detection product.

However, according to Illumina, GRAIL will continue to operate as a separate company until the ongoing regulatory review by the EC is completed.

Illumina noted that GRAIL has no business in the European Union (EU). The company believes the EC does not have jurisdiction to review the merger as the EU merger thresholds are not met, nor are they met in any EU member state. The General Court of the EU will hear Illumina’s jurisdictional challenge later in 2021. By holding GRAIL separate while proceedings are ongoing, Illumina is positioned to follow whatever final decision is reached in the legal processes.

Per Illumina’s management, the decision to make the acquisition and hold the companies separate allows the regulatory processes to proceed while safeguarding the life-saving, pro-competitive benefits of this transaction without the expiry of the deal.

How Strategic is the Acquisition for Illumina?

Cancer kills around 10 million people worldwide annually and 600,000 people in the United States alone. Nearly 71% of cancer deaths have no early detection screening recommended, and most cancer are detected when chances of survival are lower. As the early detection of cancer saves lives, the new genomic test will be nothing short of a revolution for human health and the economics of healthcare.

Moreover, combining the two companies is the quickest way to expand the availability and affordability of the test. As Illumina entered the non-invasive prenatal testing space, prices dropped, reimbursement expanded, the number of providers increased, and more expectant parents gained access to testing.

GRAIL’s Galleri blood test detects 50 different types of cancer before they are symptomatic. Currently, this groundbreaking test is available in the market but costs as high as $950 because it is not covered by insurance companies. According to Illumina, with the acquisition, the company’s expertise in market development and access will lead to coverage and reimbursement for this test. This will accelerate access and adoption of this life-saving test worldwide.

Price Performance

Shares of the company have gained 37.8% in a year’s time compared to the industry’s decline of 0.5%.

Zacks Rank and Key Picks

Currently, Illumina carries a Zacks Rank #3 (Hold). You can see the complete list of Zacks #1 Rank (Strong Buy) stocks here.

A few better-ranked stocks from the broader medical space are Envista Holdings Corporation NVST, BellRing Brands, Inc. BRBR and Henry Schein, Inc. HSIC.

Envista Holdings has an estimated long-term earnings growth rate of 26%.

BellRing Brands has an estimated long-term earnings growth rate of 22%.

Henry Schein has a projected long-term earnings growth rate of 14%.

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