Illumina/Grail: An unholy war continues

The European Commission has blocked a merger that did not meet any European jurisdictional thresholds for the first time. In a case that has seen the Commission pushing at the boundaries of its remit, it has prohibited Illumina’s $8 billion acquisition of GRAIL.

Article 22 EUMR

The Illumina/GRAIL merger did not meet the thresholds under EU Merger Regulation (“EUMR”), meaning that the Commission would not normally have jurisdiction to review it. Nor did it meet the notification thresholds at Member State level, meaning that no notifications to national competition authorities would be required either. However, the Commission accepted to review the merger following a referral made by six national competition authorities under Article 22 EUMR over concerns that the merger could give rise to anti-competitive effects despite having minimal turnover within the EU.

In July this year, as previously discussed on this blog, the General Court confirmed the legality of the Commission’s approach on all grounds.  The Court confirmed that the Commission is entitled to accept referrals from Member States even when they do not have the power to review a merger under their own rules.

Blocking a vertical merger

Illumina is a leading supplier of next-generation sequencing (“NGS”) technology. GRAIL is a developer of an innovative early cancer detection test, which aims to detect different cancers at an early stage from a simple blood sample. The competition in this market is fierce, with numerous rivals competing on innovation to bring early cancer detection tests to the market. The Commission described the market potential to be “enormous: by 2035 this market is expected to exceed 40 billion euros per year.”

It is rare for a competition authority to block a vertical merger, i.e. a merger between companies at different levels of the supply chain. However, it seems from the Commission’s press notice that it has a strong case because Illumina is the only supplier of an essential input to GRAIL and competing early cancer detection tests. I should however add the proviso that the full decision is not yet published, and I assume Illumina strongly disagrees with the Commission’s framing. People will query whether the forward-looking nature of the Commission’s analysis is too speculative, but merger control is always forward-looking. There is no problem with blocking a merger on this basis as long as the Commission has reliable evidence to support the theory.

The Commission determined that Illumina was an unavoidable trading partner as the only suitable supplier of NGS technology necessary to run early cancer detection tests. Therefore, it had concerns that the vertical integration of Illumina and GRAIL could allow Illumina to refuse rivals’ access to its technology, or otherwise disadvantage them, to strengthen its market position in the lucrative early cancer detection market. The Commission also considered that Illumina would have the economic incentive to foreclose GRAIL’s rivals already today, despite benefitting from this action only at a later stage (i.e., when the market has matured and reached its €40 billion potential).

About the decision, Executive Vice-President Vestager stated:

preserving that competition between early cancer detection test developers is vital at this critical stage. GRAIL’s rivals may develop new tests, potentially better and cheaper than that of GRAIL.  We need to make sure that such tests keep a chance of reaching the market and are not delayed or made too expensive by the merger.

Illumina proposed a number of behavioural remedies, which the Commission found to be insufficient to mitigate the potential negative effects of the merger.

Procedural wrangles

Illumina completed the acquisition in August 2021. In response, the Commission opened an investigation against Illumina for breaching its “standstill obligation”. If it is found that the Illumina and GRAIL implemented the transaction in breach of the EUMR, they could each be subject to a fine of up to 10% of their annual worldwide revenues.

Vestager stated, “Illumina’s decision to implement the merger in an apparent contravention of our rules has created this troublesome situation. Illumina now needs to undo the effects of its actions and unwind the acquisition.”

Jurisdictional conflicts

The prohibition of the Illumina/GRAIL merger in the EU comes less than a week after Illumina won the lawsuit brought by the US Federal Trade Commission to prevent the merger. One suspects the litigation will continue on this side of the Atlantic too.

The FTC is now appealing the ruling, but for now the merging parties may be subject to conflicting rulings on either side of the Atlantic. This is not ideal, but it does occasionally happen and usually a prohibition by either side is enough to kill a deal.

It will be interesting from a lawyer’s point of view to see where the extra-territoriality arguments end up given that the European authorities are trying to block a deal between two US companies, one of whom does not (yet) have revenues in the EU. This type of issue is coming up more and more due to the globalized economy and competition authorities’ increased interventionism.  For example, the UK’s Competition and Markets Authority has been frequently blocking US deals and has not encountered any serious legal impediments in doing so (see e.g. Meta/Giphy, Experian/ClearScore and indeed Illumina’s attempted purchase of PacBio which was technically abandoned just before the CMA’s final decision was due, but you can read between the lines for what that final decision would have been). I would expect the EU courts to support the Commission’s legal standing to investigate foreign-to-foreign mergers.

Don’t focus on Article 22

This case is fascinating for a competition lawyer, but commentators should be careful not to overreact to the Commission grabbing jurisdiction in this case. Article 22 EUMR is clearly being sharpened for use in a small number of cases involving companies with market power buying up nascent threats, and the possibility of its use ought not to be unforeseeable for those companies if they are well advised. For everyone else, the main impact of this case will be an irritating disclaimer regarding Article 22 EUMR at the bottom of every EU competition lawyer’s advice to dealmakers about the merger control filings required for their deal.

The bigger news may well be that the Commission outright blocked a vertical merger, where normally companies find a way to address vertical foreclosure concerns. In particular, even though early detection cancer tests with Illumina’s technology are not currently commercially available and there is uncertainty about who will win the “innovation race” to be the first to commercialise them, the Commission nonetheless considered that an ability and incentive to foreclose existed, and that this would prove to significantly impede effective competition.

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