On 6 September 2022 the EU Commission adopted a decision under the EU merger Regulation (EUMR) prohibiting the completed acquisition by Illumina of GRAIL. This is the first time the Commission has examined a transaction below the EUMR thresholds and all national EU Member State thresholds which was referred to it pursuant to its revised policy to catch such transactions jurisdictionally. It is also the first time the Commission prohibits a transaction that was completed in contravention of the EUMR. Under the EUMR the parties are prohibited from implementing their transaction before authorisation by the Commission, but Illumina completed the acquisition of GRAIL in August 2021 while the Commission was investigating the transaction (and the parties are now subject to a separate gun-jumping investigation). Article 8(4) EUMR provides that in such a case the Commission may require the undertakings concerned to dissolve the transaction or take any other measures appropriate to restore the position to that prior to its implementation. Commissioner Vestager issued a statement in which she announced that the Commission will, in due course, adopt a separate decision requiring the parties to dissolve the transaction and restore GRAIL’s independence.
Illumina is a global genomics company that develops next generation sequencing technology (NGS) which are a key input for early detection cancer tests that are able to screen for several cancers in asymptomatic patients. GRAIL is a customer of Illumina, using the NGS technology to develop its early detection cancer tests.
The transaction did not meet the EUMR’s jurisdictional thresholds but the Commission invited Member States to submit a referral request under Article 22 EUMR, despite the deal also not meeting the national merger control thresholds of the relevant Member States. Illumina subsequently appealed the Commission’s decision accepting the referral before the General Court but in its ruling of 13 July 2022 the Court dismissed the appeal and endorsed the Commission’s revised approach under Article 22 EUMR in respect of referrals that fall below the national thresholds (see our briefing here).
The Commission’s prohibition decision
The Commission’s concerns focus on vertical input foreclosure relating to Illumina’s strong position in NGS technologies and concluded that the acquisition would both enable and incentivise Illumina to foreclose GRAIL’s competitors who are dependent on Illumina’s technology by refusing access to this essential input necessary to develop their own tests. This would allow Illumina to gain control of the early cancer-detection market.
The Commission found that GRAIL is currently engaged in an innovation race with a number of competitors to develop and commercialise these early cancer detection tests. Whereas Illumina’s current sales of NGS technology to GRAIL’s competitors only represent a small proportion of its sales and profits, the technology is expected to expand rapidly and become highly profitable. Illumina would therefore already have the incentive today to foreclose GRAIL’s competitors.
Illumina offered remedies, including a licence to some of its patents to other NGS suppliers, but the Commission concluded this would only have had a limited impact as the patents concerned were due to expire in the short term and its competitors would need many more patents in order to develop a viable competing NGS system. Illumina also offered a commitment to supply GRAIL’s competitors under the terms and conditions set out in a standard contract. This was again seen as unlikely to be effective in practice as Illumina could always offer less technical support to GRAIL’s competitors or grant preferential treatment to GRAIL, making it harder for other companies to compete. Following detailed market testing the Commission concluded that the remedies offered by Illumina were not sufficient to address the competition concerns resulting from the transaction.
The FTC’s case in the US
In contrast to the Commission’s prohibition decision, the US Federal Trade Commission administrative court (the FTC’s in-house court) last week issued a decision supporting Illumina’s acquisition of GRAIL, rejecting the FTC’s conclusion that the transaction would adversely affect the market for NGS-based cancer tests. The court held that the FTC had not been able to demonstrate that GRAIL’s competitors were in a position to launch competing tests either immediately or in the near future.
The FTC has indicated that it will appeal the decision. Illumina also made it clear it will be appealing the Commission’s decision, and it will therefore be some time until we see a final decision in this case.
The Commission’s gun jumping investigation
A further Commission investigation against Illumina is ongoing, relating to its breach of the standstill obligation under the EUMR following its announcement in August 2021 that it had completed the acquisition of GRAIL. Although Illumina committed to maintain GRAIL as a separate entity during the Commission’s assessment of the transaction, this is likely to amount to a breach of Article 7 of the EUMR under which a concentration cannot be implemented until it has been declared compatible with the internal market. In July 2022 the Commission issued a statement of objections alleging that Illumina and GRAIL breached the standstill obligation by implementing the acquisition while the Commission’s detailed investigation was ongoing. This is seen as a serious breach under the EUMR and the Commission could ultimately impose fines of up to 10% of the parties’ worldwide turnover.
For further information, please contact:
Kyriakos Fountoukakos, Partner, Herbert Smith Freehills