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Illumina Proposes Opening PacBio IP to Competitors to Save Acquisition Deal

This article has been updated from a previous version to clarify that Illumina, not PacBio, is proposing the remedy to the UK Competition and Markets Authority.

NEW YORK – Illumina has proposed offering perpetual, royalty-free licenses to Pacific Biosciences' intellectual property to competitors in the sequencing market in an effort to appease UK regulators who have threatened to block Illumina's planned acquisition of PacBio.

Specifically, Illumina suggested it would be open to offering a "perpetual, royalty-free, irrevocable, sole licence" of certain PacBio patents to Oxford Nanopore Technologies or any third party working in the nanopore sequencing field, should the acquisition be completed. The licensed IP would include patents for base calling using n-mers, as opposed to calling individual bases, Illumina said.

Illumina also proposed the appointment of a monitoring trustee and establishing a "fast-track" dispute resolution mechanism for third parties, to address concerns that Illumina would breach its commitments.

According to documents dated Nov. 7 but released today by the UK Competition and Markets Authority (CMA), Illumina submitted its willingness to make concessions in response to CMA's findings that the proposed merger would lessen competition in sequencing markets in the UK and elsewhere.

"It seems like a strong concession," Doug Schenkel, Life Science & Diagnostic Tools Analyst at Cowen, wrote in an analyst note published today, "but it is unclear if this will be enough" to satisfy the CMA's concerns.

In afternoon trading on the Nasdaq, shares of PacBio were up more than 4 percent at $4.80.

Illumina's acquisition of PacBio, first announced in November 2018, hit a stumbling block in October, when the CMA published preliminary findings of Phase II of its investigation. Late last month, CMA wrote that the deal could result in a "substantial lessening of competition" (SLC) for both the UK and global next-generation sequencing markets. For their purposes, the CMA considered short-read and long-read technologies to be part of the same market.

CMA said that it preferred "structural" remedies to avoid the scenario of less competition and that blocking the deal was the "only structural remedy that CMA has identified as being likely to be effective."

"[P]rohibition is not the only comprehensively effective solution to address the SLC provisionally found by the CMA," Illumina wrote in its response, saying that its proposals would not result in an SLC, while preserving customer benefits identified by CMA, including improvements to PacBio's technology and wider access to those products. 

In its response, Illumina noted that the CMA Merger Remedies Guidelines "recognize that an exclusive, irrevocable, and royalty-free technology license 'will effectively be treated by the CMA as structural in form and subject to similar consideration and evaluation as an asset divestiture.'"

Illumina even suggested that Oxford Nanopore would recognize benefits from licensing PacBio technology, including removing the threat of litigation.

"While ONT has technological and competitive advantages over PacBio, one significant perceived weakness of its technology is the accuracy of its systems," Illumina said. "All of the patents offered for licence to ONT in this proposal entail methods that improve accuracy. In particular many of the patents cover methods of single-molecule consensus sequencing."

Licensing these patents, Illumina argued, "would enable ONT to become a significantly stronger competitor in various ways," including enabling Oxford Nanopore to commercialize its 2D products, "which it has agreed to refrain from offering in certain European countries until 2023 as part of a settlement of patent infringement lawsuits." The license would also "remove the threat of an injunction potentially preventing the sale of all Oxford Nanopore sequencing products in the US," Illumina said.

Oxford Nanopore declined to comment on Illumina's proposal. Illumina has not yet responded to request for further comment. Pacific Biosciences noted after the initial publication of this story that Illumina alone proposed the remedy to the CMA.

"We believe this concession by [Illumina and PacBio] indicates that IP was not a key motivation to the merger," Schenkel noted. "While the financial implications of the proposed merger certainly remain a key part of the deal, we believe this proposed remedy demonstrates that [Illumina] is also highly interested in making [PacBio's] technology more broadly available to customers — something that would likely be difficult for [PacBio] to achieve alone."

Despite the apparent concessions, Illumina also noted that "the [CMA's] Provisional Findings contain important errors that undermine the SLC findings." Illumina said it would make a separate submission to respond to those findings, which it felt should be taken into consideration when determining the appropriateness of any CMA-imposed actions.