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Illumina Parries FTC Challenge to Grail Acquisition With Deals for Competing Customers

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NEW YORK – Illumina is making a raft of promises to its customers in the liquid biopsy market, hoping the guarantees will be enough to convince the US Federal Trade Commission to allow it to acquire Grail, which is competing with those companies.

Chief among these promises are guaranteed supply and in vitro diagnostic licensing agreements that appear calculated to address particular allegations in the FTC's challenge to Illumina's planned acquisition of Grail. Illumina has also committed to lower the price per gigabase of next-generation sequencing by a certain percentage by 2025 and to set up an internal firewall between Grail and the rest of the company.

"Our policy is to support IVD development from anyone who asks for it," said Illumina chief technology officer Alex Aravanis, a Grail cofounder who was previously that firm's CSO and head of R&D. "[Illumina has] been doing that for many years."

FTC's administrative complaint, released publicly on Wednesday, suggests that the combined Illumina-Grail entity would have both the ability and incentive to harm competition in the nascent pan-cancer, early detection testing field. FTC alleged that Illumina "already possesses the ability to foreclose or disadvantage Grail's … rivals" and has "several tools available that it could use to impede the competitiveness of any … test developer," namely the ability to raise prices for NGS instruments and consumables, to deny technical assistance or other proprietary information needed to obtain FDA approval, and to refuse or delay execution of a license agreement required to sell IVD tests. The complaint contains several allegations that Illumina executives have acknowledged the ability to shaft rivals; however, these alleged statements were redacted.

Whether Illumina's customers will take up the company's offers is unclear. Numerous liquid biopsy firms pursuing pan-cancer early detection tests, also called multi-cancer early detection (MCED) tests by the FTC, declined to comment. "There has been significant interest in the supply agreements, and we do expect that many customers will sign them," Aravanis said but declined to provide specifics.

And whether Illumina's overtures can rebuff the FTC is a looming question with large implications for the company's future. FTC has already signaled that supply agreements will not be enough to sway it.

Aside from threatening the immediate opportunity to participate directly in a lucrative downstream application of NGS, this FTC challenge, along with the recent opposition to Illumina's failed PacBio acquisition, raises the question what types of companies Illumina may be permitted to buy while it commands nearly the entire market for sequencing technology.

"With FTC blocking its 2019 proposed horizontal acquisition of Pacific Biosciences and now preventing a move down vertically, we struggle to see where Illumina can go," Barclays analyst Luke Sergott wrote in a note to investors. "How will the FTC treat a move into software or a database?"

From Illumina's perspective, the Grail deal is less of a takeover and more of a reunification. After all, the San Diego-based sequencing giant launched Grail as a spinoff in 2016, and still retains a 14.5 percent share in the company. Just a few months before Grail, Illumina also spun off Helix, a company geared towards the consumer genomics market that has found new opportunities as a COVID-19 testing lab.

Founding Grail, one of Jay Flatley's last moves as Illumina CEO, was seen as prudent at the time. Industry observers noted that it would take a lot of investment to reach Grail's ambitious early goals of having a test ready by 2019. Indeed, Grail launched with $100 million backed by some of the biggest fortunes in technology, from Microsoft founder Bill Gates and Amazon founder Jeff Bezos. The money continued to pour in with $900M in Series B financing in 2017, $300 million in Series C financing in 2018, and another $125 million in equity financing in 2019.

Bringing Grail back into the fold has always been a consideration, according to Aravanis. "We externalized [Grail] as an efficient method of doing early R&D, appreciating that when it got to a potential point of commercialization, it might make sense to bring it back into the company," he said. Now, Grail needs the resources and capabilities of Illumina, he added, namely access to patients and large-scale testing, manufacturing, and global markets. "Grail's capabilities are still nascent," he said. "Illumina can accelerate those by years." 

"We believe that the efficiencies associated with the acquisition are massive and wouldn't occur in the absence of it," Aravanis said. He even suggested that the entire early cancer detection market could benefit from the deal, if Illumina can help Grail obtain regulatory approvals and reimbursement for these tests more quickly.

It's unclear, though, whether other early cancer detection test developers appreciate Illumina's efforts to bring Grail's tests to market by reacquiring it. When Illumina launched Grail, Guardant Health CEO Helmy Eltoukhy, a former Illumina employee, told GenomeWeb that spinning off Grail would not impact his company's relationship with Illumina. But Cowen Analyst Doug Schenkel told investors "we get the sense that [Illumina's] NGS customers working in clinical/liquid biopsy were not happy with the deal."

Industry veterans may recall that Illumina has sought to compete with its customers before, when it acquired noninvasive prenatal testing firm Verinata Health in 2013. Aravanis noted that the deal has not spelled doom for the NIPT market, and even claimed that buying Verinata made the industry more competitive, through the introduction of IVD kits and a method to reduce the amount of sequencing required per test.

Some companies, such as Sequenom, now part of LabCorp, and Natera, eventually signed supply agreements but Ariosa Diagnostics, now owned by Roche, switched to an array technology from NGS for its tests. FTC did not challenge the Verinata acquisition.

But Illumina in 2013, and even in 2016, was not where it is today, a quasi-monopoly for mainstream sequencing technology in the US, especially short-read technology used in liquid biopsies. The NGS market has consolidated around Illumina's platforms, and offerings from Thermo Fisher Scientific, Roche, Qiagen, and others have either disappeared or failed to challenge Illumina's supremacy. And while long-read technologies have improved, they don't appear viable yet for this particular application.

Grail is, of course, the second major Illumina acquisition that the FTC has challenged in the last couple of years. After Illumina announced plans to buy PacBio for $1.2 billion in 2018, FTC moved to block that deal.

To some, the PacBio situation is not necessarily important for the current FTC case. The Grail deal is a vertical rather than horizontal integration, Schenkel noted. But the crux of the issue is still that Illumina dominates sequencing in the US. In the PacBio complaint, FTC said Illumina controls more than 90 percent of the total US sequencing market, and Illumina has successfully held China's BGI at bay in the US and Europe by challenging that firm's intellectual property in court.

With no viable alternative to Illumina's NGS platforms on the horizon, FTC alleged in its newest challenge that "after the acquisition, Illumina will control the fate of every potential rival to Grail for the foreseeable future."

In addition to the allegations that Illumina already has the ability to disadvantage other early cancer detection companies, FTC alleges the sheer size of the opportunity, which Illumina CEO Francis deSouza has said could be as large as $75 billion by 2035, provides incentive to do so, even if Illumina loses some sequencing business. Schenkel, the Cowen analyst, noted that the US total addressable market for early cancer detection alone could be worth $50 billion, nearly 100 times more than what Illumina thought the US market for NIPT was in 2013, around $600 million. Eltoukhy believes the early cancer detection market could be as high as $200 billion.

In a webinar, Evercore ISI analyst Vijay Kumar suggested that preliminary injunctions in vertical mergers are a rare move for the FTC, indicating the agency is serious about blocking the merger. An FTC spokesperson said preliminary injunctions are "not uncommon when cases are in litigation."  FTC declined to comment further on the case, citing the litigation. However, it did note in a statement that the vote to issue the complaint and seek a temporary restraining order and preliminary injunction was unanimous, 4-0.

Illumina's offers of supply and IVD licensing agreements are one way to address the concerns and could be part of an attempt to reach a settlement, which happened in about 85 percent of cases brought to trial by the FTC over the past 10 years, Kumar said.

Illumina provided GenomeWeb with a form letter it is sending to customers, outlining the terms of these deals. For up to 12 years after the potential closing date of the Grail acquisition, Illumina said it will continue to provide any products in use by customers and won't raise prices. These agreements will be available to any existing or potential customer to enter into for up to six years after the closing of the Grail deal.

Customers have an option of choosing "grandfathered" pricing, along with guarantees about new product pricing and a "no price increase" guarantee, or "universal pricing," which includes a discount schedule for consumables.

Those discounts depend on annual spending on NGS consumables and the Illumina platform in use. For NextSeq 550Dx reagents, for example, the discounts start at 10 percent at $500,000 and reaches 30 percent at $20 million. For Novaseq v1.5, the reagents for Illumina's highest throughput sequencer, the discount starts at 3 percent at $5 million and goes up to 20 percent at $75 million.

Illumina also guarantees customers access to any new products within 45 days of those products being made available to Grail.

Separately, Aravanis said Illumina's current product development roadmap will lead to a 40 percent reduction in sequencing prices per gigabase by 2025, for customers running its highest-throughput instruments at full capacity.

For the IVD test agreements, Illumina partners will have three options: an "all platforms" agreement, or agreements covering only the NextSeq or the NovaSeq platforms. Illumina's NextSeq 550Dx is already approved by the US Food and Drug Administration and the firm is developing a clinical version of NovaSeq.

Technology access fees run $25 million for all platforms, $15 million for NovaSeq, and $3 million for NextSeq. Illumina would get development milestones of $1 million per IVD test kit on NextSeq and $5 million for NovaSeq, with 50 percent upon acceptance of local run manager software and 50 percent upon first regulatory approval. Additionally, Illumina would receive a 6 percent revenue share for all kits, paid quarterly.

Additional terms include setting up a joint steering committee, with an equal number of representatives from both partners to oversee development, customer access to particular Illumina data on customers and instrument placements, and a $2 million fee payable to Illumina upon any change of control.

The length of the IVD agreements are 15 years from the potential Grail transaction date and 10 years for individual platforms. Partners may continue commercializing test kits launched before the expiration of the agreement, so long as Illumina still sells the applicable consumables and services the instruments.

Under both the supply and IVD agreements, Illumina has said it will set up an internal firewall between Grail and the rest of the company (Illumina has already said it will run Grail as a standalone unit within Illumina.) The firewall would prevent any Grail personnel from accessing confidential information made available to Illumina; however, when asked what that would look like, Aravanis said there was "no detailed plan yet," since the deal hasn't closed.

Illumina declined to make any guarantees about intellectual property. "Given the nascent status of the multi-cancer early detection field, with no commercial products and still emerging and developing methods, it is too soon to understand the IP landscape," a spokesperson said in an email. However, Illumina's supply agreement said claims of infringement against Illumina's IP would not stop it from shipping products to a customer.

Already, FTC has said supply agreements will not be enough to overcome its concerns. "Any existing or potential supply agreements between Illumina and third-party MCED tests cannot offset the likely anticompetitive effects of this acquisition because these agreements cannot account for each and every current and future method by which Illumina may foreclose, raise the costs of, or otherwise disadvantage Grail's rivals," FTC said in its complaint.

Kumar, the Evercore analyst, also said that the close consultation required by IVD kit development could pose a problem for Illumina by giving the firm a window into customer plans, though an effective firewall could prevent that.

Illumina has vowed to fight the FTC at trial, which is slated to begin in August. According to court documents filed by the FTC in the US District Court for the District of Columbia, Illumina has retained New York-based firm Cravath, Swaine & Moore.

Aravanis declined to disclose his personal stake in Grail. He defended the deal and said it's common for technology platform companies to compete with their customers. "I think the framing that this is somehow unusual is actually quite unusual. This is the common state of play in businesses and the reason is, you're actually a better platform company when you're in a vertical," he said.

He even claimed FTC's actions are putting patient lives at risk. "In fact, delaying the acquisition may already, over time, have resulted in potential lives lost," he said.

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