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FTC Moves to Block $1.2B Illumina, Pacific Biosciences Deal

This story has been updated from a previous version to include information about Illumina's extension of the merger agreement. 

NEW YORK – The US Federal Trade Commission announced Tuesday that it authorized an action to block Illumina's proposed $1.2 billion deal to acquire Pacific Biosciences.

In an administrative complaint, FTC alleged that Illumina is seeking to unlawfully maintain a monopoly in the US market for next-generation DNA sequencing systems by "extinguishing PacBio as a nascent competitive threat," FTC said in a statement. The complaint also alleged that the proposed acquisition is illegal because it may substantially lessen competition in the US NGS market by eliminating current competition and preventing future competition between Illumina and PacBio.

The announcement is another major, potentially insurmountable, hurdle to the acquisition, which is also being challenged on similar grounds by the UK's Competition and Markets Authority.

"We strongly disagree with the FTC's decision and will continue to work through the regulatory approval process as we consider next steps," an Illumina spokesperson said in an email. "We believe that the acquisition will benefit the industry and customers, and the facts of our proposed transaction support this."

FTC has authorized staff to seek a temporary restraining order and a preliminary injunction in federal court, if necessary, pending the administrative proceeding.

"When a monopolist buys a potential rival, it can harm competition," FTC Bureau of Competition Deputy Director Gail Levine said in a statement. "These deals help monopolists maintain power. That's why we're challenging this acquisition."

In morning trading on the Nasdaq, shares of PacBio were down 4 percent at $5.14 and shares of Illumina were flat.

The announcement is unlikely to affect investors' views on Illumina, several Wall Street analysts said.

"[We] see limited to no impact on ILMN's long-term growth trajectory given that its short-read [sequencing-by-synthesis] technology remains key to driving elasticity of demand and new markets expansion," wrote SVBLeerink analyst Puneet Souda.

The deal was "not key to Illumina's growth story," Evercore ISI analyst Vijay Kumar wrote. "Thus, the news is more noise than substance in our minds and does not change the medium-term thesis (if anything, it removes the risk of potential dilution from the transaction.)"

And one analyst even suggested the FTC's stance wouldn't spell doom for PacBio. "We continue to believe the Sequel II launch is going well with strong placements the first two full quarters of the launch. A distribution partnership with Illumina could also drive further adoption of PacBio tech," PiperJaffray's William Quirk wrote in an analyst note. "We believe PacBio standalone is worth more now than when the deal was announced."

On Wednesday, Illumina notified PacBio that it would extend the merger agreement end time to March 31, 2020, according to a PacBio filing with the US Securities and Exchange Commission. The extension could cost Illumina up to $34 million: PacBio would be due cash payments of $6 million by Jan. 2, 2020, $22 million by Feb. 3, 2020, and $6 million by March 2, 2020. 

Illumina announced in November 2018 that it planned to acquire PacBio for $8 per share. Both the FTC and CMA announced that they would investigate. Until June, the firms said they expected the deal to close by mid-2019. But upon news that CMA was moving its investigation to a second phase, Illumina pushed back the expected close of the deal to the fourth quarter.

In October, CMA released a provisional finding that the deal would result in a "substantial lessening of competition" in the UK NGS market and suggested blocking the deal as its favored remedy. Now, it appears that FTC also favors blocking the deal.

FTC claimed PacBio has made "significant technological advancements in recent years that have increased the accuracy and overall throughput of its systems, while lowering the cost. As a result, PacBio is a closer alternative to Illumina than ever before." FTC also said the deal would reduce Illumina's incentive to innovate and develop new products.

FTC said the vote to issue the administrative complaint and to authorize staff to seek a temporary restraining order and preliminary injunction was unanimous, 5-0.

The administrative trial is scheduled to begin on Aug. 18, 2020.