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Oxford Nanopore Rejects Illumina's Expanded IP Offer, Suggests NovaSeq Divestiture

This article has been updated to correct that PacBio's instrument sales, not Sequel II sales, were up year over year in Q3.

NEW YORK – Oxford Nanopore Technologies told UK regulators last week that it believes Illumina's offer to license sequencing-related intellectual property to third parties in order to gain approval for its proposed acquisition of Pacific Biosciences doesn't go far enough.

Instead, ONT suggested Illumina divest its NovaSeq platform, arguably the company's most successful product line at the moment.

In a document filed with the UK's Competition and Markets Authority on Nov. 21 and posted on the CMA's website today, ONT called Illumina's revised remedies proposal, filed with the agency on Nov. 19, an "illusory offer which does little to offset the anticompetitive effects of the proposed merger either in the UK, or on a worldwide basis."

In addition, the CMA today posted an undated response by Shawn Baker, cofounder of sequencing marketplace AllSeq and a consultant with expertise in next-generation sequencing, to the agency's Oct. 24 proposal to block the acquisition of PacBio by Illumina. In it, Baker wrote that the CMA's findings are "extremely disappointing." He also argued that "there are several aspects that suggest the possibility the CMA had a predetermined conclusion and went hunting for the evidence they needed to back it up (while ignoring all evidence which countered the conclusion)."

In its response, ONT reiterated that a combined Illumina-PacBio would hold a "virtual monopoly in the NGS market," with a market share it estimates to be greater than 90 percent in the UK and greater than 80 percent worldwide.

In addition, ONT said Illumina's offer to license out IP "has serious limitations and appears to be confined to a very restricted field of use."

Illumina had offered a "perpetual, royalty-free, irrevocable license to any of Illumina and PacBio's pre-closing patents and patent applications to any interested third party undertaking for use in the field of single-molecule, native long-read sequencing systems and associated sequencing chemistries." This would also include IP filed within 12 months after the merger and any exclusively in-licensed relevant patents.

In ONT's view, the field of use as defined by Illumina would potentially exclude sequencing of non-native DNA, for example cDNA or DNA that is amplified; sequencing that generates short instead of long reads; or sequencing that doesn't analyze single molecules. "The license therefore would apply only to a small proportion of the NGS market and would exclude large areas of biological analysis that are currently being performed or could potentially be performed by scientists using ONT or other sequencing technologies," the company wrote.

In a supplement filed along with its response, ONT listed applications that it believes may not be covered by the IP package, including amplicon sequencing, STR sequencing, RNA sequencing through cDNA, metagenomic sequencing, noninvasive prenatal testing, newborn screening, circulating DNA analysis, sequencing of DNA from FFPE tissue, and ancient DNA sequencing.

It is unknown, however, how the CMA defines "single-molecule, native long-read sequencing systems." Experts in the field have suggested, for example, that the word "native" is meant to distinguish long reads generated from a single DNA fragment from synthetic long reads that are constructed from several short reads, and that "native long-read sequencing" would not exclude amplified DNA.

ONT also argued that "regardless of the scope of an IP package," Illumina and PacBio would still be able to pursue "the anticompetitive tactics which they have used for over a decade in relation to ONT," therefore preventing competitors from entering the market or from expanding.

"An IP license from the parties, however broad, will not by itself ensure successful entry or expansion, any time in the foreseeable future, if at all, given the challenges of this market, and the power of the merged entity which will allow it to engage in anticompetitive practices, including discounting, bundling, and aggressive litigation tactics, to drive out competition," ONT wrote.

In addition to offering "a broad IP license," a combined Illumina-PacBio should divest part of its business, ONT suggested, "potentially Illumina's NovaSeq product line."

Given the importance of the NovaSeq for Illumina's business, such a move seems unlikely, though. NovaSeq sales, for example, contributed to the growth in Q3 sequencing instrument revenues, to $142 million. Also, NovaSeq recently surpassed the HiSeq X as the platform generating the most sequencing data, Illumina CEO Francis deSouza said during the Q3 earnings call, adding that there is "still plenty of opportunity for NovaSeq."

Baker, in his response to the CMA, maintained that the agency took PacBio's ability to stay solvent without a merger with Illumina "as a given" but looked at competitors without considering their future potential.

He also suggested that the agency ignored customers who said a merger of Illumina and PacBio would benefit the market and only listened to those who said long reads would come to dominate short reads in the future. Further, he claimed that the CMA ignored sales forecasts by the companies while relying on other internal company documents.

Baker suggested that the CMA reevaluate PacBio as a "failing firm" given its last quarterly results, which saw a sequential drop in sales of the Sequel II platform, though year-over-year growth in instrument sales was strong, driven by demand for the Sequel II in Q3.