No Revenue, No Problem: Illuminating Illumina’s Blocked Acquisition of GRAIL (and What the Netherlands Has to Do With It)

On October 28, 2022, European Union (EU) regulators renewed interim measures ordering Illumina to keep GRAIL as a separate entity following Illumina’s September 2020 acquisition of the cancer detection company. Illumina jumped the gun and acquired GRAIL before obtaining approval from EU antitrust regulators under the EU Merger Regulation (EUMR). Failure to comply with the interim measures could result in steep payments of up to 5% of Illumina’s daily revenue if the corporate operations between the two entities aren’t kept separate. Both separate management of the two entities and strict protocols for the sequestration of confidential information is required

Illumina is a publicly traded biotechnology company that provides array-based sequencing for genomics and genomic testing. The company achieved $4.56B in revenues for the fiscal year 2021. As a widely diversified company, Illumina develops products ranging from library array kits to gene selection panels. In Europe, Illumina commercializesproducts directly and through distributors. GRAIL is a healthcare technology company developing screening tests to detect early-stage cancer. GRAIL has raked in roughly $2B in total funding making it a relatively mature ‘startup’. GRAIL’s main product, Galleri, is a multi-cancer detection product that has shown the ability to detect cancers through a single blood draw. Both Illumina and GRAIL are U.S.-based companies. However, at the time of enforcement, GRAIL had limited commercialization of its Galleri products in the United States, with two additional pipeline products, a diagnostic aid, and a relapse detection product. GRAIL also had yet to record revenue in Europe at the time of enforcement. Interestingly, GRAIL was originally formed in 2015 as a subsidiary of Illumina to enable cancer screening powered by Illumina’s sequencing technologies but was spun off in 2016 so that GRAIL could attract outside investments. 

In an inherently repercussive move, in September 2022, the European Commission (‘Commission’) blocked Illumina’s September 2020 acquisition of GRAIL, signaling clear intent towards restrictive merger enforcement in the EU. The Commission derived its authority under the EU Merger Regulation (EUMR), which simplified the Commission’s merger review process in three ways. First, the Commission widened the scope of its merger review procedure by using shorter notification periods. Second, the Commission reduced the information that needs to be provided when notifying a merger. Third, the Commission took measures to streamline the pre-notification process. Prior to making a final decision, the Commission conducted an in-depth investigation and concluded that Illumina, an unrivaled supplier of NGS systems (for genetic analysis), acquiring GRAIL, a customer of Illumina, would have enabled and incentivized Illumina to foreclose GRAIL’s rivals. Specifically, the Commission concluded that GRAIL’s rivals are dependent on Illumina’s technology, and as a result of an acquisition of GRAIL by Illumina, competitors could be unable to access essential inputs to compete with GRAIL for a newfound disadvantaged position. Illumina went as far as offering two proposed remedies to address the Commission’s competition concerns. The first was that Illumina would provide a license to some of its patents for three years, and the second was that it would commit to concluding agreements with GRAIL’s rivals under standard contract conditions. The Commission concluded that the proposals did not fully remove Illumina’s ability or incentives to effectively foreclose GRAIL’s competitors, and thus would not prevent the proposed transaction’s negative effect on competition. 

This was the first time that the Commission blocked an acquisition of a US startup with no revenues in the Commission, and it was the first time that the Commission used the vertical innovation theory of harm to prohibit a merger. Further, the extensive review took roughly two years, almost twice as long as the one-year drop-dead date in the purchase agreement. 

The vertical innovation theory was invoked because Illumina is an unrivaled supplier of Next-Generation Sequencing (NGS) systems, which are used by GRAIL, and its competitors, to develop cancer detection tests. Illumina NGS systems sequence millions of DNA/ RNA fragments in a way that increases speed and accuracy while reducing the cost of sequencing. Competitors would risk intellectual property litigation and tremendous switching costs if sourcing an alternative NGS provider. Specifically, the Commission determined that not only would Illumina have the ability to foreclose GRAIL’s rivals, but it would also have some incentive to do so. The Commission concluded that NGS-based early cancer detection testing would reach more than EUR 40 billion per year by 2035. And as such, the Commission highlighted that it is crucial that different features and price points of such tests come to the market uninhibited. 

The Commission, under the EUMR, examines large mergers within the EU with firms reaching certain turnover thresholds. The first of these thresholds is a combined worldwide turnover of the merging firms of EUR 5 billion or an EU-wide turnover of at least two firms of EUR 250 million, turnover meaning revenue. The second alternative also requires a variety of revenue thresholds both merger-wide and amongst EU member states. Therefore, prohibiting the Illumina/ GRAIL merger would not have been possible, however, the EUMR contains a “Dutch Clause”. Article 22 of the EUMR enables referral of merger cases to the Commission that “affect trade” between member states and threaten to “significantly affect competition”. Article 22 was initially designed to account for situations where Member States of the EU did not themselves have merger review powers. Interestingly, the clause was inserted at the requestof the Netherlands, hence the nickname. Therefore, the Commission’s decision to prohibit the Illumina/ GRAIL merger invokes the “Dutch Clause” and sets a highly restrictive precedent for mergers going forward in the EU. 

To wrap up this complex case of EU merger enforcement in the biotech industry, it is paramount to note that EU General Court, in its July 2022 judgment, upheld the Commission’s decision to use Article 22 of the EUMR to block the Illumina/ GRAIL merger. Moving forward, companies of virtually any size should exercise caution when making EU-based acquisitions, or when the target conducts business in the EU. Especially heightened caution should be exercised if the acquirer and target are engaged in a symbiotic business relationship of sorts, where the acquirer can exercise vertical control in the market in which the target operates to foreclose competition. 

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