By Jared Cooper
This week, the FTC ordered Illumina, a DNA sequencing provider, to divest GRAIL, a cancer detection test developer, to ensure that the race to develop and bring to market effective and affordable tools to detect cancer early. Their decision reverses the Initial Decision of an ALJ and continues the FTC’s current trend of energetic enforcement of merger and acquisition law intended to protect competition and innovation, reviving the antitrust enforcement to pre-Bork prominence.
GRAIL makes non-invasive, early detection liquid biopsy tests that screen for multiple types of cancer at very early stages. The tests rely on DNA sequencing to analyze genetic material. Illumina is the dominant provider of such sequencing, and if it owned a testing company, it would have massive incentive to cut off the access to its services from all of the competitors of GRAIL.
The commission determined that the acquisition would “diminish innovation in the U.S> market for [cancer-detection] tests which increasing prices and decreasing choice and quality of test,” which it commented was “extremely concerning” given the importance of developing effective cancer detection tools.
Broadly, Section 7 of the Clayton act was intended to address vertical mergers that “deprive . . . rivals of a fair opportunity to compete.” Brown Shoe Co. v. United States, 370 U.S. 294, 323. Whether a merger is anticompetitive requires analysis of the “share of the market foreclosed” and “various economic and historical factors,” including, inter alia, the nature and purpose of the transaction, barriers to entry, whether the merger will eliminate potential competition by one of the merging parties, and the degree of market power that would be possessed by the merged enterprise as shown by the number and strength of competing suppliers and purchasers. Matter of Illumina, Inc. and GRAIL, Inc., FTC No. 9401, 40 (FTC March 31, 2023). More recently, there has been a focus on whether a merger will create an incentive to foreclose rivals from sources of supply or from distribution outlets. See, e.g., United States v. AT&T, 916 F.3d 1029 (D.C. Cir. 2019).
The opinion raised several concerns in support of their divesture order. First, Illumina is the only viable supplier of the DNA sequencing platforms used by the tests, and the entry barriers to the market prevent rival platforms from emerging. Second, reflecting concerns common to many vertical integrations, Illumina could foreclose GRAIL’s competitors from competition equitably by withholding DNA sequencing platforms or their costs—activity which is seen as a “clog on competition.” Brown Shoe Co. v. United States, 370 U.S. 294, 323-24 (1962). Finally, the Commission noted that Illumina has “an enormous financial incentive to place a thumb on the scale in GRAIL’s favor” by restricting such access because they would earn substantially more profit on GRAIL tests than they would on the tests of rivals. The commission noted that Illumina gave GRAIL special pricing and other benefits while it was under the Illumina umbrella.
The defense to mergers is always that they will produce economies of production and scale that will result in lowered costs to consumers. But Illumina failed the fairly stringent test, where these “efficiencies” must be verified by independent sources (or else the exception “might well swallow the whole of Section 7”), because their assertions that the merger would “save lives,” among other things, were speculative, were not detailed, and were accompanied by no evidence that they would occur, only that they could—the Commission was not willing to take it on good faith that Illumina would operate in such a manner. Illumina, Inc, FTC No. 9401 at 78.
The Harvard Business Review wrote that “antitrust authorities bear an awesome responsibility” and the FTC and DOJ have been too lenient in scrutinizing potential merger effects. This decision comes at a time when research is beginning to reflect what has been anecdotally obvious: that pharmaceutical mergers boost short-term profits at the expense of long-term innovation. Research shows that while vertical integration may allow the integrated company to operate more efficiently, when that company abuses its newly acquired market power, it reduces the effectiveness of the money spent by its competitors on research and development of their products by way of the “rent” extracted by the monopolist from its subsidiary’s competitors. To that effect, the Commission acknowledged that “Illumina has the ability . . . to hamper the R&D and commercialization efforts of GRAIL’s rivals’ product” and that the acquisition “will increase Illumina’s incentive to do so.” It listed the various ways Illumina could restrict access to its DNA sequencing technology, a tech over which it has a functional monopoly. Illumina, Inc., at 47-52. In combination with evidence that Illumina has exploited its monopolies in other product markets in a similar manner, it was clear to the court that a “substantial lessening of competition” was likely. Id. at 52-53.
Some of Illumina’s investors agreed with the FTC decision. Carl Icahn, who owns over one percent of Illumina, wrote that attempted acquisition is a “desperate ‘Hail Mary’ power grab to attempt to reverse the declining fortunes of Illumina.” Only three years ago, the Illumina abandoned an attempt to acquire a nascent DNA sequencing rival, Pacific Biosciences of California, after the FTC authorized action to block it because it would “substantially lessen competition and further insulate Illumina’s monopoly from PacBio’s increasing competitive threat.” Matter of Illumina, Inc., and Pacific Biosciences of California, Co., No. 9387 (FTC Dec. 17, 2019). Carl Icahn somewhat flamboyantly paints a picture of Illumina as a failing firm led by an inept CEO and points out that the company’s market value has fallen from $75 billion to $36 billion when its acquisition of GRAIL occurred. Failing firms have a defense to allegations that their behavior is anticompetitive, a defense which is often made and rarely successful, but Illumina did not make defense. The test for whether an anticompetitive merger should be allowed when otherwise the failing firm would completely exit the market is stringent, and the FTC would likely have seen arguments that either Illumina or GRAIL were failing as further fodder in their campaign against anticompetitive practices.