European Commission prohibits acquisition of Grail by Illumina

Dechert LLP

Following a Phase II investigation, the European Commission (the “Commission”) on 6 September 2022 prohibited the acquisition of Grail by Illumina, on the basis that the merger would stifle innovation in the emerging market for early cancer detection tests based on sequencing technologies. This happened less than a week after the US Federal Trade Commission failed to convince a judge to block the transaction based on similar grounds. This landmark case is the first falling under the EC’s new Article 22 referral policy, meaning that the Commission now has the power to block deals that do not meet the EU turnover thresholds nor any of the Member States’ thresholds. Even though Grail does not generate any turnover in Europe, the $7.1 billion merger was referred to the Commission in early 2021 by several national competition authorities (“NCAs”) and underwent a lengthy in-depth investigation (Phase II) before being prohibited. Since Illumina refused to comply with its suspension obligation during the review process and went on to close the deal in August 2021, it may now have to divest Grail within a short time-frame.

Key takeaways

  • With the prohibition of Illumina/Grail’s merger following an Article 22 referral, EU merger control takes on a new dimension that calls for companies to exercise caution when contemplating an acquisition or a merger that would normally escape merger review anywhere in the EU. In particular, a preliminary substantive assessment of the potential effects of the merger in the internal market is warranted to mitigate the risk of a surprise Article 22 referral.
  • Concentrations in innovative sectors such as digital and life sciences are more prone to be subject to an Article 22 referral and extra caution should therefore be taken with them.
  • The new EU merger control policy may have significant practical implications for businesses that should be carefully factored in and adequately reflected in deal documentation.

Background

Illumina, the global leader in next generation sequencing (“NGS”) systems for genetic and genomic analysis, announced in September 2020 its intention to acquire Grail, one of its customers active in the emerging and very competitive market for blood-based tests for early cancer detection. Despite the concentration not reaching the turnover thresholds of the EU Merger Regulation (“EUMR”) nor any national thresholds of the Member States, the transaction caught the attention of the Commission. In a context where the Commission had expressed its willingness to review acquisitions likely to hinder innovation (so-called “killer acquisitions”), the Commission took this opportunity to implement its new Article 22 policy.

Article 22 of the EUMR allows NCAs to refer a transaction to the Commission where (i) the concentration affects trade between Member States and (ii) threatens to significantly affect competition within the territory of the Member State(s) making the referral. While this provision was rarely used in the past and, although not a legal prerequisite, it was often limited in practice to cases where the Member State(s) making the referral request had jurisdiction over the concentration, the Commission, which had long been looking for an appropriate instrument to catch potential problematic mergers falling below the European thresholds, decided to change its approach. In its guidance of 26 March 2021, the Commission specified that the use of this referral mechanism was intended to allow for oversight of transactions involving companies that do not (yet) have significant revenues in Europe, but which constitute an important competitive force in innovative and high value-added-markets such as pharmaceuticals.

The Illumina/Grail merger, which had already attracted a lot of notice in the US and was further brought to the attention of the Commission through a complaint received in December 2020, appeared to be the perfect candidate. Upon the invitation of the Commission, France, joined by Belgium, Greece, Iceland, the Netherlands and Norway sent referral requests to the Commission in March 2021. The Commission accepted the referral in April 2021, forcing the parties to notify their transaction, and opened an in-depth investigation in July 2021.

Illumina, supported by Grail, challenged the Commission’s decision to accept the referral of the case before the General Court (“GC”). In parallel, given the significant extension of the timing initially contemplated to obtain clearance, Illumina chose to proceed with the closing of its acquisition in August 2021 without waiting for the Commission’s green light.

The Commission reacted by opening proceedings against Illumina and Grail for violation of the standstill obligation to which they had become subject as a result of the Article 22 procedure (“gun jumping”). In addition, on 29 October 2021, emphasizing the unprecedented nature of the situation and having in mind the competitive concerns expressed in its statement of objections, the Commission adopted interim measures in order to prevent potential irreparable harm to competition pending the completion of its review of the transaction. The Commission thus ordered that Grail be kept separate from Illumina and be run by an independent Hold Separate Manager. The Commission also ordered the parties to refrain from exchanging confidential business information (except to the extent necessary in the course of their supplier-customer relationship) and to continue to conduct their business interactions at arm’s length, in accordance with industry practice, so as to avoid that Grail be unduly favored by Illumina, to the detriment of its competitors. Finally, the Commission invited Grail to actively look for alternative options should the concentration ultimately be blocked.

In a ruling of 13 July 2022, the GC confirmed the Commission’s jurisdiction over the Illumina/Grail transaction, thus upholding the interpretation of Article 22 EUMR according to which “any concentration”, irrespective of whether it meets national thresholds of the Member States or not, can be referred to the Commission if it satisfies the two conditions mentioned. The GC also noted that Article 22 EUMR acts as a corrective mechanism allowing the Commission to review concentrations with potentially significant effects on competition that would have otherwise escaped its control.

The Commission’s prohibition decision

Following its in-depth investigation, the Commission decided to prohibit the acquisition of Grail by Illumina. The concentration would indeed have led to the vertical integration of the parties, Illumina being active in the upstream market for NGS systems for genetic and genomic analysis while Grail, one of its customers, uses these systems to develop and commercialize blood-based tests for early cancer detection. Given Illumina’s market share for NGS systems, making it a key commercial partner for Grail and its competitors, the transaction could have, according to the Commission’s assessment, put at risk the on-going innovation race in the nascent market for blood-based early cancer detection tests, to the benefit of Grail.

More particularly, the Commission found that, following the concentration, Illumina would have the ability and the incentive to foreclose Grail’s rivals. First, the Commission considered that, despite the limited revenues currently generated by Illumina with Grail’s competitors, Illumina had clear incentives to engage in foreclosure strategies by either refusing to supply them with its NGS systems or by discriminating against them through price increase, degrading quality, or delays in supplies.

Second, the Commission noted that there were no credible alternative suppliers in the market for NGS systems, which is characterized by significant barriers to entry, adding to Illumina’s potential ability to foreclose Grail’s rivals and thus reserve to itself the promising downstream market for early cancer detection tests (whose total value is expected to reach more than €40 billion per annum in 2035).

Illumina offered several remedies, but none of them was considered to adequately address the competition concerns expressed by the Commission. In particular, Illumina proposed to openly license to NGS suppliers some of its NGS patents and to stop lawsuits in the US and Europe against NGS supplier BGI Genomics for three years. According to the market test conducted by the Commission, however, this remedy in the Commission’s view would not have been sufficient for a competitor to Illumina to emerge in the short to medium term. In addition, this remedy did not address the Commission's concern that switching providers of NGS system would be lengthy and costly for Grail’s rivals, without any guarantee of success, thereby potentially placing them at a disadvantage in the market.

Illumina also submitted a commitment to conclude agreements with Grail's rivals under the terms of a standard contract. This remedy did not achieve the Commission’s approval either because the Commission asserted it would have been easy to circumvent, difficult to monitor and did not address all the foreclosure strategies available to Illumina such as degrading technical support quality.

Against this background, the Commission decided to prohibit the concentration. Given that it has already been implemented, the Commission will decide in due course whether it is appropriate to dissolve it or to take other measures, pursuant to Article 8(4) EUMR.

Practical consequences

The Illumina/Grail saga marks an important step forward for the future of merger control in the EU. The Commission, with the approval of the GC (and subject to confirmation by the European Court of Justice, before which an appeal is currently pending), can now theoretically review any concentration that threatens to affect competition in the common market, with the consequence that there is no longer a safe harbor for companies which do not meet the European turnover thresholds nor those at national level. This shift in EU merger control policy has important business implications that will need to be factored in by companies and carefully addressed in deal documentation:

  • First, it means that the multi-jurisdictional analysis to determine where filings are required is no longer sufficient with respect to the EU market, where a preliminary substantive assessment of the competition concerns the operation may raise should now always be conducted. Depending on the outcome of this assessment, it may be advisable to informally approach the Commission to gauge its interest in reviewing the transaction so as to avoid a surprise Article 22 referral later in the process.
  • Second, condition precedents relating to merger control should be carefully written, taking into account the risk of a potential referral.
  • Finally, it may also be advisable, in certain cases, to leave more time between signing and closing in order to factor in the risk of a potential referral and/or to provide in the deal documentation for the financial consequences of postponing closing due to external factors, such as a referral to the Commission. In the case of Illumina/Grail, this could have provided Illumina with the incentive to wait for the Commission’s decision rather than to proceed with the early completion of its acquisition of Grail and could thus have avoided (i) a subsequent procedure for gun jumping with the threat of a potential fine and (ii) the risk of having to unwind the merger.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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