Illumina-Grail saga ends with divestment

Market Access
King chess piece

In a case that had been closely watched across multiple industries, Illumina chose to divest Grail in the light of legal action from the European Commission and the US Federal Trade Commission. Ben Hargreaves tracks Illumina’s decision to challenge the European Union’s ability to vet merger agreements, and how the affair unfolded.

In 2020, Illumina announced that it had reached an agreement with Grail for an acquisition worth $7.1 billion. Illumina completed the deal just under a year later, bringing Grail back under its ownership, having previously spun the company out. Only three years after the arrangement was struck, Illumina was forced to take action to divest the business.

The reason? Illumina forged ahead with its acquisition despite a European Commission (EC) review of the transaction being ongoing when the companies closed the deal. At the time of the announced closure, the company acknowledged that this was the case, but stated that it did not believe that the EC had jurisdiction to review the merger. Illumina’s move to continue with the deal meant pitting itself against the European Union (EU) and the block’s ability to take action on takeover deals that it views as being able to stifle competition. The company’s decision to back down could have far-reaching impacts, both for the pharma industry and beyond.

How the situation arose

The history of the acquisition actually saw Illumina spin out, and then decide to re-acquire Grail four years later. The latter company offers blood tests that are able to detect different kinds of cancers before they are symptomatic. The concern on the part of the EC, and the US Federal Trade Commission (FTC), was that the successful completion of the deal could reduce rival platforms from competing in the area. This is because Illumina is responsible for providing crucial elements needed to create cancer tests, and could potentially limit supply to competing companies.

However, Illumina chose to complete the deal whilst both the FTC and the EC were reviewing the potential for this to happen. One of the key sticking points that led to Illumina pushing ahead to acquire Grail was based on the deadline for the merger. In its statement on completing the deal, the company outlined that, “[r]egulators in the EU are reviewing the transaction, but a decision is projected after the deal expires. Grail has no business in the EU, and the company believes that the European Commission does not have jurisdiction to review the merger as the EU merger thresholds are not met, nor are they met in any EU member state.”

To avoid the deadline passing, Illumina continued with the acquisition and decided to hold Grail as a separate company during the EC’s review. In the US, Illumina had stated that there was ‘no legal impediment’ to acquiring the company.

Firm response

The FTC disagreed, and issued an ‘Opinion and Order’ requiring Illumina to divest Grail. In an explanation of its actions, the FTC highlighted the ‘real world evidence’ of Illumina’s past behaviour, included providing Grail special pricing and other benefits when it was wholly owned by Illumina.

The Commission concluded: “Finally, the Opinion rejects parties’ claim that this acquisition is likely to yield results that save lives, noting that their efficiency projections were vague, self-serving, and unsupported. Ultimately, the Opinion holds that letting competition spur through innovation among MCED test providers would do more to save lives than allowing a monopolist to vertically integrate and capture the market.”

For its part, the EC fined Illumina a record €432 million for the breach of EU merger control rules. According to the EC, “Illumina strategically weighed up the risk of a gun-jumping fine against the risk of having to pay a high break-up fee if it failed to takeover Grail.” In addition, the EC stated that Illumina also considered the ‘potential profits’ it could obtain by jumping the gun, even if it were ultimately forced to divest the company.

“If companies merge before our clearance, they breach our rules. Illumina and Grail knowingly and deliberately did so by implementing their tie-up as we were still investigating. Today’s decision to fine both companies, for a total amount of €432 million, shows that this is a very serious infringement,” said Margrethe Vestager, executive vice president in charge of competition policy at the EC.

The final outcome

The case was being closely watched by not just the pharma industry, but also wider industries to determine whether the EC could apply its merger regulations as strictly as it would like. In response to the EC’s divestiture order, Illumina stated that if it lost its appeal then it would be forced to divest Grail. Also, if it failed in its appeal in the US against the FTC, Illumina would also be required to sell the company. 

The latter point is exactly what happened, and Illumina immediately announced that it would divest Grail. The company said that it would achieve the divestiture through a third-party sale or a capital markets transaction, with the aim of finalising the terms by the end of the second quarter of 2024.

“We are committed to an expeditious divestiture of Grail in a manner that allows its technology to continue benefitting patients,” said Jacob Thaysen, CEO of Illumina. “The management team and I continue to focus on our core business and supporting our customers. I am confident in Illumina's opportunities and our long-term success.”

Casualties of the acquisition process had already emerged prior to this, as the company’s CEO of 10-years, Francis deSouza, handed in his resignation mid-way through 2023. The ex-CEO’s decision arrived as the company’ share price declined substantially. At the beginning of 2020, the company held a share price of $320, which has subsequently fallen to its current levels of approximately $130 per share, at the time of writing. Activist investor, Carl Icahn, put pressure on the company for management changes, leading to deSouza and Illumina’s previous chairman, John Thompson, to step down in the wake of the Grail acquisition troubles.

According to legal firm, WilmerHale, the case is ‘groundbreaking’ and has important future implications, noting, “[g]iven the EC’s new policies, parties to transactions that are not notifiable to the EC or any Member State can no longer rest assured that the EC will not review their transaction. And there is more possibility than there used to be that a transaction that is notifiable to one or more Member States could end up under EC review.”

WilmerHale adds that the action by the EC suggests that transacting parties should be careful to consider the implications of the EC’s focus on anti-competition when planning transactions and negotiating antitrust covenants. In the light of Illumina’s decision to divest, it is likely that companies will follow WilmerHale’s advice to tread carefully in future dealmaking.