In late September, the Federal Trade Commission (FTC) finished an administrative trial in which it sought to force genomics-sequencing company, Illumina, to reverse its recent $8 billion acquisition of Grail. An initial decision from the trial is not expected until 2022.
Grail, a startup that makes blood tests to detect early-stage cancers, was founded by Illumina in 2016. Grail develops a test that analyzes fragments of DNA in the bloodstream to identify cancerous cells at early stages. llumina spun off Grail to raise more money for studies and ultimately raised $1.9 billion in capital from investors while Illumina maintained a 12% stake. In September 2020, Grail was exploring an initial public offering when Illumina swooped in with a $8 billion offer.
Grail’s mission to innovate cancer screening is revolutionary because it delivers a single blood test capable of detecting the presence of multiple cancers early, including cancers with no recommended screening tests. Currently, recommended screenings exist for only five cancers (breast, colon, prostate, cervical, and lung in high-risk smokers), and they often produce false positives. For example, cancer is absent in 70% of patients with elevated prostate-specific antigen and 7% to 12% of those with suspicious mammograms. In contrast, Grail’s test can detect 12 deadly cancers, including esophageal, gastric, liver, ovarian, and pancreatic cancers, with a less than 1% false-positive rate. Grail estimated that adding its blood test to existing screenings could reduce late-stage cancer diagnoses by more than half among patients aged 50 to 79, which would translate into a 26% overall reduction in five-year cancer mortality.
The proposed merger would accelerate patient access to the test by speeding up commercialization and making the test more affordable. Undoubtedly, this has the potential to save many lives. In the United States, many Americans currently face financial obstacles to accessing Grail’s test because it is not covered by insurance. Instead, it costs a whopping $950 out of pocket. This situation exacerbates the disparities in healthcare accessibility, specifically for African Americans and other minority racial and ethnic groups. Because cancer patients from these groups are more likely to be uninsured than others, they are less likely to seek care (including screenings) until their symptoms have progressed, and therefore more likely to be diagnosed with cancer at a later stage, when survival rates are lower. Illumina could address this problem with its experience in negotiating reimbursements with governments and insurers for DNA tests.
Illumina’s dominance in the DNA testing space, however, attracted regulatory scrutiny. In March 2021, the FTC suedIllumina and Grail in federal court to block the acquisition, arguing that the merger would “lessen competition in the U.S. multi-cancer early detection test market by diminishing innovation and potentially increasing prices.” The FTC allegedthat Illumina might thwart Grail’s potential future competitors by charging them more or denying them technical assistance.”
The FTC’s arguments are uncompelling. First, vertical mergers, combinations of noncompeting businesses operating within the same supply chain (in this case, Grail using Illumina’s device), tend to unlock significant pro-consumer efficiencies. There has only been one litigated challenge to a vertical merger in the past four decades: the Justice Department’s 2017 case against AT&T’s acquisition of Time Warner, which the government lost. Second, while traditional merger challenges focused primarily on harm to price competition, the FTC’s allegation here focuses on how the transaction will harm innovation competition. Trying to address this concern, Illumina extended its long-term supply agreements to current and future clinical oncology customers to allow full access to its DNA sequencing platform. Third, the FTC is concerned that the transaction could harm competition in the emerging cancer testing market, even though there is no guarantee that Grail will actually obtain FDA approval to launch a test commercially and generate revenues. The FTC’s concern is unjustified because Grail’s test is highly differentiated, thus any other screening tests being developed are more likely to be complements rather than substitutes. Lastly, it is interesting how the FTC is treating this proposed acquisition without regard to the history that Illumina founded Grail.
To make the situation more complicated, in April 2021, the European Commission (EC) announced that it would reviewthe transaction. Traditionally, a foreign country should only review a merger if the deal materially impacts consumers in its domestic market. Despite Grail’s lack of business activity in Europe, the EC decided to utilize Article 22 to exercise jurisdiction over the transaction. The FTC then moved ahead with its lengthy administrative proceeding to challenge the deal.
The Illumina-Grail deal must be complete by December 20, 2021 under the agreed terms, yet the FTC and EU actions threaten to run out the clock. Worried the transaction would not get approved before that deadline, the companies made a bold move of closing the transaction ahead of any regulatory decision. Illumina announced it would hold Grail as a separate company during the EC’s ongoing review and plans to appeal an adverse FTC ruling in federal court. It likely will prevail considering the U.S. government has not successfully challenged a vertical merger in court since 1972. Even so, Illumina and Grail face risk that the deal could be blocked for years.
Scientists have long been on a quest for a blood test that can diagnose cancer early and the aptly named Grail might offer a solution. Today, it promises a diagnostic test to catch cancer early, but the regulatory rabbit hole is slowing it down.