Illumina and PacBio, or the Next-Generation Sequencing market’s Romeo and Juliet

The past two years have seen a number of announcements in the field of sequencing. We should spend some time wondering what they imply for the future of this exciting area. From new product launches to company acquisitions and unexpected technology trends, lots of things have happened. In this article, we will cover recent news around Illumina’s tentative acquisition of Pacific Biosciences. Following the CMA’s suggestion of blocking of the deal, several voices disagreed with this decision. Yole proposes to analyze what could be the conclusion of this next gen soap opera.

Illumina PacBio acquisition timeline 2019 - Yole Développement

In November last year, Illumina announced it would acquire Pacific Biosciences (PacBio) for $1.2B and expected the deal to close by mid-2019[1]. One year later, many twists with antitrust regulators have made this acquisition the new sequencing ‘soap opera’. Indeed, the UK’s Competition and Markets Authority (CMA) in June launched an in-depth review to assess whether the merger could reduce competition in the field of sequencing and be a concern for innovation [2]. It is true that given Illumina’s current domination of the sequencing market, any acquisition of a competitor would result in a quasi-monopoly. But it is already the case, and the situation is much more complex than just adding together companies’ market shares. Anyway, the CMA investigation’s preliminary findings[3] were released in October. They are not good news for Illumina and PacBio: the agency considers the deal as anti-competitive and proposed blocking it.

Several great articles have already covered the CMA’s phase 2 investigation and preliminary findings in detail, including Keith Robison at OmicsOmics[4] and James Hadfield at Core Genomics[5]. The CMA’s publications highlight that an Illumina/PacBio merger would be a concern for competition. However, some of the arguments pushed by the CMA to justify blocking the acquisition can be questioned. The CMA states that “for a large proportion of all sequencing applications, both short read and native long read technologies are technically interchangeable”[6] and also that both companies’ products are “products that customers consider to be close substitutes”[7]. The future of sequencing certainly lies in long reads, but as of today both technologies are not generally substitutable. The choice between them is mainly a matter of cost and accuracy, and of course of the read length itself. This is why both technologies usually address different applications. The CMA is worried about the merger removing one of Illumina’s main competitors, but Illumina and PacBio actually don’t really play in the same space.

Moreover, it looks like the CMA does not consider all the benefits that the merger could have for sequencing customers. The advantages include cheaper and more accessible long-read technology, which is currently much more expensive than Illumina’s short-read technology. In fact, the CMA considers PacBio as a significant competitive threat to Illumina. We do not see this to be the case, at least in the foreseeable future and without any change in their situation. The technology is nice and there have been significant improvements in cost and throughput lately, but it is still far from being a profitable business. Early in December, the CMA made public an Illumina/PacBio response[8] to its preliminary findings. It’s not a surprise that both companies highlight how the CMA has failed to understand how their technologies are not interchangeable and serve different markets.

Interestingly, the CMA has received other responses to its successive publications and following responses, including from Oxford Nanopore Technologies (ONT)[9] and from an independent, Shawn Baker[10],[11], co-founder of AllSeq and a life sciences consultant. All these responses were officially published by the CMA[12], along with summaries of the calls they had with sequencing customers and competitors[13]. Baker is strongly in favor of the merger, and highlights issues with many of the CMA’s arguments in favor of blocking the deal. Some voices have suggested the CMA was trying to protect UK-based ONT. It might not be the CMA’s main motivation, but at least it could have an influence on the situation.

Illumina’s attempt to save the deal was by proposing to open up its intellectual property (IP) in the field of single-molecule native long-read sequencing to competitors. It did a first proposal[14] at the beginning of November only concerning PacBio patents. Illumina then enlarged the proposal[15] also to its own patents, and to upcoming patents from the merged entity within the 12 months following the acquisition. ONT has reacted to the proposal[16], unsurprisingly saying it was not enough, and suggested Illumina divest its NovaSeq high-throughput sequencing business, which is of course unlikely to happen. It is not clear what the scope and value of these offered patents is. However it sounds like a strong concession and therefore certainly means that blocking competitors with the IP of the merged entity, which was one of the CMA’s main arguments against the merger[17], is not the purpose of the deal. However, Oxford Nanopore has suggested that this IP offer was misleading. This is in part because some of the patents proposed by Illumina, and which were involved in some patent litigation, were recently revoked. It’s also in part because they find the proposed scope of applications too restrictive.

The CMA has extended its deadline for the final decision from December 2019 to February 2020. On its side, the U.S. Federal Trade Commission (FTC) has remained perfectly silent concerning the deal. Will the merger ever happen? The market doesn’t think so. PacBio’s share price is trading between $5.00-5.50 these days, much below Illumina’s offer of $8.00 per share. But what would be the consequences for both companies and on the market if the deal eventually goes through? What if it does not?

If the deal is finally accepted, it might not be a good news for ONT. PacBio as of today is its closest competitor, even though some people at ONT have publicly stated that PacBio was not a threat at all. But what about PacBio benefiting from Illumina’s sales and marketing force? It is understandable that ONT does not want the deal to happen as it will be facing reinforced competition. Other competitors, like potential new entrants, will have even more difficulty finding their way towards commercial success. On the other hand, long read customers would probably benefit from solid performance improvements in PacBio’s technology in Illumina’s hands.

If the deal is finally canceled, it might simply delay Illumina’s entry into the field of long reads: it has internal R&D programs on such technology, as long reads are definitely the future of sequencing. But will PacBio manage to stay alive by itself? Or will it disappear in the coming two or three years? Or maybe it will get acquired by another sequencing player? Roche seems unlikely because of its terminated deal with PacBio three years ago. China’s BGI would certainly be blocked by US authorities due to the current trade war. The remaining candidates include Thermo Fisher or Agilent.

In its review, the CMA refuses to consider PacBio as a “failing firm”. The reality is that it is burning cash at an incredible pace and still seems far from reaching breakeven[18]. Even the $100M it would get from Illumina in the context of a deal cancelation, in addition to the $6M the sequencing giant is currently paying monthly to fund PacBio’s operations, would only keep it alive for a few more quarters. A failure of PacBio would certainly benefit ONT, which would therefore lose its closest competitor. But it would not be good news for long read customers in general, in the sense that the PacBio/ONT competition is driving up performance and driving down the cost of these sequencing technologies. If PacBio does not get acquired by Illumina or someone else, it likely won’t survive for long into the next decade. Illumina doesn’t absolutely need PacBio, but PacBio critically needs the giant’s deep pockets and commercial force.

The real question that this case raises is whether Illumina will eventually be challenged by other players. Who’s likely to threaten them in the coming years? Oxford Nanopore? BGI? New entrants? This is covered in a second article Next-Generation Sequencing market: are we feeling a real wind of change or is it simply the last breath of declining players?, in which we will discuss the latest technology trends in the sequencing industry and what they mean for the future.

On 17th December, the U.S. Federal Trade Commission (FTC) announced that it has authorized an action to block the acquisition. It claims that “Illumina is seeking to unlawfully maintain its monopoly in the U.S. market for next-generation DNA sequencing (NGS) systems by extinguishing PacBio as a nascent competitive threat.”[19] More details will be made public in an administrative complaint to be published by the FTC. This announces another fascinating episode of the story. And as the USA is a much more important market than the UK for Illumina, if the FTC keeps its position it might well be an insurmountable situation for the union of our Romeo and Juliet.


[1] Illumina to Acquire Pacific Biosciences for Approximately $1.2 Billion
[2] CMA’s decision to engage a phase 2 investigation (taken on 18th June 2019, published on 19th July 2019)
[3] CMA’s provisional findings report (24th October 2019)
[4] OmicsOmics blog: CMA Drops the (Preliminary) Hammer on ILMN-PacBio
[5] Core Genomics blog: CMA says no to @illumina @pacbio deal
[6] CMA’s decision to engage a phase 2 investigation, point #68
[7] CMA’s decision to engage a phase 2 investigation, point #67
[8] Illumina and PacBio’s response to CMA’s provisional findings report (submitted on 14th November 2019, published on 3rd December 2019)
[9] Oxford Nanopore Technologies’ views on Illumina’s and PacBio’s response to the CMA’s notice of possible remedies (submitted 7th November 2019)
[10] Shawn C. Baker’s response to the CMA’s decision to engage a phase 2 investigation (submitted in a personal capacity, published on 25th September 2019)
[11] Shawn C. Baker’s response to the CMA’s provisional findings (submitted in a personal capacity, submitted on 14th November 2019, published on 25th November 2019)
[12] List of all the documents published by the CMA relatively to the Illumina/PacBio merger investigation
[13] CMA’s summary of customer calls (published on 19th September 2019)[14] Illumina and PacBio’s remedies proposal (submitted on 7th November 2019, published on 13th November 2019)
[15] Illumina’s revised remedies proposal (submitted on 19th November 2019, published on 21st November 2019)
[16] Oxford Nanopore Technologies’ views on Illumina’s revised remedies proposal (submitted on 21st November 2019, published on 25th November 2019)
[17]CMA’s provisional findings report, points #9.21 to #9.31
[18] Pacific Biosciences’ 2018 annual report, page 49, provides selected financial data from 2014-2018 including revenue, losses, and cash equivalents.
[19] FTC Challenges Illumina’s Proposed Acquisition of PacBio

Author

Sébastien Clerc - Yole Développement

Sébastien Clerc is a Technology & Market Analyst in Microfluidics, Sensing & Actuating at Yole Développement (Yole).
As part of the Photonics & Sensing team, Sébastien has authored a collection of market and technology reports dedicated to microfluidics and other micro-devices for both market segments: medical (including diagnostics, pharmaceutical, biotechnology, drug delivery, medical devices) and industrial (including environment, agro-food).
At the same time, he is involved in custom projects such as strategic marketing, technology scouting and technology evaluation to help academic and industrial players in their innovation processes. Thanks to his technology & market expertise, Sébastien has spoken in more than 20 industry conferences worldwide over the last 4 years.
Sébastien Clerc graduated from Grenoble Institute of Technology (Grenoble INP – Grenoble, France) with a Master’s degree in Biomedical Technologies. He then completed his academic studies with a Master’s degree in Innovation and Technology Management in the same institute.

Source: http://www.yole.fr/

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