Illumina proposes opening PacBio IP to competitors to save acquisition deal

Illumina has proposed offering perpetual, royalty-free licenses to Pacific Biosciences’ intellectual property to competitors in the sequencing market in an effort to appease UK regulators who have threatened to block Illumina’s planned acquisition of PacBio.

Specifically, Illumina suggested it would be open to offering a “perpetual, royalty-free, irrevocable, sole licence” of certain PacBio patents to Oxford Nanopore Technologies or any third party working in the nanopore sequencing field, should the acquisition be completed. The licensed IP would include patents for base calling using n-mers, as opposed to calling individual bases, Illumina said.

According to documents dated Nov. 7 but released today by the UK Competition and Markets Authority (CMA), Illumina submitted its willingness to make concessions in response to CMA’s findings that the proposed merger would lessen competition in sequencing markets in the UK and elsewhere.

“It seems like a strong concession,Doug Schenkel, Life Science & Diagnostic Tools Analyst at Cowen, wrote in an analyst note published today, “but it is unclear if this will be enough” to satisfy the CMA’s concerns.

In afternoon trading on the Nasdaq, shares of PacBio were up more than 4 percent at $4.80.

Illumina’s acquisition of PacBio, first announced in November 2018, hit a stumbling block in October, when the CMA published preliminary findings of Phase II of its investigation. Late last month, CMA wrote that the deal could result in a “substantial lessening of competition” (SLC) for both the UK and global next-generation sequencing markets. For their purposes, the CMA considered short-read and long-read technologies to be part of the same market.

CMA said that it preferred “structural” remedies to avoid the scenario of less competition and that blocking the deal was the “only structural remedy that CMA has identified as being likely to be effective.”

[P]rohibition is not the only comprehensively effective solution to address the SLC provisionally found by the CMA,” Illumina wrote in its response, saying that its proposals would not result in an SLC, while preserving customer benefits identified by CMA, including improvements to PacBio’s technology and wider access to those products.

In its response, Illumina noted that the CMA Merger Remedies Guidelines “recognize that an exclusive, irrevocable, and royalty-free technology license ‘will effectively be treated by the CMA as structural in form and subject to similar consideration and evaluation as an asset divestiture.'”

Illumina even suggested that Oxford Nanopore would recognize benefits from licensing PacBio technology, including removing the threat of litigation.

We believe this concession by [Illumina and PacBio] indicates that IP was not a key motivation to the merger,Scheckel noted. “While the financial implications of the proposed merger certainly remain a key part of the deal, we believe this proposed remedy demonstrates that [Illumina] is also highly interested in making [PacBio’s] technology more broadly available to customers — something that would likely be difficult for [PacBio] to achieve alone.”


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