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US Federal Trade Commission Begins Making the Case for Unwinding Illumina's Grail Purchase


NEW YORK – The US Federal Trade Commission on Tuesday began its administrative hearing on Illumina's purchase of Grail, with lawyers from both sides agreeing that multi-cancer early detection, or MCED, tests are an issue of life-saving importance.

But aside from some technical matters, the opponents disagreed on what that should mean for the future of Illumina's relationship with Grail, an acquisition that closed last week to the surprise of many observers.

In opening remarks for the FTC, attorney Susan Musser asked administrative law judge Michael Chappell to unwind the transaction. "Grail is in a race and today is competing with other MCED developers to commercialize their tests. Prior to this transaction, Illumina benefited with every company who decided to enter the race," she said. "Now, Illumina's incentives have changed." 

Illumina will have the ability to "anoint Grail in this race," she said, and will have the financial incentives to pull its available levers to disadvantage other test developers. The FTC intends to show how the company has pulled those levers in the past, she added, when it entered the noninvasive prenatal testing and cancer therapy selection markets.

"The stakes here are too high to trust Illumina, to trust any one company," she said. "Getting cancer patients the most shots on goal to detect cancer earlier and treat cancer sooner is too important."

Illumina's counsel, David Marriott of Cravath, Swaine & Moore, countered that the FTC had erred in its assessment of the MCED market and maintained that it can't meet its burden to show competitive harm.

"In fact, the speculative harms imagined here are far outweighed by the procompetitive benefits of the transaction," he said. "The FTC assumes, for example, that there will be rival screening tests on the market. There are in fact none today." Further, he said that contrary to what the FTC has maintained, there are no close substitutes to Galleri in development, Illumina will lower its prices — not raise them — and the firm has no incentive to disfavor potential rivals. Also, there are numerous efficiencies that would offset the alleged anticompetitive harm, he said, and Illumina already faces competition in next-generation sequencing that will increase going forward.

He reiterated Illumina's claims that merging Grail with Illumina will save tens of thousands of lives by accelerating commercialization of the Galleri test.

"Grail is much further along than anybody," Grail's counsel Al Pfeiffer, of Latham & Watkins, added in his subsequent opening. "But being ahead is not enough to get to where we need to get. We need resources that we do not have. Grail determined there's no better, surer, faster, more practical way than this merger with Illumina."

Illumina's dominant position in the US sequencing market is sure to factor into the trial. In Illumina's recent attempt to acquire Pacific Biosciences, which collapsed due to pressure from the FTC and the UK's Competition and Markets Authority, regulators said Illumina commanded more than 90 percent of the US sequencing market.

That's an issue in this case, the FTC contended, because Grail's competitors have nowhere else to go for this crucial component of MCED tests. Musser suggested that even if a technically viable alternative were to appear, it could take up to five years before that impact would be felt in the market.

Illumina disagreed with this assessment, saying that competition is coming fast. Moreover, it pointed to guaranteed supply agreements that it is offering to any oncology customer, which include a promise to lower sequencing costs by over 40 percent by 2025 and promises to provide new technology at the same time it's made available to Grail.

But the FTC said it views so-called behavioral remedies with skepticism. "Both research and experience have shown that behavioral remedies pose significant administrability problems and have often failed to prevent merged entities from anticompetitive tactics enabled by the transaction," Musser said.

Illumina suggested that "no case has ever done what FTC asks this court to do, which is to enjoin a vertical transaction on the grounds that it would have an effect in a market that does not even exist."

The FTC has now called the first of more than a dozen witnesses, which will include representatives of other cancer screening test developers and even two former Illumina employees. The first day of the hearing ended Tuesday with testimony from Christoph Lengauer, a partner at Third Rock Ventures and cofounder of Thrive Earlier Detection, now part of Exact Sciences. Illumina will also call witnesses, including several healthcare providers and economists.

It's unclear how long the hearing will take, but Illumina said when it closed the Grail deal last week that it didn't expect a decision from the judge until the beginning of next year. Following the trial, each side will submit a brief and the judge will issue a nonbinding initial decision, which the FTC will ultimately review.