Hostile Regulatory Environment Further Chills Diagnostics Market

Merger and acquisition (M&A) volume in the diagnostics space was unusually light last month, even for these economic times where deals seem to be scarce. In fact, the biggest story in M&A dealmaking continues to be the deal that’s being undone.

FTC Orders Illumina to Sell Off GRAIL

In that vein, one of the largest and most controversial transactions in recent years, Illumina’s $8 billion acquisition of former spinout GRAIL, is now on the fast and seemingly inevitable path to nullification.¹ On March 31, the Federal Trade Commission (FTC) ordered Illumina to divest GRAIL, which it acquired in August 2021.² According to the FTC’s statement, allowing Illumina to keep its former spinout and developer of early cancer detection liquid biopsy tests “would stifle competition and innovation in the U.S. market for life-saving cancer tests,” resulting in higher prices, lower test quality, and less consumer choice.³

Pressure to divest GRAIL is also coming from within Illumina’s own boardroom with billionaire activist investor Carl Icahn initiating a proxy war aimed at galvanizing shareholders to “put an end to this insanity now” by voting out three of the company’s most powerful directors, including CEO Francis deSouza, who made the decision to close the deal without regulatory approval in either the US or Europe.⁴

But deSouza and Illumina remain defiant. And now the proxy battle has become nasty and personal with both sides hurling insults and invective. Unfazed by the FTC order, Illumina says that it has a strong legal case and that it plans to appeal the action. Meanwhile, the company is waging its war over GRAIL on a third front overseas. Like the FTC, the European Commission (EC) has expressed antitrust concerns over the GRAIL acquisition and is soon expected to impose sanctions against Illumina for closing the deal in defiance of the EC standstill order.⁵ Illumina has filed a lawsuit in the European Court of Justice contending that the EC has no jurisdiction over a deal transacted in the US.

Why is Illumina being so stubborn? It’s possible that the San Diego-based company knows that it can’t keep GRAIL, but filed the appeal to buy extra time to validate GRAIL’s Galleri^® blood test that screens for over 50 different types of cancer from a single blood draw. Data validating the Galleri^® technology would significantly increase the price Illumina could demand for GRAIL given the intensity of the competition to bring multicancer detection tests to market.

US Regulators Turn Up the Heat on Healthcare M&A Deals

Of course, Illumina isn’t the only major diagnostics company affected by the current hostile regulatory environment. The Biden administration has made no secret of its concerns about how large M&A deals are stifling competition, particularly in healthcare. Less than six months after taking office, the president issued an Executive Order calling on the FTC, the Department of Justice (DOJ), and other federal agencies to vigorously enforce antitrust laws, especially in the healthcare markets, noting that the 10 largest healthcare systems now control a quarter of the market.⁶

On December 9, 2022, the administration doubled down when the Antitrust Division of the DOJ signed a memorandum of understanding (MOU) with the Department of Health and Human Services (HHS) Office of Inspector General (OIG) to work together to enforce antitrust laws in the healthcare markets. Under the MOU, the agencies will share data, make referrals of potentially illegal activity to each other, and coordinate enforcement efforts to rein in healthcare M&A deals that threaten competition.

“Through coordination in information sharing, enforcement activity, and training, the two agencies will strengthen the enforcement of federal laws, including the full force of OIG’s exclusion authorities and the antitrust laws enforced by the [DOJ’s] Antitrust Division, while ensuring the continuity of health care products and services,” according to the press release officially announcing the new MOU.⁷

Bottom Line: While current macroeconomic conditions are less than optimal for strategic M&A, the current regulatory environment and new enforcement initiatives are also apparently exerting at least somewhat of a chilling effect on new dealmaking in the diagnostics and larger healthcare markets.

References:

1. https://www.g2intelligence.com/illumina-faces-losses-of-grail-massive-fines/
2. https://www.ftc.gov/system/files/ftc_gov/pdf/d09401commissionfinalorder.pdf
3. https://www.ftc.gov/news-events/news/press-releases/2023/04/ftc-orders-illumina-divest-cancer-detection-test-maker-grail-protect-competition-life-saving
4. https://carlicahn.com/open-letter-to-shareholders-of-illumina-inc/
5. https://ec.europa.eu/commission/presscorner/detail/en/ip_22_5364
6. https://www.whitehouse.gov/briefing-room/statements-releases/2021/07/09/fact-sheet-executive-order-on-promoting-competition-in-the-american-economy/
7. https://www.justice.gov/opa/pr/justice-department-s-antitrust-division-and-office-inspector-general-department-health-and

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Here’s a summary of the few M&A diagnostic deals that did sign or close in April 2023:

Mergers, Acquisitions, & Asset Sales