Illumina, Inc. (Illumina) and Pacific Biosciences of California, Inc. (PacBio) announced that they have mutually agreed to terminate their merger agreement. The merger was first proposed in November 2018 that Illumina would be acquiring PacBio at a fully diluted enterprise value of ~$1.2 billion. Now with the merger terminated, Illumina will have to pay a termination fee of $98 million to PacBio.

Illumina and PacBio are both global suppliers of Next-Generation DNA-sequencing systems, with their products being used in research institutes, hospitals and universities worldwide. The merger aimed to combine Illumina’s short-read sequencing technologies with PacBio’s long-read sequencing technologies to create the ultimate sequencing powerhouse. Both sequencing types are useful, but PacBio’s long-read technology is better suited for personalised medicine and more accurate when sequencing extensive stretches of DNA, unlike Illumina’s short reads.

The Competition and Markets Authority (CMA) in the UK investigated the merger and on 24th October 2019, issued findings that highlighted serious competition concerns. With few alternative providers of DNA sequencing systems remaining, the CMA predicted that the merger would result in a significant loss of competition between the two companies. They also suggested that losing PacBio as an independent competitor would lead to a reduction in overall levels of innovation in the market, and the only way to prevent these concerns from happening would be to block the merger deal.

Two months after the CMA produced their findings, the US Federal Trade Commission (FTC) also investigated the merger and said it would block Illumina’s planned PacBio purchase, stating that “Illumina was unlawfully seeking to maintain its monopoly in the US market for next-generation DNA sequencing systems by eliminating potential competition from PacBio”

The deputy director of the FTC’s Bureau of Competition, Gail Levine, said “This deal threatened to let a monopolist extinguish nascent competition in a growing health care market: next-generation DNA sequencing. Customers across the United States and the world will now continue to benefit from the independent innovative efforts of these companies to develop faster, better, and less expensive next-generation DNA sequencing technologies,”

After the close of trading on the NASDAQ exchanges, a joint statement released by Illumina and PacBio was released. “Considering the lengthy regulatory approval process the transaction has already been subject to and continued uncertainty of the ultimate outcome, the parties decided that terminating the agreement is in the best interest of their respective shareholders and employees”

President and CEO of Illumina Francis de Souza said, “We believe this proposed combination would have broadened access to Pacific Biosciences sequencing technology, significantly expanded and accelerated innovation, and ultimately increased the clinical utility and impact of sequencing.”

PacBio CEO Michael Hunkapiller, PhD added “We are disappointed that our customers and other stakeholders will not realise the powerful advantages of integrating the sequencing capabilities of our two companies. With that said, we are confident in the future of Pacific Biosciences as we continue to pursue improved sequencing accuracy and throughput that can be utilised in an ever-expanding number of applications.”

So what’s next for Illumina and PacBio?

PacBio missed their revenue expectations by nearly 20%, mainly due to a decrease in consumables as they shifted to a new system. In the third quarters of 2018 and 2019, PacBio saw instrument revenue increase by $5.3 million, but consumable revenue decrease by $2 million. PacBio has seen a 117% year-over-year increase in gross profit with technology upgrades, but the company is set to lose over $100 million from operations in 2019, which is still far from sustainable. If PacBio can improve their operating systems by improving technology, then it is possible they could experience a change or could strike another merger deal. The $98 million termination fee that PacBio will receive will certainly help them in the process.

Illumina holds 80% of the market share in next generation sequencing. However, Illumina’s short read sequencing technology isn’t ideal for personalised medicine. If Illumina wants their technologies to be used for personalised medicine, they will need to adopt new and different technologies that are better suited to this and are able to sequence DNA at a high accuracy, much like PacBio’s.