In provisional findings published Thursday, the U.K. Competition and Markets Authority said the takeover “would result in a significant reduction of competition.”
Analysts at Cowen think it is now “highly unlikely” the deal will be completed, according to a note to investors Thursday. Shares in PacBio fell almost 10% after the watchdog released its findings.
The U.K. Competition and Markets Authority first warned that the PacBio takeover could hurt competition in July. That preliminary conclusion led CMA to mount an in-depth review of the deal by independent panel members. CMA reported preliminary findings from the second review Thursday.
Illumina framed the takeover of PacBio as a way to add long-read DNA sequencing capabilities to complement its existing stronghold in the short-read space. Working from that position, Illumina and PacBio argued that they do not compete at all as short and long-read technologies serve different use cases. CMA reached a different conclusion.
"There is significant evidence of direct competition between the Parties. There is also clear evidence that this market is dynamic and that the competitive overlap and closeness of competition between the Parties is likely to increase in the future as R&D is devoted to improving each Party’s technology to address a wider range of uses, applications and/or projects," CMA wrote.
CMA may have been amenable to the merger of two rivals if the combined entity would face strong competition from other organizations. However, CMA’s analysis of the sequencing market suggests that is unlikey. CMA estimates Illumina has 90% of the U.K. market, meaning even the elimination of a small rival may have a significant effect on the limited competition it faces.
The provisional findings released by CMA are now open for comment. CMA plans to reach a final decision in December. In theory, that gives Illumina a chance to rescue the deal but a CMA document on potential workarounds suggests that will be difficult. CMA wants to see a structural remedy, such as divestiture or prohibition.
"At this stage, the only structural remedy that CMA has identified as being likely to be effective would be prohibition of the Proposed Merger," CMA wrote.
That conclusion informed the Cowen analysts’ belief that CMA is likely to kill off the deal, as well as the drop in PacBio’s share price. Illumina is still making the case for the deal, though.
"While we are still in the process of reviewing the document, we continue to believe that this acquisition is pro-competitive and in the best interest of customers and the genomics industry. We’ll continue our discussions with the CMA in the weeks ahead," Illumina CEO Francis deSouza said.
DeSouza made the comments on its third quarter earnings call with investors Thursday. Illumina’s revenues and earnings beat expectations on the back of a 12% increase in sales at its sequencing business. The results show the U.K. is an important market for Illumina, with management citing investments in an initiative to sequence 450,000 genomes as a driver of the 7% rise in European revenues.
Shares in Illumina were down more than 10% Friday morning.