Illumina-PacBio probe shows unusual CMA definition of market

The UK antitrust regulator rattled investors last month when it said an Illumina-Pacific Biosciences merger could lead to higher prices and lower quality for UK customers — a conclusion that was governed by broad interpretation of their market.

The Competition and Markets Authority referred the deal for an in-depth review, and the decision will hinge on how far the expert panel that conducts it agrees with the watchdog.

San Diego-based Illumina is the dominant maker of DNA sequencing machines using “short-read” technology, while PacBio is a supplier of sequencing systems using “long-read” technology. Long-read systems have risen in popularity in recent years, due to their ability to read long stretches of genomes — something short-read gene sequencers can’t do.

Eyebrows were raised at the CMA’s initial assessment. In a June 18 statement warning that it could refer the $1.2 billion acquisition for a phase 2 review, the CMA hinted that it believes long-read and short-read gene sequencers operate within the same market and described the merging companies as “close competitors”.

This view is understood to conflict with what Illumina and PacBio believe. They say customers will select different technologies depending on the kind of DNA being studied — whether from microbes or humans or water fleas, for example — and what they want to learn.

The question has also taxed regulators in the US. There, the Federal Trade Commission is examining whether the markets for short-read and long-read gene sequencers are separate, and whether they will remain so.

The CMA’s current view — that the markets are not separate — could prove a tough hurdle to clear for Illumina and PacBio, which may have been hoping for a more granular approach to market definition. 

Their hopes will likely lie in a rethink at phase 2, where the deal will be looked at afresh by an inquiry panel — an independent panel of experts not bound by the CMA’s initial assessment.

But the companies could face further hurdles, if customers submit that their respective sequencing systems are competitors and the panel deems future entrants would be less able to offer effective competition.

Customer use

The CMA’s view that Illumina and PacBio are close competitors may boil down to how customers use their products.

Given the respective benefits and pitfalls in long-read and short-read technology, one type of gene-sequencer can rarely deliver all the information ideally needed. Short-read is blind to large swaths of the human genome, for example, while long-read is significantly more expensive and typically less accurate.

For some, the most accurate and complete sequencing results often come from combining both reads, rather than favoring one over the other. Academics approached by MLex said they currently use the products offered by Illumina and PacBio in conjunction, to secure the best results.

Reliance on PacBio’s products could also grow as the market develops. The long-read specialist recently rolled out a new product, the Sequel II System, which it says provides more highly accurate long reads, or HiFi reads, than its predecessor and makes sequencing more affordable.

The CMA said in its statement that the Sequel II System means PacBio is “well-positioned to offer stronger competition to Illumina in the future.”

One expert specializing in infectious diseases told MLex the Sequel II System could change the way customers currently use both systems. “PacBio claims that the HiFi reads (which are a little shorter) have equivalent accuracy to Illumina. This means it may not be inconceivable that long reads only will do the job," he said.

"For high-quality reference assemblies, I would be surprised if we can rapidly move to an Illumina-free model but for other applications this could be on the horizon,” the expert said.

The CMA is typically tough on deals that might lead to consolidation by seeing would-be acquirers bolster their already weighty presence. Illumina’s $1.2 billion offer for PacBio is a 71 percent premium to its share price before the merger was announced, and the inquiry panel will be keen to know why it is paying so much.

Future disruption?

In order to get over regulatory hurdles, Illumina and PacBio will have to convince the panel that the merger is beneficial for customers and that new entrants into the market will pose a substantial competitive constraint. 

DNA sequencing technology has attracted a lot of venture capital investment, and the future of long-read technology is still up for grabs. 

For Illumina’s part, it can claim its technology has helped make the price of sequencing the human genome more affordable, dropping from millions of dollars to less than $1,000. That means it has an interest in maintaining a wide uptake and keeping prices low in the face of new competition.

Nanopore sequencing, a third DNA sequencing approach, is seen by some as a potential market disruptor. It is long-read technology, but can achieve routine reads of 100,000 base pairs and is rapidly improving under companies such as Oxford Nanopore and Roche. 

Going by early indications, the CMA is as yet unconvinced these companies pose enough of a competitive constraint — but the inquiry panel could take a different view.

Illumina and PacBio will therefore be keen to show their products don’t operate in the same market, and face increased competition from newer entrants, in order to get over the regulatory hurdle.