Last week’s roundup was postponed because I was kibbitzing at the spring meeting of the American Bar Association (ABA) Antitrust Section. For those outside the antitrust world, the spring meeting is the annual antitrust version of Woodstock. For those inside the antitrust world: Antitrust Woodstock is not really a thing. At the planetary-orbit level, the two events are similar in that they comprise times that are alternately engaging, interesting, fun, odd, and stultifying. There were more than 3,500 competition lawyers and economists in one place, if not one room. Imagine it, then pour yourself a good stiff drink.
With apologies—this says nothing flattering about me—my spring meeting highlight was a bit of a Freudian slip by Bill Baer, the former head of the U.S. Justice Department’s (DOJ) Antitrust Division. Voicing support for the Biden administration’s antitrust policies and personnel, Baer expressed admiration for the Tim Wu book “The Curse of Business.” A most excellent and fitting title, if not precisely the one on the book’s cover. Your (occasionally) humble antediluvian scribe learnt about antitrust law and economics so long ago that I still imagine that consumer welfare matters (many consumers are actually people, it turns out) and that antitrust is supposed to protect commerce, not curse it.
As a former enforcer with friends still inside the building, not a few sessions seemed to me very, very enforcement-friendly, as if someone had confused a perspective with the perspective. The enforcers were very much on-message. It’s full speed ahead on enforcement and regulation, some conspicuous setbacks in the courts notwithstanding.
Curiously, they seem to regard some of the losses as wins. In February, I briefly described U.S. District Court Judge Edward J. Davila’s order denying the Federal Trade Commission’s (FTC) request for a preliminary injunction to block Meta’s proposed acquisition of virtual-reality fitness-app maker Within. The denial was not so preliminary, as it rested on a finding that “the FTC has not demonstrated a likelihood of ultimate success on the merits.” Reading the writing on the wall, and in the order, the FTC then dropped the matter.
At the spring meeting, however, we heard detailed and satisfied reports about the court endorsing the FTC’s theory of the case as a potentially viable theory, but only clipped, sotto voce recognition of the fact that they lost. That is, a federal district court, setting no precedent, recognized that there were such things as viable potential competition cases. Right. And the FTC’s case was not one of them. Is there such a thing as a Pyrrhic loss?
More FTC Departures Made Public
Everybody rightly notices the appointees—Commissioner Christine S. Wilson’s last day coincided with the last day of the Spring Meeting – but let’s not forget about the staff. Michael Vita, deputy director of the Bureau of Economics, retired, and that’s a loss for the FTC. Some of Mike’s work is still posted here. Note that Mike helped to kick off the FTC’s famous hospital-merger retrospective study program before it was a program. He did rather a lot. Cheers to Mike.
I also learned about the departure of Holly Vedova, Chair Lina Khan’s first director of the Bureau of Competition, and author of the fabled “Vedova letters.” And Elizabeth Kraus, who did a great deal for the FTC’s international program, is also out the door, as was Randy Tritell earlier in the administration.
A Not Completely Unreasonable Click-to-Cancel Rule
Some version of this could be right, if not this one.
On March 23, the FTC proposed a “click to cancel” amendment to its Negative Option Rule. I’ll discuss this more fully in a later post, but for now, I’d suggest two high-level observations:
The proposed rule is overly broad; but
There is at least a real problem in the area, and one that might be properly amenable to FTC consumer-protection rulemaking.
That is, firms sometimes make it so hard to cancel various types of contracts—such as automatic renewals—that there’s one or another species of fraud at work. The initial offer was deceptive, or they’re imposing an undue (and unforeseen) tax on consumers, or they’re foisting a supposed contract-in-perpetuity on unsuspecting consumers, and collecting funds without real authorization. Or all of the above. All actionable, and perhaps there’s a viable and well-tailored rule in there somewhere.
That doesn’t mean that the FTC has proposed the right or correctly focused regulation, but there is, at least, a there there. I recommend Commissioner Wilson’s final dissent, alas, for more.
I wrote about the case here. I won’t pretend to have evaluated all the facts and circumstances of what’s been, after all, a rule-of-reason case. Still, I’ll note again that this was a vertical acquisition with some obvious efficiencies and a not-so-obvious foreclosure argument. The commission’s press release says that bringing the early-cancer-detection test to market is extremely important, and potentially life-saving. We’re also told that:
Illumina has an enormous financial incentive to ensure that Grail wins the innovation race in the U.S. MCED market. Illumina stands to earn substantially more profit on the sale of GRAIL tests than it does by supporting rival test developers.
So . . . that seems like a pretty good argument on behalf of the merger. Rather than recapitulate the whole thing, I’ll point readers to Alden Abbott’s ToTM discussion earlier this week, another by Thom Lambert. an amicus brief by my International Center for Law & Economics colleagues Geoff Manne and Gus Hurwitz (plus a number of other law & economics scholars), and a thorough critique of the FTC’s case by Bruce Kobayashi (former director of the FTC’s Bureau of Economics) and Tim Muris (former FTC chairman).
But Elsewhere, the Commission Won’t Just Take the Win
One more quick note—this one on the now-abandoned Altria-Juul deal—but first a confession of priors: I hate tobacco and I miss my dad, a long-time heavy smoker who did, indeed, fall victim to lung cancer. Too much information, perhaps.
With that said (or typed), this case wasn’t about cigarettes. Tobacco products are lawful, there’s no shortage of information about tobacco risks, and the FTC is not a health and safety regulator.
There’s a lot about the case that’s complicated, but one issue that remains curious is the FTC’s persistence, given that, notwithstanding the loss before its own ALJ, the commission seems to have gotten more or less everything it sought in its notice of contemplated relief(part of the initial complaint):
The transaction has been abandoned;
Altria has divested itself of its stake in Juul;
The parties have agreed to terminate the various challenged agreements associated with the now-abandoned transaction (including a challenged agreement not to compete, in anticipation of the now-abandoned acquisition);
The parties have proposed an enforceable (by the FTC) agreement not to enter into any new transaction in the relevant market without prior approval;
The parties have proposed to provide prior notice of any other transactions in the relevant market; and
The parties have proposed to provide for outside monitoring, at their own expense, for a period of time.
So why aren’t they taking the win? Khan and Assistant Attorney General Jonathan Kanter seem fond of saying that they’re not scared of losing, but they shouldn’t be scared of winning either, should they?
The FTC’s raft of proposed rulemakings seems to suppose that they can enforce rules and orders, with substantial fines at their disposal, and in this matter, they would have been aided in monitoring by interested third parties in the industry. So, as the young’uns were asking last evening: why is this night different from all other nights?
Regrettably, but not unexpectedly, the Federal Trade Commission (FTC) yesterday threw out a reasoned decision by its administrative law judge and ordered DNA-sequencing provider Illumina Inc. to divest GRAIL Inc., makers of a multi-cancer early detection (MCED) test.
The FTC claims that this vertical merger would stifle competition and innovation in the U.S. market for life-saving cancer tests. The FTC’s decision ignores Illumina’s ability to use its resources to obtain regulatory clearances and bring GRAIL’s test to market more quickly, thereby saving many future lives. Other benefits of the transaction, including the elimination of double marginalization, have been succinctly summarized by Thom Lambert. See also the outstanding critique of the FTC’s case by Bruce Kobayashi, Jessica Melugin, Kent Lassman, and Timothy Muris, and this update by Dan Gilman.
The transaction’s potential boon to consumers and patients has, alas, been sacrificed at the altar of theoretical future harms in a not-yet-existing MCED market, and ignores Illumina’s proffered safeguards (embodied in contractual assurances) that it would make its platform available to third parties in a neutral fashion.
The FTC’s holding comes in tandem with a previous European Commission holding to prohibit Illumina’s acquisition of GRAIL and impose a large fine. These two decisions epitomize antitrust enforcement policy at its worst: the sacrifice of clear and substantial near-term welfare benefits to consumers (including lives saved!) based on highly questionable future harms that cannot be reasonably calibrated at this time. A federal appeals court should quickly and decisively overturn this problematic FTC holding, and a European tribunal should act in similar fashion.
The courts cannot, of course, undo the harm flowing from delays in moving GRAIL’s technology forward. This is a sad day for believers in economically sound, evidence-based antitrust enforcement, as well as for patients and consumers.
The lame duck is not yet dead, and the Federal Trade Commission (FTC) is supposed to be an independent agency. Work continues. The Commission has announced apartly open oral argument in the Illumina-Grail matter. That is, parts of the argument will be open to the public, via webcast, and parts won’t. This is what’s known as translucency in government.
Enquiring minds: I have several questions about Illumina-Grail. First, for anyone reading this column, am I the only one who cannot think of the case without thinking of Monty Python’s grail-shaped beacon? Asking for a friend who worries about me.
Second, why seek to unwind this merger? My ICLE colleagues Geoff Manne and Gus Hurwitz are members of a distinguished group of law & economics scholars who filed a motion for leave tofile an amicus brief in the matter. They question the merits of the case on a number of grounds.
Pertinent, not dispositive: this is a vertical merger. Certainly, it’s possible for vertical mergers to harm competition but theory suggests that they entail at least some efficiencies, and the empirical evidence fromFrancine Lafontaine and others tends to suggest that most have been beneficial for firms and consumers alike. One might wonder about the extent to which this case is built on analysis of the facts and circumstances rather than on Chair Lina Khan’s well-publicized antipathy to vertical mergers.
There’s also a question of whether FTC’s likely foreclosure argument is all that likely. Illumina, which created Grail and had retained a substantial interest in it all along, would have strong commercial incentives against barring Grail’s future competitors from its platform. Moreover, Illumina made an open offer—contractually binding—to continue providing access for 12 years to its NGS platform and other products, on terms substantially similar to those available pre-merger. That would seem to undercut the possibility of foreclosure. Complaint counsel discounts this as a remedy (with behavioral remedies disfavored), but it is relatively straightforward and not really a remedy at all, with terms both private parties and the FTC might enforce.Thom Lambert andJonathan Barnett both have interesting posts on the matter.
This is about a future market and potential (presumed) competitors. And it’s an area of biologics commerce where the deep pockets and regulatory sophistication necessary for development and approval frequently militate in favor of acquisition of a small innovator by a larger, established firm. As I noted in a prior column, “[p]otential competition cases are viable given the right facts, and in areas where good grounds to predict significant entry are well-established.” It can be hard to second-guess rule-of-reason cases from the outside, but there are reasons to think this is one of those matters where the preconditions to a strong potential competition argument are absent, but merger-related efficiencies real.
What else is going on at the FTC? Law360 reportson a staff brief urging the Commission not to pitch a new standard of review in Altria-Juul on what look to be sensible grounds, independent of the merits of their Section I case. The Commission had asked to be briefed on the possibility of switching to a claim of a per se violation or, in the alternative, quick look, and the staff brief recommends maintaining the rule-of-reason approach that the Commission’s ALJ found unpersuasive in dismissing the Commission’s case, which will now be heard by the Commission itself. I have no non-public information on the matter. There’s a question of whether this signals any real tension between the staff’s analysis and the Commission’s preferred approach or simply the Commission’s interest in asking questions about pushing boundaries and the staff providing good counsel. I don’t know, but it could be business as usual.
And just this week, FTC announced that it is bringing a case to block Microsoft’s acquisition of Activision. More on that to follow.
What’s pressing is not so clear. The Commission announced the agenda for a Dec. 14 open meeting. On it is a vote on regulatory review of the “green guides,” which provide guidance on environmental-marketing claims. But there’s nothing further on the various ANPRs announced in September, or about rulemaking that the Chair has hinted at for noncompete clauses in employment contracts. And, of course, we’re still waiting for merger guidelines to replace the ones that have been withdrawn—likely joint FTC/DOJ guidelines that will likely range over both horizontal and vertical mergers.
There’s the Altria matter, Meta, Meta-Within, the forthcoming Supreme Court opinion in Axon, etc. The FTC’s request for an injunction in Meta-Within will be heard in federal district court in California over the next couple of weeks. It’s a novel (read, speculative) complaint. I had a few paragraphs on Meta-Within in my first roundup column; Gus Hurwitz covered it, as well. We shall see.
Wandering up Pennsylvania Avenue onto the Hill, various bills seem not so much lame ducks as dead ones. But perhaps one or more is not dead yet. The Journalism Competition and Preservation Act (JCPA) might be one such bill, its conspicuous defects notwithstanding. “Might be.” First, a bit of FTC history. Way back in 2010, the FTC held a series of workshops on the Future of Journalism. There were many interesting issues there, if no obvious room for antitrust. I reveal no secrets in saying THOSE WORKSHOPS WERE NOT THE STAFF’S IDEA. We failed to recommend any intervention, although the staff did publish a clarification of its discussion draft:
The FTC has not endorsed the idea of making any policy recommendation or recommended any of the proposals in the discussion draft
My own take at the time: many newspapers were struggling, and that was unfortunate, but much of the struggle had to do with the papers’ loss of local print-advertising monopolies, which tended to offer high advertising prices but not high quality. Remember the price of classified ads? For decades, many of the holders of market power happened to turn large portions of their rents over to their news divisions. Then came the internet, then Craigslist, etc., etc., and down went the rents. Antitrust intervention seemed no answer at all.
Back to the bill. In brief, as currently drafted, the JCPA would permit certain “digital journalism providers” to form cartels to negotiate prices with large online platforms, and to engage in group boycotts, without being liable to the federal antitrust laws, at least for four years. Dirk Auer and Ben Sperry have anoverview here.
This would be an exemption for some sources of journalism, but not all, and its benefits would not be equally distributed. I am a paying consumer of digital (and even print) journalism. On the one hand, I enjoy it when others subsidize my preferences. On the other, I’m not sure why they should. As I said in a prior column, “antitrust exemptions help the special interests receiving them but not a living soul besides those special interests. That’s it, full stop.”
Moreover, asBrian Albrecht points out, the bill’s mandatory final arbitration provision is likely to lead to a form of price regulation.
England v. France on Saturday. Allez les bleus or we few, we happy few? Cheers.
President Joe Biden’s July 2021 executive order set forth a commitment to reinvigorate U.S. innovation and competitiveness. The administration’s efforts to pass the America COMPETES Act would appear to further demonstrate a serious intent to pursue these objectives.
Yet several actions taken by federal agencies threaten to undermine the intellectual-property rights and transactional structures that have driven the exceptional performance of U.S. firms in key areas of the global innovation economy. These regulatory missteps together represent a policy “lose-lose” that lacks any sound basis in innovation economics and threatens U.S. leadership in mission-critical technology sectors.
Life Sciences: USTR Campaigns Against Intellectual-Property Rights
In the pharmaceutical sector, the administration’s signature action has been an unprecedented campaign by the Office of the U.S. Trade Representative (USTR) to block enforcement of patents and other intellectual-property rights held by companies that have broken records in the speed with which they developed and manufactured COVID-19 vaccines on a mass scale.
Patents were not an impediment in this process. To the contrary: they were necessary predicates to induce venture-capital investment in a small firm like BioNTech, which undertook drug development and then partnered with the much larger Pfizer to execute testing, production, and distribution. If success in vaccine development is rewarded with expropriation, this vital public-health sector is unlikely to attract investors in the future.
Contrary to increasingly common assertions that the Bayh-Dole Act (which enables universities to seek patents arising from research funded by the federal government) “robs” taxpayers of intellectual property they funded, the development of Covid-19 vaccines by scientist-founded firms illustrates how the combination of patents and private capital is essential to convert academic research into life-saving medical solutions. The biotech ecosystem has long relied on patents to structure partnerships among universities, startups, and large firms. The costly path from lab to market relies on a secure property-rights infrastructure to ensure exclusivity, without which no investor would put capital at stake in what is already a high-risk, high-cost enterprise.
This is not mere speculation. During the decades prior to the Bayh-Dole Act, the federal government placed strict limitations on the ability to patent or exclusively license innovations arising from federally funded research projects. The result: the market showed little interest in making the investment needed to convert those innovations into commercially viable products that might benefit consumers. This history casts great doubt on the wisdom of the USTR’s campaign to limit the ability of biopharmaceutical firms to maintain legal exclusivity over certain life sciences innovations.
Genomics: FTC Attempts to Block the Illumina/GRAIL Acquisition
In the genomics industry, the Federal Trade Commission (FTC) has devoted extensive resources to oppose the acquisition by Illumina—the market leader in next-generation DNA-sequencing equipment—of a medical-diagnostics startup, GRAIL (an Illumina spinoff), that has developed an early-stage cancer screening test.
It is hard to see the competitive threat. GRAIL is a pre-revenue company that operates in a novel market segment and its diagnostic test has not yet received approval from the Food and Drug Administration (FDA). To address concerns over barriers to potential competitors in this nascent market, Illumina has committed to 12-year supply contracts that would bar price increases or differential treatment for firms that develop oncology-detection tests requiring use of the Illumina platform.
The FTC’s case against Illumina’s re-acquisition of GRAIL relies on theoretical predictions of consumer harm in a market that is not yet operational. Hypothetical market failure scenarios may suit an academic seminar but fall well below the probative threshold for antitrust intervention.
Most critically, the Illumina enforcement action places at-risk a key element of well-functioning innovation ecosystems. Economies of scale and network effects lead technology markets to converge on a handful of leading platforms, which then often outsource research and development by funding and sometimes acquiring smaller firms that develop complementary technologies. This symbiotic relationship encourages entry and benefits consumers by bringing new products to market as efficiently as possible.
If antitrust interventions based on regulatory fiat, rather than empirical analysis, disrupt settled expectations in the M&A market that innovations can be monetized through acquisition transactions by larger firms, venture capital may be unwilling to fund such startups in the first place. Independent development or an initial public offering are often not feasible exit options. It is likely that innovation will then retreat to the confines of large incumbents that can fund research internally but often execute it less effectively.
Wireless Communications: DOJ Takes Aim at Standard-Essential Patents
Wireless communications stand at the heart of the global transition to a 5G-enabled “Internet of Things” that will transform business models and unlock efficiencies in myriad industries. It is therefore of paramount importance that policy actions in this sector rest on a rigorous economic basis. Unfortunately, a recent policy shift proposed by the U.S. Department of Justice’s (DOJ) Antitrust Division does not meet this standard.
In December 2021, the Antitrust Division released a draft policy statement that would largely bar owners of standard-essential patents from seeking injunctions against infringers, which are usually large device manufacturers. These patents cover wireless functionalities that enable transformative solutions in myriad industries, ranging from communications to transportation to health care. A handful of U.S. and European firms lead in wireless chip design and rely on patent licensing to disseminate technology to device manufacturers and to fund billions of dollars in research and development. The result is a technology ecosystem that has enjoyed continuous innovation, widespread user adoption, and declining quality-adjusted prices.
The inability to block infringers disrupts this equilibrium by signaling to potential licensees that wireless technologies developed by others can be used at-will, with the terms of use to be negotiated through costly and protracted litigation. A no-injunction rule would discourage innovation while encouraging delaying tactics favored by well-resourced device manufacturers (including some of the world’s largest companies by market capitalization) that occupy bottleneck pathways to lucrative retail markets in the United States, China, and elsewhere.
Rather than promoting competition or innovation, the proposed policy would simply transfer wealth from firms that develop new technologies at great cost and risk to firms that prefer to use those technologies at no cost at all. This does not benefit anyone other than device manufacturers that already capture the largest portion of economic value in the smartphone supply chain.
Conclusion
From international trade to antitrust to patent policy, the administration’s actions imply little appreciation for the property rights and contractual infrastructure that support real-world innovation markets. In particular, the administration’s policies endanger the intellectual-property rights and monetization pathways that support market incentives to invest in the development and commercialization of transformative technologies.
This creates an inviting vacuum for strategic rivals that are vigorously pursuing leadership positions in global technology markets. In industries that stand at the heart of the knowledge economy—life sciences, genomics, and wireless communications—the administration is on a counterproductive trajectory that overlooks the business realities of technology markets and threatens to push capital away from the entrepreneurs that drive a robust innovation ecosystem. It is time to reverse course.
John Carreyrou’s marvelous book Bad Blood chronicles the rise and fall of Theranos, the one-time Silicon Valley darling that was revealed to be a house of cards.[1] Theranos’s Svengali-like founder, Elizabeth Holmes, convinced scores of savvy business people (mainly older men) that her company was developing a machine that could detect all manner of maladies from a small quantity of a patient’s blood. Turns out it was a fraud.
I had a couple of recurring thoughts as I read Bad Blood. First, I kept thinking about how Holmes’s fraud might impair future medical innovation. Something like Theranos’s machine would eventually be developed, I figured, but Holmes’s fraud would likely set things back by making investors leery of blood-based, multi-disease diagnostics.
I also had a thought about the causes of Theranos’s spectacular failure. A key problem, it seemed, was that the company tried to do too many things at once: develop diagnostic technologies, design an elegant machine (Holmes was obsessed with Steve Jobs and insisted that Theranos’s machine resemble a sleek Apple device), market the product, obtain regulatory approval, scale the operation by getting Theranos machines in retail chains like Safeway and Walgreens, and secure third-party payment from insurers.
A thought that didn’t occur to me while reading Bad Blood was that a multi-disease blood diagnostic system would soon be developed but would be delayed, or possibly even precluded from getting to market, by an antitrust enforcement action based on things the developers did to avoid the very problems that doomed Theranos.
Sadly, that’s where we are with the Federal Trade Commission’s misguided challenge to the merger of Illumina and Grail.
Founded in 1998, San Diego-based Illumina is a leading provider of products used in genetic sequencing and genomic analysis. Illumina produces “next generation sequencing” (NGS) platforms that are used for a wide array of applications (genetic tests, etc.) developed by itself and other companies.
In 2015, Illumina founded Grail for the purpose of developing a blood test that could detect cancer in asymptomatic individuals—the “holy grail” of cancer diagnosis. Given the superior efficacy and lower cost of treatments for early- versus late-stage cancers, success by Grail could save millions of lives and billions of dollars.
Illumina created Grail as a separate entity in which it initially held a controlling interest (having provided the bulk of Grail’s $100 million Series A funding). Legally separating Grail in this fashion, rather than running it as an Illumina division, offered a number of benefits. It limited Illumina’s liability for Grail’s activities, enabling Grail to take greater risks. It mitigated the Theranos problem of managers’ being distracted by too many tasks: Grail managers could concentrate exclusively on developing a viable cancer-screening test, while Illumina’s management continued focusing on that company’s core business. It made it easier for Grail to attract talented managers, who would rather come in as corporate officers than as division heads. (Indeed, Grail landed Jeff Huber, a high-profile Google executive, as its initial CEO.) Structuring Grail as a majority-owned subsidiary also allowed Illumina to attract outside capital, with the prospect of raising more money in the future by selling new Grail stock to investors.
In 2017, Grail did exactly that, issuing new shares to investors in exchange for $1 billion. While this capital infusion enabled the company to move forward with its promising technologies, the creation of new shares meant that Illumina no longer held a controlling interest in the firm. Its ownership interest dipped below 20 percent and now stands at about 14.5 percent of Grail’s voting shares.
Setting up Grail so as to facilitate outside capital formation and attract top managers who could focus single-mindedly on product development has paid off. Grail has now developed a blood test that, when processed on Illumina’s NGS platform, can accurately detect a number of cancers in asymptomatic individuals. Grail predicts that this “liquid biopsy,” called Galleri, will eventually be able to detect up to 50 cancers before physical symptoms manifest. Grail is also developing other blood-based cancer tests, including one that confirms cancer diagnoses in patients suspected to have cancer and another designed to detect cancer recurrence in patients who have undergone treatment.
Grail now faces a host of new challenges. In addition to continuing to develop its tests, Grail needs to:
Engage in widespread testing of its cancer-detection products on up to 50 different cancers;
Process and present the information from its extensive testing in formats that will be acceptable to regulators;
Navigate the pre-market regulatory approval process in different countries across the globe;
Secure commitments from third-party payors (governments and private insurers) to provide coverage for its tests;
Develop means of manufacturing its products at scale;
Create and implement measures to ensure compliance with FDA’s Quality System Regulation (QSR), which governs virtually all aspects of medical device production (design, testing, production, process controls, quality assurance, labeling, packaging, handling, storage, distribution, installation, servicing, and shipping); and
Market its tests to hospitals and health-care professionals.
These steps are all required to secure widespread use of Grail’s tests. And, importantly, such widespread use will actually improve the quality of the tests. Grail’s tests analyze the DNA in a patient’s blood to look for methylation patterns that are known to be associated with cancer. In essence, the tests work by comparing the methylation patterns in a test subject’s DNA against a database of genomic data collected from large clinical studies. With enough comparison data, the tests can indicate not only the presence of cancer but also where in the body the cancer signal is coming from. And because Grail’s tests use machine learning to hone their algorithms in response to new data collected from test usage, the greater the use of Grail’s tests, the more accurate, sensitive, and comprehensive they become.
To assist with the various tasks needed to achieve speedy and widespread use of its tests, Grail decided to reunite with Illumina. In September 2020, the companies entered a merger agreement under which Illumina would acquire the 85.5 percent of Grail voting shares it does not already own for cash and stock worth $7.1 billion and additional contingent payments of $1.2 billion to Grail’s non-Illumina shareholders.
Recombining with Illumina will allow Grail—which has appropriately focused heretofore solely on product development—to accomplish the tasks now required to get its tests to market. Illumina has substantial laboratory capacity that Grail can access to complete the testing needed to refine its products and establish their effectiveness. As the leading global producer of NGS platforms, Illumina has unparalleled experience in navigating the regulatory process for NGS-related products, producing and marketing those products at scale, and maintaining compliance with complex regulations like FDA’s QSR. With nearly 3,000 international employees located in 26 countries, it has obtained regulatory authorizations for NGS-based tests in more than 50 jurisdictions around the world. It also has long-standing relationships with third-party payors, health systems, and laboratory customers. Grail, by contrast, has never obtained FDA approval for any products, has never manufactured NGS-based tests at scale, has only a fledgling regulatory affairs team, and has far less extensive contacts with potential payors and customers. By remaining focused on its key objective (unlike Theranos), Grail has achieved product-development success. Recombining with Illumina will now enable it, expeditiously and efficiently, to deploy its products across the globe, generating user data that will help improve the products going forward.
In addition to these benefits, the combination of Illumina and Grail will eliminate a problem that occurs when producers of complementary products each operate in markets that are not fully competitive: double marginalization. When sellers of products that are used together each possess some market power due to a lack of competition, their uncoordinated pricing decisions may result in less surplus for each of them and for consumers of their products. Combining so that they can coordinate pricing will leave them and their customers better off.
Unlike a producer participating in a competitive market, a producer that faces little competition can enhance its profits by raising its price above its incremental cost.[2] But there are limits on its ability to do so. As the well-known monopoly pricing model shows, even a monopolist has a “profit-maximizing price” beyond which any incremental price increase would lose money.[3] Raising price above that level would hurt both consumers and the monopolist.
When consumers are deciding whether to purchase products that must be used together, they assess the final price of the overall bundle. This means that when two sellers of complementary products both have market power, there is an above-cost, profit-maximizing combined price for their products. If the complement sellers individually raise their prices so that the combined price exceeds that level, they will reduce their own aggregate welfare and that of their customers.
This unfortunate situation is likely to occur when market power-possessing complement producers are separate companies that cannot coordinate their pricing. In setting its individual price, each separate firm will attempt to capture as much surplus for itself as possible. This will cause the combined price to rise above the profit-maximizing level. If they could unite, the complement sellers would coordinate their prices so that the combined price was lower and the sellers’ aggregate profits higher.
Here, Grail and Illumina provide complementary products (cancer-detection tests and the NGS platforms on which they are processed), and each faces little competition. If they price separately, their aggregate prices are likely to exceed the profit-maximizing combined price for the cancer test and NGS platform access. If they combine into a single firm, that firm would maximize its profits by lowering prices so that the aggregate test/platform price is the profit-maximizing combined price. This would obviously benefit consumers.
In light of the social benefits the Grail/Illumina merger offers—speeding up and lowering the cost of getting Grail’s test approved and deployed at scale, enabling improvement of the test with more extensive user data, eliminating double marginalization—one might expect policymakers to cheer the companies’ recombination. The FTC, however, is trying to block it. In late March, the commission brought an action claiming that the merger would violate Section 7 of the Clayton Act by substantially reducing competition in a line of commerce.
The FTC’s theory is that recombining Illumina and Grail will impair competition in the market for “multi-cancer early detection” (MCED) tests. The commission asserts that the combined company would have both the opportunity and the motivation to injure rival producers of MCED tests.
The opportunity to do so would stem from the fact that MCED tests must be processed on NGS platforms, which are produced exclusively by Illumina. Illumina could charge Grail’s rivals or their customers higher prices for access to its NGS platforms (or perhaps deny access altogether) and could withhold the technical assistance rivals would need to secure both regulatory approval of their tests and coverage by third-party payors.
But why would Illumina take this tack, given that it would be giving up profits on transactions with producers and users of other MCED tests? The commission asserts that the losses a combined Illumina/Grail would suffer in the NGS platform market would be more than offset by gains stemming from reduced competition in the MCED test market. Thus, the combined company would have a motive, as well as an opportunity, to cause anticompetitive harm.
There are multiple problems with the FTC’s theory. As an initial matter, the market the commission claims will be impaired doesn’t exist. There is no MCED test market for the simple reason that there are no commercializable MCED tests. If allowed to proceed, the Illumina/Grail merger may create such a market by facilitating the approval and deployment of the first MCED test. At present, however, there is no such market, and the chances of one ever emerging will be diminished if the FTC succeeds in blocking the recombination of Illumina and Grail.
Because there is no existing market for MCED tests, the FTC’s claim that a combined Illumina/Grail would have a motivation to injure MCED rivals—potential consumers of Illumina’s NGS platforms—is rank speculation. The commission has no idea what profits Illumina would earn from NGS platform sales related to MCED tests, what profits Grail would earn on its own MCED tests, and how the total profits of the combined company would be affected by impairing opportunities for rival MCED test producers.
In the only relevant market that does exist—the cancer-detection market—there can be no question about the competitive effect of an Illumina/Grail merger: It would enhance competition by speeding the creation of a far superior offering that promises to save lives and substantially reduce health-care costs.
There is yet another problem with the FTC’s theory of anticompetitive harm. The commission’s concern that a recombined Illumina/Grail would foreclose Grail’s rivals from essential NGS platforms and needed technical assistance is obviated by Illumina’s commitments. Specifically, Illumina has irrevocably offered current and prospective oncology customers 12-year contract terms that would guarantee them the same access to Illumina’s sequencing products that they now enjoy, with no price increase. Indeed, the offered terms obligate Illumina not only to refrain from raising prices but also to lower them by at least 43% by 2025 and to provide regulatory and technical assistance requested by Grail’s potential rivals. Illumina’s continued compliance with its firm offer will be subject to regular audits by an independent auditor.
In the end, then, the FTC’s challenge to the Illumina/Grail merger is unjustified. The initial separation of Grail from Illumina encouraged the managerial focus and capital accumulation needed for successful test development. Recombining the two firms will now expedite and lower the costs of the regulatory approval and commercialization processes, permitting Grail’s tests to be widely used, which will enhance their quality. Bringing Grail’s tests and Illumina’s NGS platforms within a single company will also benefit consumers by eliminating double marginalization. Any foreclosure concerns are entirely speculative and are obviated by Illumina’s contractual commitments.
In light of all these considerations, one wonders why the FTC challenged this merger (and on a 4-0 vote) in the first place. Perhaps it was the populist forces from left and right that are pressuring the commission to generally be more aggressive in policing mergers. Some members of the commission may also worry, legitimately, that if they don’t act aggressively on a vertical merger, Congress will amend the antitrust laws in a deleterious fashion. But the commission has picked a poor target. This particular merger promises tremendous benefit and threatens little harm. The FTC should drop its challenge and encourage its European counterparts to do the same.
[1] If you don’t have time for Carreyrou’s book (and you should make time if you can), HBO’s Theranos documentary is pretty solid.
[2] This ability is market power. In a perfectly competitive market, any firm that charges an above-cost price will lose sales to rivals, who will vie for business by lowering their prices down to the level of their cost.
[3] Under the model, this is the price that emerges at the output level where the producer’s marginal revenue equals its marginal cost.
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