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Illumina's (ILMN) Grail Merger in Trouble as FTC Files Suit

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The FTC (Federal Trade Commission) recently filed an admission complaint along with a federal court lawsuit to block Illumina’s (ILMN - Free Report) $7.1 billion proposed acquisition of cancer diagnostic start up Grail Inc. Following this, shares of Illumina declined 6.7% to $368,96 at yesterday’s close.

Going by an article of The Wall Street Journal, this case has huge significance considering the fact that the proposed acquisition of Grail was a vertical merger (these companies don’t compete head-to-head). According to the article, most merger lawsuits involve so-called horizontal deals that involve the combination of direct rivals.

FTC's Logic Behind the Litigation

Grail is a provider of a non-invasive, early detection liquid biopsy test that can screen for multiple types of cancer in asymptomatic patients at very early stages using DNA sequencing. Illumina on the other hand, is the sole provider of DNA sequencing, a feasible option for multi-cancer early detection (MCED) tests in the United States.

According to FTC, the merger will diminish the scope of innovation in the U.S. market for MCED tests. The tests can be used to detect a varied line of cancer (as much as 50 types).  Along with many of its competitors, Grail is working on developing these liquid biopsy tests that analyze a sample of a patient’s blood or other fluid through DNA sequencing.

FTC stated that the MCED test is a game changer for cancer patients and if this acquisition matures, as the only viable supplier of a critical input, Illumina can raise prices charged to Grail competitors for NGS instruments and consumables. This will impede Grail competitors’ research and development efforts, For the specific application in question, these test developers will have no choice but to use Illumina NGS instruments and consumables.

Illumina's Stance

Illumina, however, came up with a press release opposing the FTC’s challenge. The company noted that it will pursue its right to proceed with the transaction.

The company, while discussing the huge impact of this proposed merger, noted that 71% of all deadly cancers do not currently have a screening test. However, GRAIL’s Galleri test is able to detect over 50 cancers across all stages out of which more than 45 types do not have recommended screening in the United States. According to the company, in 93% of the positive results, the test correctly identified the tissue of origin.

Earlier, during the last-reported fourth-quarter update, the company was extremely positive about the proposed acquisition of Grail and noted that it was looking forward to GRAIL’s recent-announced partnerships with Amgen, AstraZeneca, Bristol-Myers Squibb for its MRD test.

Price Performance

Shares of the company have gained 35.1% in a year’s time compared with the industry’s growth of 12.7%.

Zacks Rank and Key Picks

Currently, Illumina carries a Zacks Rank #3 (Hold).

A few better-ranked stocks from the broader medical space are DENTSPLY SIRONA, Inc. (XRAY - Free Report) , Invacare Corporation (IVC - Free Report) and McKesson Corporation (MCK - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

DENTSPLY SIRONA has a projected long-term earnings growth rate of 7%.

Invacare has an estimated long-term earnings growth rate of 57%.

McKesson has a projected long-term earnings growth rate of 7%.  

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