• Illumina has pulled out of its planned $1.2 billion takeover of California-based Pacific Biosciences, the genetic sequencing giant said Thursday.
• The action follows resistance to the takeover from the Federal Trade Commission and other regulators on the grounds that it would reduce competition.
• Illumina will pay $98 million to cancel the deal but could recoup that outlay if another company strikes a deal to buy PacBio before October. Cowen analysts listed Agilent Technologies, Danaher and Thermo Fisher Scientific as potential PacBio buyers.

The FTC’s action to block the Illumina-PacBio deal comes amid heightened scrutiny of deals across the life sciences sector. Celgene was ordered to sell off its psoriasis drug Otezla before Bristol-Myers Squibb was permitted to complete its $74 billion acquisition, while Roche’s buyout of Spark Therapeutics was held up for months by a close review, something to which AbbVie’s proposed takeout of Allergan has been subjected.

Significant doubts about Illumina’s ability to complete the PacBio takeover emerged last year, when the U.K. Competition and Markets Authority warned the acquisition could hurt competition. Illumina and PacBio argued that, as specialists in short and long-read sequencing, respectively, they operated in different fields. The agency disagreed.

When the FTC weighed in last month by ruling the Illumina-PacBio deal illegal on competition grounds, analysts braced for the cancellation of the takeover. Illumina bought itself more time after the FTC ruling by offering to pay PacBio to extend the deal timeline, but has now given up.

The sequence of events left analysts at Cowen unsurprised by the outcome but puzzled by aspects of Illumina’s handling of the situation.

“While the timing is a bit of a surprise given that [Illumina] just opted to extend the deadline to close, the outcome is not given regulatory challenges. It is also unclear why [Illumina] extended the deadline ~2 weeks ago, after a scathing rebuke from the FTC,” the analysts wrote in a note to investors.

FTC commissioners charged that the proposed takeover would have been anti-competitive. “This deal threatened to let a monopolist extinguish nascent competition in a growing health care market: next-generation DNA sequencing,” wrote Gail Levine, deputy director of the FTC’s Bureau of Competition, in a Jan. 2 statement.

The termination leaves Illumina and PacBio to plot independent futures, although there remains room for the companies to collaborate. PacBio originally approached Illumina, and 22 other parties, to discuss a strategic partnership but the talks escalated to a takeover agreement late in 2018.

When the takeover was first announced, Cowen analysts said Agilent Technologies, Danaher and Thermo Fisher may also be interested in buying PacBio. However, a subsequent regulatory filing by PacBio revealed Illumina was the only party that tried to buy it in 2018.

PacBio began looking for a partner to expand distribution of its products and access money for R&D and commercialization. Those needs could drive it to look for another strategic transaction now that the Illumina deal is off.

The situation is clearer for Illumina, as PacBio was a relatively small piece of its plans.

However, the protracted, ultimately unsuccessful deal still has implications for the company. As the Cowen analysts note, the opposition to the PacBio deal from FTC and its peers suggests Illumina “will be very limited in pursuit of sequencing assets” as they are likely to trigger concerns about competition.