April 1, 2021

Antitrust: FTC Challenges Vertical Merger

On Tuesday, the FTC announced that had filed an administrative complaint & authorized a federal lawsuit to stop Illumina’s $7.1 billion proposed acquisition of Grail, which is developing an early stage cancer detection test. What makes this challenge particularly interesting is that involves a vertical merger, not a merger between competitors. This excerpt from a WSJ article on the FTC’s action suggests that it could also set the tone for the Biden administration’s merger enforcement efforts:

The case has added significance because Illumina’s proposed acquisition of Grail Inc. is a vertical merger of companies that don’t compete head-to-head. Most merger lawsuits involve challenges to so-called horizontal deals that involve the combination of direct rivals. There has only been one litigated challenge to a vertical merger in more than 40 years: the Justice Department’s 2017 case against AT&T Inc.’s acquisition of Time Warner Inc., which the government lost.

The FTC—consisting currently of two Democrats and two Republicans—voted 4-0 to go forward with the suit against Illumina’s planned acquisition, which comes amid expectations that the Biden administration will step up government efforts to police the marketplace for potential harms to competition.

FTC Acting Chairwoman Rebecca Kelly Slaughter, a Democrat, has advocated a more aggressive stance against vertical deals, and Tuesday’s case could set the tone for future efforts. The suit also comes two weeks after the FTC signaled it is preparing to take a harder line on drug-company mergers.

The case represents the first challenge to a vertical merger since the FTC & DOJ published new Vertical Merger Guidelines last summer. Vertical mergers are often viewed as beneficial because of the efficiencies they create, but the Guidelines note that a vertical merger raises antitrust concerns when it “may diminish competition by allowing the merged firm to profitably use its control of the related product to weaken or remove the competitive constraint from one or more of its actual or potential rivals in the relevant market.”  This excerpt from the FTC’s press release indicates that these concerns featured prominently in the decision to challenge the deal:

As the only viable supplier of a critical input, Illumina can raise prices charged to Grail competitors for NGS instruments and consumables; impede Grail competitors’ research and development efforts; or refuse or delay executing license agreements that all MCED test developers need to distribute their tests to third-party laboratories. For the specific application at issue in this matter—MCED tests—developers have no choice but to use Illumina NGS instruments and consumables.

John Jenkins