Is Illumina Still a Good Stock to Buy?

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The world’s leading maker of DNA sequencing technology has a problem. It’s been less than two years since the Federal Trade Commission (FTC) successfully sued to block a proposed acquisition from Illumina (NASDAQ:ILMN), and the agency is at it again. Recently, the government’s antitrust watchdog started arguing against the acquisition of a company that’s still in the developmental stage.

If the FTC’s latest move makes you nervous about buying Illumina stock, you’re not alone. However, this case promises to be extra challenging for the plaintiff. Here’s why the government’s attempt to block Illumina’s proposed acquisition of GRAIL isn’t a reason to remove this market leader from your list of stocks to buy.

Image source: Getty Images.

A tougher antitrust case to argue

In December 2019, the FTC argued against Illumina’s proposed acquisition of Pacific Biosciences (NASDAQ:PACB) for $1.2 billion. PacBio is a much smaller manufacturer of next-generation DNA sequencing technology, which made it fairly easy to argue that Illumina was trying to extinguish a competitive threat. 

Illumina terminated its merger agreement with PacBio a few weeks after the FTC challenged the buyout, but the company won’t give in as quickly this time around. Now, the FTC is trying to stop Illumina from buying GRAIL, a company Illumina initially founded to develop blood-based tests for early cancer detection.

Illumina spun GRAIL off into a separate business in 2017 and still owns 14.5% of the privately held company. As an aspiring multicancer early detection (MCED) provider, GRAIL doesn’t manufacture DNA sequencing machines. GRAIL simply relies on them to run samples drawn from patients. That means the FTC can’t allege monopoly-seeking and instead has to rely on the courts to establish a new reason to prohibit mergers. 

Innovation diminisher?

Instead of a simple monopoly-seeking case, the FTC proposes to stifle this merger on the grounds that it would diminish innovation in the U.S. market for MCED tests. That’s because Illumina is effectively the only provider of DNA sequencing for GRAIL and its potential competitors.

Blocking a merger because it could choke off a critical input for all MCED test providers is an argument that might hold up if the FTC had evidence to that effect. However, this case is going to be extremely difficult for the agency to argue, because MCEDs are still in a prelaunch phase.

The FDA has approved tumor profiling tests from Roche (OTC:RHHBY) and Guardant Health (NASDAQ:GH) for people already diagnosed with cancer. These tests can tell oncologists which genetic mutations are driving a patient’s disease from a vial of blood. However, the FDA hasn’t approved any MCEDs from GRAIL or its potential competitors.  

Likely scenario

Antitrust regulators wouldn’t have a problem here if Illumina had retained ownership of GRAIL in 2017, but the company isn’t interested in starting from scratch. Illumina is likely to forge ahead with its planned acquisition of GRAIL to keep pace with Roche and Guardant Health.

GRAIL should be ready to launch its MCED test as a laboratory-developed test this year. But that isn’t the same as an FDA approval that would make it a lot easier for GRAIL to bill insurers and Medicare for its services.

Since there isn’t an MCED industry as such yet, and laws already exist to prevent Illumina from treating potential competitors unfairly, it’s hard to see how the FTC’s lawsuit could go very far. But if a court rules against Illumina, the ruling could affect any successful service provider that tries to buy a business it services. 

A winner either way

The FTC’s lawsuit is hardly a reason to avoid the stock. After all, the commission’s complaint stems from the fact that Illumina dominates the market for next-generation DNA sequencing. 

Illumina thinks the market for clinical diagnostics that rely on next-generation DNA sequencing will reach $75 billion by 2035. As the lead provider of picks and shovels for this gold rush, Illumina shares still have what it takes to outperform.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.