Thursday, November 21, 2019

Should Patent Pool Save the ILMN-PACB Merger? ONT Doesn't Think So

Last week the UK’s CMA published a proposal submitted by Illumina and PacBio to save their merger. This was then published in a revised, seemingly more generous form on Wednesday.  Most strikingly, the proposal tackles head-on an elephant long in the room: is the CMA playing hardball because the biggest competitor in this space is not named Oslo Nanopore Technologies.

The possibility that CMA is trying to defend the local favorite comes up in a lot of conversations around this business saga (if you want to read a particularly strong version of this, check out' take). It would be hard to imagine there aren’t social and educational ties that interconnect CMA staffers with ONT executives and investors. It wouldn’t even need to involve anything particularly dubious in terms of ethics; just having tea and saying over tea and biscuits “if you should perchance take an extra look at this PacBio kerfuffle you’d be doing a right smart job” - particularly if it happened in multiple cases - could ensure that the deal got more than a cursory look.

Last week's proposal was to offer a royalty-free license to certain PacBio patents to ONT, or any other interested party, for use in the nanopore sequencing field. The revised proposal throws this wide open, adding not only Illumina's patents but also any patent applications filed up to a year after the deal closes! Plus the field of use is expanded to any native, single molecule long read technology. The list of patents and applications is staggering -- nearly 6420! I'll make it clear right now I have no plans to even skim all those!

Naming ONT here wasn’t strictly necessary, so doing so is already eyebrow-raising. But it gets, as my second most favorite Alice would say, curiouser and curiouser. The companies go on to offer to drop several IP actions against ONT, including releasing ONT from a prior settlement enjoining ONT from selling 2D sequencing kits in much of Europe. The proposal comments that ONT is in a position to launch on a new version of this tech in a matter of weeks. 

The proposal details how this would be all enforced: a third party would be appointed to adjudicate any disputes and an arbitration mechanism would exist to contest.

One take on this is that ONT would be a huge winner. ONT would appear to be reed of several current and future legal challenges from IlluminaPacific. The numerous other companies contemplating jumping into single molecule sequencing would still face the possibility of ONT deploying its extensive patent portfolio against them.

But it turns out ONT isn't having any of this. In a sharply worded response (which obviously crossed paths with the revised Illumina proposal), ONT throws a lot of cold water on the proposal. They raise two classes of objections: combining the two companies would reduce the number of players in the space and is therefore inherently anti-competitive, would do nothing to block Illumina from subsidizing long reads with short read profits through bundling and that the patent proposal has many flaws.

ONT complains that some of the patents the original proposal offered have already been invalidated.  That could be sloppy work by someone at Illumina, but given the historically bad relationship between ONT and Illumina it is clearly seen as a bit of misdirection. 

Nanopore also kvetches that neither Illumina nor PacBio showed any signs of ever having a nanopore product, so releasing patents in that space is more around trying to "discredit ONT".  I find this a bit disingenuous, as the proposal did seem to be simply declaring an IP cease-fire in the area of nanopore sequencing.

But with the revised proposal, which we don't yet have a public ONT response to, this level of distrust does highlight the new definition of the field for which Illumina is proposing to release patents.  What scope is Illumina setting with "in the field of single molecule, native long read sequencing systems and associated sequencing chemistries"?  In particular, does this mean they are reserving the right to enforce their IP for sequencing of non-native DNA such as that generated by PCR, RCA and similar amplification techniques?  Or approaches that modify DNA in such a way as to make homopolymer or base modification detection more sensitive and accurate?  In other words, is this really a broad truce or simply Illumina abandoning one battlefield to commit all its forces on a different battlefield? 

The financial markets responded to the new proposal positively, boosting PacBio by about 50 cents -- but it is still trading  in the $5 range far below the offer price of $8.  I'm not clear when GenomeWeb broke the story of ONT's response yesterday (it's still not on the CMA website), so we'll see if there is some settling back today.  I've taken long enough to finish this that the market has now opened and $PACB is still higher than two days ago.  Still, what would PacBio be worth if Illumina wasn't in this process? That's a key unknown.

This ongoing drama across the pond underscores the baffling silence of the U.S.'s FTC on this deal. While we've sadly become used to a historically incompetent and dysfunctional administration these past few years, there's always the hope that some areas have escaped largely unscathed. Perhaps more surprising is in such a usually porous administration there have been few leaks about where the process sits; I did stumble on an antitrust journals bit from last month that suggests there may be a clash between a laissez faire oriented commissioner and staff more willing to put the kibosh on the merger. Other than some execrable opinion pieces from earlier in the year, that's all I can find.

It seems in all likelihood this matter will remain unsettled through the rest of the year. Most likely the next development is a new statement from ONT addressing the revised Illumina patent proposal. Maybe the FTC will actually wake up The newest developments underscore how committed Illumina is to this deal, but there's always the risk that this is a quixotic quest which is distracting them from renewed competition at the low end of their market.

Should Illumina throw in the towel, the long-term stability of PacBio remains a question. Earlier this month they released third quarter financials, and this showed only $49M in cash and investments. This included the effects of one of Illumina's lifeline (technical a "Continuation Advance") payments. Should Illumina bail out in the immediate future, the $95M breakup fee would be partially offset by a $20M bond payment due in February. PacBio's business is also subject to non-genomics issues: the 10Q states that nearly 30% of their revenue comes from their Chinese distributor and given the toxic trade relations between the U.S. and China that could always be subject to nasty fluctuation.

If Illumina scampers, the field of other acquirers looks messy. Roche Diagnostics previously jilted PacBio in a collaboration; would they consider a re-look? BGI is probably a non-starter due to the U.S.-China trade relationship; they were the only other company to even consider acquiring PacBio last year (but that was pre-Sequel II). Qiagen just announced they are entertaining multiple offers for acquisition; that not only takes Qiagen off the table but probably whomever they are swallowed by -the leading rumor candidate is ThermoFisher. Who does that leave? Danaher that just swallowed GE Healthcare? Agilent? BioRad? Who have I forgotten?


Anonymous said...

" I find this a bit disingenuous, as the proposal did seem to be simply declaring an IP cease-fire in the area of nanopore sequencing."

I ONTs point here as while ILMN/PacB seem to be offering up some patents on a technology they don't practice, perhaps as a cease fire as you say, in the background they are reserving live ammunition and manufacturing even more of it.

Anonymous said...

To the poster above, what a hyperbolic muppet you are. To what extent are you willing to block advances in the field to try and save ONTs failing product? Get over yourselves, produce a better product or give up

Anonymous said...

I think the "native" in "the field of single molecule, native long read sequencing systems" probably means native long read (not synthetic long read) instead of native DNA in this context. But who knows...

Hyperbolic Muppet said...

It seems to me PacBio are the desperate ones. Patent trolling, loosing money, desperately scuttling off to hide behind ILMNs skirts. If PacBio were that successful why cant they stand and compete alone ? What advances in the field are you referring to ?

BTW: the most interesting bit of the GenomeWeb article was the last sentence.

Anonymous said...

Ah, based on the Annexes now posted on the CMA web site i can see what ‘~Hyperbolic Monkey’ means.

Anonymous said...

"The possibility that CMA is trying to defend the local favorite comes up in a lot of conversations around this business saga"
I hope those who did that on twitter, etc will be apologising for these accusations in light of the FTC decision.
I work in the public service and the attack upon my fellow colleagues working integrity was appalling.
The CMA is there to protect customers, most of whom are spending government money. Making sure that money is used to obtain the best value (i.e. lower sequencing cost in long term) is the sole purpose (whether their decision is right or wrong for that we can only guess, as there will be no control).