When most investors and consumers think of antitrust issues and monopolies, they probably think of big giant multinational companies with billions of dollars in sales and assets and likely even millions of customers. In the new world of health and information, that just might not be the case. The merger in which Illumina Inc. (NASDAQ: ILMN) is acquiring, or wants to acquire, Pacific Biosciences of California Inc. (NASDAQ: PACB) has been complicated since early in January of 2019 when the Federal Trade Commission (FTC) requested more information from the companies on their pending merger.

As of Tuesday afternoon, the FTC challenged the Illumina/Pac-Bio merger after regulators in the United Kingdom proposed blocking the $1.2 billion acquisition this October.

The FTC is alleging that the acquisition would boost Illumina by eliminating a nascent competitive threat to maintain its monopoly in next-generation DNA sequencing systems. Where the problems seem to come into play is that Pacific Biosciences has just an $823 million market cap, compared to $47 billion for Illumina.

The FTC complaint also alleged that the buyout is illegal because “it may substantially lessen competition in the U.S. NGS market by eliminating current competition and preventing future competition between Illumina and PacBio.” So the FTC has authorized its staff to seek a temporary restraining order and a preliminary injunction in federal court (if necessary) to maintain the status quo pending the administrative proceeding.

Where things get interesting is that this merger was announced in November of 2018. If you read into the proposed block-rationale below, it turns out that Pacific Biosciences may be worth far more than a mere $8 per share. Most companies drop in price when their merger is blocked. After all, the premium is now no longer there. This might open up a scenario in which another company with deep lifesciences experiences would be able to turn an $800 million (or $1.2 billion) company into a $10 billion company that’s better equipped to handle the challenge if the acquisition cannot legally continue.

Now Illumina has gone as far as saying it will pay a deal-extension fee of as much as $34 million to PacBio to keep pressing ahead for the merger to be cleared. Shares of PacBio were of course down initially on the news, but after a $5.57 close on Monday, the shares closed at just $5.38 on Wednesday, after having opened as low as $5.06. That’s even higher than the $5.04 closing price as recently as December 9.

There are many lifescience companies out there that could take a closer look at Pacific Biosciences if the deal is ruled illegal if it goes to a full trial. Which company that would be depends, but there is a good argument to make that PacBio would be worth more on its own than it is at this time if it were allowed to fully compete in the way the FTC has built it up.

The iShares Nasdaq Biotechnology ETF (NASDAQ: IBB) was last seen up just under 14% so far in 2019. PacBio shares were last seen down 27% year to date, while Illumina shares were last seen up just over 8%. PacBio was down at $4.50 before the merger was announced last year, and it’s fair to wonder if a company that would help to further foster a monopoly in such an important field of health care and science should be worth just $823 million. Sadly, it may be another 10 months or more before the outcome is known.

According to the FTC release:

According to the complaint, PacBio has made significant technological advancements in recent years that have increased the accuracy and overall throughput of its systems, while lowering the cost. As a result, PacBio is a closer alternative to Illumina than ever before. Customers have already switched some sequencing volume from Illumina to PacBio for certain use cases and applications, and PacBio is poised to take increasing sequencing volume from Illumina in the future.

The FTC’s complaint also alleges that the acquisition would harm competition by reducing the combined firm’s incentive to innovate and develop new products. According to the complaint, PacBio and Illumina drive each other’s innovation, and the acquisition would eliminate that incentive.The Commission vote to issue the administrative complaint and to authorize staff to seek a temporary restraining order and preliminary injunction was 5-0. The administrative trial is scheduled to begin on Aug. 18, 2020.

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