Here's Why Pacific Biosciences Gained as Much as 10.5% Today

What happened

Shares of Pacific Biosciences (NASDAQ: PACB) rose over 10% today after the latest regulatory development injected optimism into investors hoping that the proposed merger with Illumina (NASDAQ: ILMN) will pass muster in the United Kingdom. 

In an effort to appease regulators critical of the merger, Illumina has offered to provide royalty-free licenses to all intellectual property in single-molecule, native long-read DNA sequencing owned by Illumina and Pacific Biosciences at the time of the merger closing and to any patents granted up to 12 months after closing. 

As of 10:55 a.m. EST, the small-cap stock had settled to a 8.1% gain. Shares of Illumina had settled to a gain of 1.3%.

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So what

The primary reason for Illumina to acquire Pacific Biosciences is that the latter has the leading long-read, single-molecule DNA sequencing technology platform. It can read parts of the human genome that Illumina's short-read approach cannot see, which has made it increasingly valuable to researchers asking difficult questions about genetic links to disease. 

Therefore, it may seem odd that Illumina would open up the IP at the center of the merger, but there's a not-so-subtle power play here. 

The United Kingdom's Competition and Markets Authority (CMA) has taken a critical stance on the proposed merger, citing the massive market share the merged company would hold in the global DNA sequencing market. It's right. But the U.K. is also home to Oxford Nanopore, which is developing a technology platform based on nanopore sequencing that could eventually overtake both Illumina and Pacific Biosciences. In other words, the CMA is partially protecting its homegrown sequencing powerhouse.

By proposing to open up all intellectual property related to single-molecule, native long-read DNA sequencing, Illumina is essentially making two bets. First, Illumina thinks it can commercialize and improve the existing technology of Pacific Biosciences better than any competitor. It currently dominates the global DNA sequencing market in terms of reach and customer relationships, so that's not a stretch.

Second, the move is an attempt to call CMA's bluff over arguments that market competition would suffer from the merger. If Roche and Agilent and every other competitor has access to the technology, that should increase competition in DNA sequencing. More subtly, the move would change the battle for the future of sequencing from Oxford Nanopore vs. Illumina to Oxford Nanopore vs. an all-star billing along the lines of Illumina, Roche (which is developing its own nanopore sequencing platform), Agilent, and everyone else. 

Now what

There's no guarantee that the latest proposal from Illumina will be enough to appease U.K. regulators, which can block the merger regardless of the decisions handed down by trade authorities in other countries (and even the broader European Union). In the long run, the recommendation from the CMA may not matter that much if nanopore sequencing can live up to its potential for faster, more accurate, and scaled-down DNA sequencing. 

Considering shares of Pacific Biosciences are trading well below the proposed acquisition price of $8 per share, investors can see there's a long way to go before the public markets take Illumina's proposal seriously. What happens heading into an important regulatory deadline on December 11 may determine how this ends.

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Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Illumina. The Motley Fool has a disclosure policy.

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