What happened

Shares of Pacific Biosciences (NASDAQ:PACB) fell over 14% today as investors grappled with more bad news for long-read DNA sequencing power. The latest twist comes courtesy of the European Patent Office (EPO), which revoked a second patent for the company pertaining to its ability to read long, uninterrupted strands of DNA with its machines. More specifically, the EPO found that the patent in question made too broad a claim to "single molecule sequencing," which is central to the company's entire technology platform. 

A shrinking patent portfolio isn't ideal, but it's compounded by recent news from the United Kingdom's Competition and Markets Authority (CMA). The trade body has referred the company's pending acquisition by Illumina (NASDAQ:ILMN) for an in-depth investigation after the parties failed to address the CMA's concerns raised from an initial inquiry that began in April, as first reported by The Motley Fool. Turns out both the patent dispute and the antitrust investigation have a similar root cause: Oxford Nanopore, a start-up based in the United Kingdom.

As of 11:32 a.m. EDT, the stock had settled to a 12.8% loss.

A scientist in the lab with a disappointed look on his face.

Image source: Getty Images.

So what

By revoking the second long-read patent from Pacific Biosciences in Europe, the EPO handed an important win to Oxford Nanopore. The start-up is developing a competing long-read DNA sequencing technology based on nanopore technology, which, on paper at least, could one day replace existing sequencing technologies from both Illumina and Pacific Biosciences. Wall Street has stubbornly resisted the idea that technology upgrades out of Oxford Nanopore in the last year likely spurred the defensive acquisition, but analysts appear to be coming around to that possibility.

More troubling for Wall Street is that the latest news throws even more uncertainty into an already complicated matter: will the acquisition proceed? 

When the CMA opened its investigation in April no one -- not even the CMA -- was exactly sure how it might be complicated by Brexit. The United Kingdom is still a part of the European Union, so even if the CMA ruled against the Illumina acquisition of Pacific Biosciences, could it be overruled by the sister body of the European Union? 

The messy dynamic between the United Kingdom and the European Union comes into play again with the latest EPO decision. Does revoking European patents from Pacific Biosciences blunt the argument from the CMA that a merger would be anti-competitive? After all, the intellectual property in dispute now unequivocally belongs to Oxford Nanopore, which would theoretically increase the amount of competition in the market. 

Now what

Wall Street is suddenly not very optimistic. Analysts are finally coming around to the very real possibility that Illumina could fail in its bid to acquire long-read DNA sequencing technology and stave off the rise of nanopore sequencing. Shares of Pacific Biosciences have fallen 31% since the beginning of 2019 and now trade almost 40% below the proposed acquisition price of $8 per share. That's a very pessimistic signal about the acquisition's chances for success.