For the past few months, DNA sequencing giant Illumina Inc. has been locked in a high-stakes proxy battle with activist investor Carl Icahn. In May, two of the three candidates Icahn had sought to put on Illumina’s board were defeated by shareholders. Chief Executive Officer Francis deSouza was also reelected to the board, despite Icahn seeking his removal. That suggested that the heated drama over Illumina’s leadership and direction was finally cooling down.
Just how wrong that view was became clear on June 11, when the company’s board announced it had accepted deSouza’s resignation, handing a surprise victory to Icahn after all and highlighting that the uncertainty about the company’s next steps is far from over.
Icahn said in a tweet that he’s “happy” about the change. “While obviously I believe the change of CEO should have come meaningfully sooner, it is still a very positive occurrence,” he tweeted. The stock rose 1.4% on Monday at 9:41 a.m. in New York trading.
Although the recent war of words with Icahn might be ending, the many business issues that created an opening for the activist to take on Illumina have certainly not. As competitors have gained a foothold in the company’s terrain, its dominance in the sequencing world has started to look far less assured. A sinking stock price and regulatory challenges on both sides of the Atlantic to the company’s acquisition of cancer test upstart Grail has put its growth-by-acquisition strategy in question. And though the company’s sequencing machines, which sell for about $1 million, have dominated the sequencing market for decades, new technologies have made Illumina increasingly vulnerable.
“Investors have not been thrilled with the Grail acquisition,” says Bloomberg Intelligence analyst Jonathan Palmer. “There’s concern that Illumina has maybe lost sight of the increased competition that’s coming to market.” The company did not respond to a request for comment.
Illumina’s main business is making machines to read DNA, the code that forms the building blocks of life. Use of Illumina’s machines has grown as the cost to run them has decreased and researchers have found more things to do with them, such as cracking the code of viruses like SARS-CoV-2 or tailoring treatment to a patient’s specific cancer. Illumina’s core business brought in revenue of $4.5 billion last year.
Yet rivals—and venture capitalists—sense an appetite for alternatives. In recent years, two upstarts, Element Biosciences and Ultima Genomics, have raised $1 billion between them, according to data from Pitchbook. They joined existing competitors such as Oxford Nanopore Technologies Plc and Pacific Biosciences of California Inc., companies that specialize in sequencing techniques different from what Illumina is known for.
Illumina has fought to hold on to its leadership through acquisitions. In 2019, regulators struck down its deal to acquire Pacific Biosciences. Last year the company introduced its own competing technology. At a four-day event that felt more like an Apple product launch than a health-care conference, Illumina unveiled the NovaSeq X and NovaSeq X Plus, devices that promise to produce faster and more accurate sequencing.
It also has sought to expand its diagnostic capabilities. In 2020 the company announced it would spend $8 billion to acquire Grail, a company started as part of Illumina’s accelerator program and then spun off. Grail is working on a so-called liquid biopsy, or blood tests that can screen for a wide range of cancers. Grail and other makers of such tests rely on Illumina’s technology. Regulators objected to the deal, saying that combining both the maker of a new generation of tests with the leading company that would interpret the samples from those tests could stifle competition.
Instead of walking away, as it did from the Pacific Biosciences bid, this time Illumina completed the buyout in 2021 despite regulatory concerns. The company wants to diversify beyond its core business with products like prenatal screening and Covid-19 tests. It sees a huge opportunity for blood tests, such as those developed by Grail, that can detect cancer. “We believe that it has the potential to save many lives around the world,” deSouza said in an interview with Bloomberg Television last year.
Illumina has fought antitrust regulators in the US and Europe who want it to unwind the Grail deal, resulting in a lengthy and costly legal battle. Since the deal was announced, Illumina shares slid 32% through Friday. In a March 2023 open letter to shareholders, Icahn blamed the value destruction on a “series of ill-advised (and frankly inexplicable) actions taken by the board of directors” related to the Grail acquisition. Illumina has said that should it lose either regulatory battle, it will get rid of Grail.
Some have wondered whether moving beyond sequencing makes much sense for Illumina in the first place. The company is spending some $700 million a year on Grail and will need to keep pumping money into it for the next five years, if not a decade, says Evercore ISI analyst Vijay Kumar. That’s a completely different investment strategy than Illumina’s core business, which is all about executing and expanding.
“There’s a lot of distractions going on right now, but my advice to Illumina is just focus on the X launch,” says Tim McCarty, lead Illumina analyst at Janus Henderson. “You’ve invested five years and 1,500 people for this. Now’s the time to shine.”
A solid launch of the new X machines, which began shipping earlier this year, could help soothe recent doubts about Illumina’s business. The company trimmed its sales and earnings forecasts twice last year and said it would eliminate 5% of its employees, amid a tough economic environment and slowing demand for its older products as customers waited for the new versions. Illumina in April unveiled another $100 million in cuts that will bring an undisclosed number of additional jobs.
During the proxy fight, deSouza and other Illumina representatives repeatedly promised investors they had everything under control for the long haul. Now the company will need to find a new leader and prove it can deliver.
©2023 Bloomberg L.P.
