Illumina: Shareholder Vote Ousts Chairman and Adds One Icahn Associate

A proxy battle between narrow-moat Illumina ILMN and activist investor Carl Icahn generated mixed results, ousting the company’s chairman, John Thompson, who has close ties to CEO Francis deSouza, but only adding one of Icahn’s three nominees (Andrew Teno) to the board. Shares declined over 10% directly following this news, as investors may have been hoping for a more significant change at the embattled genomic sequencing leader. We are not making any fair value estimate changes and view shares as significantly undervalued.

Icahn has been lobbying for a management change and a quick divestiture of Grail, the liquid biopsy startup that Illumina purchased in 2021 without approval from antitrust regulators. We suspect neither will be likely now after this mixed result, but the addition of this new board member should keep Illumina’s management team on a tight leash. Specifically, we think the board will be more open to significant changes if financial results do not improve quickly or if U.S. or EU regulators maintain their unwinding orders following the appeals processes that is scheduled to be completed later this year or early next year.

The Grail liquid biopsy assets look like a promising long-term opportunity, but investors have been frustrated by the significant drain on Illumina resources that Grail has caused. Grail projects a $670 million operating loss in 2023 and could remain a drag on Illumina’s earnings power until widespread reimbursement can be achieved after Food and Drug Administration approval of its Galleri test (which could take several more years) or until regulators force Illumina to unwind the transaction. However, we also recognize the long-term value that Grail’s technology could create if it is used widely to detect cancer earlier. Shifting cancer detection to earlier stages could improve survival rates and reduce treatment costs, and we suspect Grail will eventually deliver significant value for investors, despite its murky near-term outlook.