Illumina CEO Francis deSouza

The price of Illumina (ILMN) stock has hardly budged this past week, but that calm belies a continuing storm of developments that included a regulatory setback for the sequencing giant and escalating criticism from activist investor Carl Icahn—who yesterday urged the company’s board to fire CEO Francis deSouza.

In his latest open letter to Illumina shareholders, Icahn repeated arguments he has laid out over the past month in past open letters and in interviews. Icahn has faulted Illumina for agreeing to acquire cancer blood test developer Grail for $7.1 billion, then pursuing approvals despite opposition from U.S. and European regulators on antitrust grounds.

Insisting that Illumina’s continuing pursuit of Grail has shrunken its market capitalization by $50 billion, Icahn has announced plans to nominate three allies to the company’s board at its annual meeting. Illumina has rejected the three as lacking the qualifications and experience it seeks in board members, and defended its pursuit of Grail under deSouza.

“We believe the board of directors should dismiss Mr. deSouza immediately and bring back Jay Flatley (or someone else on his level) as CEO,” Icahn wrote.

Flatley is deSouza’s predecessor as CEO, under whom Illumina gained dominance in next-generation sequencing. Under Flatley, Illumina revenues zoomed from just $1.3 million in 2000 to $2.2 billion in 2015. (Illumina finished last year with $4.584 billion in revenue, up 1% from 2021; first quarter results will be released April 25).

Among company milestones Flatley spearheaded was Illumina’s acquiring Solexa in 2006, and its breaking of the $1,000 cost barrier for genome sequencing in 2014, an announcement that electrified the investor crowd attending that year’s J.P. Morgan Healthcare Conference.

Flatley served as CEO from 1999 to 2016, then remained on Illumina’s board for five years as executive chair, and later as chairman until stepping down in 2021. More recently he has helmed the board and served as interim CEO of Zymergen when the previous chief executive quit after unspecified technical problems with its lead product forced the company to walk back earlier rosy revenue predictions—causing a 68% plunge in its share price. Zymergen was acquired by Ginkgo Bioworks last year for $300 million.

Near double compensation

Icahn launched his proxy battle to change Illumina’s board, and thus its direction, last month. That battle expanded into volleys against deSouza last week, after Illumina released its 2023 Proxy Statement showing that deSouza’s total compensation last year nearly doubled, to nearly $27 million from $14.3 million, most of the increase being $12.5 million in stock options.

Activist investor Carl C. Icahn

“Illumina’s board amazingly justified Mr. deSouza’s massive pay increase by saying it was necessary due to the ‘highly competitive talent environment.’ For once we are in complete agreement with this board. It is probably impossible to find a CEO candidate “talented” enough to lose $50 billion of shareholder value in this short a period,” Icahn wrote in a Monday open letter to shareholders. “The more that occurs, the more we realize that something is truly rotten in the state of Illumina.”

Not so, Illumina sought to convey this past week, as it highlighted a pair of recent accomplishments:

  • 200+ Orders: One announcement highlighted how the company had received more than 200 orders for its new NovaSeq X sequencing system in the first quarter. NovaSeq X can generate more than 20,000 whole genomes per year at a cost of $200 per genome, according to Illumina.
  • 25 Years: Another detailed Illumina’s month-long celebration of its 25th anniversary, which the company kicked off on March 30 when a group of its customers, employees, and leaders joined Chief Commercial Officer Susan Tousi to ring the closing bell at the Nasdaq Stock Market in New York’s Times Square.

“We’ve made tremendous progress over the last 25 years, with every discovery bringing us closer to unlocking the power of the genome to improve health—of humans and of the planet,” deSouza said in a statement. “As we celebrate our 25th anniversary, the Illumina family is inspired, energized, and ready to help create the next 25 years of innovation.”

Investors responded to Icahn’s stumping for Jay Flatley by briefly sending Illumina shares up 1% on Wednesday morning, before they finished the day at $230.92, just 0.3% above Tuesday’s close of $230.22—down 56% from the stock’s five-year high of $524.84 reached August 16, 2021 and 22% below the $295.50 price on September 18, 2020, the last trading day before the Grail acquisition was announced, touching off a 12% one-day decline to $270.13.

A group of iIllumina customers, employees, and leaders joined Chief Commercial Officer Susan Tousi to celebrate the company’s 25th anniversary by ringing the closing bell at the Nasdaq Stock Market in New York’s Times Square on March 30. [Nasdaq Inc. via Illumina]
Over the past week, Illumina shares have largely run in place, except for a 1% dip Monday, to $230.02.

FTC orders Grail divestment

The Monday dip came after the U.S. Federal Trade Commission (FTC) ordered the sequencing giant to divest itself of Grail. The FTC concluded in an Opinion and Order that Grail falling under Illumina control “may substantially lessen competition in the relevant United States market for the research, development, and commercialization of MCED tests,” using the acronym for multi-cancer early detection.

The order reversed the decision last September of Chief Administrative Law Judge D. Michael Chappell, who ruled in Illumina’s favor against the FTC challenge to the Grail acquisition.

Illumina said it is appealing the FTC decision, which as a result will stay the agency from carrying out its order. The company is also appealing a European Commission order directing the company to divest itself of the cancer blood test developer. The EC blocked the deal in September 2022, concluding (like the FTC) that the purchase would stifle innovation and reduce choice in the emerging market for blood-based early cancer detection tests. Three months later the Commission issued a Statement of Objections laying out measures to undo the deal.

A final EC decision is expected this spring.

“If Illumina does not prevail in this appeal or the ECJ [European Court of Justice] jurisdictional appeal, the company expects to move expeditiously to divest Grail in a manner that serves the best interests of Illumina’s shareholders,” Illumina stated on Monday.

Icahn called Illumina’s appeals “an almost impossible battle.”

“Our major concern as a large shareholder is that this multi-year battle will consume hordes of cash and go on for years, luxuries that Illumina does not have,” Icahn wrote. “Even in the best case for Mr. deSouza, the ability to own Grail will be a pyrrhic victory, as the core business deteriorates, and customers defect to rival sequencing platforms.”

One analyst agrees with Icahn as to the prospects of Illumina overturning the U.S. and European decisions against the Grail deal, yet still sees upside in Illumina stock. Kyle Mikson, a director and senior equity research analyst with Canaccord Genuity covering the life science tools and diagnostics sector, this week restated the firm’s “Buy” rating for the company’s shares as well as the firm’s 12-month price target of $300 a share—about 30% above where the stock is now trading.

“Although we understand the merits of the Grail business, it appears most investors would prefer the asset to be removed from Illumina,” Mikson wrote in a research note. “We believe ILMN shares will appreciate as the divestiture (which appears highly likely) draws closer.”

Leaders and laggards

  • InflaRx (IFRX) shares nearly tripled, zooming 197% over two days, from $2.05 to $3.77 on Tuesday, then to $6.10 on Wednesday, after the FDA granted emergency use authorization to the company’s first-in-class monoclonal anti-human complement factor C5a antibody Gohibic (vilobelimab). Gohibic was authorized to treat COVID-19 in hospitalized adults when initiated within 48 hours of receiving invasive mechanical ventilation, or extracorporeal membrane oxygenation. The FDA based its decision on Phase III clinical trial results showing a significant relative reduction in 28-day all-cause mortality of 23.9% compared to placebo in critically ill invasively mechanically ventilated COVID-19 patients.
  • Liminal BioSciences (LMNL) shares rocketed 86% on Wednesday, from $3.62 to $6.72, after the developer of small molecule therapeutics that modulate G protein-coupled receptor pathways (GPCRs) confirmed receipt of an unsolicited proposal from Structured Alpha—which already owns 64% of Liminal’s shares—to buy the remaining issued and outstanding common shares at $7.50 per share cash. “The Company’s board of directors will review the Proposal to determine the course of action that it believes is in the best interest of the Company,” Liminal stated.
  • OncoSec Medical (ONCS) shares plunged 50% Monday, from $2.58 to $1.30, after the company acknowledged that its lead clinical program assessing TAVO™ with Merck & Co.’s cancer immunotherapy Keytruda® (pembrolizumab) failed the Phase II KEYNOTE-695 trial (NCT03132675) by missing its primary endpoint of overall response rate (ORR). Among 98 efficacy-evaluable patients with at least one post-baseline tumor assessment, TAVO-EP plus Keytruda achieved ORR of 10.2%; the pre-specified clinically meaningful ORR was ≥17%. OncoSec plans to continue developing the combination in neoadjuvant melanoma, and said it is scheduled to meet with FDA officials in May to discuss a Phase II randomized trial design and future development plans.
  • VBI Vaccines (VBIV) shares plummeted 53%, from 30 cents to 14 cents, on Tuesday after the company announced a restructuring that will eliminate 30-35% of its internal workforce—approximately 60 jobs, based on the 190 full-time and six part-time employees it reported as of December 31, 2022. VBI said it will focus its development efforts on broadening access to its sole marketed product, the FDA-approved 3-antigen hepatitis B virus (HBV) vaccine for adults PreHevbrio™ [Hepatitis B Vaccine (Recombinant)], and advancing its HBV immunotherapeutic candidate VBI-2601 for chronic HBV. VBI also said it will carry out a 1-for-30 reverse stock split of its issued and outstanding common shares effective April 12.
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