Activist investor Carl C. Icahn

Illumina (ILMN) has been enmeshed for more than two years in trying to acquire cancer blood test developer Grail, only to find itself fighting antitrust regulators in the U.S. and Europe who have effectively blocked the $7.1 billion deal.

And while Illumina still sees merit in combining with Grail, at least publicly, the sequencing giant has also already written down nearly half the value of the deal, having taken a $3.914 billion goodwill impairment charge against third-quarter 2022 earnings, “primarily due to the negative impact of current capital market conditions and higher discount rates.”

“To paraphrase William Shakespeare’s Hamlet, something is rotten in the state of Illumina,” activist investor Carl C. Icahn declared Monday in an open letter to Illumina investors. That letter contained the first shot in what could be another knock-down drag-out for Illumina—this one concerning its board and direction as well as its effort to buy Grail, which has gone anything but smoothly.

According to his open letter, Icahn owns a total 2,198,853 shares representing approximately 1.4% of Illumina’s 158 million outstanding shares as of February 10, as disclosed in Illumina’s Form 10-K annual report for 2022, filed last month.

Icahn’s letter also announced the intent of his Icahn Partners, and 13 affiliated entities and individuals, to nominate three allies to the company’s nine-member board at its upcoming annual meeting:

  • Vincent J. Intrieri, founder and CEO of VDA Capital Management, a private investment fun, and a former Icahn employee from 1998–2016.
  • Jesse A. Lynn, general counsel of Icahn Enterprises.
  • Andrew J. Teno, a portfolio manager at Icahn Capital since October 2020.

“Dose of sanity”

“We believe our three nominees will bring a badly needed dose of sanity to Illumina’s boardroom,” Icahn asserted. “We are convinced that at least three shareholder representatives are needed on Illumina’s board to attempt to put an end to this insanity now before the reckless decision making escalates into a no-return situation.”

At deadline, Icahn had not responded to a GEN query about how effective the three could be as a board minority, and how much Illumina’s challenges go beyond the Grail acquisition.

Illumina has seen a growing number of competitors announce new sequencing systems designed to take aim at the sequencing giant, often by name—including Singular Genomics’ G4 platform and MGI subsidiary Complete Genomics’ full sequencing platform. Pacific Biosciences (PacBio) said earlier this year it received orders for 76 Revio systems during the fourth quarter of 2022, making it the most successful product announcement in PacBio’s history. Illumina insists it can remain the leader in sequencing while acknowledging its market share will shrink as more rivals step up their activity in the space.

Illumina responded to Icahn with a statement disclosing that board Chairman John W. Thompson and CEO Francis deSouza had “multiple” conversations with Icahn while the board’s Nominating/Corporate Governance Committee met with the three nominees.

“Mr. Icahn was explicit and unyielding in his demand that any resolution should give him outsized influence and control,” Illumina stated before recommending against supporting Intrieri, Lynn, and Teno: “The Board has determined Icahn’s nominees lack relevant skills and experience, and that it is not in the best interests of shareholders to appoint Mr. Icahn’s three nominees to the Board of Illumina. The Board recommends that shareholders not support Mr. Icahn’s nominees.”

“Ignore this noise”

deSouza, Illumina’s CEO since succeeding Jay Flatley in 2016, doubled down against Icahn on Monday in a letter to Illumina employees.

Illumina CEO Francis deSouza

“We can expect Mr. Icahn to leverage media and other resources in the coming days and weeks to make inflammatory statements—a common activist tactic—about Illumina in order to maximize attention. We ask you to please ignore this noise and stay focused on your day-to-day work, which is so vitally important,” deSouza urged.

A day later, Illumina hoped to generate attention beyond the Icahn fight, by announcing the availability of its first-ever product offering users access to both long- and short-read data on the same Illumina instrument. Illumina Complete Long Read Prep, Human, is a long-read, human whole-genome sequencing (WGS) assay based on the company’s novel Illumina Complete Long Read technology.

Undeterred, Icahn issued a second letter to Illumina shareholders on Wednesday concluding: “We believe unequivocally that Illumina should divest Grail (and will likely be forced to do so by the European Commission). We believe that Illumina overpaid for Grail (as evidenced by the $3.9 billion write-down). We believe that Illumina should never have acquired Grail over regulatory prohibitions.”

“We feel strongly that our three highly qualified nominees are particularly suited because of their experience to help keep Illumina from sinking further into the quicksand,” Icahn said.

Icahn also argued that Illumina has tacitly admitted the Grail deal was a blunder through recent statements like one asserting that if it loses a pending appeal in Europe, it “expects to execute a divestiture based on the terms of the final order, expeditiously and in a manner that serves the best interests of Illumina’s shareholders.” And a divestiture of Grail could subject Illumina to “a major tax problem,” he contended, based on Illumina’s acknowledging in its annual report that it “would incur significant tax liabilities.”

Illumina announced its plan to buy Grail in September 2020, saying the deal would accelerate the commercialization of its Galleri™ blood detection test, then being planned for launch in 2021. “Galleri is among the most promising new tools in the fight against cancer,” Illumina gushed at the time, noting that the test was supported by both Grail’s tech platform and Illumina’s NGS platform.

While Illumina disclosed the deal as being $8 billion, it still had a stake in Grail, reducing its value to $7.1 billion. A year later with its value having shrunk, Illumina completed the acquisition over objections from the European Commission.

“Terrible risks”

“The decision by Illumina’s board of directors to close the company’s acquisition of Grail over the explicit prohibition from European Commission regulators exposed Illumina to terrible risks, shows a lack of common sense AND, most disturbingly, destroyed $50 billion of shareholder value,” Icahn argued.

Illumina has appealed to the European Commission not to make binding an antitrust order directing the company to divest itself of the cancer blood test developer. The EC blocked the deal in September 2022, concluding 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.

In the U.S., an administrative law judge ruled in Illumina’s favor against the U.S. Federal Trade Commission (FTC)’s challenge to the Grail acquisition. The FTC is appealing the ruling.

More pointedly, Icahn linked his proxy fight over control of Illumina to a surge this week in the company’s rollercoaster stock price, which over the past year has traded between $173.45 and $371.16.

Illumina shares climbed 17% the day of Icahn’s first letter Monday, from $194.01 to $226.94. Over the following two days, shares rose another 0.5%, to $228.15 at the close of trading Wednesday.

“Clearly, other shareholders strongly support our efforts, as evidenced by Illumina’s stock market value increasing by over 17% in one day, an increase of $5.2 billion in shareholder value!” Icahn enthused. “We believe there is much more value to be unlocked over time and our nominees will work tirelessly for justice for ALL shareholders.”

Two analysts this week predicted a sizable number of investors would support Icahn’s Grail-focused campaign to reshape Illumina’s board, and through that its current direction.

“We aren’t surprised to see the stock respond favorably to the activist presence given the prevailing investor desire to end the regulatory saga and high cash burn that have come with the Grail acquisition,” Catherine Ramsey Schulte, Senior Research Analyst with Baird, wrote Monday in a research note. “While the timeline is dependent on EU regulators (ILMN expects to receive divestiture order in 2Q), we think activist pressures to ensure a timely and clean break would be well-received.”

Beyond Grail

Puneet Souda, senior managing director, Life Science Tools and Diagnostics and a senior research analyst with SVB Securities, also agreed that the Icahn-sparked surge in Illumina’s share price “is reflective of the investor sentiment towards Grail and overall execution.” [SVB Securities was not among entities included in the Chapter 11 filing of its parent company SVB Financial Group, and SVB Securities operations have continued uninterrupted.]

However, Souda added that investor support for Icahn’s proxy fight reflected more than just discontent over Illumina’s acquisition of Grail and its dogged defense of the deal.

“We believe that support for board seats is likely to remain high given limited to no support for Grail among investors, the massive dilution that ILMN has already taken as a result on Grail, and at a time when it is launching its most significant product in the NGS market,” Souda observed Tuesday in a research note.

That product is the NovaSeq X sequencing system, unveiled in September 2022 at the Illumina Genomics Forum. The system includes a pair of instruments: NovaSeq X, which uses a single flow cell, and NovaSeq X Plus, which applies dual flow cells. Speaking at the J.P. Morgan 41st Healthcare Conference in January, deSouza predicted that Illumina will reap the reward of shipping the first NovaSeq X systems this quarter.

Last month, Illumina disclosed that 155 orders had been placed for NovaSeq X systems, with more than 250 customers deemed “advanced pipeline prospects”—improved numbers from the 140 order and 200+ advanced pipeline prospects the company reported in January. Illumina expects to ship more than 300 NovaSeq X systems to customers this year.

Illumina is counting on NovaSeq X to deliver the jumpstart in results that it lacked during a lackluster 2022—an underperformance that Icahn did not cite in his letters decrying the performance of Illumina’s current management. The $3.9 billion write-down for Grail fueled Illumina’s $4.404 billion GAAP net loss for last year, compared with $762 million in net income for 2021, while revenue climbed only 1% year-over-year, from $4.526 billion to $4.584 billion.

For 2023, Illumina has projected a much brighter year, with revenue expected to range from $4.9 billion to $5.03 billion, for 7 to 10% revenue growth, and earnings per share set to range from $1.25 to $1.50. The EPS forecast fell short of the $2.99 that analysts surveyed by Bloomberg News expected Illumina to project—a key reason why investors greeted Illumina’s guidance with a stock selloff that sent shares down 16% in after-hours trading.

Also at JP Morgan, Illumina projected a revenue increase for Grail from about $55 million in 2022 to between $90 million and $110 million this year. De Souza said 80% of that growth will come from Grail accelerating adoption of Galleri. Last month, John Hancock said it will expand access to Galleri to eligible life insurance customers participating in its John Hancock Vitality PLUS program.

Last year, Grail sold more than 60,000 tests ordered by more than 4,500 physicians—a feat Illumina trumpeted as the fastest first-year revenue ramp in the history of cancer screening tests.

Leaders and laggards

  • Bellicum Pharmaceuticals (BLCM) shares tumbled 50% on Wednesday, from $0.86 to $0.43, after launching a review of strategic alternatives and halting clinical trials assessing its GoCAR-T cell candidates plus rimiducid in heavily pre-treated cancer patients. Bellicum said the most recently-treated patient in its Phase I/II trial (NCT02744287) of BPX-601 in metastatic castration-resistant prostate cancer experienced serious immune-mediated adverse events including Grade 4 cytokine release syndrome—the second dose-limiting toxicity seen in that dose escalation cohort. Bellicum added that it “believes that it does not have the necessary resources to optimize either the clinical dose and schedule of BPX-601 cells and the activating agent rimiducid, or the design of the BPX-601 cell construct to achieve a favorable risk/benefit profile.”
  • Esperion Therapeutics (ESPR) shares nosedived 54% on Thursday, from $3.98 to $1.82, after the company acknowledged in a regulatory filing an ongoing dispute with Daiichi Sankyo. The companies differ on whether Esperion is entitled to up to $440 million in milestone payments in the development of its lead candidate empedoic acid based on data from the Phase III, 14,000-patient CLEAR Outcomes trial (NCT02993406). Daiichi Sankyo licenses rights to the cardiovascular disease drug in Europe and select countries in Asia, the Middle East and Latin America, through a collaboration designed to pay Esperion up to $1.1 billion tied to achieving milestones.
  • Lifecore Biomedical (LFCR) shares plunged 65% on Friday, the first trading day after the contract development and manufacturing organization (CDMO) restated results for the fiscal year ending May 29 2022, and quarter ending August 28, 2022—restatements that “raise substantial doubt about the Company’s ability to continue as a going concern within one year,” Lifecore said. Lifecore has retained Morgan Stanley to help explore strategic alternatives “which could include a sale of the Company, potential debt or equity financing transactions, or other possible strategic transactions.” No timetable has been set. Lifecore specializes in the development, fill and finish of complex sterile injectable pharmaceutical products.
  • Provention Bio (PRVB) shares nearly quadrupled, zooming 260% from $6.70 to $24.10 after joining Sanofi to announce the pharma giant’s planned acquisition of the company for approximately $2.9 billion cash. The deal will expand Sanofi’s product offerings with Provention’s FDA-approved Tzield® (teplizumab-mzwv), authorized last year as the first and only therapy to delay the onset of Stage 3 type 1 diabetes (T1D) in adults and youths aged eight and older with Stage 2 T1D. The deal builds on Sanofi’s expertise in diabetes and its growth in immune-mediated diseases and disease-modifying therapies in areas of high unmet need. Sanofi expects to complete the acquisition in the second quarter.
  • ThermoGenesis Holdings (THMO) shares nearly tripled, rocketing 184% this week from $2.11 on Tuesday to $4.19 on Wednesday and to an even $6 on Thursday after opening a facility near Sacramento, CA, containing 12 class-7 ReadyStart cGMP Suites available for lease by early-stage cell and gene therapy developers. The provider of automated cell processing tools and services quickly capitalized by inking agreements for a $3 million private placement entailing the purchase and sale of 1,071,429 shares of common stock or equivalents at $2.80 per share, and warrants to buy another 1,071,429 shares at an exercise price of $2.65 per share.
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