Icahn proxy fight is 'distraction' for Illumina outlook: RBC analyst

Carl Icahn's proxy fight with Illumina (ILMN) escalated Monday with a new open letter as well as from a decision from the Federal Trade Commission (FTC).

The FTC is now ordering the biotech to unwind its $8 billion deal with cancer testing company Grail, saying that its ownership would restrict competition in developing cancer tests.

Icahn, who has a 1.4% stake in Illumina, wants to appoint three members to the company's board as well as bring back a former CEO to help with this task, to right-size what he sees as a failing trajectory.

"After speaking with numerous shareholders, we believe it is unconscionable that the board of directors still entrusts [current CEO, Francis] deSouza with running our potentially great company. During his tenure, not only has the company lost $50 billion of shareholder value but many of his talented executives have left or are in the process of leaving," Icahn wrote in a letter Monday.

The letter is the fifth Icahn has published since launching the proxy fight for control of the board last month, after months of private negotiations fell apart.

The FTC decision to bar the acquisition of Grail, which Illumina completed last year, follows a similar ruling late last year from the European Commission. Both regulators have warned the company could face fines that would result in billions in losses if it doesn't comply.

Illumina is already appealing the decision in Europe, and said Monday it would seek the same for the FTC. The company believes it has strong case since an FTC judge already sided with the company in September.

But in its statement Monday, Illumina added that if it does not prevail in the EU or with the FTC, "the company expects to move expeditiously to divest Grail."

Ultimately, that's what Icahn wants the company to do, according to RBC Biotech Analyst Conor McNamara.

"Some of his concerns are shared by shareholders, that GRAIL has been a distraction," McNamara said of the $8 billion deal.

He said that the proxy fight is taking attention away from Illumina's product launch of a new testing system NovaSeq X.

"This product, its our view, its going to lead to a series of revenue beats, earnings beats and revenue acceleration. Because of this distraction that Icahn is causing, people aren't really focusing on that," McNamara said.

The product is part of a growing space in biotech estimated to be a $40-plus billion market by 2030, according to the company.

McNamara says he believes Icahn is missing the growth projections for the company. In his original letter in March, Icahn has focused on the regulatory battles and $50 billion loss of shareholder value.

"If Illumina continues on its current path, the cost of fighting powerful regulators, especially when they obviously believe strongly in their position, will become extremely expensive no matter what happens," Icahn said.

"Illumina’s share price performance, and the $50 billion of value destruction that has occurred since the GRAIL deal was closed, clearly shows that shareholders have lost faith in Illumina’s management team and board of directors," he added.

Icahn instead wants to appoint three members of his firm to the board and unwind the GRAIL deal ahead of any appeal decision by regulators. He also wants to bring back former CEO Jay Flatley, Icahn recently told the Wall Street Journal.

Illumina countered with one board seat before negotiations broke down last month.

McNamara said the timing, right as a product is launching, bodes poorly for the company, but could also indicate a lack of knowledge about the industry on Icahn's part.

"I think that's the primary reason that Illumina can't give up three board seats. This is a long term growth company in a market that they dominate and that isn't fully understood by all investors," McNamara said.

So to give up the board would "be a mistake," he added.

This is the second time Illumina has struggled with an acquisition. The company first tried to acquire PacBio (Pacific Biosciences of California), which the FTC challenged in 2019. Illumina terminated that $1.2 billion merger agreement in early 2020.

Follow Anjalee on Twitter @AnjKhem

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