NEW YORK – The battle between Illumina and activist investor Carl Icahn entered its final stage this week as both sides try to secure enough votes for their respective slates of directors ahead of the firm's annual shareholder meeting on Thursday.
Illumina has been fighting Icahn as if his campaign to place three associates on the board has a real chance of succeeding, which it very well could — at least partially. Over the last few weeks, the two main independent research firms that advise shareholders in contested director elections have each recommended replacing Illumina Board Chairman John Thompson with Icahn nominee Andrew Teno.
On May 10, Glass Lewis issued its report, recommending that shareholders replace both CEO Francis deSouza and Thompson on the board with Teno and Vincent Intrieri.
A few days later, Institutional Shareholder Services (ISS) — the larger and more influential of the two firms — recommended only that Teno replace Thompson.
For its part, Illumina has seen Thompson issue an open letter conceding that "our financial results and shareholder returns have not met shareholder expectations, nor our own expectations for ourselves." He reiterated plans to taper spending and execute on the NovaSeq X product rollout, and argued that Illumina lacks a quickly accessible exit ramp for the Grail liquid biopsy business.
Illumina has also hammered home allegations of improper corporate governance in Icahn's own house, following a short seller's report that the investor's main company, Icahn Enterprises (IEP) is "Ponzi-like." On May 10, Icahn's IEP disclosed in a filing with the US Securities and Exchange Commission that it is being investigated by the US Attorney's Office for the Southern District of New York.
How the vote will shake out is unclear, and if it's close, the results may not be available for days. According to Illumina, vote certification happens separately from vote tabulation.
So far, the only large investor that has publicly declared its stance has come out in Illumina's corner. Norges Bank, the 20th-largest shareholder, with just under 1 percent of the San Diego-based sequencing and genomic analysis firm's shares, said it has backed Illumina's unchanged nine-member slate.
But the fact that both ISS and Glass Lewis agree on replacing Thompson "is in itself quite a big shift," said Kyle Mikson, an analyst at Canaccord Genuity covering life science tools and diagnostics companies. "That alone suggests there are very likely going to be some changes."
In a note to investors, TD Cowen Analyst Dan Brennan wrote that the odds favor one Icahn nominee elected, noting that "ISS also saw support for the election of a second nominee but withheld a recommendation, in part given lack of necessary candidate credentials."
If shareholders follow the recommendations of ISS, "it does send a message to management," Mikson said. That would follow several "messages" sent through stock price changes, including a 20 percent bump upon news of Icahn's challenge in March. Since the firm released its first quarter financial results, which saw revenues down 11 percent year over year, shares of Illumina have returned to pre-proxy fight levels. In Tuesday trading on the Nasdaq, shares of Illumina were down 2 percent at $204.37.
In its report, Glass Lewis said the Illumina board "appears decidedly and disconcertingly disinclined to accept any clear responsibility" for the "high-risk, functionally unprecedented closure of the Grail transaction [that] has been a costly, distracting, value-crimping millstone." Moreover, the firm gave Illumina an "F" grade for its executive compensation program following an 87 percent increase in deSouza's total compensation in 2022 to approximately $26.8 million.
In a statement issued May 12, Illumina said it "strongly disagrees with Glass Lewis' recommendation and believes that replacing Illumina's leadership with Carl Icahn's associates puts Illumina's business momentum at risk."
ISS was more conservative in its recommendations, although its report suggests that change is "warranted."
"In consideration of the lack of evidence of malfeasance by the CEO, and the fact that the dissident does not have a CEO candidate in hand … removal of CEO deSouza from the board seems excessively disruptive at this stage," ISS wrote.
How the allegations against Icahn will affect the vote is also unclear. Following its initial short seller's report, Hindenburg Research said it offered Icahn a chance to respond. "Given that Carl Icahn has styled himself as a 50+ year warrior for corporate transparency, we expected he would provide clarity on the issues we highlighted," Hindenburg wrote. "Icahn Enterprises failed to address every key issue we raised. Instead, it rehashed its prior opaque and inadequate disclosures."
Illumina's largest shareholders "probably don't want to see a huge disruption," Mikson said, but he thought that many investors are "fatigued" by the Grail saga and "ready to move on." Moreover, "there are a material number of investors that want to see a new CEO, and those investors want to own the stock if a CEO transition were announced," he said.
Results in line with Glass Lewis' recommendations would be a much stronger message and produce more of a wild-card scenario. But there's also a chance deSouza actually comes out stronger than ever: If shareholders vote to replace Thompson but keep deSouza on the board, it's possible that the latter is elected chairman.
"That's probably unlikely," Mikson said. "But if that were to happen, I don't even know what Icahn's response would be. It would be awkward."