Icahn and Illumina's Rights and Wrongs
We’ve been having an interesting discussion about the Carl Icahn proxy fight over on Discord. Based on his recent presentations Icahn would like to kick out Illumina CEO deSouza, and bring back Jay.
Unfortunately, I don’t think this will solve all Illumina’s problems…
Current Landscape
A couple of years ago I wrote a post about the next few years in DNA sequencing. For the most part, I think this has held up pretty well. Realistic competition to Illumina has appeared, and we’re starting to see how this will erode Illumina’s market dominance.
In that post I suggested that Illumina will be forced to retreat into the high-end relying on IP developed post acquisition (patterned flowcells, ExAmp, better polymerases etc.) to give them an edge.
While it still looks like Illumina will have a throughput edge (I’m not yet convinced Ultima provides realistic competition here), other players (Element, PacB) may even have a slight accuracy edge. Making the situation even worse for Illumina.
Whatever happens, with multiple players fighting over the market, margins are likely to drop and Illumina’s market share is likely to decrease.
Illumina is for the first time since the Solexa acquisition facing realistic competition.
deSouza’s Response
I think deSouza and Illumina’s current management realized this and have been trying to maintain their edge in sequencing and expand into new markets. Specifically they tried the following:
To Buy PacBio
First they tried to buy PacBio. This would have given the company both long and short read offerings and a shot at maintaining dominance in sequencing. Given how well Illumina iterated over the Solexa approach, it would have been interesting to see this play out. But of course, the acquisition was blocked by the FTC.
This must be particularly irritating for Illumina given that PacBio then acquired Omniome (a short read platform). Resulting in a company which in a few years could look very similar to a Illumina+PacBio entity.
To Buy GRAIL
Being blocked from buying PacBio must have been very frustrating. Illumina don’t have a great track record for building new approaches internally. Meaning that their only realistic option is to acquiring new sequencing technologies. But if they’re going to be blocked from that? What can they do?
Well, one option is to acquire sequencing adjacent applications! Jay had already started doing that with NIPT. Early stage cancer screening seems like the next logical step. And surely Illumina can’t be blocked from acquiring GRAIL? They basically developed it anyway! Didn’t they?
I think at this point, regardless of price and potential regulatory issues they decided to press ahead. Following a well established methodology of: We must do something. This is something. Therefore, we must do this.
Personally, the GRAILs scientific basis seems pretty solid. But in hindsight, it’s hard to argue that the acquisition wasn’t overpriced.
Margin Optimization
Illumina have also been optimizing their production process, moving away from cold chain logistics on reagents and bringing flow cell manufacturing in house. I talked about this in a paid post last September (I’ve now made it free). This is actually pretty significant. Perhaps they can claw back in some of those margins that increased competition is forcing them to erode?
I should perhaps also mention Illumina Complete Long reads here… unfortunately it’s really just too boring to be relevant...
What Would Investors Do?
I’ve previously talked about some of the things Illumina could do. But what would investors do? Well, Icahn apparently said that he does not “know how to run the business” and does not “care about running the business”. So he would try and bring Jay back, and this would magically solve all of Illumina’s problems.
Others are pretty dismissive of competition:
“Illumina has built this great moat around their technology, and how it’s used. So, we just don’t think the competition is going to have much of a much of a headwind.”
So perhaps they think that all a new CEO needs to do is keep things on course and everything will be fine.
To me this seems obviously wrong. Illumina are facing increasing competition. New players will likely be willing to fight on margins to gain market share, and technological approaches are similar enough that if it makes economic sense, users will switch to platforms.
Bringing in a new CEO isn’t magically going to solve these problems.
It may however make investors happy in the short term.
Thanks for reading and apologies for the hiatus. Spring holidays made it impossible to get regular posts out for a while. I’ve temporarily reduced the subscription costs (they’ll probably go back up next week). Paid subscriptions mean a lot, and help me devote more time to writing.