Icahn's Advice to Illumina (and my comments)

For those of you who don’t know, Carl Icahn has been trying to get Francis DeSouza fired from his position as CEO of Illumina.

Anyway he has a new letter out! So let’s take a look, it includes a handy list of questions for us to review:

Icahn: Why have core Illumina operating margins declined from a historic range of ~30% to a guided range of 22% in 2023?

Ouch!

Core Illumina gross margins went from 70.7% in 2021 to 68.2% in 2022. Not bad! So why have the operating margins changed so much?!

From the gross margins it seems like the incremental cost of producing instruments and consumables hasn’t changed. However the “operating margins” don’t reflect this. Illumina seemed to have hired a ton of people in 2021 and 2022, before laying off 5% of their work force in late 2022.

I suspect like a lot of companies they over hired during COVID… and this has effected their operating margins significantly.

Icahn: Despite declining revenue growth, and only one major project launch (NovaSeqX), R&D has increased to 22% of sales. What exactly is Illumina spending on? How do they evaluate the ROIC on that investment? And how do they measure if the R&D is meeting targets?

I suspect a bunch of the R&D expense went on things like developing nano-imprinted flow cells and bringing manufacturing of those flowcells in-house and room temperature stable reagents. These developments are not really a huge deal for most users, but might give them a fighting chance of retaining margins while being forced to reduce consumable pricing (in the face of competition).

Icahn: There are three outstanding FDA warnings from February 22, 2023, May 22, 2023 and April 23, 2022 warning Illumina customers of data vulnerabilities. Why hasn’t Illumina provided a permanent fix to the first vulnerability (which they promised by year-end 2022) and what led to the current vulnerability? Is Illumina disclosing the vulnerabilities as quickly as it should be?

From what I can tell Illumina didn't set the password on the UCS account. Which means if your DNA sequencer accessible from any random Internet connected PC you're in trouble.

This should never be the case. And in particular anything diagnostic facing should really be on it’s own network isolated from the Internet completely…

Not like this Ion Torrent instrument, or this one or this one¹.

Or the devices found by this security researcher who:

“was able to locate PACS workstations sharing their hard drive content with the Internet, publicly accessible infusion pumps, blood gas analyzers, microscopes, mass spectrometers, an MRI machine”

I’m not saying that Illumina shouldn’t have more robust security. But you’re likely to find similar issues with other Internet connected healthcare devices, and this it’s an issue that is unique to “DeSouza’s Illumina”.