Corvex’s Meister joins the board at Illumina. How he can create value

Firm: Illumina, Inc. (ILMN)

Enterprise: Illumina gives sequencing-and array-based options for genetic and genomic evaluation. It gives services and products to prospects in a variety of markets, enabling the adoption of genomic options in analysis and medical settings. Its DNA sequencing know-how relies on its reversible terminator-based sequencing chemistry, referred to as sequencing by synthesis biochemistry. Its BeadArray know-how combines microscopic beads and a substrate in a producing course of to supply arrays that may carry out many assays concurrently.

Inventory Market Worth: $12.67B ($80.00 per share)

Activist: Corvex Administration LP

Possession: ~2.5%

Common Value: n/a

Activist Commentary: Corvex was based in 2011 by Keith Meister, Carl Icahn’s former lieutenant who served as CEO and vice chairman of Icahn Enterprises. Corvex is a extremely concentrated, basically pushed hedge fund that makes use of activism as a device, however not a main technique. The agency’s desire is to not be an activist, with a proxy struggle being a final resort. It could desire to amicably be invited onto boards.

What’s occurring

On March 25, Illumina introduced that Keith Meister (founder, managing accomplice and chief funding officer of Corvex Administration) will be part of the board on March 28. The corporate additionally stated that Dr. Scott Gottlieb has been elected non-executive chair of the board and that Stephen MacMillan (chairman, president and CEO of Hologic), who joined the board in June 2023, will retire as a director.

Behind the scenes

Illumina (ILMN) is a know-how firm that sells sequencing machines and consumables required for genomic testing. This enterprise noticed a dramatic rise in demand throughout the Covid-19 pandemic. Income surged by about 40% from $3.2 billion to $4.5 billion between 2020 and 2021. In that interval, earnings earlier than curiosity, taxes, depreciation and amortization went from $800 million to $1.1 billion. The inventory traded as excessive as $511 per share in August 2021. At present, income is at $4.3 billion, EBITDA is at $900 million and the inventory closed Friday at $80.00.

Since Covid, it has been nothing however unhealthy information for Illumina. Initially, post-pandemic headwinds slowed the demand for sequencing machines because the pressing want for testing waned. However the greatest reason for the corporate’s underperformance was the expensive spin-out, reacquisition and later re-spin of its Grail enterprise. Illumina created Grail in 2015 and spun it out in 2016, retaining a 20% possession. In September 2020, Illumina agreed to amass Grail again for $8 billion. They closed the acquisition a yr later regardless of not receiving the approval of the Federal Commerce Fee or the European Union, which angered the European Fee. The European Fee finally blocked the deal and levied a major tremendous. With stress from Icahn who was an activist at Illumina on the time, the corporate ultimately re-spun Grail in June 2024. Nonetheless, that’s not the top of Illumina’s struggles, as the brand new political setting has led to extra challenges. The corporate has confronted geopolitical setbacks for its Russia and China companies. Moreover, biotech funding revolving across the unsure way forward for the Nationwide Institutes of Well being has furthered issues. As soon as valued at $70 billion, Illumina is now valued at lower than $13 billion.

The excellent news is that every one the issues are within the rearview mirror. The pandemic’s affect available on the market has lengthy subsided, the Russia and China companies have been priced out, and the Grail debacle has been resolved. What stays is a streamlined enterprise with a renewed management staff, together with a brand new CEO, CFO and a refreshed board led by a brand new chairman. Illumina is now an organization that’s the market chief in promoting gene-sequencing know-how. The corporate controls over 80% of the worldwide market and maintains an put in base of greater than 20,000 machines. Illumina operates underneath a razor-and-blade enterprise mannequin, with the machines themselves having margins of roughly 30%, and the recurring consumable gross sales that drive sustained income have a lot greater margins at roughly 80%. For the reason that Grail spinoff was introduced, Illumina’s share worth has declined additional. That is partly as a result of one hiccup the corporate has left: transitioning to a brand new technology of sequencing know-how — the NovaSeq X. This can be a pure evolution for the sort of enterprise that ought to drive long-term development however may end in short-term stress to income.

Now Illumina has introduced that it’s including Keith Meister (founder, managing accomplice and CIO of Corvex Administration) to the board, to be appointed on March 28. Meister and Corvex aren’t any strangers to the board room or biotech. In actual fact, Meister is presently on the board of GeneDx (WGS), a significant consumer of Illumina having built-in its DRAGEN (Dynamic Learn Evaluation for Genomics) Bio-IT Platform. Corvex is a superb investor, and Meister has created worth as a director of many corporations together with Biogen, Motorola, Yum Manufacturers and MGM. Furthermore, as a long-term investor Corvex seemingly sees the short-term problem to income throughout Illumina’s know-how transition as a chance. We anticipate he might be a invaluable director as the corporate goes by means of this transition.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.

Disclosure: Scott Gottlieb is a CNBC contributor and is a member of the boards of Pfizer, genetic testing startup Tempus, health-care tech firm Aetion Inc. and biotech firm Illumina. He additionally serves as co-chair of Norwegian Cruise Line Holdings’ and Royal Caribbean’s “Wholesome Sail Panel.”