Breakingviews: Icahn reacts audaciously to Illumina’s audacity

Carl Icahn has correctly diagnosed what ails Illumina, but he is prescribing an overly aggressive treatment. The pushy billionaire wants three board seats at the biotechnology company, after it overpaid for Grail and took on too much regulatory risk. Such aggression invites oversight, but a 1.4% stake only buys so much.

Illumina makes genetic sequencing machines used in medical research and discovered by accident that it could detect cancer by finding tumor fragments in blood. Boss Francis deSouza spun off that business in 2016. He later changed his mind, agreeing to buy it back for $7 billion.

The $3.9 billion impairment charge Illumina took in the fourth quarter makes clear just how badly overpriced the deal was. Worse, Illumina hastily completed it last year, even as trustbusters were still investigating. The European Commission ultimately found that Illumina violated competition rules because Grail’s rivals depend on Illumina’s technology and ordered a divestiture, a decision the company is appealing.

At this stage, it’s worth waiting for the EU verdict. Owning Grail makes strategic sense and Illumina already has set aside some $450 million for possible fines. It is not, however, the first time Illumina’s M&A strategy has backfired. In 2020, deSouza abandoned an attempt to buy Pacific Biosciences of California following regulatory pressure and paid a $98 million break fee.

Illumina’s board is stuffed with medical and technological expertise, including former U.S. Food and Drug Administration head Scott Gottlieb. Icahn nevertheless makes a reasonable case that some more attention on behalf of shareholders is warranted. What isn’t is his demand for three directors on the nine-member board. That would amount to disproportionate power for such a small investor. Larger ones such as Baillie Gifford, for example, which owns more than 10% of Illumina, may have different perspectives and objectives.

One candidate from Icahn’s slate, perhaps alongside some other new appointees, would be more reasonable. Such a solution would hold Illumina’s board more accountable, and inject some M&A restraint, while avoiding a costly fight with an uncertain outcome. The 20% rise in Illumina’s shares since Icahn’s presence became known this week suggests hope for a cure.