Illumina Faces Proxy Battle Over Grail Acquisition

It’s an old-fashioned proxy battle, one led by Carl Icahn no less. What has been the most intriguing story in diagnostics M&A over the past year, Illumina’s controversial $8 billion acquisition of former spinout Grail, became even more compelling when the infamous billionaire investor activist decided to take his beef with Illumina’s board of directors over the acquisition directly to company shareholders.¹ On March 13, Icahn sent an open letter calling on his fellow Illumina shareholders to put at least three of their own representatives on the board in an effort to “put an end to this insanity now before the reckless decision-making escalates into a no-return situation.”²

Illumina has been holding Grail as a separate subsidiary while awaiting a European Commission (EC) decision on penalties for closing the deal in August 2021 without the required regulatory antitrust approval. The EC and US Federal Trade Commission (FTC) have raised concerns that the takeover would stifle competition and innovation in the blood-based early-cancer detection test market. Illumina disputes the claims and the EC’s jurisdiction over the matter but is bracing for the possibility of having to unwind the transaction and pay a massive fine of up to 10 percent of its annual earnings.³

Icahn claims in his letter to shareholders that Illumina paid too much for Grail and that continuing to hold it is costing the sequencing giant $800 million per year. On Feb. 7, Illumina reported a full-year net loss of $4.4 billion for 2022, primarily due to a $3.91 billion goodwill impairment charge attributable to “the negative impact of current capital market conditions and higher discount rates, including a standalone risk premium, on the fair value calculation of the Grail segment,” the company stated.⁴

Only a complete makeover of the board can keep the company from “sinking further into the quicksand,” Icahn warns in his letter.

As it has with the EC and FTC, Illumina has taken on Icahn’s claims about the Grail acquisition head-on, contending that the Wall Street maverick has neither an understanding of the regulatory process nor any viable new ideas for resolution. “The board’s ongoing management of the Grail process is carefully considered and informed by thorough analysis,” noted a company statement responding to Icahn’s letter.⁵

The board also says that it has a plan for rectifying the situation. The best outcome, according to the board, would be for the company to win its appeal over EC jurisdiction, which would take the risk of an EC fine off the table. A final decision will likely come down in late 2023 or early 2024, the board notes. If the appeal fails, Plan B would be to disgorge Grail as rapidly as possible in a way that maximizes value to Illumina shareholders.

Labcorp Acquires Enzo Biochem Lab Ops as Both Companies Get Back to Basics

In other major industry happenings, Labcorp and Enzo Biochem both want to get back to basics. For Enzo, that means pivoting from basic lab testing to focus on life sciences for the drug discovery and research market. For Labcorp, it means spinning off the Covance Inc. clinical trials and drug development business that it acquired for $6.2 billion in 2015 into a separate entity and focusing on core lab testing.⁶

So, it makes all the sense in the world that Labcorp is acquiring Enzo’s lab testing business for $146 million in cash.⁷ The sale, which Enzo disclosed in its latest US Securities and Exchange filing, must still be approved by Enzo’s shareholders at a special meeting that the board of directors is planning to call for that purpose.⁸

Like so many other molecular diagnostics firms, Enzo has struggled as a result of the falling demand for COVID-19 testing. However, while overall lab testing division revenues fell 52 percent to $16.3 million in the fiscal second quarter of 2023, the company reported solid seven percent growth in non-COVID-19 testing.⁹

PerkinElmer Sells Off Food Business for $2.45 Billion

Another major diagnostics company getting back to bread-and-butter business is PerkinElmer, which closed the previously announced sale of its applied, food, and enterprise business to investment firm New Mountain Capital for up to $2.45 billion.¹⁰ The plan is to make PerkinElmer trimmer, faster, and more nimble by creating an analytical and enterprise firm comprised of two units: a high-margin life sciences business that will operate under the PerkinElmer name and brand, and a diagnostics business whose name has yet to be determined. The combined company will have approximately 11,000 employees and $3.3 billion in revenue from sales of infectious disease, autoimmune, reproductive health, medical research, biologics, and cell and gene therapy products.¹¹

“After the transaction, our company will have a compelling revenue growth rate in the double digits, largely in line with our new higher-value peers,” noted PerkinElmer president and CEO Prahlad Singh in a conference call after the transaction was announced. “We will have stronger margins and differentiated scale with total revenues that well exceed the average of our peers.”¹²

References:

1. https://www.g2intelligence.com/illumina-faces-losses-of-grail-massive-fines/
2. https://carlicahn.com/open-letter-to-shareholders-of-illumina-inc/
3. https://ec.europa.eu/commission/presscorner/detail/es/ip_22_5364
4. https://www.illumina.com/company/news-center/press-releases/press-release-details.html?newsid=8bee47bc-f3a5-40c9-8f50-5e5b6a85e03b
5. https://www.illumina.com/company/news-center/press-releases/press-release-details.html?newsid=dd63723d-f082-450c-957d-3192988c76d3
6. https://www.businesswire.com/news/home/20150219005757/en/LabCorp-Completes-Acquisition-of-Covance
7. https://enzo.com/corporate/press-releases/enzo-biochem-agrees-to-sell-clinical-laboratory-to-labcorp
8. https://ir.enzo.com/sec-filings/all-sec-filings
9. https://ir.enzo.com/news-events/press-releases/detail/324/enzo-biochem-reports-second-quarter-fiscal-year-2023
10. https://www.newmountaincapital.com/new-mountain-capital-announces-intent-to-acquire-perkinelmers-applied-food-and-enterprise-services-businesses-for-up-to-2-45-billion/
11. https://news.perkinelmer.com/press-announcements/press-releases/press-release-details/2023/PerkinElmer-Completes-Divestiture-of-its-Applied-Food-and-Enterprise-Services-Businesses/default.aspx
12. https://seekingalpha.com/article/4530108-perkinelmer-inc-pki-ceo-prahlad-singh-on-q2-2022-results-earnings-call-transcript

*****

Here’s a summary of the key M&A diagnostic deals that were signed or closed in late February to late March 2023:

Mergers, Acquisitions, & Asset Sales