M&A & Strategic Dealmaking: Illumina May Finally Be Ready to Unwind GRAIL Acquisition

For almost two years, Illumina’s attempted acquisition of GRAIL for $8 billion has been one of the most significant M&A stories in the diagnostics space. After an eventful month, it appears that the story may soon be over. Here’s a briefing on the recent developments and what they may portend for Illumina’s ownership of GRAIL:¹

Illumina Shareholders Deliver a Mixed Verdict

Most in the industry seem to believe that Illumina overreached by acquiring its former spinout, GRAIL, in August 2021 without regulatory approval from either side of the Atlantic.¹ The only ones who appear to disagree are Illumina’s directors, who remain determined to follow through on the company’s long-shot legal appeal against the antitrust rulings by the US Federal Trade Commission (FTC)² and European Commission (EC).³

On May 25,⁴ Illumina’s shareholders had their say in the form of a proxy vote⁵ forced by activist investor Carl Icahn in a bid to replace the company’s three leading board members and end the quest for GRAIL.⁶ The results were mixed; shareholders replaced current board chairman John Thompson with Icahn Capital L.P. portfolio manager Andrew Teno, but re-elected two key directors targeted for removal by Icahn, including CEO Francis deSouza, the leading driver of the GRAIL deal. Icahn secured a victory, though, when shareholders voted down the company’s proposed executive compensation package.⁷

Far from settling the matter, the shareholder elections only deepened the divide within Illumina, causing company shares to fall 10 percent that same day.⁸ In an apparent move to weaken Teno’s influence, the board expanded its numbers from nine to 11 by adding two new “independent” members.⁹

The Proxy War Aftermath

For a while, it looked like the bid to get Illumina to unwind the GRAIL acquisition had failed, leaving a divided shareholder base and board of directors. On June 5, the San Diego-based sequencing giant went on the offensive by filing a petitioner’s brief in the US Fifth Circuit Court of Appeals to challenge the FTC’s constitutional authority to head off the GRAIL deal. “FTC’s actions have brought longstanding constitutional defects in the agency’s structure and proceedings into sharp focus” and “violated fundamental constitutional protections,” the brief argues.¹⁰

“Sometimes the price of an unconstitutional agency can be measured in lost dollars,” it continues. “This time, the price is lost lives. This Court should reverse the Commission’s decision and render judgment for Illumina and GRAIL, clearing the way for them to continue their life-saving work together.”

The deSouza Resignation

Less than a week later, the story took another twist when CEO deSouza, having survived a proxy challenge, announced that he was voluntarily resigning. In his farewell letter, which he posted to LinkedIn, deSouza reiterated his support for the Illumina-GRAIL merger, stating that his “belief in the potential of GRAIL’s potentially life-saving technology and the benefits of merging it with Illumina remains unshakeable.”¹¹

The company formally accepted deSouza’s resignation and named senior vice president and general counsel Charles Dadswell interim CEO as it searches for a permanent replacement.¹²

What Does It All Mean?

After a month of mixed messages, deSouza’s departure may be a sign that Illumina is finally ready to unwind the GRAIL acquisition. Keeping GRAIL might have been a move designed to increase the price Illumina can command on the market for the company. However, Illumina is still at risk of significant fines in both the US and Europe for having defied regulatory authorities by proceeding with the deal despite clearly expressed concerns about its anti-competitive effects on the genetic cancer testing market.^2,3

References:

1. https://www.g2intelligence.com/illumina-faces-losses-of-grail-massive-fines/
2. https://www.ftc.gov/news-events/news/press-releases/2023/04/ftc-orders-illumina-divest-cancer-detection-test-maker-grail-protect-competition-life-saving
3. https://ec.europa.eu/commission/presscorner/detail/es/ip_22_5364
4. https://www.sec.gov/Archives/edgar/data/1110803/000095015723000577/ex99-1.htm
5. https://www.sec.gov/Archives/edgar/data/1110803/000119312522105644/d246458ddef14a.htm
6. https://www.g2intelligence.com/illumina-faces-proxy-battle-over-grail-acquisition/
7. https://www.sandiegouniontribune.com/business/story/2023-06-01/vote-totals-released-in-illuminas-proxy-fight-with-activist-carl-icahn-with-ceo-getting-71-percent-suppor
8. https://www.morningstar.com/stocks/illumina-shareholder-vote-ousts-chairman-adds-one-icahn-associate
9. https://www.prnewswire.com/news-releases/illuminas-board-of-directors-elects-two-experienced-independent-directors-to-board-301841153.html
10. Illumina v. FTC, 23-60167, US Court of Appeals for the Fifth Circuit, June 5, 2023
11. https://www.linkedin.com/pulse/thank-you-francis-desouza
12. https://www.illumina.com/company/news-center/press-releases/press-release-details.html?newsid=9e81a4ac-0559-4af2-a3fb-6604847d7b80
13. https://www.epigenomics.com/epigenomics-ag-negotiations-on-the-acquisitions-of-almost-all-assets/
14. https://www.marketscreener.com/quote/stock/EPIGENOMICS-AG-18044986/news/Epigenomics-Shares-Surge-on-Talks-to-Sell-Nearly-All-Assets-for-11-5m-44099262/

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Here’s a summary of the key M&A diagnostic deals that were announced or closed in late May through June 2023:

Mergers, Acquisitions, and Asset Sales