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

Company: Illumina, Inc. (ILMN)

Business: Illumina provides sequencing-and array-based solutions for genetic and genomic analysis. It offers products and services to customers in a range of markets, enabling the adoption of genomic solutions in research and clinical settings. Its DNA sequencing technology is based on its reversible terminator-based sequencing chemistry, known as sequencing by synthesis biochemistry. Its BeadArray technology combines microscopic beads and a substrate in a manufacturing process to produce arrays that can perform many assays simultaneously.

Stock Market Value: $12.67B ($80.00 per share)

Activist: Corvex Management LP

Ownership: ~2.5%

Average Cost: n/a

Activist Commentary: Corvex was founded in 2011 by Keith Meister, Carl Icahn’s former lieutenant who served as CEO and vice chairman of Icahn Enterprises. Corvex is a highly concentrated, fundamentally driven hedge fund that uses activism as a tool, but not a primary strategy. The firm’s preference is not to be an activist, with a proxy fight being a last resort. It would prefer to amicably be invited onto boards.

What’s happening

On March 25, Illumina announced that Keith Meister (founder, managing partner and chief investment officer of Corvex Management) will join the board on March 28. The company also said 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 technology company that sells sequencing machines and consumables required for genomic testing. This business saw a dramatic rise in demand during the Covid-19 pandemic. Revenue surged by about 40% from $3.2 billion to $4.5 billion between 2020 and 2021. In that period, earnings before interest, taxes, depreciation and amortization went from $800 million to $1.1 billion. The stock traded as high as $511 per share in August 2021. Today, revenue is at $4.3 billion, EBITDA is at $900 million and the stock closed Friday at $80.00.

Since Covid, it’s been nothing but bad news for Illumina. Initially, post-pandemic headwinds slowed the demand for sequencing machines as the urgent need for testing waned. But the biggest cause of the company’s underperformance was the costly spin-out, reacquisition and later re-spin of its Grail business. Illumina created Grail in 2015 and spun it out in 2016, retaining a 20% ownership. In September 2020, Illumina agreed to acquire Grail back for $8 billion. They closed the acquisition a year later despite not receiving the approval of the Federal Trade Commission or the European Union, which angered the European Commission. The European Commission ultimately blocked the deal and levied a significant fine. With pressure from Icahn who was an activist at Illumina at the time, the company eventually re-spun Grail in June 2024. However, that is not the end of Illumina’s struggles, as the new political environment has led to more challenges. The company has faced geopolitical setbacks for its Russia and China businesses. Additionally, biotech funding revolving around the uncertain future of the National Institutes of Health has furthered concerns. Once valued at $70 billion, Illumina is now valued at less than $13 billion.

The good news is that all the problems are in the rearview mirror. The pandemic’s impact on the market has long subsided, the Russia and China businesses have been priced out, and the Grail debacle has been resolved. What remains is a streamlined business with a renewed leadership team, including a new CEO, CFO and a refreshed board led by a new chairman. Illumina is now a company that is the market leader in selling gene-sequencing technology. The company controls over 80% of the global market and maintains an installed base of more than 20,000 machines. Illumina operates under a razor-and-blade business model, with the machines themselves having margins of approximately 30%, and the recurring consumable sales that drive sustained revenue have much higher margins at approximately 80%. Since the Grail spinoff was announced, Illumina’s share price has declined further. This is in part due to the one hiccup the company has left: transitioning to a new generation of sequencing technology — the NovaSeq X. This is a natural evolution for this type of business that should drive long-term growth but could result in short-term pressure to revenue.

Now Illumina has announced that it is adding Keith Meister (founder, managing partner and CIO of Corvex Management) to the board, to be appointed on March 28. Meister and Corvex are no strangers to the board room or biotech. In fact, Meister is currently on the board of GeneDx (WGS), a major client of Illumina having integrated its DRAGEN (Dynamic Read Analysis for Genomics) Bio-IT Platform. Corvex is a great investor, and Meister has created value as a director of many companies including Biogen, Motorola, Yum Brands and MGM. Moreover, as a long-term investor Corvex likely sees the short-term challenge to revenue during Illumina’s technology transition as an opportunity. We expect he will be a valuable director as the company goes through this transition.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager 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 company Aetion Inc. and biotech company Illumina. He also serves as co-chair of Norwegian Cruise Line Holdings’ and Royal Caribbean’s “Healthy Sail Panel.”