As it search­es for a new CEO, Il­lu­mi­na faces a high-stakes year of chal­lenges

Just two and a half weeks af­ter the abrupt ex­it of Il­lu­mi­na’s CEO Fran­cis deS­ouza, the DNA se­quenc­ing gi­ant is fac­ing one of the most piv­otal pe­ri­ods in its his­to­ry.

It has promised in­vestors $100 mil­lion in cost cuts, is await­ing the fi­nal out­come in an an­titrust saga stem­ming from its $7.1 bil­lion ac­qui­si­tion of can­cer test de­vel­op­er Grail, and faces com­pe­ti­tion that wasn’t there a few years ago. This all comes amid its search for a new CEO, who will have to lead the San Diego-based com­pa­ny through those dif­fi­cul­ties.

The hope is that the com­pa­ny, whose ma­chines are ubiq­ui­tous in drug and med­ical labs across the world, can re­store some of the shine that once made it the dar­ling of re­searchers and in­vestors alike. But the chal­lenges have changed from the last decade, dur­ing the com­pa­ny’s phase of rapid growth.

“The play­book will have to be a bit dif­fer­ent than in the past,” said Dan Bren­nan, an an­a­lyst at the in­vest­ment bank TD Cowen.

End­points News reached out to Il­lu­mi­na with ques­tions about its suc­ces­sion plans and oth­er mat­ters, and the com­pa­ny de­clined to com­ment.

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While none of those prob­lems are small ones, the CEO search is per­haps the most press­ing. Il­lu­mi­na has hired Bench In­ter­na­tion­al, a firm spe­cial­iz­ing in life sci­ences re­cruit­ment.

Fran­cis deS­ouza

It has been less than three weeks since deS­ouza’s ex­it, and Il­lu­mi­na has said it’s look­ing for in­ter­nal and ex­ter­nal can­di­dates af­ter nam­ing gen­er­al coun­sel Charles Dadswell as in­ter­im chief. Il­lu­mi­na, which de­clined to com­ment, as did Bench, has said lit­tle else about what type of can­di­date it is seek­ing.

Carl Ic­ahn, the ac­tivist who launched a proxy fight and pushed for deS­ouza’s ouster, had months ago float­ed the re­turn of the com­pa­ny’s ex-CEO, Jay Flat­ley. Flat­ley led the com­pa­ny from 1999 to 2016 and was pop­u­lar among em­ploy­ees for fight­ing off a hos­tile takeover bid by Roche and turn­ing Il­lu­mi­na in­to the largest DNA se­quenc­ing com­pa­ny in the world.

Flat­ley, who hand­picked deS­ouza for the CEO role and stepped down as chair­man in 2021, has large­ly kept qui­et in pub­lic about the com­pa­ny.

But not en­tire­ly qui­et.

He told the Fi­nan­cial Times in Jan­u­ary that in hind­sight Il­lu­mi­na should have held off on the $7.1 bil­lion Grail deal while the mar­ket was over­heat­ed.

Jay Flat­ley

And more re­cent­ly, Flat­ley told sev­er­al peo­ple close to him that he is open to com­ing back as CEO or in an­oth­er ca­pac­i­ty if the board asks, ac­cord­ing to two peo­ple fa­mil­iar with his think­ing.

It’s not clear if the board would wel­come him. One per­son fa­mil­iar with the process said Flat­ley lacked sup­port on the board for any CEO bid, in part be­cause of the per­cep­tion by some there that he mis­led peo­ple at the com­pa­ny about his in­volve­ment in the ac­tivist process.

Flat­ley vig­or­ous­ly de­nied that char­ac­ter­i­za­tion. “I can tell you that is bla­tant­ly un­true,” he said in a text mes­sage to End­points, and de­clined an in­ter­view re­quest.

Tal­ent ex­o­dus

No mat­ter who takes over, they’ll have to fig­ure out how to stem an ex­o­dus of tal­ent that has cre­at­ed new com­pe­ti­tion for the com­pa­ny.

Un­der deS­ouza, Il­lu­mi­na made progress reach­ing be­yond re­search labs and in­to hos­pi­tals and clin­ics. But the com­pa­ny in re­cent years has strug­gled at times with where pre­cise­ly to fo­cus and it some­times stum­bled in ex­e­cut­ing its vi­sion, ac­cord­ing to cur­rent and for­mer em­ploy­ees.

DeS­ouza did not re­spond to a re­quest for com­ment.

The com­pa­ny’s vol­un­tary turnover among di­rec­tors and above stood at 5% in 2018 and ticked up a per­cent­age point the next year. But the fig­ure jumped to 13% in 2020 and climbed to 17% the fol­low­ing year. The rate dropped to 7% in 2022, ac­cord­ing to Il­lu­mi­na’s 2022 and 2021 cor­po­rate so­cial re­spon­si­bil­i­ty re­ports.

Com­peti­tors like Roche have poached Il­lu­mi­na tal­ent, and the de­par­tures have led to a rise in start­up com­peti­tors like El­e­ment Bio­sciences. Mol­ly He – El­e­ment’s CEO and a for­mer se­nior di­rec­tor at Il­lu­mi­na – said that when cus­tomers have con­sid­ered one of El­e­ment’s ma­chines, Il­lu­mi­na has re­spond­ed by dis­count­ing its prices.

“It’s a com­mon theme,” said He. As of last month, El­e­ment had sold about 50 of its desk­top se­quencers, and the com­pa­ny has about 300 em­ploy­ees.

Shawn Bak­er, a ge­nomics con­sul­tant and for­mer Il­lu­mi­na em­ploy­ee, said com­pa­nies com­mon­ly dis­count prod­ucts for key opin­ion lead­ers in the space.

“Il­lu­mi­na hav­ing to of­fer dis­counts in the face of new com­pe­ti­tion is ex­act­ly what I would ex­pect,” Bak­er said.

Il­lu­mi­na is prof­itable, but fi­nan­cial pres­sure is ev­i­dent. In its lat­est quar­ter­ly re­sults, Il­lu­mi­na re­port­ed rev­enue of $1.1 bil­lion dur­ing the first quar­ter, down 11% from the same pe­ri­od in 2022.

While Il­lu­mi­na’s fledg­ling com­pe­ti­tion is grab­bing head­lines, the com­pa­ny still com­mands some 80% of the mar­ket, ac­cord­ing to a re­cent analy­sis from Bak­er.

“It’s pret­ty easy to get ex­cit­ed about all the new com­pe­ti­tion — and there is new com­pe­ti­tion,” Bak­er said. “It doesn’t just change in­stant­ly. It’s not like flip­ping a switch.”

And some of the star­tups helmed by ex-Il­lu­mi­na tal­ent may ac­tu­al­ly aid the com­pa­ny by push­ing in­to the fron­tiers of ge­nomics in ar­eas that Il­lu­mi­na hasn’t touched — while al­so be­ing re­li­able cus­tomers for Il­lu­mi­na.

The fu­ture of Grail 

Grail be­came a po­lit­i­cal foot­ball dur­ing the proxy fight with Ic­ahn, who ar­gued the deal was a cost­ly mis­take that should be re­versed.

But for­mer Grail CEO Jeff Hu­ber, who ran the com­pa­ny from 2016 to 2017, said there’s a rea­son Il­lu­mi­na bought the com­pa­ny: The deal cre­at­ed the po­ten­tial to ac­cel­er­ate the de­ploy­ment of tests and dri­ve down their prices, just as Il­lu­mi­na has done with DNA se­quenc­ing.

Hu­ber fears Il­lu­mi­na will quick­ly di­vest Grail and fol­low through with Ic­ahn’s sug­ges­tion for a “rights of­fer­ing.” Ic­ahn didn’t spell out how ex­act­ly this could work, but gen­er­al­ly, rights of­fer­ings give ex­ist­ing share­hold­ers rights to buy a num­ber of shares of the com­pa­ny at a dis­count.

“The rights of­fer­ing ap­proach as pro­posed by Ic­ahn has nev­er been used for a com­pa­ny spin­out, and there is no cred­i­ble plan for ad­dress­ing many crit­i­cal is­sues that must be ad­dressed to align in­vestor in­ter­ests and en­sure the re­sult­ing com­pa­ny has ap­pro­pri­ate cap­i­tal and run­way to suc­ceed,” Hu­ber said in an email. “If Grail were to be di­vest­ed, the best ap­proach is to se­cure pa­tient per­ma­nent-cap­i­tal in­vestors that have a long view.”

An­drew Teno, who won a board seat with sup­port from Ic­ahn, de­clined to com­ment.

No mat­ter what path Il­lu­mi­na takes with Grail, it ap­pears it will see through its court fights with the Fed­er­al Trade Com­mis­sion and the Eu­ro­pean Union, which blocked the takeover on an­titrust con­cerns. If it can win, Il­lu­mi­na would be able to di­vest Grail on its own terms and pre­serve the com­pa­ny’s abil­i­ty to grow through fu­ture ac­qui­si­tion.

Af­ter decades of wav­ing through deals, the FTC used the Grail-Il­lu­mi­na deal as an op­por­tu­ni­ty to show­case the agency’s tougher stance. The two com­pa­nies don’t com­pete – the old stan­dard for scru­ti­niz­ing trans­ac­tions. Rather, Il­lu­mi­na makes se­quencers while Grail sells blood tests to de­tect can­cer.

The agency ar­gued Il­lu­mi­na could use its size to throt­tle po­ten­tial com­pe­ti­tion, a nov­el ar­gu­ment for life-sci­ences deal­mak­ing. Amid the FTC’s clam­p­down, Il­lu­mi­na is lim­it­ed in what com­pa­nies it can buy, which could hurt its quest to push fur­ther in­to hos­pi­tals.

“It seems to hin­der Il­lu­mi­na’s plan to en­ter the clin­i­cal space in a big way,” said Bak­er, the ge­nomics con­sul­tant.