Morningstar

Illumina: CEO Out After Proxy Battle and Board Shakeup

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Securities In This Article
Illumina Inc
(ILMN)

On Sunday, narrow-moat Illumina ILMN announced that CEO Francis deSouza had resigned a couple of weeks after activist investor Carl Icahn won a seat on Illumina’s board (Andrew Teno) and a week after new chairman Stephen MacMillan (Hologic CEO and former Stryker CEO) joined the board, along with Edwards CFO Scott Ullem. While we suspect the market may appreciate this CEO change, we are not changing our $269 fair value estimate and continue to view shares as significantly undervalued.

Since March, Icahn has been lobbying for a management change and a quick divestiture of Grail, the liquid biopsy startup that Illumina purchased in 2021 without approval from antitrust regulators. After a mixed shareholder vote two weeks ago, with deSouza keeping his seat on the board but the previous chairman John Thompson losing his seat, we had suspected that the board would only consider more significant changes if financial results did not improve quickly or if U.S. or EU regulators maintained their unwinding orders following the appeals processes, which are scheduled to complete in late 2023 or early 2024. With this CEO change though, more significant strategic changes may happen quicker than anticipated. An interim CEO (Illumina legal chief, Charles Dadswell) has been selected until a full-time replacement CEO can be found. Icahn previously stated that Illumina should bring back previous CEO Jay Flatley to lead the firm.

Overall, we continue to hope Illumina will be able to strike a balance with Grail, which looks like a promising long-term opportunity but is draining Illumina’s resources and earnings potential now with its $670 million expected operating loss in 2023. In a tax-free spinoff to Illumina shareholders, investors could retain exposure to this promising but nascent asset while also more fully recognizing the value of the legacy genomic sequencing business. The latter is currently operating below its long-term profit potential, as it launches new technology platforms.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Julie Utterback, CFA

Senior Equity Analyst
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Julie Utterback, CFA, is a senior equity analyst, AM Healthcare, for Morningstar*. She focuses on medical technology and service companies. She covers managed care organizations including UnitedHealth, service providers like HCA, medical suppliers such as Baxter, and life sciences companies like Danaher. She is also the chairperson of the equity research team’s capital allocation methodology.

Before joining Morningstar in 2005, Utterback was an equity analyst at State Farm Insurance for several years. Utterback joined Morningstar in 2005 as an equity analyst in the healthcare industry, and initially she primarily covered medical technology companies, including orthopedic device, medical equipment, and cardiac device firms. In 2010, she joined Morningstar's credit research team, initiating coverage of the entire healthcare industry and generally helping the organization expand and maintain its credit coverage across many industries. She held that senior credit analyst role until April 2019, when she returned to the equity team to cover medical technology and service companies.

Utterback holds a bachelor's degree in finance from the University of Illinois Urbana-Champaign’s Gies College of Business. She also holds the Chartered Financial Analyst® designation.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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