Illumina (ILMN) isn’t the only entity crossing swords, so to speak, with activist investor Carl C. Icahn lately. But the sequencing giant stayed quiet as Icahn’s publicly-traded Icahn Enterprises (IEP) saw its shares tumble 44% earlier this week after short seller Hindenburg Research took a short position in Icahn’s investment firm—and issued a report taking issue with many of its practices.
Hindenburg alleged that the value of Icahn Enterprises shares was inflated by 75%+, and complained that IEP was trading at a more than triple (218%) premium to its last reported net asset value (NAV).
Hindenburg also took issue with Icahn Enterprises’ current dividend yield of ~15.8%, which it said was the highest dividend yield of any U.S. “large cap” company (market value between $10 billion and $200 billion), with the next closest company at ~9.9%—as well as an annual dividend rate of “an absurd” 50.5% of last reported indicative NAV.
“Icahn has been using money taken in from new investors to pay out dividends to old investors. Such ponzi-like economic structures are sustainable only to the extent that new money is willing to risk being the last one “holding the bag,” Hindenburg wrote.
An Illumina spokesperson told GEN the company had no comment on the Hindenburg report.
Hindenburg compared IEP with two other investment firms, Third Point (owned by Daniel S. Loeb) and Pershing Square Holdings (owned by Bill Ackman), which the short seller said trade at discounts of 14% and 35% to NAV, respectively.
Ackman is a longtime investor rival of Icahn’s. The two clashed years ago over Herbalife, with Icahn—a onetime owner of nearly 25% of its shares—defending the nutritional supplement company’s multilevel marketing business model and firing back after Ackman likened the model to a pyramid scheme and took a $1 billion short-selling position.
In a tweet posted Tuesday to Twitter, Ackman referenced the Hindenburg report and needled Icahn: “There is a karmic quality to this short report that reinforces the notion of a circle of life and death. As such, it is a must read.”
Concluded Hindenburg: “Overall, we think Icahn, a legend of Wall Street, has made a classic mistake of taking on too much leverage in the face of sustained losses: a combination that rarely ends well.”
44% Selloff
Investors appeared swayed enough by Hindenburg to touch off a roughly stock selloff that stretched three days and cut Icahn Enterprises’ share price by 44% before it started bouncing back.
IEP’s share price slumped 20% on Tuesday, the day Hindenburg issued its report, from $50.42 to $40.36, then nosedived another 19% on Wednesday, to $32.37. Those shares inched up about 1% in early afternoon Thursday, to $32.75 as of 1:15 p.m. ET, after sinking 12% ($28.42) about three hours earlier.
Icahn fired back at the short seller in a statement: “We believe the self-serving short seller report published by Hindenburg Research today was intended solely to generate profits on Hindenburg’s short position at the expense of IEP’s long-term unitholders. We stand by our public disclosures and we believe that IEP’s performance will speak for itself over the long term as it always has.”
Pharma is one of its seven primary business segments of Icahn Enterprises, a diversified holding company based in Sunny Isles Beach, FL, 20 miles northeast of Miami. The other six are investment, energy, automotive, food packaging, real estate, and home fashion.
“We continue to believe that activism is the best paradigm for investing and my activist investments over the last 25 years have well proved this out,” said Icahn. He added that Icahn Enterprises was in a “position of strength” to do so since it had approximately $2 billion of cash and cash-equivalents on its balance sheet as of March 31.
Exactly how much in cash and cash equivalents will be known when Icahn Enterprises releases first quarter results on May 10. The company reported $2.337 billion as of December 31, 2022, up 0.7% from $2.321 billion a year earlier.
“We believe strongly in hedging our positions to mitigate risk, especially in markets that we are living in today,” Icahn added. “We regularly put our activist principles into effect at our majority-controlled companies as well as the minority positions held in our investment segment, and currently have representatives on 14 public company boards.”
Pursuing 15th company
For nearly two months, Icahn has pursued a 15th company by waging a proxy campaign to change Illumina’s board and management, and through that, the company’s direction. Icahn and allies have decried Illumina’s effort to acquire cancer blood test developer Grail despite opposition from the U.S. Federal Trade Commission (FTC) and European Commission (EC), which they contend has drained the company of resources.
Icahn and supports have also taken issue with llumina’s shrinking stock price—The company has lost some $50 billion in market capitalization—and the board’s near doubling of CEO Francis deSouza’s total compensation last year, to nearly $27 million, much of that increase based on stock options.
Icahn—who held a 1.4% stake in Illumina as of February 10—has nominated three allies to Illumina’s board: Vincent J. Intrieri, founder and CEO of VDA Capital Management, a private investment fund, and a former Icahn employee from 1998–2016; Jesse A. Lynn, general counsel of Icahn Enterprises; and Andrew J. Teno, a portfolio manager at Icahn Capital since October 2020.
Teno and Icahn recently stated their case against Illumina in an exclusive interview on GEN’s “Close to the Edge” video series.
Shareholders are voting on board seats, with results expected at the company’s annual meeting, to be held virtually on May 25 at 1 pm ET.
Illumina has not discussed the short selling report in any regulatory filings. The only filing by Illumina this week was a Monday letter to shareholders restating highlights from its first-quarter results, which two analysts considered encouraging enough to raise their 12-month price targets on the company’s shares.
The letter included some verbal swipes at Icahn.
“Illumina’s Board does not endorse Carl Icahn or his unqualified nominees and believes the election of any such nominees would detract from Illumina’s strong momentum and deprive the Board of critical leadership and perspective required for the execution of the business,” the sequencing giant asserted. “Illumina firmly believes that it has the right team and strategy in place to deliver long-term sustainable value for shareholders.”
Not so, countered Icahn, who has insisted his allies are qualified for seats on Illumina’s board, and has called for replacing board Chairman John W. Thompson and CEO Francis deSouza—the latter with his predecessor Jay Flatley, who served as Illumina’s CEO from 1999 to 2016, then remained on Illumina’s board for five years as executive chair, and later as chairman until stepping down in 2021.
Going forward
In his most recent open letter to shareholders, issued Thursday, Icahn offered a roadmap for how an Illumina under his influence would go forward, and what his nominees would expect to carry out as board members if elected. Among their priorities:
- Ending Grail acquisition—“We believe Illumina should approach both agencies [FTC and EC] in a conciliatory manner, drop the appeals and focus on a framework that allows Illumina to divest Grail through a spin-off with a rights offering to appropriately fund Grail on its quest to develop an early-cancer detection test,” Icahn stated.
- Maximizing core sequencing growth—Icahn and allies committed to reversing Illumina’s decline in core operating margin, which this year is projected to be 22%, down from an historic range of ~30%.
- Consumables for Royalties?—“Could the company discount consumables to new biotech companies in exchange for a portion of future royalties?” Icahn asked, suggesting a new revenue source. “Given that Illumina’s customers create the vast majority of the world’s genomics data, could Illumina discount reagents in exchange for access to data and build a data analytics business on the resulting global data set?”
- Replacing deSouza—“We have come to believe that the path forward with CEO Francis deSouza leads to further value destruction,” Icahn concluded. “We have been inundated with phone calls and emails from current and former Illumina executives who speak of a toxic culture, en masse departures of executives, and many things that we can’t even repeat in these letters for fear that those executives will suffer retaliation.”
Icahn has cited the departure of seven of eight senior executives and eight of nine board members since deSouza became CEO. Illumina says its management is positioning the company for robust growth, citing plans to cut its annualized run-rate expenses by more than $100 million beginning later this year—as well as the positive launch of its NovaSeq X sequencing system. Illumina installed 67 NovaSeq X systems in Q1, well above the 40 to 50 installations projected for the quarter.
Illumina announced the launch of NovaSeq X last September at its glitzy annual conference in San Diego, where the company is headquartered. The event’s days may be numbered under an Icahn-influenced Illumina.
“What exactly is the ROIC [return on invested capital] for the Illumina Genomics Forum?” Icahn asked. “How much did it cost Illumina to hire Barack Obama and Bill Gates to speak? Or is the whole exercise simply an excuse for CEO Francis deSouza to hobnob with some bigwigs and curry favors and invites to Davos and Sun Valley?”
Leaders & laggards
- Eli Lilly (LLY) shares doubled their usual trading volume at 8.94 million shares, rising 7% on Wednesday from $404.20 to $431.19, after the pharma giant announced positive data from the Phase III TRAILBLAZER-ALZ 2 trial (NCT04437511). Data showed that Lilly’s Alzheimer’s disease candidate donanemab slowed clinical decline by 35% compared to placebo, and resulted in 40% less decline on the ability to perform activities of daily living. Based on the results, Lilly said, it will go ahead with global regulatory submissions “as quickly as possible” and anticipates making a submission to the FDA later this quarter.
- ImmunoGen (IMGN) shares more than doubled, zooming 136% on Wednesday, from $5.20 to $12.26, after it announced positive top-line data from the Phase III confirmatory MIRASOL trial (NCT04209855; GOG 3045/ENGOT OV-55) assessing Elahere® (mirvetuximab soravtansine-gynx) vs. chemotherapy in patients with folate receptor alpha (FRα)-positive platinum-resistant ovarian cancer who had received one to three prior lines of therapy. Based on the data, ImmunoGen said, it will pursue full approval of Elahere, which received accelerated approval from the FDA last November.
- Minerva Neurosciences (NERV) shares soared 66% over two days after the company announced that the FDA had filed its New Drug Application (NDA) for lead candidate roluperidone to treat negative symptoms in patients with schizophrenia on April 27. Shares jumped 36% Monday from $2.77 to $3.76, and rose another 22% Tuesday, to $4.59. The filing followed Minerva appealing a refuse-to-file letter the agency issued last October. The agency official who heard the appeal held that issues cited in the letter should be considered during NDA review. Those issues were discussed at an April 7 Type C meeting—after which Minerva said it gave the FDA additional data, including the effect of roluperidone on the efficacy and safety of antipsychotic drugs, and supporting statistical evidence of roluperidone effectiveness.
- Travere Therapeutics (TVTX) shares sank 31% on Tuesday, from $22.61 to $15.65, after the company acknowledged that its focal segmental glomerulosclerosis (FSGS) candidate sparsentan failed the pivotal 371-patient Phase III DUPLEX trial (NCT03493685) by not achieving the primary efficacy endpoint of significant improvement vs. irbesartan in estimated glomerular filtration rate (eGFR) slope over 108 weeks of treatment. Sparsentan achieved a mean reduction in proteinuria from baseline of 50%, vs. 32% for irbesartan. Travere said it will engage with the FDA to explore a potential path forward for a supplemental New Drug Application for the rare kidney disease drug, approved as Filspari™ for IgA nephropathy.