Inside Illumina’s bruising proxy battle with billionaire activist investor Carl Icahn

Last year, the California-based biotech firm Grail released a $950 test called Galleri that can identify trace signs of more than 50 types of cancers, including difficult-to-detect pancreatic and ovarian cancers, in the DNA of completely symptom-free people. One of the reasons there isn’t wider awareness of Galleri is that insurance companies do not yet cover such hyper-early diagnostic tools. Another holdup: Grail has been stuck in legal limbo for two years.

In 2020, Illumina, the world’s leading maker of whole-genome sequencing machines, announced its intention to acquire the cancer test company for $8 billion. In the years since, Illumina has tussled with U.S. and EU regulators over whether an Illumina-Grail tie-up would be anticompetitive; closed the Grail deal over regulators’ objections; lost billions in market value; became embroiled in a no-holds-barred proxy battle with the notorious activist investor Carl Icahn; and witnessed the eventual defenestration of two of Silicon Valley’s most prominent Black executives: former CEO Francis deSouza and former chairman John Thompson.

To Icahn’s supporters, the ouster of deSouza and Thompson, an effort staunchly championed by the billionaire investor, proves the 87-year-old still has relevance decades after he forged the corporate raider model. Insiders with a view into the last days of deSouza’s rule at Illumina, who spoke on the condition of anonymity, insist that Icahn’s financial case against the company was watertight and that the leadership problems at Illumina extended beyond the Grail debacle.

But while Icahn takes a victory lap, others warn that the disruption at Illumina has slowed the development and deployment of a potentially lifesaving cancer test, one that’s expected to be a part of President Biden’s “moonshot” goal to dramatically reduce cancer deaths in the U.S. Moreover, biotech, an industry lacking diversity, has lost a champion of inclusion in deSouza.

One could make the argument that many of deSouza’s strategies were not as inexplicable as Icahn claimed; at worst, the CEO was overconfident in his ability to dominate a new market opportunity, and, at best, he wanted to save lives by quickly moving Galleri into mainstream medicine. DeSouza’s defenders say timing—the rise of aggressive regulators, the decline in biotech stocks—was the real barrier to a successful merger.

In the end, however, deSouza’s fate at Illumina may more accurately be seen as a cautionary tale of overzealous CEO ambition, a case where one man’s desire to burnish a lasting image temporarily led one of the country’s most innovative companies astray.

The startup that billionaires loved

DeSouza was a rising star in Silicon Valley when Jay Flatley, Illumina’s then-CEO, recruited him from cybersecurity firm Symantec to become the biotech company’s president in 2013. The newcomer was tasked with growing the company’s clinical business to boost revenue. At the time, the firm almost exclusively served the research market.

The same year that deSouza arrived at Illumina, a pathologist in the company’s prenatal testing business discovered that A.I. could identify trace fragments of cancer in certain parts of DNA. This eureka moment would eventually lead to the Galleri test years after Illumina created and spun off Grail. The startup attracted investments from the deepest pockets, including billionaires like Amazon founder Jeff Bezos and Microsoft’s Bill Gates, while Illumina held on to a 12% stake. Upon orchestrating Grail’s launch in 2016, Flatley stepped down as Illumina’s CEO, with deSouza replacing him and Flatley becoming executive chairman.

According to several people familiar with deSouza’s tenure, the new CEO was an effective leader—at least initially. Icahn himself would later say that deSouza did a “good job” of running Illumina’s core business, developing and selling the company’s million-dollar genome sequencers. As president, deSouza successfully expanded the company’s clinical labs business, a market that grew to rival its research enterprise. Diversity also improved at the firm, with deSouza—of Indian, Ethiopian, and Greek descent—increasing the number of people of color and women in top positions.

Outside the firm, deSouza used his perch to call attention to the lack of representation in pharma companies and, as a result, racial biases in genomics. Part of deSouza’s mission was to make Illumina’s DNA data bank representative of racial diversity in the U.S. and globally. (DeSouza declined to comment on the record for the story. Icahn didn’t respond in time for publication.)

As CEO, deSouza focused on further expanding the clinical market—which today accounts for more than half of the company’s revenue, according to one source—and building an overseas presence. He also prepared for the company’s next big release: the NovaSeq X, expected to cut the cost of sequencing an entire human genome to as low as $200, down from $150,000 in Illumina’s early years. However, that product—a $1.2 million machine—wouldn’t ship until the first quarter of 2023.

With the company’s financials weakening and distant competitors gaining ground, deSouza looked for M&A targets. He’d taken over at Illumina after a period of rapid growth, as one insider said, following in the footsteps of ex-CEO Flatley, who had transformed the company from 30 employees in 1999 to nearly 5,000 by 2015. Revenues grew from under $1 million per year to $2.2 billion under the former CEO; deSouza, having inherited a more mature company, was expected to define Illumina’s next act and bring revenues to $5 billion annually. (Revenues reached $4.5 billion in 2022.)

But for deSouza, the acquisition path led to dead ends. 

First, Illumina failed at a 2020 attempt to pick up Pacific Biosciences of California, which specializes in a different form of sequencing. The FTC effectively kiboshed the merger by challenging the company over anticompetitive concerns. That didn’t deter deSouza from pursuing Grail, which was preparing for an IPO then. Grail appeared less risky since it produced cancer tests, not sequencers. The FTC had never successfully challenged a vertical merger, the company would later remind shareholders and the press. 

Grail became deSouza’s, well, holy grail. He took many—perhaps too many—opportunities to talk up Grail in press appearances, yoking his name to the project. “It’s a blood test, a simple blood draw that looks for 50 cancers across all stages in your blood,” he told CNBC just this April. “Ten million people a year die of cancer, and we know that if you catch cancers early, your odds of surviving are much higher than if you catch it later.” He also argued that Illumina was the best company to help accelerate Grail’s development since the larger firm was already established in 150 countries and had the relationships and know-how to make the test reimbursable for patients.

That noble mission may partly explain deSouza’s interest in Grail, but the financial incentives for Illumina were also significant. The merger would have given Illumina a toehold in a still-emerging market for multi-cancer early detection tests, where Grail was positioned to become a force. 

Whether Grail was as valuable as deSouza believed is debatable. In January, Flatley—who was still executive chair when Illumina announced the Grail bid—told the Financial Times that the company bought in at the top of the market, spending $8 billion (including Illumina’s existing stake) for a startup that would not be cash-flow positive for 10 years. Although Flatley was on the board when the deal was approved and voted in favor of the purchase, he had reportedly advocated for allowing Grail to go public and reassessing whether to buy it in a few years. But deSouza had stopped taking advice from the former CEO, who was left out of most leadership meetings by this time and saw his remit limited to a few internal projects, according to a source close to the events.

A second source offers a contradictory take, telling Fortune that deSouza regularly consulted with Flatley on the Grail deal, inviting Flatley to meetings appropriate for his new board role. But Flatley and other members of Illumina’s old guard, the executive contends, might have felt pushed aside when deSouza made changes meant to democratize decision-making at the firm.

To be fair, CEOs are expected to press forward with their own agendas and establish their authority after taking control of a company. In Silicon Valley lore, a CEO’s most valuable tool is not the former chief executive but their gut instincts. Who could blame deSouza for asserting his independence?

“With Francis’s leadership, and the support of the Board, the Illumina team transformed the company to be more clinical, more global, and more digital,” Thompson told Fortune in a statement. “This gives people around the world more access to the power of genomics, makes the genome more reflective of our diverse world, and positions Illumina well by dramatically expanding the market.”

In fact, there is a world where Grail would have looked like a brilliant purchase, as many believe that the market for cancer screening could one day make Grail a bigger company than Illumina (assuming Grail clears FDA regulatory hurdles). Even antitrust regulators’ interest in the Illumina-Grail merger underscores why deSouza almost pulled off a pivot for the ages. Had the merger happened seamlessly, Illumina would be part of a market forecasted to grow to $44 billion by 2027. Presumably, this was an opportunity that deSouza did not want to miss, the way that Microsoft slept through the rise of mobile computing, or Yahoo, which once declined to buy Google, watched that rival develop search.

Nor did deSouza act impulsively. Before bidding for Grail, Illumina later explained, the company hired external experts and sought advice from legal counsel in the EU, U.S., and U.K. to assess the likelihood of any regulatory hurdles. The risk was not zero, because Grail and a handful of his nascent-stage competitors rely on Illumina’s sequencers to process their tests. But trusted advisors said the deal looked safe because the FTC would not likely take on a vertical merger. And in the EU, the company did not have revenue nor immediate plans to earn income (Grail only operated in the U.K.), which meant it wouldn’t fall under the EU’s jurisdiction. Or so Illumina believed.

Just before the bid was announced, the company’s market value stood at an all-time high of $75 billion. It wouldn’t last. Investors disagreed with Illumina’s calculus, and the company’s stock price dropped after announcing its intention to buy Grail in the fall of 2020. Analysts correctly warned that the company could scuffle with U.S. regulators and questioned whether Grail was worth the hefty price tag.

A new era for regulators

DeSouza and Illumina’s quest for Grail soon became roadkill in a new regulatory rush to block consolidation in tech, including biotech. The FTC sued to stop the Illumina-Grail deal in 2021, making the company an early portent of the commission’s new order under Chair Lina Khan. Months later, when the EU’s antitrust watchdog warned that it was reviewing the merger and could force Illumina to unwind Grail, the regulator leaned on what’s known as Article 22, a legal clause allowing it to review mergers for companies that could eventually operate in Europe and monopolize that market. This new interpretation of the law was a first. If there’s one point deSouza’s critics and defenders agree on, it’s that the EU’s decision to intervene blindsided everyone.

DeSouza and his board were in a tough spot, the first victims of what the company saw as an effort by the EU and the U.S. to use coordinated delay tactics to block large companies pursuing acquisitions. It was a lose-lose scenario: If Illumina waited for the legal processes to play out in both jurisdictions, it would miss the closing deadline. If it dropped the purchase, it would need to pay a breakup fee of about $300 million under the deal’s terms. And if it closed the deal, it would incur a fine of over $450 million (the fee would be 10% of the company’s revenues) for closing before the EU’s review was complete. That fee, however, would be refunded if the company successfully challenged the EU’s right to interfere in the merger. DeSouza and the board—with its former CEO allegedly forced out as lead director and Microsoft chair and former Symantec CEO John Thompson now the independent chair—proceeded with the purchase, closing in 2021. (Flatley declined to comment on the record for this story.)

Such a bold, exceedingly rare move shocked investors, although not everyone condemned the decision. One analyst called deSouza a “maverick,” while an unnamed investor told the Financial Times that Grail was a “natural extension” of Illumina’s technology. Still, the consensus was that the gamble would be ruinous. Details about the Galleri test’s promise, the size of the future cancer diagnostic market, and deSouza’s financial judgment were all lost in the flap. Grail had become a distraction, analysts complained. Eventually, the legal melee would weigh on Illumina’s once-soaring share price, which would fall more than 60% before Icahn joined the brawl.

Today, Illumina is still waiting for a ruling from an EU court over whether the EU Commission has jurisdiction to block its Grail deal. As expected, in July, the company was required to pay the EU $476 million in a record-setting fine for completing the acquisition. The company says it set the sum aside in anticipation of the fine. In the U.S., Illumina triumphed over the FTC when one of the commission’s administrative judges sided with the company. But the commission later ordered the company to spin off Grail anyway. The FTC rejected Illumina’s assertion that blocking the merger put lives at stake. Illumina’s claims about Grail were “vague, self-serving, and unsupported,” the agency declared. “Letting competition spur through innovation among MCED [multi-cancer early detection] test providers would do more to save lives than allowing a monopolist to vertically integrate and capture the market.”

This time, the company pushed back with constitutional claims that will be heard by a federal appeals judge and could eventually land before the Supreme Court.

Icahn launches a proxy battle

Before Icahn made his involvement public, he held private talks with Thompson and deSouza. The company offered to accept one board member from team Icahn to deter a proxy battle. It also promised to add an independent director whom Illumina would select. Icahn insisted on two or three board seats, saying he “would not even support Jesus Christ” as a company candidate.

By Icahn’s calculations, the Grail debacle cost the company $50 billion in value. That big number gave weight to his campaign, which he publicly unveiled in mid-March, boosting the stock price by 17%. With his signature colorful language, Icahn’s opening salvo to shareholders declared that something was “rotten in the state of Illumina,” where the company’s “Rip van Winkle” board had allowed a manipulative CEO to destroy billions in market value by pursuing Grail.

Icahn proposed three nominees for Illumina’s board, all of whom would answer directly to him and replace three of Illumina’s sitting members: Robert Epstein, a biotech veteran and Illumina’s longest-serving director; Thompson, the independent chair; and deSouza, who had a board seat. “It is easy for them to say they should fight on forever, as they have no skin in the game,” Icahn said of the company’s determination to cling to the Grail deal. “They are literally fighting a war with our money.” 

Icahn, who had built less than a 1.5% stake in Illumina, didn’t focus all of his ire on the Grail purchase. In a series of open letters, he took issue with the company’s increased spending on R&D and called attention to deSouza’s pay package, which had nearly doubled to $27 million in 2022. He also accused deSouza of personally recruiting Thompson, supposedly deSouza’s “buddy” from his days at Symantec. (Both men also had ties to Microsoft, where deSouza had worked before joining Symantec.) As the proxy battle continued, Icahn went further down this rabbit hole. “We wonder how chairman John Thompson and CEO Francis deSouza can continue with straight faces to minimize their extensive relationship,” he wrote in a May letter, arguing that Thompson might be “technically independent” but could not hold deSouza accountable.

Few could, at least according to comments from Icahn echoed by an insider who spoke to Fortune. They claimed that deSouza was not a leader who considered the counsel of others before making strategic decisions. Rather, he sidelined executives who disagreed with him. In Icahn’s version of Illumina’s history, top talent left the company owing to deSouza’s domineering style, and the CEO couldn’t replenish those seats.

On this point, defenders of the maligned CEO disagree. They argue that DeSouza had led a leadership shake-up to bring in world-class talent with clinical expertise and introduce diversity to the company’s top ranks. Icahn also blamed what he characterized as a too-deferential board for allowing this talent drain. Even putting Grail aside, he said, deSouza’s ability to lead Illumina was in question.

As is his wont, Icahn dragged deSouza’s personal life and an ugly divorce into the limelight, further publicizing details about the CEO’s marriage history revealed during the FTC’s case against the Grail deal. In 2020, a San Francisco court ruled that deSouza hid millions in crypto earnings from his wife when the couple dissolved their marriage. The case, known as the first “Bitcoin divorce,” fed into Icahn’s narrative that deSouza was untrustworthy. 

But the dual decision to acquire Grail—for too much money, in Icahn’s opinion—and plow ahead with the deal despite regulator pushbacks got the most Icahn ink. “Someone should have mentioned to our ‘genius board’ that fighting a huge government agency involving antitrust is not like fighting a competitor, especially when you just insulted the regulatory agency,” he wrote in his initial letter. 

In April, Icahn told the trade publication GenEdge that Illumina was wasting money and energy on Grail, which Illumina was forced to fund, instead of stockpiling cash to protect its status at the world’s largest genome sequencer and improve profit margins that had suffered to the point where the company announced a cost-cutting plan. Icahn wanted his men on the board to force the company to back out of the merger, which Illumina retorted was legally impossible. It was obligated to hold on to Grail until receiving a divestiture order from the EU, but it had also begun divestiture preparation. That wrinkle made little difference to Icahn, who called for deSouza’s expulsion and for Flatley to come out of retirement to retake control. The former CEO, Icahn said, was in high demand among employees who reached out to his team.

Illumina defends its board and CEO

The company responded to Icahn’s attacks with talking points centered on Grail’s potential as a future biotech blockbuster and an urgency to get the Galleri test into more hands. It also explained the company’s reasoning for pursuing the Grail deal. 

The board and deSouza met several times to weigh their options, inviting input from various experts, as they had before starting the acquisition. They were advised that the FTC likely wouldn’t win an appeal in a federal court based on past precedent. That advice may still prove to be accurate. Just last week, a Biden-appointed federal judge granted Microsoft a victory in its FTC fight to buy video game company Activision Blizzard. The company’s case in the EU also appeared solid.

Illumina had also told regulators that it would draw contracts guaranteeing Grail’s future competitors fair prices and access to its sequencers. It justified deSouza’s pay by pointing out that it was tied to the NovaSeq X’s release—the company’s first new launch in five years—not the Grail deal. The CEO had not cherry-picked its board, the company said. Thompson and deSouza only worked together briefly at Symantec, and the board recruited Thompson through its usual nomination and vetting process. In its letters to shareholders, the company cited Thompson’s “40 years of experience leading companies through periods of transformative growth and value creation,” noting that the IBM veteran had led the board at Microsoft responsible for Satya Nadella’s CEO appointment.

Neither Icahn nor Illumina made racial diversity a focal point of their arguments in support of their candidates, but it would have been hard for shareholders to miss the significance of the proxy battle just by looking at the slates on both sides. Icahn nominated three white men; two of the three incumbent candidates he wanted off the board were Black.

Still, ahead of Illumina’s AGM, in May, advisory firm Glass Lewis issued its verdict in the proxy battle, siding with Icahn by withholding its support for Thompson and deSouza and calling the Grail deal a “self-made boondoggle” for which the board was not taking responsibility. ISS, by contrast, recommended that shareholders reelect deSouza to the board, which they did. Epstein, the board member with the longest tenure, also survived the vote, but Thompson did not receive enough support to remain chair, losing to Icahn’s candidate, Andrew Teno, a portfolio manager at Icahn Enterprises. It was the first time in a decade that a large-cap North American company voted out its chairman, according to data from Diligent’s Insightia.

Though it’s impossible to know for sure, the results of the proxy battle were likely influenced by the recent introduction of the universal proxy card, which allows shareholders to choose from either the company’s slate of directors or the dissident’s. Now investors can elect one or two activist nominees on a “What’s the harm?” basis, says Insightia’s editor-in-chief, Josh Black.

Icahn’s victory wasn’t surprising, given Illumina’s financial hit after the Grail deal. Icahn plugged into a feeling from investors that deSouza was steering what had been a reliable moneymaker in the wrong direction. And although Icahn had suffered his own brutal attack on his holding company, Icahn Enterprises, from short-seller Hindenburg Research, he still had the capital and savvy to get his way at Illumina.  

Icahn’s influence became even more pronounced when deSouza, who had handily survived his proxy vote, resigned as CEO and director on June 11. That left Illumina with an almost entirely white board. In his goodbye memo to staff, deSouza maintained his faith in Grail, writing, “My belief in the potential of Grail’s potentially lifesaving technology and the benefits of merging it with Illumina remains unshakable.” 

The future of Illumina, Grail, and deSouza

Today, Grail’s fate as an Illumina subsidiary remains unknown. (Grail representatives declined to comment.) The parent company won’t have its case questioning the EU’s jurisdiction heard until around the first quarter of 2024, though a divestiture order could come before that. In the U.S., several Republican attorneys general have called the FTC’s veto of the merger an overreach, while the American Hospital Association and a bipartisan group of lawmakers and public health advocates have signed amicus briefs supporting Illumina’s case at the federal appeals court, which is set to begin in September.

For now, Grail is selling its test through a waiver program since it is not yet FDA-approved. In June, a bipartisan group of U.S. senators introduced a bill allowing Medicare to cover the cost of a multi-cancer early detection test. Advocates for the bill say that making such cancer tests easy to access, especially in rural areas, would help close racial and income health disparities among older Americans. The company may know by December whether Medicare will cover Galleri. In the meantime, it’s running clinical studies, including one with 140,000 subjects, in partnership with the U.K.’s National Health Service. Grail has also publicized cases where it identified cancer cells later confirmed by MRI in U.S. patients.

The U.S. National Cancer Institute is preparing a double-blind trial to see whether early cancer detection positively impacts cancer screenings or puts patients at risk of overdiagnosis. Though the test intuitively sounds like a win for humanity, public health experts say it’s not that clear-cut. “One concern is that because early cancer detection with a blood test is such an attractive idea, it could be tough to find people willing to be part of the control group,” Science magazine wrote.

At Illumina, Charles Dadswell, the general counsel, is now interim CEO, and the company says it’s searching for a successor. Illumina did not say when the next CEO might be named, but a source says Flatley is interested and would likely return if asked. However, the boomerang CEO route wouldn’t be a long-term solution, meaning the company would need to endure another CEO transition in a few years.

Under deSouza, Illumina said it would unwind Grail if it loses either appeal. If it wins, deciding whether to keep Grail will be up to the forthcoming CEO’s discretion. It’s possible the next leader won’t wait for the legal process to play out before signaling an intention to sell Grail, no matter what happens with regulators. That would be an investor-backed solution, particularly with Icahn, who wants to see Illumina refocused on its bread-and-butter genome sequencing business. 

As it happens, Illumina’s core business could ultimately still help brand deSouza’s legacy at Illumina. The NovaSeq X launched in January to strong demand, and analysts will see sales results for the instruments in the year’s second half. If the launch proves successful, says RBC analyst Conor McNamara, deSouza would deserve much of the credit.

By then, however, a new CEO will be in charge, assuming Illumina acts quickly. More likely, deSouza’s lasting image will not be that of a trailblazer who took big swings, stuck to his vision, caught a market on the rise, attempted to deliver a potentially lifesaving test to the masses, defied regulators, and pulled off a major product launch. Instead, fairly or not, he’ll be the once-promising leader who came perilously close to hollowing out an iconic company.