I was reading the recent blog by Matt Stoller about Illumina and the recent CEO resignation. Matt writes about monopolies in considerable detail.
“Last Sunday, Francis deSouza resigned from his position as the CEO of Illumina, which is one of the most important medical technology firms in the world. Since 2019, deSouza had pursued a string of failed acquisitions, and ultimately his shareholders revolted. His most recent was an attempt to buy cancer test producer Grail, which was ruled unlawful by both European antitrust enforcers and the Federal Trade Commission’s Lina Khan.”
It is well worth your time as his analysis is very detailed about the aggressive way that the management team of Illumina maintained their monopoly in the gene sequencing area through aggressive legal and political maneuvers.
It is one thing to build a world class company through innovation, strong strategy, and competent leadership. It is quite another to aggressively block competition in a myriad of predatory ways as a core strategy rather than to focus on innovation, strong strategy, and operations.
I spent many years as a healthcare investment analyst, and I always loved the diagnostic and life science tools space. Admittedly, it is not easy to compete in the life science tools space despite amazing innovation. The competition is often fierce, and the marketing challenges are not small. Most of the larger companies in this space are serial acquirers. They maintain large marketing and distribution advantages and the small tools that are developed at universities often end up in their portfolios. Illumina kept their interests rather concentrated in one area and, for a long time, that worked. They grew quickly and had early mover advantages in a large and fast-growing market. They had their marketing and distribution advantages, and the wind was at their back in this fast-growing space. Rather than choosing to diversify into selling other types of life science tools they decided to turn to diagnostics to maintain their fast growth and world dominance. Their machines actually helped open up large new markets in molecular diagnostics and they went for the glory of what they perceived as large billion dollar plus markets rather than diversifying in their core area of life science tools. I suppose settling into a slower growing but strong cash flow generating life science tools business was not sexy enough for Illumina’s management team. However, there were large conflicts of interest with their core strategies. Anti-trust offices also had concerns with concentration of power in their core area. These conflicts and concerns were transparent and obvious. When you read Matt’s article, you can see the extent to which the company went to maintain political favor to transfer their monopoly positions within genetic engineering to the diagnostic space. The prices were also high for acquisitions within this space due to the industry trends, so it was not exactly cheap for them to pursue this aggressive strategy.
It may not be obvious what the catalyst is that finally changes things for predatory management strategies like this. They can work for a long time until they do not. In this case, it was a combination of investor revolt (with activist investors pressuring the company) and regulatory scrutiny from anti-trust regulators. Maybe this is the one area where both Republicans and Democrats can agree as this company has had trouble with FTC offices in different administrations.
When you talked to potential competitors in this space, they understood the difficulty competing with Illumina. Illumina used their monopoly position to keep prices high and competitors out. The ones they could not keep out they tried to buy but that did not work out so well with the global anti-trust regulators. The innovation in the genetics space is also high, so everyone loses in all sorts of unexpected ways when this innovation does not move forward. These aggressive strategies are not unique to Illumina. However, the world is changing in important ways. The bubble times from leaving interest rates low for so long are coming to an end. Investors are more discerning and need to see sensible strategies with business models that can generate sustainable long term cash flows. Regulatory agencies around the world are concerned about the tremendous concentration of power across industries. We have many more journalists and analysts with publications like Substack, SeekingAlpha and others. It is easier to find out the truth with all this new information available. There are large online groups sharing information. As the tide goes back out with the funny money harder to get, we are just starting to see more clearly the sleazy moves by some management teams to maintain their power and world dominance. I suspect we will all be surprised and horrified in the days to come about some of these efforts.
It is hard to raise venture capital money for many companies in the diagnostics, medical device areas and life sciences tools despite incredible innovation as VCs tend to look for companies that have not only large market opportunities but potential for market dominance. That is how they earn their returns with their investment model.
Using new technologies and new networked strategies, it is now possible for interdisciplinary groups to come together in new ways, borrowing principles from nature on how to organize, innovate and share resources. How can we move forward with innovations that many VCs ignore due to problems with their model? There are many important areas that do not fit their model. This is certainly true in diagnostics, life science tools and medical technology. However, it is also true in other industries such as agriculture, food, alternative energy, and many positive lifestyle businesses that add so much vitality to communities around the world but are not good focus areas for VCs. With these networked models, innovation is actually higher as you do not have one monopolistic tree taking over the whole forest. Returns should not only be strong, but failure rate much lower. You can think of Mother Nature as encouraging lean business and lean finance, not wasting resources of any type. In this world so concerned about solving complex problems, this is one grounded, down to earth place to start. We found out the hard way during the recent pandemic how unprepared we were and how our version of capitalism lets us down. It is a grow at all cost model that pushes for monopolies over a model that prioritizes making money by improving health and well-being in an integrated way.