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Friday, December 14, 2007

Biogen Idec and Carl Icant: A Report Card on Shareholder Activism in Biotech

On Wednesday, a panel at Windhover’s Bio/Pharma Partnerships meeting in San Francisco was discussing the prospects for M&A – and in particular the future of activist shareholders.

Less influential, opined Goldman Sachs banker Geoff Parker.

Funny that. More or less as the words were leaving his mouth, Goldman’s best known biotech client, Biogen Idec, was publicly reconciling itself to the equivalent of corporate chastity. No one wanted to buy it. (We point out for the record: we told you so.) At least for a price that would have satisfied the greed of its merger-obsessed shareholders.

And chief among those was Carl Icahn whose colossal and embarrassing failure to foist the company onto Big Pharma was, for many a CEO, the unspoken subtext of the Biogen press release. Kurt von Emster, the fund manager at MPM Bioequities, now dubs him Carl Icant.

Icahn– no doubt still drunk on the profits from AZ’s acquisition of MedImmune—figured that since drug companies were desperate for revenues but had bucketloads of cash, they’d of course be willing to pay $23 billion-plus for a company which could easily lose two of its top-three products to its partners Genentech (which would inherit a bigger share of Rituxan) and Elan (which had a right to buy back Tysabri on a change in control). And that’s precisely what Elan would have done (private equity firms would have clamored to finance the repurchase) unless a buyer made it worth its while to keep the drug in Biogen’s hands.

So much is evident.

But there is also a side story to Icahn’s humiliation. Biogen apparently required bidders to sign a CDA that, while it let them ogle the company’s private data, forbid them from any dealmaking with Elan or Genentech. That means the prospect of buying Biogen wasn’t merely expensive, it was a complete crapshoot. To risk the kind of money Icahn wanted, a buyer would need to be certain it could retain at least Tysabri, which meant it had to come to some pre-acquisition settlement with Elan…to whom it couldn’t talk pre-acquisition.

We assume Carl le Terrible knew about this teensy problem. And we also assume that he won’t let himself be snookered again by the clever folks at Biogen (we had figured that CEO Jim Mullen wanted to sell the company; now – given the sneaky poison pill he inserted into the CDA -- we ain’t so sure any more). Icahn will want his revenge. This is only Act I, says our not merely witty but wise friend Kurt von Emster.

But is there a further meaning to be found in Icahn's loss? We think so—another demonstration of the failure of shareholder activism in the biotech industry.

So far, Icahn is one for three in his most recent attempts to get Big Pharma to buy his shares at big premiums (he certainly made money in ImClone—but was unable to force its sale; and as we note this month in IN VIVO, he didn’t have much effect on Genzyme’s strategy either, which remains soundly diversified).

Meanwhile, the other major hedgie activist in the biotech space has certainly had his effects, but they weren’t what he and his groupies would have liked. Most spectacularly, Dan Loeb and his Third Point fund dismastered PDL by driving Captain Mark McDade from the bridge with a series of entertaining public letters alleging, among less serious business deficiencies, intraoffice kanoodling and geographic self-dealing (like moving the office so McDade could be closer to home and his boat slip) -- the sum of which added up to gross incompetence. Or at least provided the excuse for engaging in Loeb’s subraction-of-parts strategy that involved monetizing its antibody royalty stream and breaking the rest of its business into pieces.

The result: Loeb had bought in at about $18 and apparently exited his position for the tremendous price of … $18. PDL, of course, remains unsold. And it ain’t clear to us that he did anything to improve the shareholder economics of the other companies he’s afflicted—NABI and Ligand.

Now for all we know Third Point did make some money on PDL through some God-knows-what mix of option trading. But the shareholders who jumped into the stock after him didn’t.

And neither did most of the Icahnologers, most of whom rode the stock up on Icahn’s coattails and rode it right down again.

So we’re further downgrading our rating on activist shareholders. Investing in biotech isn't easy. It requires plenty of research; understanding products; contracts; the environment. The best investors in this industry know what they’re talking about because they study hard to figure it out. But by and large, we haven’t seen much evidence that the activists in biotech are doing their assigned homework.

1 comment:

snug said...

Roger, excellent scoop on the shennagins at Biogen. Eln message board at Investor Village have enthuased at the indept analysis in the real world of Big Pharma. regards, snug