Hold Your Horses On Splicing Amgen, Say Citi Analysts
October 22, 2014
By Riley McDermid, BioSpace.com Breaking News Sr. Editor
Embattled biotech Amgen would do well to heed the calls from activist investors to get more aggressive in ramping up business though splitting into two companies may not be merited yet, a Wall Street analyst said Wednesday.
Activist hedge fund Third Point called on Amgen yesterday to spin off into two companies, saying in a letter that doing so could significantly increase shareholder value.
Third Point, a pet project of famous boardroom agitator Dan Loeb, holds 450,000 shares of Amgen, according to the hedge fund’s last SEC filing, and has said they think Amgen shares could be worth $249, which is 80 percent higher than they are now.
Yaron Werber, who leads the biotech research team at Citigroup, said that although splicing the company up may seem an easy solution, more details would need to be hammered out before Wall Street goes all in on the idea.
“As we have written previously, breaking the company into two entities is not easy or necessarily attractive given that the legacy entity will be facing an uncertain future. There are tax de-synergies and complicating manufacturing issues to sort through,” he wrote in a note to investors.
“More importantly to us is to better rationalize the size of the company given that it is very sizable relative to its specialty pharma product set,” said Werber. “As such, we would welcome more strategic discussion and hope that Amgen will talk about more aggressively about further cost cutting on their upcoming analyst day since there must be more operating synergies among its business units.”
Citi’s analysts do agree that “Amgen has largely underperformed its large cap biotech peer group.” Still, the company does show some significant opportunity for investors who are paying attention, he said.
“In our view, we would like to encourage management to get more aggressive on its operating margins,” wrote Werber in a research note. “We have sensed a shift over the past two months wherein the company previously focused expectations that operating margins could get a boost from COGS whereas now we get a sense that they may also provide more long-term visibility at the upcoming Business Review day relating to OpEx spending.”
Its recent trouble have had Amgen trading at a discount related to other similar players in the pharma space despite offering better growth rates. That could have major upside for savvy biotech investors, said Citi.
“We now sense that they may also provide more about the second phase of cost cutting and operating margin expansion that we hope will be more than just driven by high manufacturing yields/low COGS,” wrote Werber. “We understand that near-term research and development will be reduced but will be offset by higher SG&A. But in our view that is not enough and we hope to get a better sense of the level of operating margin expansion over the next five years.”