We Are All Activists Now
Hard times can breed hard feelings, and that’s been apparent in biotech board rooms across the country. Well-known activist investors like Carl Icahn and Dan Loeb, CEO of hedge fund Third Point, started getting heavily involved in the biotech sector a few years back to somewhat mixed results. But now corporate raiding is gaining broader appeal as more and more investors see a quick profit to be made by liquidating or arranging shotgun marriages for companies trading below their asset or even cash value.
Witness what has happened to Avigen and NitroMed, a couple of companies whose unfortunate sagas I’ve followed a bit in these pages. Both have been pressured by shareholders to accept buyout offers they felt undervalued their companies. (NitroMed has since agreed to be acquired by Deerfield Capital; Avigen is still resisting a match-up with MediciNova). Nor are they alone--a New York Times article late last month pointed to at least eight recent cases in which companies trading below cash value were being pressured by activist investors into liquidation.
Now we can add to the list a new case: Facet Biotech. Facet is the R&D arm spun out of PDL Biopharma after Dan Loeb’s activist campaign in 2007 successfully led to its eventual breakup and the sale of some assets. Now a group of activists led by Roderick Wong of Davidson Kempner Partners wants the company to liquidate and pay out a cash dividend. A battle is already starting to heat up.
But few activists can match Icahn in scope. He is still playing in biotech and is gunning for Amylin. According to Amylin management, that means trying to engineer a quick sale to Eli Lilly after first slashing internal spending to reserve the cash potentially available to investors. Amylin is resisting the deal as undervaluing the company, especially as it tries to get once-weekly dosing of exenatide out the door.
Now, I’m not overly squishy on top management of biotech companies. Many will happily take all-or-nothing bets and then refuse to recognize the “nothing” when the dice come up snake eyes. Many CEOs who were happy to throw good money after bad start thinking more about their shareholders only after their feet are held to the fire by activists. After the failure of its lead product AV650, Avigen cut employees and overhead, but then talked about having “sufficient cash to fund operations for over four years” and about partnering or selling select assets to raise cash enough to further other development efforts. CEO Kenneth Chahine later complained about his shabby treatment at the hands of Biotechnology Value Fund, but it was only after an activist campaign that he starting talking about liquidation options that might preserve the remaining capital for shareholders. Avigen‘s subsequent stock price indicates that shareholders have been better off for BVF’s activist involvement. (Hint: companies only trade below cash value because investors perceive that cash is going to be frittered away with nothing to show for it.)
I don’t agree with many analysts I’ve spoken to, who take it almost as a matter of faith that activists always create value by their involvement with companies. But when Chahine says in the New York Times, “I hear that argument [about shareholder rights], but it’s really ‘I want to raid the cash,’” I can’t help but wonder if he’s forgotten who that cash belongs to.
As for Amylin, Icahn has fired back saying he doesn’t want a quick sale; he wants a sale at $30 or more, which is almost triple the current value. It’s certainly not going to get there overnight; that sounds like some serious value creation to me.
--Karl Thiel
