Activist shareholders increasingly battling biotech executives
PHILADELPHIA — They pore over balance sheets and clinical data, hunting for undervalued companies. They wait for executives to make mistakes that send their stock tumbling, creating an opening to scoop up shares at a discount and begin shaking things up.
Shareholder activists, once known as corporate raiders, didn’t attend last week’s Biotechnology Industry Organization’s annual convention here. But their shadow hung over many of the sessions at a time when the biopharma business has become one of their favorite targets.
These investors have become an increasing concern of biotech executives, who argue their short-term outlook undermines a business that demands a long-term view. Drug development can require years or even decades of research before it pays off; activists want quicker returns and say too many biotech executives aren’t looking after the interest of stockowners.
That often means battles over measures aimed at boosting share prices, from cutting research programs to replacing executives to selling the entire enterprise. Executives have lost control of biotechs across the country — among them Cambridge-based Biogen Inc., Genzyme Corp., and most recently Ariad Pharmaceuticals Inc. — in fights with activist shareholders.
“The issue is long term versus short term,” said David Pyott, former chief executive of Botox maker Allergan Inc., still smarting from a hostile takeover bid engineered by activist investor Bill Ackman. Ackman’s Pershing Square Capital Management worked with Canadian drugmaker Valeant Pharmaceuticals International Inc., but Allergan, once in play, was ultimately purchased in March by Ireland’s Actavis PLC for $66 billion.
Pyott, though initially resisting a sale, left with an $89 million golden parachute.
Biotechs are being targeted by activist investors largely because that’s where the money is, said Joel I. Papernik, a partner in the corporate and securities practice at Boston law firm Mintz, Levin, Cohn Ferris, Glovsky and Popeo, who led a BIO panel on the rise of shareholder activism. Papernik said many publicly traded biotechs are still primarily research companies, pouring much of their investment capital into drug discovery.
“When you’re seeing a decent cash flow at a company and the money is going into R&D rather than to the shareholders, these activists see an opportunity,” he said. “Their theory is have the money go to us. I think this is short-sighted. How are you going to get the research done?”
Boston area biotech executives, to their chagrin, have had to confront that question in recent years. New York investor Carl C. Icahn mounted an assault on Biogen, a maker of multiple sclerosis drugs, in 2008 and 2009, ultimately winning seats on the company’s board, pushing it to divest research programs, and forcing out then-chief executive James Mullen.
After a manufacturing problem sent Genzyme’s stock falling, activists Icahn and Ralph V. Whitworth of San Diego began accumulating shares and agitating for a sale. Ultimately, the company was sold to French drug maker Sanofi SA for more than $20 billion in 2011.
Harvey J. Berger, chief executive at Ariad, vowed to fight to retain his job when another activist shareholder, Icahn protege and Connecticut hedge fund manager Alexander J. Denner, acquired 7 percent of the company’s stock and pushed for Berger’s removal. But after losing the support of other stockowners, Berger negotiated a deal in April to step down.
Denner did not respond to requests for an interview. But in a question-and-answer with consultants from the New York firm Ernst & Young, published on the eve of the BIO convention, Denner explained his philosophy. He said his company, Sarissa Capital Management, typically seeks a 100 percent return when it invests in a company and suggested many biotech companies “are not well run.”
“Some of the biggest companies in the industry waste billions of dollars every year,” he said.
Denner, who, with Icahn, pushed Biogen to divest what he said were unpromising research programs, defended the view of activists that many biopharma companies are unfocused. “R&D funding decisions are frequently made by committee, and it’s hard for an individual to stand up at a meeting and say, ‘The data don’t look great, we should kill the program,’ ” he said.
Papernik, who typically represents executives and boards that are defending themselves from the campaigns of activist investors, takes the opposite view.
“Officers and boards are much better able to determine how the company should allocate its resources,” he said. “If you’re investing in the company, you’re betting on the jockeys who are there. And why should those jockeys be attacked by financial people from the outside?”
The answer for biotech executives might be preempting activist shareholders by adopting some of their tactics, such as repurchasing stock or shedding unproductive research programs earlier in the process.
“In the end, what really matters is who can present the most compelling plan to create shareholder value,” said Jeffrey Greene, global life sciences transaction leader at Ernst & Young, who moderated another panel on the issue at the BIO convention. “If push comes to shove and shareholders get to vote on this, both management and the activist group are going to have to be able to say that they have the better plan for increasing shareholder value.”