Biogen Idec-Icahn Story Likely Far From Over; History Says the Activist Investor Will Act Again

12/18/07Follow @bbuderi

Does anyone really think Carl Icahn is done with Biogen Idec? He pushed for a sale of the company, by most reports at a price around $80 per share. But as of yesterday’s close, just three trading days after the Cambridge biotech’s announcement that it had failed to find a buyer and would remain independent, the value of Icahn’s 8.8 million shares in the company had fallen by nearly $180 million. (Overall, Biogen had lost almost $6 billion in value—the stock closed Monday at $55.57, down 27 percent from Wednesday’s close, which came shortly before the announcement.) If you were Icahn, would you leave things there?

An analysis of Icahn’s style indicates that the veteran boardroom battler is not likely to walk away with that outcome. Based on his past actions, he could well push for a management change, as a way of unlocking the value he apparently sees in Biogen (NASDAQ: BIIB), and maybe encouraging the company to revisit its efforts to attract a buyer. Given his clout and the fact that, at the end of Q3 he owned 3 percent of the company, he might also push for a board seat for himself or one of his representatives—although a Biogen spokeswoman said yesterday that she knew of nothing like that in the works.

A quick recap of what likely went wrong with the sale. Biogen is one of the world’s top biotech concerns. According to Thursday’s Wall Street Journal, analysts expect its sales to reach about $3.1 billion this year, with the company on track to meets its profit forecast of roughly $600 million. Perhaps more importantly, the company’s pipeline includes some 15 drugs in Phase 2 trials or beyond. In September, CEO Jim Mullen provided a bullish forecast and set a goal of achieving at least 15 percent annual growth in revenues through 2010.

In surveying the company and its prospects, Icahn reportedly told people, also according to the Journal, that he thought Biogen might bring a share price of “high 70s to low 80s.” Big pharmaceutical makers, after all, have been struggling to fill their pipelines, especially with looming patent expirations on many of their blockbuster drugs. But the general take in many news reports over the last few days is that would-be purchasers of Biogen deemed that kind of price as simply too steep.

Of particular concern is the uncertainty surrounding the market and prospects for Biogen’s three core drugs—Rituxan for non-Hodgkins lymphoma and rheumatoid arthritis, and Tysabri and Avonex for multiple sclerosis. What’s more, Biogen partners Elan and Genentech have, respectively, certain rights to Tysabri and Rituxan. In an intriguing analysis of the failed sale posted on the In Vivo Blog, Roger Longman laid much of the blame on the fact that Biogen evidently made would-be bidders sign an agreement that prohibited them from negotiating with Elan or Genentech about the drugs’ futures. “That means the prospect of buying Biogen wasn’t merely expensive, it was a complete crapshoot,” writes Longman. Biogen spokeswoman Naomi Aoki says the company is not commenting further on the sales process and that she can neither confirm nor deny this report.

But where does that leave things? Icahn no doubt knew about the core issues with Biogen’s big drugs and still concluded that the price range where Biogen had been trading when he amassed his shares was too low. Between June 30 and September 30, for example, Icahn bought some 6 million of his 8.8 million Biogen shares; in that period, the stock was trading between $53 and $69. If he felt the company was undervalued then, it’s hard to see him fundamentally changing that outlook, even despite Biogen’s failure to come up with a buyer. So that leaves the ball in his court, and it seems reasonable to think he’ll pick it up, assuming he hasn’t sold off his Biogen shares since the end of the third quarter. (Our hedge fund sources tell us one common trick big investors play is to load up on a stock the last day of the quarter to make it appear to companies that they are major investors—and then sell the next day. There’s no way of knowing if Icahn has done that; he also could have increased his holdings since the end of Q3.)

Icahn has already had one outright, slam dunk biotech success this year—the sale of MedImmune, in which he was an investor, to AstraZeneca. As MarketWatch summed it up on Thursday: “In April, Icahn threatened a proxy contest at the company’s annual meeting if it did not soon find a buyer. Several days later, AstraZeneca PLC announced it planned to buy MedImmune for $15.6 billion.”

Given Wednesday’s announcement, it’s clear the sailing isn’t as smooth with Biogen. So let’s look at two recent corporate fights Icahn waged, one he lost (so far) and one he won—Motorola and ImClone.

Let’s start with Motorola, the one Icahn “lost,” although the story is not yet over. Late this past January, it became known that he had purchased a 1.6 percent toehold in the company. (By comparison, Icahn’s inital stake in Biogen, revealed in August, was 0.95 percent.) Icahn then announced that he would seek a board seat to try to pressure Motorola—which had lost a good chunk of its market value as profits tumbled in the face of falling cell phone prices and worldwide competition—into using its billions in cash reserves to buy up its own shares and improve shareholder value, according to a Reuters report.

Icahn upped his Motorola stake over the next few months (something he’s done with Biogen as well, where, according to his latest SEC filing he owned about 3 percent of the stock at the end of the third quarter). But at the annual shareholder meeting last May, he was denied the board seat, as stockholders elected to stick with their current slate and CEO Ed Zander. According to The Deal, “Although Icahn ultimately lost that battle, his highly publicized campaign brought Zander under further scrutiny and heightened pressures on him to articulate an effective turnaround strategy.” Indeed, on November 30, the embattled Zander announced his resignation, effective January 1. And Icahn has continued to argue for big changes at the cell phone maker—most notably late last week, when the Wall Street Journal reported him as saying that breaking up Motorola could increase shareholder value by some $20 billion.

With ImClone, Icahn has enjoyed much more success to date, although it has also been a long haul. Icahn and ImClone go way back, but let’s pick up the story in mid-September of 2006. By that time, he held nearly 14 percent of the company’s stock—he had upped his stake several times to get to that point—and was, you guessed it, fighting for a seat on the board. On September 20, he found success—winning a spot not just for him but also for two allies; the three joined one other Icahn supporter already on the board.

Icahn had a host of issues with the company’s management, and he wasted no time in effecting changes. As soon as he was elected, he issued a statement calling for the company’s chairman, David Kies, to step down.

He also filed a proxy statement seeking shareholder consent to remove half of the firm’s 12 board members and add one replacement. Kies opposed these moves, but by the next month Kies and interim CEO Joseph Fischer were gone and Icahn had taken over as chairman of the board. He reportedly tried, and failed, to force a sale of the company. However, at the time he took control, the stock was trading around $30 per share. Now, with Icahn’s management team in place, it’s over $40, a gain of more than 30 percent.

It’s important to stress that Icahn has not issued public criticisms of Biogen’s management, and the company has certainly been doing better than ImClone and Motorola were doing when he got so involved. But given his track record, it seems reasonable to think that the activist investor will become more active on the Biogen front, perhaps beginning with trying to win a board seat and pressing more vigorously for whatever changes he thinks are needed in order to bring the company’s stock price in line with what he believes is the true value of the company.

Bob is Xconomy's founder and editor in chief. You can e-mail him at bbuderi@xconomy.com, call him at 617.500.5926. Follow @bbuderi

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