Do Takeover Efforts (Like Icahn’s Move on Biogen Idec) Harm Innovation?
When shareholder activists like Carl Icahn start banging on a company’s front door, threatening to rally investors to help them take over the company, it naturally gives management headaches. But what effect does it have on a company’s ability to innovate?
It’s a good question in general, and it’s moving front and center next week here in Boston as Icahn seeks to gain control of Biogen Idec, the Cambridge, MA-based global biotechnology company (NASDAQ: BIIB). The answer, according to an unscientific poll of a dozen leading business school professors of innovation, is that nobody really knows.
In Biogen’s case, the company believes, not surprisingly, that such activism hurts not just innovation, but morale and other aspects of the business. “It’s the uncertainty,” says Biogen spokeswoman Naomi Aoki. “Whenever you have uncertainty, it has an impact on whether people want to do deals with you and with your ability to recruit and retain employees.”
Although the firm won’t reveal too many fresh stats, it is forthcoming about a few problems that seem to support the company line. At least one key executive spot has been hard to fill during these recent uncertain times at Biogen. David Parkinson, who had been the company’s senior vice president for oncology research and development in San Diego, left to become CEO of Nodality, a San Francisco Bay Area diagnostics startup in September, a month after Icahn first began making noise at the company. The oncology research job remains unfilled nine months later, Aoki confirms. And, as of last weekend, the company counted 83 openings in research and preclinical development.
Biogen’s business development group also appears to have slowed a bit, as, perhaps, partners wait to see if Icahn can get his nominees elected to the board before they agree to a deal. Biogen did seven business development deals from September 2005 to July 2007—a rate of about one every three months. Since Icahn entered the picture, Biogen has completed two deals in 10 months, Aoki says.
To at least partially counter the presumed effects of Icahn’s presence on employee morale—including that of top scientists who lead its innovation efforts—Biogen launched a retention program in February that offers key employees bonuses of up to 150 percent of their annual salary if they remain continually employed at the company through March of 2009.
It seems like common sense that an ongoing proxy fight might unnerve employees, and that morale—and innovation with it—could suffer. In Biogen’s case, top executives, even if they keep their jobs, may also feel the pinch in their wallets, because their annual bonuses are partly based on their ability to keep turnover low and fill senior vacancies quickly, according to the company’s proxy statement with the Securities and Exchange Commission.
But some academic research suggests that corporate takeovers, despite their controversy, actually have a positive effect on innovation. Josh Lerner, a professor at Harvard Business School, looked at patenting trends before and after 495 buyout deals. “Patents granted to firms involved in private equity transactions are more cited (a proxy for economic importance), show no significant shifts in the fundamental nature of the research, and are more concentrated in the most important and
prominent areas of companies’ innovative portfolios,” Lerner and colleagues wrote in the April 2008 paper.
Of course, patenting data is public, so it’s easy to capture, but it isn’t the only measure of innovation. Business development, product approvals, publications, and advancements through phases of clinical trials are also signs of the potential for innovation at a biotech company like Biogen, just like recruiting and retaining innovative employees.
Lerner’s data doesn’t address any of those issues, and it also doesn’t tease out patterns like what happens to innovation if there’s a prolonged tug-of-war for control.
This is where Biogen’s case falls into completely uncharted territory. There really aren’t any academic studies that specifically dig deep into what happens to innovation at biotech companies after takeovers by large drugmakers, or after extended takeover battles, says Louis Galambos, co-director of the Institute for Applied Economics and the Study of Business Enterprise at Johns Hopkins University. It’s an especially difficult question in biotech, because it takes years for a drug candidate to mature into a marketed product.
“What fascinates me is that I haven’t seen a good study of this that examines the effect of takeovers on innovation at biotech companies over a 10-year period,” Galambos says. “This is a really good question, it may just be that we lack data for it.”
Based on interviews he’s done with scientists at biotech companies, Galambos says a proxy battle like the one waged by Icahn might drag down morale, yet he’s skeptical it would harm innovation over a 10-year period. Scientists are far removed from the executive suite where proxy battles are fought, and what they seem to get most excited about—and motivated by—are promising drug candidates, Galambos says.
“The people that wear white lab coats see themselves as a separate breed,” Galambos says. “They are different than the suits. The suits are probably the ones who are most affected.”