Billionaire investor Carl Icahn made a relatively softball argument a year ago about why shareholders should throw out the management slate for the Biogen Idec (NASDAQ: BIIB) board and vote for his nominees instead. It didn’t work. This time, he’s launching a blistering attack that accuses the company of botching its 2003 merger with Idec Pharmaceuticals, and for having “failed leadership” that leaves it poorly positioned for the future.
Icahn made his case today in a 52-page PowerPoint presentation he’s delivering to shareholders, filed with the Securities and Exchange Commission. It’s a key part of the strategy for swaying stockholders to vote in favor of his four nominees to the 13-member Biogen board, before the votes are tallied at the company’s annual shareholder meeting on June 3. The company needs an overhaul, Icahn argues, so badly that his directors would consider splitting it into two operations—one of which concentrates on neurology, the other on cancer.
For starters, Icahn argues that the November 2003 merger of Biogen and Idec was a failure. It never generated the kind of rich returns shareholders have gotten from peer companies like Genentech, Gilead Sciences, and Celgene. The Biogen executives never delivered the cost savings advertised at the time of the Idec merger; in fact, operating expenses have shot up to be more than $711 million beyond the company’s target at the time of the union, Icahn said. As this played out over the years, CEO James Mullen was “paid well, despite poor performance and failures across many dimensions,” Icahn said. Part of the root problem, Icahn said, is that “management turnover makes consistent strategy and execution difficult.”
Last year, Icahn rolled out a relatively vague four-point plan for Biogen based mainly on boosting spending on R&D, improving employee morale, and mending relationships with partners. The goal, for a time, was to sell the company to a larger drugmaker. Last year, Icahn didn’t attempt to deliver a knockout blow like today’s proxy filing.
Not surprisingly, Biogen Idec wasn’t thrilled to answer the latest round of tougher charges.
“This appears to be nothing more than an 11th hour tactic by Mr. Icahn to win votes,” said Biogen spokeswoman Naomi Aoki. “Since last year’s shareholder vote, he’s made no suggestions on how to better run the business. I find it curious that he only makes suggestions on the eve of the shareholder vote, even though he’s had a year to make suggestions.”
Alex Denner, a portfolio manager for Icahn who is one of his nominees for a board seat at the upcoming annual meeting, couldn’t be reached for comment tonight.
But Icahn’s team has obviously spent a lot of time and research digging into every aspect of Biogen Idec’s business, and it heaps criticism in every major department.
On the commercial product side, Icahn singled out shortcomings in marketing of interferon beta (Avonex) for multiple sclerosis. That drug has lost the lead in U.S. market share to Teva Pharmaceuticals’ glatiramer acetate (Copaxone), which now has 37 percent of the market, compared to Avonex’s 28 percent. The Biogen product has lost 14 percentage points of market share since April 2005, Icahn said. Another Biogen drug for severe psoriasis, alefacept (Amevive), “never lived up to management hype.” That product generated just $12 million in sales in 2006 instead of the $500 million projected three years earlier, Icahn said. Then there are the sales projections for natalizumab (Tysabri), its fastest-growing product, which were “overly aggressive” Icahn said.
On business development, the company has also “done very little” to defend or build up strength in its cancer drug and MS franchises, Icahn said. This lack of dealmaking prowess “limits future growth prospects,” he said. The company did just one cancer drug deal over the past year even though there were 150 opportunities, Icahn said, while competitors like Bristol-Myers Squibb, Roche, and Pfizer acquired cancer drugs. Biogen has completed just five product in-licensing deals in five years, he said.
On the R&D side, Icahn said Biogen’s productivity is the worst in its peer group, which includes Gilead, Genentech, Amgen, and Genzyme. Among peers, Biogen is the only company that hasn’t introduced a new drug since 2004, Icahn said. During that period, 23 new cancer drugs have been brought onto the market.
On market valuation, Biogen has seen a marginal increase of a couple billion dollars since the November 2003 merger, bringing its value up to about $15 billion as of April 2009. Genentech, by comparison, saw its value more than double in those years to $101 billion, while Gilead and Celgene more than tripled to $43 billion, and $18 billion, respectively, Icahn said.
On executive pay, Icahn pointed out that Mullen has sold $85 million worth of his shares in the company at an average price of $59 a share since the merger. (Biogen shares closed yesterday at $49.14). He noted that Mullen was paid $60.8 million in total compensation, combining salary, bonus, and stock options over the past five years, while Biogen’s stock declined from $66.61 to $47.63 in that time.
The second half of Icahn’s presentation makes the case for why he thinks his four nominees could help turn around Biogen, as some of the same nominees did with New York-based ImClone Systems, which was sold last year to Eli Lilly for more than $6.5 billion. Icahn’s proposals for Biogen include:
—Studying whether to split Biogen into two companies, one focused on neurology, and the other on cancer
—Examining the cost structure of the company
—Prioritizing and re-invigorating R&D
—Improving partner relationships
At the end of his presentation, Icahn summed up his position. “We have shown that management has failed shareholders strategically and operationally, resulting in a company not well positioned for future changes!” (The exclamation point is his.)