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Although a controversial topic, activist hedge funds and private equity firms typically use a small equity stake in an underperforming company to put public pressure on its management and board of directors with the goal of increasing stakeholder value through cost cutting, changes in corporate strategy or management, capital restructuring, asset divestiture and other tactics. Biotechnology investors with recent activist roles include Biotechnology Value Fund, Third Point LLC, Eastbourne Capital Management, and DellaCamera Capital Management among others.

Perhaps the most prominent shareholder activist in biotechnology is billionaire investor Carl Icahn, largely through his Icahn Management LP investment fund. He has created value for some biotechnology stakeholders, including a very quick return with MedImmune, Inc. and a longer-term payoff with ImClone Systems, Inc.

MedImmune, Inc.

On February 14, 2007, Icahn Management LP disclosed that it purchased 2.8 million shares of MedImmune, Inc., or just over one percent of the company. The stock had ranged from $25 to $37 over the prior 12-months and Icahn had threatened to nominate a slate of opposing directors to MedImmune’s board unless the company put itself up for sale, adding that the firm suffered from “very lackluster management.” In less than two months, MedImmune announced that the company hired investment bank Goldman Sachs to help evaluate whether third parties would have an interest in acquiring the company at a price and on terms that would represent a better value for its stockholders than having the company continue to execute its business plan on a stand-alone basis. Less than two weeks later, AstraZeneca plc (NYSE:AZN) announced the $15.6 billion acquisition of MedImmune Inc. for $58 per share in cash, representing a premium of approximately 53% to MedImmune’s share price the day before it was disclosed that the company was for sale. At the time, MedImmune had several marketed products and posted $1.3 billion in 2006 sales.

ImClone Systems, Inc.

Icahn Management LP’s success with ImClone Systems, Inc. took a little longer to materialize – in fact, nearly a decade. Icahn first reported a 5.1% stake in ImClone in October 1999 through a Securities and Exchange Commission [SEC] filing, including the purchase of 594,100 shares from September 29, 1999 to October 10, 1999 at prices ranging from $22.09 to $32.05 a share. At that time, Icahn Management LP reported owning a total of 1.29 million shares of ImClone.

The price of ImClone’s stock reached a high of $74 in early December 2001, but dropped to $14 by February 2002 after the U.S. Food and Drug Administration [FDA] raised serious doubts about test results for the company’s Erbitux® (cetuximab) product candidate for the treatment of colon, head and neck cancers. Investigations, scandals [eg, Martha Stewart] and lawsuits ensued.

By March 2002, Icahn received clearance from the Federal Trade Commission and the Department of Justice under the Hart-Scott-Rodino Act to acquire up to $500 million of ImClone’s stock, or about 40% of the company. In August 2006, Icahn reached an agreement with ImClone to avoid a possible proxy contest by accepting the company’s offer to have him and three of his recommended candidates on the management slate of director nominees for the 2006 annual stockholders meeting. The three nominees were Alexander Denner, a current ImClone director, as well as Charles Woler and Richard Mulligan. Icahn replaced David M. Kies as chairman of ImClone and ousted Joseph L. Fischer, ImClone’s interim chief executive officer [CEO]. At the time, Icahn also reported in the filing that he increased his stake in ImClone to 12.89%.

It wasn’t until October 2008 that Eli Lilly (NYSE:LLY) agreed to pay $70 per share in cash for a total of $6.5 billion for ImClone Systems, a 51% premium to ImClone’s closing price on July 30, 2008, the day before an initial $60 per share offer by Bristol-Myers Squibb (NYSE:BMY) was made public. At the time, ImClone had one drug on the market, Erbitux, which posted $1.3 billion in 2007 sales worldwide, up 18% from 2006.

Three Recent Activist Wins

In view of major coups with MedImmune and ImClone, we reviewed Icahn’s current biotechnology holdings as reported in SEC filings (see Table 1) and identified three companies that have significantly underperformed the NASDAQ Biotechnology Index ((NBI)) over the past five years, but have very recent successful activist outcomes that could positively impact future performance. In particular, Alexander Denner, who has served as Managing Director of entities affiliated with Carl Icahn and as a director of ImClone, has recently been elected as a director at each company. Consider the following:

  • Biogen Idec Inc. (NASDAQ:BIIB): On June 9, 2009, Biogen Idec Inc. reported that Icahn won two seats on the board, giving him leverage to push for change at the company. Alexander Denner and Richard Mulligan, both formerly with Icahn at ImClone, were appointed to Biogen Idec’s board. Icahn owns about 5.6% of Biogen Idec, his largest current biotechnology holding, and has urged the company to consider a break-up or sale to a large pharmaceutical company. Biogen Idec, with more than $4 billion in annual revenue for 2008, sells three FDA approved drugs for cancer, multiple sclerosis [MS] and rheumatoid arthritis. While Biogen Idec possesses a strong pipeline with several drugs in Phase 2 and Phase 3 development, the company’s flagship product Avonex® (interferon beta-1a) will soon face competition from Extavia®, a branded version of interferon beta-1b by Novartis AG (NYSE:NVS) for the treatment of MS that will be introduced this fall. Avonex represented more than half of Biogen Idec’s revenue in 2008.
  • Amylin Pharmaceuticals, Inc. (AMLN): On August 24, 2009, three months after a high profile proxy battle resulted in the ouster of its chairman, Joseph C. Cook, Jr., Amylin Pharmaceuticals announced the appointment of a new chairman. Paulo F. Costa, who formerly headed the U.S. operations of Novartis AG as President and Chief Executive Officer of Novartis U.S. Corporation, took over as chairman after gaining a seat on Amylin’s board in May 2009. At that time, two board members recommended by Icahn and Eastbourne Capital Management, Kathleen Behrens and Alexander Denner, were also elected. Amylin’s top drug Byetta® (exenatide), which it sells with partner Eli Lilly & Co (LLY), is a GLP-1 agonist for patients with type 2 diabetes that is administered twice daily as a subcutaneous injection. Amylin, with more than $840 million in annual revenue for 2008, has set a goal of becoming operating cash flow positive by the end of 2010. An important near-term catalyst for the company, Amylin, Eli Lilly, and Alkermes, Inc. (NASDAQ:ALKS) are working together to develop exenatide once weekly, which would represent the first weekly therapy to treat type 2 diabetes with glucose control and weight loss. A New Drug Application [NDA] for exenatide once weekly was accepted for review by the FDA in July 2009.
  • Enzon Pharmaceuticals, Inc. (NASDAQ:ENZN): In May 2009, Alexander Denner and Richard Mulligan, both formerly with Icahn at ImClone, were appointed to Enzon’s board. More recently, on July 23, 2009, Enzon appointed Alexander Denner as non-executive Chairman of the Board, separating the role of CEO and Chairman. Jeffrey H. Buchalter, who previously served as executive Chairman, continues to serve as a Director as well as President and CEO. DellaCamera Capital, which beneficially holds approximately 8.3% of the shares of Enzon had been making a case for removal of Jeffrey Buchalter as CEO due to excessive compensation, poor stock performance, and questionable expense levels. DellaCamera recently withdrew its consent solicitation to remove the CEO in order to better allow the Company`s new Chairman and new independent director to bring positive change to the Board. Enzon, with more than $48 million in annual revenue for 2008, has a portfolio of four marketed products, Oncaspar®, DepoCyt®, Abelcet® and Adagen® along with a royalty revenue stream from licensing partnerships for other products developed using Enzon’s PEGylation technology.

Table 1: Icahn’s biotechnology holdings (as of 6/30/09)

Ticker

Company Name

# Shares

Held

% of Outstanding

Recent

Price

$ Value of Shares Held

BIIB Biogen Idec, Inc.

16,075,256

5.56%

$49.93

$802,637,532

AMLN Amylin Pharmaceuticals, Inc.

12,971,328

9.20%

$12.91

$167,459,844

REGN Regeneron Pharmaceuticals, Inc.

2,508,001

3.22%

$22.33

$56,003,662

ENZN Enzon Pharmaceuticals, Inc.

3,521,075

7.82%

$7.19

$25,316,529

ENDP Endo Pharmaceuticals Holdings, Inc.

1,129,126

0.97%

$22.74

$25,676,325

EXEL Exelixis, Inc.

2,357,110

2.20%

$5.71

$13,459,098

MEDX Medarex, Inc.

313,040

0.24%

$15.97

$4,999,249

ANX Adventrx Pharmaceuticals, Inc.

4,324,324

3.66%

$0.17

$722,162

EMIS Emisphere Technologies, Inc.

86,430

0.24%

$0.94

$81,244

A Word of Caution

Not all of Icahn’s biotechnology investments turn out like MedImmune and ImClone, so investors should conduct their own due diligence regarding Biogen Idec, Amylin, and Enzon before blindly following the billionaire investor. For example, shares of Telik, Inc. (OTCQB:TELK) plunged more than 70% in a single trading session – falling from over $16 per share to below $5 per share – in late December 2006 after the company reported that its most advanced development compound, Telcyta® (canfosfamide HCI), failed to improve survival in patients with advanced lung cancer or in patients with ovarian cancer. At one point, Icahn Management LP reported nearly a 10% holding in Telik but reported holding zero shares as of December 31, 2008. Shares of Telik recently traded below a dollar.

Disclosure: No positions

Source: Three Recent Biotech Activist Wins by Carl Icahn