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Fresh off his victory over the board of directors of CVR Energy (CVI) in his battle to take control of the company, Carl Icahn is now turning his sights to Amylin Pharmaceuticals (AMLN). And as history has shown time and time again, companies are wise to, at the very least, pay attention to what Carl Icahn has to say.

After the markets closed on Tuesday, April 3, CNBC interviewed Carl Icahn, who stated that "if ever a company should be sold, it's this company." Icahn thinks that Amylin has a great drug in Bydureon, but that it simply does not have the financial strength to properly commericizlize the drug. Our first article on Amylin highlighted the company's weak financials as a prime reason to avoid investing in the company. While our overall thesis on Amylin has changed since then, the financial aspect is still largely true. Amylin more debt than 90% of biotechnology companies, and it faces commercialization challenges. But it would seem that Bristol-Myers (BMY) liked what it saw, or else it would not have allegedly bid $22 per share for the company. There has been no response from Amylin or Bristol-Myers regarding this offer. And now it appears that Carl Icahn's patience has run out.

The Letter: The Style of Dan Loeb, The Indignation of Carl Icahn

On the morning of April 4, Amylin filed a form SC 13D/A with the SEC, in which it disclosed a letter that Carl Icahn sent to the Amylin's board. The letter is written in the style of Dan Loeb, whose letters to management are always free of pretention and do not mince words, and features the indignation of Carl Icahn, who does not enjoy being sidelined by what he deems is incompetent managers and directors. Alongside the letter, it was noted that Icahn has a 8.94% stake in Amylin.

In the letter, Icahn expressed both his optimism in Bydureon and his frustration with management. Icahn stated that:

"it appears to me that there are significant risks in Amylin continuing as a stand-alone venture. Chief among our concerns is the company's weak financial position, which is exacerbated by a debt load that is far in excess of the average for the company's peers. Amylin has experienced significant losses since its inception in 1987, including losses of $543.4 million in 2011, $152.3 million in 2010 and $186.3 million in 2009. By your own admission, the extent of the company's future losses and the timing of potential profitability are uncertain, and Amylin may never achieve profitable operations. The company's future is highly dependent on its three commercial products, Bydureon, Byetta and Symlin, which may not be as commercially successful as the Board hopes in the company's hands because of its lack of scale. Furthermore, now that Amylin has finally succeeded in terminating its relationship with Eli Lilly, we think that pursuing an international partnership would be an egregious error [emphasis his] because it would make it more difficult for the company to be sold to a third party that would not want to be saddled with that relationship."

Icahn is concerned that even though Bydureon may be a great drug, the company does not have the resourced needed to properly realize its full potential. He believes that Amylin should not continue as a stand-alone entity.

Icahn's frustration runs deeper than the company simply turning down Bristol-Myers' bid. He thinks the way the board is communicating with shareholders is flawed. Furthermore, Icahn notes that Amylin diluted shareholders by offering 10% of the company in a secondary sale for $15.92 per share. At the time of the sale, we viewed it as a positive, for it helped strengthen Amylin's balance sheet, something that the company dearly needed, and to a large extent, still needs. But that offering stands in a different light now that a takeover is on the table. It is dilutive and served no real purpose. There is no point in strengthening the balance sheet at the expense of shareholders if the company will soon cease to be an independent entity. In addition, Carl Icahn thinks it is highly inappropriate for the board to have granted options to Amylin executives at a strike price of $16.02 per share (a gain of nearly 47% based on current prices). Icahn, repeating what many analysts have stated, argues that there is a great deal of synergy that can be realized in a merger by cutting redundant SG&A and other costs.

Amylin executives have, in the past, made no secret of their preference for an international partnership to commercialize Bydureon as opposed to an outright sale of the company. Yet Icahn, like many analysts, sees this as a mistake. The market will not tolerate the signing of an international partnership as opposed to a takeover, and the stock will plunge the day such an announcement is made. Icahn views an international partnership as an egregious error, for it diminishes that chances of a takeover because a would-be acquirer would not want to be saddled with that partnership.

The Proxy Battle

Carl Icahn is not a quiet shareholder. When a company is not acting the way he thinks it should, he makes his opinions well known. And when the board does not listen to him, he tries to change the board. And that is exactly what is being done here.

In his letter, Icahn notes that the deadline to nominate nominees to the board of directors has passed. However, he cites extraordinary circumstances in demanding that Amylin allow for new nominees (presumably his own) to be put to a vote at the company's annual meting by 5 P.M. eastern time on Thursday. In addition, Icahn is demanding to examine records related to the Bristol-Myers bid under Section 220 of Delaware's General Corporation Law. Icahn states that he does not wish for a proxy battle, as it is costly and can be distracting, but he will begin one if the board does not pursue a sale process, and is ready to sue the company in court if it fails to allow for new board nominees. We believe that should it come to a proxy battle, Carl Icahn will likely prevail. Most Amylin shareholders are now set on having the company be taken over, and if the board is opposed to those wishes, than the board should be changed

Conclusions

We stand with Carl Icahn in demanding that Amylin allow for new nominees. There has been a noted lack of communication, with no confirmation or denial of the bid. The only comments Amylin has made is a generic statement that the board is focused on "creating the greatest value for stockholders." Bydureon has a good deal of potential, but Amylin may not be the company that is best suited for that objective. Amylin has not posted a single annual profit since its founding in 1987. Even in the biotechnology sector, 25 years of unprofitability is difficult to explain away. A biotechnology company that is unprofitable for 25 years should either fold, or be sold.

We initiated our position in Amylin based on the belief that management could finally guide Amylin to profitability, even if it would be a difficult task. We believed that over time, if all went right for the company, Amylin could eventually achieve profitability. But the developments that have unfolded since then, namely the takeover offer from Bristol-Myers, and Amylin's unresponsiveness, have changed the landscape dramatically. We are now convinced that if the current board of directors will not do what is right for shareholders, it is time for a new board.

Source: Amylin Pharmaceuticals: Enter Carl Icahn And The Proxy Battle