Thursday, June 23, 2011

Another Swim Around BioPharma for Icahn

Image extracted from Bloomberg
Carl Icahn is at it again. This time his target is Forest Laboratories (FRX), a $11.5 billion biotech firm that has struggled to create shareholder value for the last decade. Of late, Forest Labs has also struggled with seemingly never-ending complaints from the government about illegally promoting two of its drugs, and from losing its patent protection on Lexapro - one of the company's flagship products.

Recently, Icahn disclosed a 7.2% stake in Forest Labs and announced his intention to nominate four representatives to its nine-member board.

While Icahn may not be exactly what the company is looking for at this time, ultimately, he has been very successful in leading previous biotech firms where he has gained board representation. In total, Icahn has yielded significant returns in the stock of his previous biotech targets. As measured since the time of his first investment, his activism in ImClone, Amylin, Biogen, Enzon, and Genzyme has netted the creation of nearly $17 billion worth of shareholder value (not counting dividends). What follows is a summary of his impressive track record.

ImClone Systems (IMCL)
Market cap at the time of its sale: $6.5 billion

2006: Speculated to have started buying shares when IMCL was trading around $2, Icahn disclosed a 13.85% stake in June 2006. At that time, he opposed a $36/share sale and requested that the interim CEO not be given a long-term employment contract. Additionally, he pushed for more drug trials and improvements in the commercialization of certain products, such as Erbitux. Other aims included increasing R&D spending, reducing costs, replacing senior management, trimming capital expenditures, and boosting free cash flow.

Carl was offered a board seat in August 2006. The interim CEO and Chairman resigned around the time Icahn was named Chairman in late October 2006. In addition to being named Chairman, 4 other Icahn affiliates were elected to the board.

2008: In late July 2008, with influential representation on the board, IMCL turned down a $60/share all-cash buyout offer from Bristol-Myers Squibb, which valued the company at $4.5 billion. Bristol-Myers (which owned 17% of IMCL at the time) was in disbelief when Icahn stated that he found a suitor who valued the company at a higher premium. The pharmaceutical company subsequently raised their offer to $62/share.

On July 30, 2008, IMCL was sold to Eli Lilly (LLY) for $70/share at $6.5 billion, a 51% premium to what shares were trading at just a few days earlier when Bristol-Myers made its offer.

Image extracted from The WSJ (graph from April to Oct 2008)

Bottom Line: Icahn bought shares in IMCL for around $390.5 million.  After 2 years of board representation, those shares were sold for around $818 million, netting him a profit of ~$427 million and creating $3.4 billion worth of shareholder value, a nearly 110% return. 

Amylin Pharmaceutical (AMLN)
Market cap: $1.8 billion

2008: On May 22, 2008, Icahn disclosed a 6.54% stake in the company. A week later, Eastbourne Capital Management disclosed a 12.5% "active" ownership stake. On September 12, 2008, Icahn increased his ownership to 7.3% (owning 10.06M shares). Cognizant about the implications of being considered a group filer with Eastbourne (the group would trigger a 15% poison put trigger on the company's debt), both investors independently expressed their belief that the stock was undervalued and that product development could be improved. The two were also critical of the Chairman.

2009: On January 30, 2009, Icahn increased his ownership to 8.81%, proposed that the company reincorporate from Delaware to North Dakota (a non-binding shareholder proposal), and nominated 5 representatives to the board. That same day, Eastbourne nominated a separate slate of 5 representatives.

AMLN accused Icahn of seeking to sell the company to Eli Lilly. Icahn responded by stating that his intentions were mischaracterized. More verified objectives from the Icahn campaign included cutting costs and improving the commercialization of drugs, particularly Byetta, which the activist felt was a "blockbuster drug" that should have very easily made the company grow value. 

Ultimately, on June 2, 2009, the activists prevailed: Not only was the Chairman and lead director replaced, but 2 Icahn and 2 Eastbourne representatives were elected to the 12-member board. Nevertheless, shareholders did not approve of the Icahn proposal to re-incorporate the business to shareholder-friendly North Dakota.

2010 and 2011: Entire board was re-nominated.

AMLN relative stock price performance 2008 to present

Bottom Line: When Icahn first disclosed ownership and the start of his activist campaign, he starting purchasing AMLN shares at around $24 on average. In the eight months that followed when Icahn accumulated 2.27% greater ownership, the stock price fell substantially, hitting a low of $6.05/share in late November 2008.  Since Icahn's initial investment, the company has been negative and underperformed both its peers and the market. When the board was reshuffled in mid-2009, shares were trading at around $11.10/share. After much volatility, they are now worth $11.87. If measured from the time that Icahn began his investment, ~$2.6 billion worth of shareholder value was lost. However, in part due to the stock's wild swings, it is difficult to say that the company has underperformed since the reshuffling. Overall, it is a mixed record (at best) here for AMLN and a weaker record here so far for Icahn.

Biogen (BIIB)
Market cap: $24.1 billion

2007: On August 15, 2007, Icahn disclosed a 0.8% stake, valued at around $147 million. He pushed for a sale in late 2007 and the company was "unable" to produce a suitor, which Icahn criticized as a deliberate lack of good faith effort. He continued to pursue a sale.

2008: On May 2, 2008, Icahn disclosed 4.24% ownership, then increased it to 6.03% on August 11. He unsuccessfully pursued a proxy contest to get 3 representatives elected to the board. 

2009: With about 5.5% ownership, Icahn pursued a second proxy fight and ended up getting 2 of 4 representatives elected to the 13-member board. He pushed to cut costs and spending, improve partnership relationships, and to enhance product pipeline.

2010: On March 20, 2010, Icahn reached a settlement deal with the company to avert what would have been the third proxy fight. 1 Icahn representative was added to the board, although the activist was seeking 3 more seats.

2011: Icahn continues to own around 5.56%.

BIIB relative stock price performance

Bottom Line: When Icahn started pushing for a sale around August 2007, BIIB shares were trading at ~$57. The stock value of Icahn's holdings has nearly doubled. Evaluated from the time that Icahn began his campaign, or from the time that he gained board representation, BIIB's stock performance significantly outperformed the market generally and its competitors specifically. Since gaining board representation, the stock has nearly doubled to around $100, resulting in the addition of ~$11.5 billion dollars worth of shareholder value.

Enzon Pharmaceuticals (ENZN)
Market cap: $544.3 million

2008: On March 14, 2008, Icahn disclosed 6.93% ownership. He urged the minimization of specific assets, spinoff of the biotech business, and for the company to explore a sale.

2009: On January 29, 2009, Icahn increased ownership to 7.83% and the board agreed to nominate 2 Icahn representatives to the board.

2010: From November 9, 2010 to November 18, 2010, Icahn gradually increased his ownership to 9.72%.

2011: As disclosed in the March 31, 2011, 13F-HR statement, Icahn owns 3.1% of ENZN.

ENZN relative stock price performance

Bottom Line: When Icahn first disclosed ownership, ENZN shares were trading at ~$8.66. Since then, the stock has generally performed equivalent to the market. Since gaining board representation, the picture is a little worse. With shares currently at ~$10.13, about $94 million in shareholder wealth was added.

Genzyme (GENZ)
Sold: $20.1 billion

2010: On March 22, 2010, Icahn disclosed a 3.8% stake in the company and his intention to remove the Chairman & CEO (dual position) and 3 other directors. He also nominated 4 Icahn representatives to the board. About two weeks later, he increased his ownership to 4.91%, criticized management for acquiring unrelated businesses, and pushed for reductions in SG&A, greater margins, better management of manufacturing assets, and the exploration of possible spinoffs. 

GENZ then tried to ward off Icahn by electing shareholder activist Ralph Whitworth of Relational Investors and buying back $2 billion worth of stock, in addition to spinning-off certain assets.

On June 9, 2010, GENZ reached a settlement agreement with Icahn and appointed 2 Icahn representatives to the board, which was increased from 10 to 13 members (2 Icahn representatives and Whitworth would fill the vacancies).

2011: Through a 13G statement (a "passive" investment disclosure), Icahn disclosed 5.06% ownership of GENZ. On February 16, 2011, GENZ was sold to Sanofi-Aventis SA (now Sanofi) for $20.1 billion.

Image extracted from Biotech Sector Investing
Bottom line: In less than a year since the first investment and eight months since gaining board representation, Icahn was able to help drive tremendous returns and sell the business. Icahn is said to have made $300 million off of the investment. As measured from the time that he first disclosed ownership and from the time he gained board representation, shareholder value increased by ~$4.3 billion (27.1%) and by ~$6.9B (52.5%), respectively.

Forest Laboratories Inc. (FRX)
Market cap: $11.5 billion
Annual meeting date: Expected to take place in August 2011

2011: Disclosed 7.2% ownership (19.9M shares) on June 21, 2011.

Background on Forest Lab's recent difficulties

In September, 2010 Forest agreed to pay $89 million to federal programs and another $60 million to states to resolve charges that it – through a subsidiary, Forest Pharmaceuticals – had illegally promoted two of its drugs, Celexa and Lexapro.  Forest also agreed to resolve criminal liability on related charges by pleading guilty to felony and misdemeanor counts.  Those guilty pleas cost it another $164 million, combined fine and forfeiture.  
It appears Forest Labs promoted Lexapro, chemical name escitalopram, as a way to treat depression in children.  Escitalopram is an antidepressant, but it is only approved by the Food and Drug Administration for use on adults with “major depressive disorder” or “generalized anxiety disorder.”  It is said to increase suicidal thinking and behavior in patients under 24 years old.  

Celexa, chemically citalopram, is also an anti-depressant.  The involvement of Celexa in the same accusations and settlements was a bit surprising, though, because citalopram is generally considered a less drastic treatment than escitalopram.  Doctors prescribe it for a variety of so-called “off label” uses.  

Last month, the AFL-CIO, which owns a small stake of its own in Forest Labs called for the resignation of the chief executive, Howard Solomon. Download the AFL-CIO's letter here.

Extracted from the labor federation's press release:  “While we recognize that Mr. Solomon was not personally accused of wrongdoing, we believe that the Chairman and CEO should be held accountable for major regulatory compliance failures by company subsidiaries"

Icahn moves into Forest Labs' stock

On June 10, Icahn nominated 4 representatives to the 9-member board for election at the 2011 annual meeting. He reportedly had a meeting with company representatives on June 14, 2011, where "no agreements or understandings" materialized. Icahn stated his concern about poor stock performance and the loss of patent protection on Lexapro, one of the company's flagship drugs. He also requested that the company disclose information about the OIG-HHS' (Office of the Inspector General, Department of Health and Human Services) exclusion letter preventing Chairman & CEO Mr. Solomon from participating in federal health programs.

Icahn's Nominees:
Dr. Alexander J. Denner - Icahn Capital; Chairman of ImClone Systems; director of Biogen, Amylin, and Enzon (later Chairman of Enzon)
Dr. Richard Mulligan - Director of ImClone, Biogen, Enzon
Professor Lucian A. Bebchuk - Professor of Law, Economics, and Finance and Director of Corporate Governance Program at Harvard Law School. Well respected governance activist.
Dr. Eric J. Ende - Director of Genzyme.

FRX relative stock price performance July 2010 - present

Bottom Line: With enterprise value trading at around 5.53x EBITDA, no debt, $3.85 billion worth of cash in a $11.5 billion market cap company, a quick ratio of 5.13, could Forest Labs be targeted by Icahn for a sale?  It's worth noting that three of Icahn's four nominees have had direct experience in the specific strategic activism highlighted above. It is quite clear that Icahn has been a successful investor in this industry, so a negotiated settlement for board representation is likely being considered by the FRX board, as it was for Biogen and Genzyme (both larger corporations than Forest Labs)...

Download Forest Lab's recently filed preliminary proxy statement

*Graphs extracted and revised from Google Finance

Posted by David Schatz (Hedge Fund Solutions) and Christopher Faille (Christopher Faille writes about a variety of legal and financial issues, and co-authored Basic Economic Principles (2000) with David O'Connor)