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| Third Point CEO Daniel Loeb |
Hedge fund manager Daniel Loeb is lending his voice to the chorus of investors who believe Amgen ($AMGN) would do better as two companies. And his firm, Third Point, has upped its stake in the Big Biotech, giving him a bigger stage from which to pressure executives.
Loeb disclosed Third Point's expanded interest in Amgen at an investor conference on Tuesday, and, illustrating his clout, the company's shares promptly jumped 5%. In a letter to investors issued shortly thereafter, Loeb put forth his thesis: Amgen is a company with a pedigree of innovation in biotech, but, due to sloppy R&D spending, flat margins and some errant M&A, the drugmaker "has all the hallmarks of a hidden-value situation, one of our favorite investment themes."
How do you unlock that value? Loeb proposes a few across-the-board austerity measures but concludes that the move with the highest upside is an all-out breakup, leaving one company to handle Amgen's legacy drugs, like the blockbusters Neulasta and Enbrel, and forming a spinout would carry forward with the unapproved pipeline, headlined by the cardio drug evolocumab and leukemia treatment blinatumomab.
"In two years, we expect that such a separation could create almost $249 per share in total value, over 80% upside to the current share price," Third Point wrote.
In a statement, Amgen said it "has always appreciated the perspectives of all of its shareholders, including Third Point, and welcomes constructive input toward our common goal of enhancing shareholder value.
"... The Board and management continually assess Amgen's strategic priorities--and, when appropriate, take action," the company said, adding that it will further discuss its future at an analyst day scheduled for Oct. 28.
Loeb's suggestion echoes escalating pressure from Bernstein analyst Geoffrey Porges, who first issued the call for a split over the summer.
According to Porges, Amgen's problem stems largely from its appetite for risky R&D. Over the last 10 years, the company has spent about $30 billion on R&D--including buyouts--but generated just $15 billion in cumulative revenue from the resulting drugs, he wrote in June. The company's $9 billion acquisition of Onyx Pharmaceuticals didn't help matters much, according to Porges, who argues that the best outcome for investors is the above-mentioned split into a high-margin drug seller and a smaller, R&D-focused operation.
Porges' initial suggestion stirred plenty of conversation in biotech circles, but Loeb's signal boost could make for critical mass. Third Point is now among the 15 largest stakeholders in Amgen, according to its letter, meaning Loeb and company have a sizable megaphone for their message. And, considering the instantaneous bump in share value, investors may be willing to back them up.
Such a split would mirror the largely successful move staged by Abbott Laboratories ($ABT) last year, launching the pipeline-focused AbbVie ($ABBV) while retaining its med tech, generics and nutrition business. Baxter ($BAX) is on the eve of a similar effort, planning to retain its dialysis and diagnostics business under the old name and spin its biopharma holdings out into a new operation called Baxalta next year.
As for Amgen, the company's best defense may come via execution, and it has plenty of opportunities to prove its critics wrong over the next year. The biotech has already filed FDA applications for evolocumab, blinatumomab and the cancer vaccine T-Vec, three treatments that could bring in blockbuster sales, and it has a potential multibillion-dollar drug on its hands with the AstraZeneca ($AZN)-partnered psoriasis treatment brodalumab. If each of those high-risk bets makes its way to market, the conventional wisdom on Amgen could be quite different by 2016.
- read the letter (PDF)