12/4/2023
Will Resurgent Shareholder Activism Help Reignite the Biotech Sector?
IFA Magazine (12/04/2023) Bratley, Meg
The biotech industry is on a stable and long-term growth trend, thanks to an aging population and accelerating scientific innovation. However, the investment cycle in biotech stocks does not always reflect this, with new technologies and shifting sentiment often fueling exaggerated highs and lows in share prices — which investors can exploit. There are five stages in this investment cycle: despair, recovery, equilibrium, euphoria and correction. The most recent loop around this cycle was exaggerated by the Covid-19 pandemic, which raised focus on the biotech sector. This resulted in an increase in retail trading during lockdown, but the subsequent comedown in the Spring of 2021 was equally sharp and the biotechnology industry has now lagged the market as a whole for two years. However, there is some hope on the horizon. The market currently is alternating between recovery — in which the pace of mergers and acquisitions (M&A) kickstarts and valuations start to recover; and equilibrium — in which there is an influx of capital, a steady stream of M&A and an active IPO environment. There are several signs experienced fund managers will be seeking to give them confidence about a genuine recovery. During 2022, M&A in the sector increased, with appetite fueled by the combination of impending patent expiries and big cash balances at the large pharmaceutical companies. This has continued into 2023, with significant transactions occurring such as Amgen’s (AMGN) recently completed $28bn takeover of movement from the recovery phase to the equilibrium phase of the investment cycle. In early May, Johnson & Johnson (JNJ) successfully spun off its consumer healthcare arm Kenvue (KVUE), raising $3.8bn, the biggest ever IPO in the sector and one of seventeen biotech IPOs so far in 2023. As the biotechnology industry moves out of recovery and into equilibrium, there also tends to be a boost in shareholder activism. Shareholders tend to become more assertive during this period because they are frustrated with the lack of activity and poor returns during a protracted downturn, so they begin to rattle the cage in order to extract returns on their investments. Investors may feel the market recovery is taking too long, and they need to take proactive steps to accelerate the next phase. They may also think management at individual companies is failing to live up to expectations. There has been an increase in such shareholder activism in 2023. In April, Farallon Capital sent a letter to the board of Exelixis (EXEL) announcing its nomination of three directors to the board. The hedge fund said the biotech firm should focus its research and development efforts, communicate a differentiated and coherent strategy and commit to ongoing distributions of excess capital to shareholders. All three Farallon candidates were elected at the May AGM and a share repurchase program was launched. In June, Illumina (ILMN) CEO Francis deSouza quit amid pressure from Carl Icahn. The proxy fight was spurred by the market punishing the valuation of Illumina after deSouza pushed ahead with the acquisition of cancer blood test developer Grail in the face of opposition from the U.S. Federal Trade Commission which continues to challenge the transaction. Icahn backed the new CEO Jacob Thaysen at the September AGM. Subsequently in October 2023, EU regulators ordered Illumina to dispose of Grail, dismissing Illumina’s claim that Grail’s lack of EU revenues put them outside the EU’s jurisdiction. After its success deposing the chairman and imposing seven new directors at Amarin (AMRN) in March 2023, Sarissa Capital launched a third proxy fight at Alkermes (ALKS), hoping to secure its choice of three new board directors. Sarissa accused Alkermes’ board, which already includes one earlier Sarissa nominee, of overseeing “tremendous shareholder value distruction” but didn't win adequate wider shareholder backing to depose any directors in the June 23 AGM. In November, Biomarin was engaged by Elliott Management, which reported a $1bn investment in the company. The company's shares rose 12% on the news.
Read the article