Panel: Activist success begets more activism by biotech shareholders

Print 29 June 2015
Jennifer Boggs / BioWorld

PHILADELPHIA – With biotech enjoying a spurt of tremendous growth – increasing market caps and widening profit margins – another trend has emerged, one that’s not quite so enjoyable, at least for company execs: increasingly confrontational shareholder activity.

A recent example is the ousting of Ariad Pharmaceuticals Inc.’s longtime CEO Harvey Berger, a move that pre-empted a further proxy fight with hedge fund Sarissa Capital. And it’s often found amid M&A negotiations, such as last year’s hostile bid by Valeant Pharmaceutical International Inc. for Allergan Inc., pushed forward by activist shareholder Bill Ackman, of Pershing Square Capital Management. That saga ended with a better offer from Dublin-based Actavis plc. (See BioWorld Today, April 23, 2014.)

The truth is shareholder activism has always been around – company stakeholders trying to make sure management doesn’t misuse capital resources and that it protects shareholder value – and there have always been the big name activists such as Ackman and Carl Icahn. But in recent years even previously passive shareholders have started getting more confrontational, in large part because it works.

The number of proxy fights over the past five years has remained about the same in U.S. business. But the prevalence of activist shareholder success – defined as attaining a board seat through a vote or settlement – is increasing, according to Jonathan Salzberger, director of proxy solicitor firm Innisfree M&A Inc.

In 2012, activist shareholders had a 52 percent success rate, Salzberger said. In 2013, that success rate was 60 percent and, in 2014, it was 74 percent. Through June 12, activists have a 67 percent success rate, with 22 contests remaining for the year.

“We are now witnessing activism on steroids,” said Barrett Golden, partner at Joele Frank, a New York firm that works on the defense side against activist shareholders.

And “no company or industry is immune,” she told attendees at a session (Managing Your Response to Activist Shareholders) at the BIO International Convention last week. Nor are size and company performance preventive measures, she added, as evidenced by the recent proxy fight at Dupont, a chemical firm with a market cap of $60 billion. Dupont managed to repel the board challenge by activist investor Nelson Peltz last month.

Another disturbing tidbit: While the names of Ackman, Icahn and other headline-making activist shareholders might strike fear into the hearts of management teams, it’s the new, lesser-known activists companies should be wary of, Golden said. Those are the activists that are “very aggressive, loud [and] difficult to negotiate with . . . because they need the street cred.”

In a way, the rise of increasingly forceful shareholders is a result of the success of the biotech industry. Simply put, “there’s much more value to go after,” said Spiro Rombotis, CEO of Cyclacel Pharmaceuticals Inc. and an industry veteran whose three decades in the business includes being one of the first employees of Centocor Inc., a firm acquired by Johnson & Johnson in 1999.

Back then, shareholder activism tended to take the form of short sellers, he said, and tended to be driven by the fact that many investors simply didn’t understand the timelines and high failure rate unique to the biotech industry.

Today, however, many investors are well-versed in biotech. With those, management needs to engage, in part because those investors can offer valuable input, but also because keeping those backers clearly informed can help pre-empt conflicts before they turn into full-blown proxy fights.

When dealing with less educated investors, however, Rombotis advises hiring experts. “You should bring the pros in,” he said.

Regardless of industry, the activist “playbook” remains pretty much the same, said Sven Pfeiffer, managing director at Lazard Partners. It starts with private discussions between the activist shareholder and the company’s management and board. Then comes the media and public relations campaign and bringing aboard other activists. After that, only the proxy contest remains.

Of those, the publicity can be the most damaging. As Joele Frank’s Golden noted, “Activism sells newspapers.

“It’s easy for activists to make headlines,” she added. Companies, however, are precluded from speaking with the same candor. So while she encourages management teams to engage with activist shareholders during those initial discussions, executives must still proceed cautiously because “everything you’ve said can and will be used against you in the court of public opinion.”

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