Third Point’s Dan Loeb Pushes Amgen Breakup

Speculation began almost immediately after Dan Loeb’s Third Point impressively raised $2.5b in just two weeks this summer. Who would the new targets be? Existing investments? Foreign companies? One new mark was just identified in the fund’s most recent quarterly letter as Amgen (AMGN), the $100b+ market cap biotech giant. The letter, which is worth a read in its entirety, suggests that Amgen should consider breaking itself up into a high growth/high R&D expenditure company and a slow growth/more mature products company. Mr. Loeb believes investors would welcome such a split and that the move would even help the company’s day to day operations:

Internally, each business would have different priorities: MatureCo would focus on efficiency and cash flow, while GrowthCo would emphasize product development and innovation. Externally, each business would be valued with different metrics: MatureCo on a dividend yield and GrowthCo on a peer‐based sales or earnings multiple.

This type of asset split is not a new idea for a spinoff and others have had success following that approach. Mr. Loeb was first attracted to the company because ‘using nearly any valuation metric, the Company trades at a substantial discount to peers,’ despite having historical success and a good mix of products,  Apparently, it even trades at a discount to the broader US pharma sector ‘despite superior revenue and earnings growth rates.’ Typically, good companies don’t get punished for no reason (especially in this market environment), so what gives? It’s not all good news as Third Point noted, and agreed, with several pointed criticisms of the company including:

  1. Its historical lack of R&D productivity
  2. More than a decade of flat operating margins; and
  3. The suspension of its share repurchase program in 2013 following its $9 billion acquisition of Onyx Pharmaceuticals

So…in other words, maybe it’s actually not operating as well as its peers? It’s not 100% clear how a spin would solve these issues, but Mr. Loeb has a few other ideas for the company to turn itself around such as:

  1. Focusing its R&D efforts
  2. Providing long‐term margin guidance demonstrating a commitment to reducing a bloated cost structure; and
  3. Creating clarity on additional shareholder returns.

Using these suggestions and the company’s own restructuring plans, Third Point calculated a wide range of potential value in two years. The range went from $189 (current management plan with 17x peer multiple) to $219 (Third Point restructuring ideas & peer multiple) to $249 per share (the breakup). All three represent nice upside to Amgen’s current price, but the breakup number represented an over 80% gain to the pre-letter price. Certainly enticing.

Investors liked the ideas (or Third Point’s involvement) and sent the stock soaring. Mr. Loeb believes the Amgen management team to be ‘receptive’, but the company took the polite tact in responding, issuing a brief, yet formal statement yesterday:

Amgen maintains an active, engaged dialogue with all shareholders. Amgen 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.  Amgen’s Board of Directors frequently receives input from shareholders, including ideas like those offered by Third Point. The Board and management continually assess Amgen’s strategic priorities – and, when appropriate, take action – to set the best path forward to increase shareholder value.

While there are many ‘ways to win’ with Amgen according to Third Point, it will be interesting to hear the company’s more detailed response during its upcoming investor day. I would guess the company would prefer to stick with a less dramatic restructuring plan, but it’s worth noting that Third Point carries a lot of clout and is now one of Amgen’s ‘largest shareholders’. If nothing else, this serves as a reminder that no company, no matter the size, is safe from activists these days.

Disclosure: Author holds no position in any stock mentioned.