Wednesday, February 21, 2007

Wanna scare a CEO?

Just say these 7 scary words: "Mr. Icahn is holding on line 2"

To a CEO, there's probably few things messages more dreaded than a call from Carl Icahn. (With the possible exception of the classic "I saw your daughter on Springer last night.")

King Carl apparently has developed a taste for biotech, following his experience with ImClone.

This month's lucky recipient of a call from Icahn is David Mott, CEO of Medimmune. Congrats, Dave!

I don't know Medimmune's story well enough to comment on what Icahn's interest in MEDI means and what actions might follow, but it's a good opportunity to see what this means for the industry.

One view might be that Icahn's involvement is likely to hurt the biotech industry as his activities might scuttle 2 viable biotech companies (IMCL and MEDI), either thru their outright sale, or by sacrificing R&D in order to increase short term earnings.

I tend to think, though, that Icahn's involvement is very positive, at least for the industry, if not for IMCL or MEDI. Here's 10 reasons why:

1. Interest by corporate raiders validates the biotech industry as viable businesses, rather than a collection of high-risk experiments.

2. Raider interest will attract other sources (non-alternative investments) of capital sends the message that biotech may be volatile, but not necessarily risky. (As opposed to the current notion that biotech is risky, but not necessarily volatile.)

3. Corporate raiders will keep biotech more slim and agile versus big pharma. (Though I've heard rumblings that some hedge fund could take down a pharma one of these days, so maybe this edge won't hold for long.)

4. Raiders force target companies to focus on "what's next," rather than complacently focusing on the sales and marketing of existing products.

5. Raiding will bring about needed consolidation among mid-sized biotechs, as the raiders view the overhead for companies at this size as a bad investment.

6. Raiders will increase the amount of business discipline within the industry. (And likely instigate management turnover, which could also be management evolution.)

7. Raiders will increase attention on the biotech industry.

8. Biotech has (and probably will always be) a game of capital raising. Raiders will bring more capital to the biotech industry, though the capital will tend to be higher-velocity.

9. Attention to financial returns by biotechs will increase among industry folks, as raider interest is in part related to the very high margins earned by biotechs. The high margins decrease risk for raiders, and can generate large amounts of incremental cash to justify raider transactions, if the margins are believed to be improvable.

10. Raiders (and other private equity types) may innovate new vehicles to finance biotech. One of these 'innovations' is quite old, but new to the biotech industry: dividends. (Icahn, in particular, often presses target boards to increase their dividend to drive stock prices.)

One other wildcard thought: there could be other angles to Icahn's involvement. What if Icahn were to instigate the combination of IMCL and MEDI (and perhaps others)? Ignoring the specific stories of IMCL and MEDI, there could be a nice cash flow generated from combining any mid-sized biotechs, with the surviving entity succeeding much like BiogenIdec. Hmmmm.

Note: these comments come from an N=2, but I tend to think that Icahn's pursuit of biotechs is representative of what's to come for the industry.


curiousGeorge said...

You must be unaware of Icahn's interest in TELK.

In my opinion TELK's small molecule oncology-focus complements IMCL's strategy nicely.

And for the idea of selecting better managers, my experience shows that talented managers in small-mid sized biotechs are rare indeed, so addressing this presents big opportunities.

milkshake said...

In my experience talented managers are rare in big pharma as well. In addition, the few talented managers in big pharma are railroaded away from doing meaningful things.

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