An Analysis of Icahn’s Biogen Idec Strategy: Why Three Board Seats When Four Will Be Open?

Carl Icahn is making no bones about it—he is not happy with the way Biogen Idec handled its efforts to seek a buyer for the company, and so now he’s moving to take matters more into his own hands. That was the point behind Icahn’s announcement Monday that he plans to advance a slate of three candidates for Biogen’s board at its upcoming annual meeting. But what he didn’t explain is the reason he only asked for three board seats when four are coming up for vote: because he has no interest in trying to knock Biogen co-founder and MIT Nobel Laureate Phillip Sharp, one of the four directors slated for reelection, off the board. He is also well aware that a sale of the company might take a while and is positioning himself for a longer-term effort.

Those are two insights provided by a source close to Icahn’s thinking who asked not to be named, combined with a closer analysis of the investor’s announcement.

As laid out in general terms in Icahn’s press release, the bid for three board seats at the upcoming election (the date of which is not yet set but will likely happen by late spring) is part of a longer-term strategy to position Icahn to take control of the board at the 2009 annual meeting, when four more seats will be up for reelection. If Icahn were to win three seats this year and four next, the resulting seven seats would be enough to control the 12-person board. (That’s assuming it remains a 12-member board; Icahn is also proposing that Biogen’s bylaws be amended to fix the number of board seats at a dozen.)

Icahn is, of course, an astute investor and likely was under no illusions that things would be easy when he pushed late last year for a sale of Biogen—for reasons I’ll get to in a minute. But, as Icahn said in his press release, “We believe that the process was flawed in a number of key respects and that the process was run to placate us and other large shareholders who we believe asked for Biogen to find a buyer.” In particular, the statement cited the confidentiality agreement that prospective buyers were required to sign before they could talk to Elan Pharmaceuticals, Biogen’s partner on the key drug Tysabri, which is approved for treating multiple sclerosis and Crohn’s disease. (Elan holds some change-of-control rights on Tysabri that, if exercised, could discourage a sale of Biogen). Icahn stated, “We also believe that the confidentiality agreement was so restrictive that certain potential bidders were not able to sign the agreement and therefore were not able to participate in the bidding.”

Biogen director of public affairs Naomi Aoki told me, as she has said to other members of the press, that Biogen “ran what can only be described as a thorough, comprehensive process that was in keeping with industry standards.” And at an investor meeting earlier this month, Biogen CEO Jim Mullen also defended the process, saying it was like making an offer to buy a home, contingent on a final inspection, according to the Boston Globe. But that clearly was not how Icahn viewed it. He saw it more as prospective buyers being asked to make a significant commitment to purchase before they could even fully inspect the goods—a process that could make them nervous from the outset. Or, put another way, if a prospective buyer is going to spend $20 billion or so, it would like to talk to Elan directly from the get-go.

Indeed, Tysabri is central to the deal. And the biggest issue with the drug is a rare, often fatal brain infection called progressive multifocal leukoencephalopathy (PML) that occurred in three Tysabri users. In response to those cases, the drug was pulled from the market in February 2005. In July 2006 it was reintroduced under a strict prescribing and monitoring program; while there have been no new cases of PML in Tysabri users since that time, one theory—or fear—is that people who take the drug over a prolonged period might be more prone to the infection. That risk of an increased rate of the infection going forward is one reason even if companies could have easily negotiated with Elan, a sale might have been tough.

Our information is that Icahn understands that the question marks around Tysabri could mean that a sale of Biogen will take time—indeed, another year or so of safety data could help quell fears about PML—and that the investor is prepared to wait. But recent events nudged him to get more active in the meantime. Basically, as Icahn laid out in his press release, he was miffed by Mullen’s widely reported comments—in an interview with Mergermarket quoted in the Financial Times—that Biogen could spend up to $10 billion on an acquisition. Icahn’s statement referred to such an acquisition as a potentially “toxic” action that could greatly raise the price for Biogen and discourage future suitors. And the Mergermarket interview was followed by reports that Biogen was looking into a potential purchase of Danish biotech firm Genmab (While Biogen doesn’t comment on possible acquisitions, a source close to Biogen says that neither deal is likely).

Icahn decided to act. As Rebecca reported on Monday, he put forth his slate of Alexander Denner, the managing director of two of his investment funds; Richard Mulligan, a professor of genetics at Harvard Medical School and the director of the Harvard Gene Therapy Initiative; and Anne Young, another Harvard Medical School professor and chief of the neurology service at Massachusetts General Hospital. Both Mulligan and Denner are also members of the ImClone board and were part of Icahn’s 2006 takeover of that company.

Biogen’s board has staggered three-year terms, with four of its 12 directors coming up for vote each year. Icahn wanted to put three in place this year. And the reason for three is if in fact things don’t go well, shareholders could then on the next election cycle put in another four directors. That would give Icahn seven seats, if his slate won again, enough to control the board. Icahn saw it as important to put that threat in place.

But there was another reason Icahn chose to put forth only three director candidates this year: to leave room for Biogen co-founder Sharp to remain on the board. (Whether that’s because he likes Sharp or just doesn’t want to mess with such a weighty figure, or both, is unclear. And Mulligan, as we also noted previously, did part of his training in Sharp’s lab at MIT’s Center for Cancer Research.) The current terms for Sharp, Cecil Pickett, and longtime board member Lynn Schenk are all expiring this year. (A fourth director, Thomas Keller, will have reached mandatory retirement age by the time of the annual meeting).

Icahn is a veteran boardroom battler and must have reasons to believe he can pull this off. But whether he does or not, he is a major Biogen shareholder, with around 4 percent of the company’s stock at this point. He will continue to push for a sale at the right price.

There simply are just a very small number of companies that have the ability to make a biologic drug, and Biogen is one of them. That’s seen as a very valuable asset to one of the Big Pharma companies that is not in this space but wants to be. Pfizer has been widely speculated to be the most likely suitor for Biogen. Novartis, Wyeth, Johnson & Johnson, GlaxoSmithKline—and pretty much every other major drug company—have been mentioned as potential buyers as well. The pharma companies are contending with enough of their own problems that it may take them a while to make the move on Biogen. But, presuming they do get there, one way or another Icahn will be on hand to help.

Bob is Xconomy's founder and chairman. You can email him at Follow @bbuderi

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