[Update: 1:55 pm Eastern, 11/20/09] After a bitter standoff earlier this year with billionaire investor Carl Icahn over alleged mismanagement, Cambridge, MA-based Biogen Idec now faces another sharp attack from a major shareholder.
New York-based HealthCor Management, a hedge fund that invests in health and biotech companies, said today in a regulatory filing that Biogen (NASDAQ: BIIB) overpays CEO James Mullen, that his performance has been poor, and that the company has a record of “excessive and fruitless” spending on R&D and little regard for its shareholders. HealthCor portfolio managers Joseph Healey and Arthur Cohen, in a letter dated November 18, urged the board to “revisit” Mullen’s compensation, cut research spending, and start buying back shares to boost the stock price. HealthCor said it holds 3.65 million shares, or about a 1.3 percent stake in Biogen, and it has held a position for more than a year.
HealthCor is urging the board to turn things around by buying back $500 million to $1 billion worth of stock annually. That would reduce the supply of available shares, and increase the value of those that remain on the market.
“We fear that continued acquiescence to the status quo will be viewed as an indictment of the Board’s lack of focus on shareholder value creation,” HealthCor wrote in a letter to the board, which was disclosed to the Securities and Exchange Commission.
[Update with company response, 1:55 pm Eastern, 11/20/09.] Biogen Idec “actively engages with our shareholders and we appreciate their input,” says company spokeswoman Jennifer Neiman. That said, she also noted that Biogen has already done share repurchases worth $5 billion since 2004, and last month its board authorized an additional $1 billion of share repurchases.
HealthCor said in its letter that it has been arguing for changes at Biogen for more than a year. The fund noted that the company’s stock has seen no real growth for six years, and is currently trading near levels seen before the company filed for FDA approval of natalizumab (Tysabri) in 2004. (The stock was selling for $44.26 per share on February 17, 2004, and was at $46.05 at the time HealthCor wrote its most recent letter on November 18, 2009.)
While “investors have been left holding the bag,” in HealthCor’s words, the firm noted that Mullen has been getting rich. The Biogen CEO has received $63 million in compensation during this nearly six-year period, and he has sold $85 million worth of stock.
“We demand that the Board take steps to ensure that Mr. Mullen’s compensation is more closely aligned with the interests of the shareholders he is working for,” Healey and Cohen wrote in their letter to the Biogen board.
HealthCor also criticized Biogen for failing to develop any significant new drugs since the FDA approval of natalizumab in 2004. In an analysis of Biogen’s peers, HealthCor says the company is spending too much on R&D and getting too little in return. The analysis resembles one that Icahn released earlier this amidst his campaign to get Biogen shareholders to elect new directors.
It’s estimated that Biogen will spend about 27 percent of its revenue this year on research and development, while the average rate among its peers is 18 percent, according to HealthCor. “One analyst report suggests that Biogen Idec would be worth $5 to $6 more per share, if the Company cut R&D to a more reasonable 23 percent of sales,” Healey and Cohen wrote.
The performance of the R&D group has been “particularly disappointing,” HealthCor said, because only two of the company’s drugs in late-stage clinical trials were developed in-house or remain wholly owned by Biogen. Those two examples are the longer-lasting version of interferon-beta1a (Avonex), and a new use of the same drug for ulcerative colitis.