Carl Icahn needs to justify his Biogen escalation

January 28, 2010

Carl Icahn has given Biogen Idec  a needed shake-up. The veteran activist investor won two board seats, pushed out the CEO and pressured the biotech firm to put itself up for sale.

But none of it has generated much of a return for shareholders. Unless Icahn proposes new ideas, his 6 percent stake in the company doesn’t merit the extra influence he wants.

Biogen has had its problems. The company’s labs don’t appear particularly effective at drug discovery despite spending a higher percentage of revenue on research and development than the typical biotech.
Investors spotted the shortcomings. The shares have underperformed the Amex Biotech index by more than 50 percent over the past five years.

But Icahn didn’t talk with his feet. Instead, he won his board appointees last year after a two-year fight. The burden now falls on him to show why he deserves the three more he wants on the 12-seat board.

While Icahn says the company fluffed its chance at selling itself, Biogen doesn’t look too appealing. Yes, it’s valued at 3.5 times estimated sales, while competitors trade at around five times. But Biogen deserves a discount. Its labs haven’t delivered. And its most attractive drugs, such as Tysabri for multiple sclerosis, are encumbered by licensing agreements and change-of-control clauses. A buyer of Biogen might not end up with Tysabri.

Icahn’s other proposal, splitting the company, doesn’t seem likely to generate value. Biogen’s administrative costs as a percentage of sales are already below competitors such as Amgen and Genzyme.

The best way to improve Biogen would be to appoint a good CEO. An Icahn appointee is one of the four members on the search committee. So he already has quite a bit of say, if not a disproportionate amount, on who will run the company.

If Icahn can devise a credible plan for Biogen, then he may deserve more seats. He hasn’t yet. But if he wants to control the company’s direction that badly, perhaps he should just make a bid.

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