Biopharma — Beware Of The Activist Investor

By Rob Wright, Chief Editor, Life Science Leader
Follow Me On Twitter @RfwrightLSL

Activist investors and hedge fund managers seem to take a general view that the business of business is business. Let’s consider an example just outside of our industry.

Since consumer food giant Mondelez International was spun off from Kraft Foods in 2012, shareholders have notched a total return of about 68 percent, 13 points above the S&P 500, and 16 points above its industry peers. But that success hasn’t stopped hedge fund managers turned activist investors (e.g., Nelson Peltz and Bill Ackman) from acquiring a significant stake in the company and then proceeding to push for even higher profits. While their meddling may result in greater returns, what will be the true cost of that success? Mondelez CEO Irene Rosenfeld says that addressing the concerns of just two activist investors consumes one-quarter of her time and has resulted in her requesting a new executive to assume some of her duties so she has more time to deal with activist-related issues. But while these activist investors play “corporate fantasy budget football” with a Fortune 100 business, one has to wonder how long before their cost-cutting initiatives result in decreased productivity, employee burnout, higher turnover, lower product quality, or product recalls. As outsiders we might not get overly concerned about a bad batch of Oreos or Ritz Crackers, but what if an activist investor took a shining to your biopharmaceutical company? Doesn’t the prospect of activist meddling that leads to a shortage of life-sustaining medications seem a bit more serious? And while you might think Big Pharma immune to such a scenario, consider this: If Mondelez International were a biopharma, it would be bigger than Gilead, Amgen, AbbVie, Lilly, Bristol-Myers Squibb, Biogen, and Celgene.

As you field questions from investors who unabashedly maintain the mantra of being in the business of shareholder profit and not helping the sick, keep in mind the importance of ethical decision making. For what will be the consequences should more investors such as Martin Shkreli and Kyle Bass decide they want to play biopharma CEO for a day? Although activist investors can be good at bringing new ideas to the table, potentially lifting value and holding leadership accountable, they also can be extremely fickle. Just ask David Pyott, former president and CEO of Allergan, who is featured in our article on page 20. In fact, like Irene Rosenfeld, Pyott, too, has had the pleasure of having to deal with Bill Ackman, who partnered with Valeant Pharmaceuticals in a hostile takeover attempt of Allergan back in 2014. When I asked Pyott what was one of the biggest lessons he learned during the tumultuous time period that he refers to as “seven-and-a-half months of total war,” he said, “Fortune smiles on the well-prepared.”

Pyott’s “been there, done that” when it comes to dealing with activist investors. His insights are especially appropriate this month with the BIO CEO & Investor Conference as a backdrop and the hundreds of biopharma executives knocking on doors in search of funding.

So, if you’re an executive trying to make your biotech dream — one that helps those less fortunate while still providing a reasonable return — come true, don’t underestimate the importance of being prepared for the kind of investor who is focused only on profits. Because though the business of biopharma needs to be about business, it also needs to be about something more, and much better than that represented by the likes of Martin Shkreli.