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Appeasing short term activist interests raises questions about management responsibility


Source: Los Angeles Times, October 28, 2014 article

Amgen, bowing to hedge fund pressure, to cut up to 1,100 more jobs


Amgen Inc. said Tuesday it will eliminate up to 1,100 additional jobs next year as the firm faces pressure to split into two. (Al Seib / Los Angeles Times)



  Amgen's job cuts were part of maneuvers intended as a way to funnel money back to Wall Street investors

  Who should be driving strategic decisions — Amgen managers or owners?


OCTOBER 28, 2014, 7:51 PM


Amgen Inc., the Southern California biotech giant that has struggled to match the torrid growth of its pharmaceutical peers, finds itself in the crosshairs of a New York hedge fund manager, one of the new breed of activist investors, who is loudly calling for the company to split in two.

Amgen is resisting a split, though by promising to shed thousands of jobs as part of a bid to boost its share price, it has been steadily giving in to Wall Street criticism of being bloated and inefficient.

On Tuesday, it blinked again.

In a surprise statement at an investment conference in New York, the Thousand Oaks firm said it would eliminate up to 1,100 jobs, boosting the total announced cuts this year to as many as 4,000, about 20% of its global workforce. Wall Street cheered, sending shares up 6% on the day to $157.19, a gain of $8.99.

The job cuts were part of a sweeping set of financial maneuvers the company intended as a way to funnel money back to Wall Street investors. The company also said it would buy back $2 billion in stock and increase its dividend 30%. It also made an ambitious promise of double-digit earnings growth for the next three years.

The fight between management and activist investor Daniel Loeb is part of a broader argument over whether such high-stakes face-offs result in short-term benefits to shareholders at the expense of a company's ability to invest in its operations and thrive long term.

Another big question: Who should be driving strategic decisions — managers or owners?

Robert A. Bradway, Amgen’s chairman and chief executive, insisted that the company still had plenty of capital to invest in new products, including cutting-edge "biosimilars," which are less expensive versions of pricey biological drugs.

"With four potential product launches in 2015 and a strong pipeline of innovative and biosimilar molecules, we are well positioned to deliver breakthrough medicines for patients and drive long-term growth," Bradway said.

Bradway, himself a former investment banker, told investors and analysts Tuesday that a spinoff didn't make sense financially.

"As we've looked at this, we've not seen a way through that we think unlocks significant value for our shareholders," Bradway said. "So what I'm not saying is, 'No, never,' but what I am saying is that right now, [we're] not convinced there's a way through that adds value for all of our shareholders."

In a letter to its investors last week, Loeb's hedge fund, Third Point, suggested that Amgen could benefit by splitting into two companies: a mature brand that focuses on established drugs and a growth company that targets drugs in development.

Amgen is one of a wave of public companies under pressure from activist investors, usually hedge funds, that buy large blocks of shares and use their clout to force financial or operational changes such as spinoffs, mergers, stock buybacks and new slates of directors.

Hedge funds, which face fewer restrictions than other money managers on how and where they can invest, have thrived in the low-interest-rate environment. Investors scrambling for bigger yields have turned to such higher-risk, higher-reward operators.

Overall, hedge funds have seen their money under management balloon to $2.8 trillion, including a 7% rise through the first nine months of this year, according to Hedge Fund Research Inc. Of that amount, activist hedge funds have grown the fastest, rising 20% to $113 billion this year.

Activist hedge funds have grown so quickly mainly by outperforming the rest of the industry.

Over the last three years, the group has posted annualized returns of 12.9% while hedge funds as a whole have generated returns of 6.5%. A mutual fund indexed to the Standard & Poor's 500 index would have garnered a 15.2% return, and at much lower risk.

Once known as corporate raiders and pilloried by Hollywood in movies such as "Wall Street," these engaged, charismatic investors rebranded themselves as activists, arguing that they force efficiencies and other changes that complacent managements won't make.

Among higher-profile campaigns recently were Bill Ackman's successful push for changes at Canadian Pacific Railway and a less successful push at retailer Target Corp. He also is part of a Canadian firm's effort to acquire Allergan Inc., the Irvine eye- and skin-care company.

Nelson Peltz at Trian Fund Management has pushed for splits and spinoffs at Pepsico Inc. and DuPont. Old-guard activist Carl Icahn campaigned for Ebay Inc. to split off its PayPal unit and for Apple Inc. to use a portion of its cash horde to buy back some of its shares.

Loeb's Third Point, meanwhile, has been among the most active in the business, notably with a successful and noisy campaign for management and strategic changes at Yahoo Inc. last year.

Now, he's turned to Amgen.

In a recent letter to investors, Loeb cited the company as an underperformer and argued that it has failed to realize its potential value despite producing both longtime, high-margin products such as anti-inflammatory Enbrel, and recently launched blockbusters such as Prolia and Xgeva, both for bone-related disorders.

"Amgen has all the hallmarks of a hidden value situation, one of our favorite investment themes," Loeb wrote. "The company does not receive proper credit from investors for either the cash generative potential of its mature products or the coming financial impact of its growth assets."

Founded in 1980, Amgen became the world's largest independent biotech company by developing drugs to treat anemia, arthritis, kidney disease and bone disease. It is one of the largest publicly traded companies in Southern California, with $18.7 billion in revenue last year and a market capitalization of nearly $110 billion. It reported $5 billion in profit last year.

In recent years, the company has looked to expand into new sectors, including a wider variety of treatments for cancer.

Last year, as Amgen struggled with slower sales growth, the company bought Onyx Pharmaceuticals Inc. for more than $10 billion. The deal gave Amgen control of a blood cancer drug, Kyprolis, which is expected to become highly popular in the next few years.

With the latest round of layoffs disclosed, an Amgen employee described the mood in Thousand Oaks as "very dark" while workers wait to see who will be affected. Some left last week in the initial round of layoffs, the employee said, and it's grown difficult to work under the threat of constant downsizing.

Workers wonder whether the consolidations are motivated by the desire to develop life-changing drugs, said the employee, who asked to remain anonymous given the sensitivity of the situation.

"A lot of people are wondering if Bob [Bradway] appeased investors and Wall Street or appeased our patients and improving their lives."

Copyright © 2014, Los Angeles Times



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