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Tuesday, Jan 31, 2023
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Winners and Losers at Amgen

It was almost inevitable. Comparisons are starting to be made between today’s “activist” hedge fund managers and the corporate raiders of yesteryear whose favorite weapon was the leveraged buyout. That, of course, involved financing acquisitions through heavy debt that generally couldn’t be serviced unless the takeover target was sold, often in pieces. The raiders walked off with fortunes in the process, and you don’t exactly have to be an old-timer to remember their names. Some are still active on Wall Street and involved in other ventures today, such as T. Boone Pickens, Nelson Peltz and Carl Icahn. But is the comparison really fair? Consider the latest example: the call by Daniel Loeb for the breakup of Amgen Inc. Management listens when Loeb talks; after all, his net worth as of last week was $2.3 billion, according to Forbes. And they listen even harder when he discloses that his New York hedge fund Third Point has become a large shareholder, as it has with the Thousand Oaks biotech. Amgen’s Chief Executive Robert Bradway has been under pressure since he assumed his position in May 2012 to do something about growth at the company. Twenty years ago, Amgen was a rising star but today still relies on its older drugs – such as the once groundbreaking anemia treatment Epogen – for 80 percent of its revenue. That produces the kind of lackluster financial results, share price appreciation and dividends that might be expected. Last year, he made a move, spending more than $10 billion to buy a San Francisco drug developer and get his hands on Kyprolis, a pricey new blood cancer drug that is a top seller. And just a few months ago, Bradway announced a plan to slash up to 15 percent of the company’s workforce – that’s nearly 3,000 jobs – and other restructuring. But that wasn’t enough. Loeb claims the best value would be obtained by splitting Amgen into one company selling legacy drugs and a second company developing new ones. Bradway resisted that call last week following some solid earnings, but was prodded to hack away perhaps 1,100 more jobs, buy back some $2 billion in shares and take other steps to rev up earnings. To be fair, he said that included doubling down on efforts to produce an assortment of new drugs. So, again, is Loeb’s call for a breakup and Bradway’s aggressive response equivalent to the 1980s corporate raiders, who sought to unlock the hidden value in a company by selling it in pieces? Well, not exactly, of course. Loeb’s essential argument is that Amgen is an inefficient company that could return more value to stockholders by being better managed. Nothing wrong with that. In fact, seen in that light, Loeb is nothing more than the embodiment of capitalism and the entire stock market, which demands financial performance. And with hundreds of millions of people having at least some of their wealth tied up in the market, a better performing stock should at least help some average investors. Indeed, in Amgen’s case, the stock has soared some 20 percent since Loeb got involved, so investors have already reaped rewards. You could also argue the resistance by Bradway, and his management and board, to a breakup may be nothing more than self interest. The current arrangement is literally comfortable and profitable for all involved atop one of the biggest biotechs in the world. But there is more going on here. Loeb is representing wealthy investors in his fund who are seeking higher short-term returns than traditional, passive stock market investments can achieve. In order to answer to those demands, Amgen is likely taking steps that management does not believe are in its best long-term interests – though anyone who has visited its plush campus knows the company is clearly not cut to the bone. But the reductions are still coming on the backs of the one class these days who seem to be taking it on the chin more than any other: the middle class. In this case, scientists, managers and others who make the company run and earn a decent living in the process. Biotech boosters are hopeful that out of the layoffs a new generation of biotech startups will be born in the Conejo Valley, but I side with Cal Lutheran economist Bill Watkins. He believes the promise of some new startups is outweighed by the thousands of workers who will lose their jobs and their paychecks, damaging the local economy. Now, play this scenario out across the country with other companies in other communities, and you can see what may be the bottom line here. Wealthy investors are clamoring for better returns, hedge fund investors are trying to find a way to give it to them and middle class workers find themselves somehow stuck with the bill. Correct me if you think I’m wrong. Laurence Darmiento is editor of the Business Journal. He can be reached at editor@sfvbj.com.

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