Actelion Punches Back Against Activist Shareholder

Actelion's board vice-chairman Joe Scodari highlights 'fallacies' in activist shareholder's call for sale.

Joe Scodari, vice-chairman of the board at Swiss biotech Actelion Pharmaceuticals Ltd., has issued a strong rebuke to activist hedge fund investor Elliott Advisors' campaign to force a sale of the company. He claims the shareholder's position is "fallacious" and that a fast sale now would be "ill-timed."

It's but the latest move in an ongoing and highly public wrangle between the current board and management of Europe's largest and most successful biotech firm, and Elliott, an investor since last October. Elliott claims that, in seeking to remain independent, Actelion is pursuing a highly risky strategy that is not in shareholders' best interests. It also accuses the incumbents of failing to properly consider alleged takeover approaches (Also see "Actelion Hedge-Fund Shareholder Urges Sale" - Pink Sheet, 4 Feb, 2011.).

Earlier in March, the activist assembled six board nominees and undertook an investor road-show in London, New York and Zurich to try to win sufficient support for these candidates' election at the company's May 5 AGM (Also see "Actelion's Top Shareholder Calls for Board Change" - Pink Sheet, 17 Mar, 2011.).

Elliott also sought endorsement for these nominees from the only two current board members it's not seeking to remove, Scodari and Carl Feldbaum, chairman of the nominating and governance committee.

Board Members Rebuff Elliott's Nominees, Ask Shareholder Support

Unsurprisingly, both Scodari and Feldbaum refused to offer their support to a hastily-assembled team whose track record and independence have also been criticized by analysts. "They are [Elliott's] puppets,'' claimed one Swiss-based analyst.

Scodari is also a co-signatory, along with Chairman Robert Cawthorn, of a letter issued Mar. 28 on behalf of Actelion's board of directors to the company's 10,000 shareholders calling for their support at the May 5 AGM. The letter claims Elliott's board antics mean it's "trying to take control of your company...without paying for control" and that "forcing" a sale ahead of key near-term milestones is "ill-timed" and would "surrender to a potential acquirer the future value that rightly belongs to all shareholders."

Support from the remaining shareholders is crucial for Actelion's current board and management to keep Elliott's influence at bay. Although the hedge fund holds only 6% of shares, two other hedge funds, Perry Capital and Jabre, are reported to have since each acquired an estimated 1% in the group. Only Rudolf Maag, a 4.2% holder, has come out explicitly in support of the company's management. Typically, less than one third of shareholders attend an AGM, according to The Financial Times, potentially giving an edge to the most vocal minority groups.

Activist Position Is Contradictory, Fallacious, Scodari Asserts

Scodari outlined what he sees as two key fallacies in Elliott's position. By seeking a sale now, before key data from Phase III hopeful macitentan are due in early 2012, any potential buyer would have to take on considerable risk. "No Big Pharma will sign on for that sort of risk when they know there's a key inflection point nine months down the road," Scodari told 'The Pink Sheet' DAILY. And if they did, he continued, they wouldn't pay a "substantial premium" for it.

Yet any price calculated on the basis of "recent comparable multiples" to Actelion's current share price would be "substantially below the fundamental value of the company," argued Scodari.

And Actelion's board claims to know what that fundamental value is, according to Scodari, since they hired one of the top three consulting firms to perform an "independent" valuation exercise shortly after Elliott started to call for change. While not revealing the final figure, Scodari said that within that valuation calculation, pulmonary arterial hypertension candidate macitentan had a "somewhat higher" probability of success than an average Phase III candidate because it's in the same family of compounds as Tracleer (bosentan), the $1.8 billion PAH drug that underpins Actelion's stellar performance to date - but which goes off-patent in 2015.

Macitentan's still far from a dead cert, though. And the trouble is that since a series of clinical setbacks to other late-stage programs during 2010 (which caused the shares to tumble and gave Elliott its buying opportunity), "Actelion has unfortunately turned into a macitentan all-or-nothing," claims the analyst (Also see "Actelion, GSK Scrap Sleep Drug Almorexant" - Pink Sheet, 28 Jan, 2011.).

But the second inconsistency in Elliott's position, according to Scodari, is that while highlighting the company's dependence on macitentan as risky, the fund also decries "our diversification strategy as too risky," by claiming that the earlier-stage pipeline is overly broad for a company of Actelion's size, and consumes too high a portion of revenues.

Scodari retorted that Actelion's R&D spend, at 25% of sales, is consistent with that of other large biotech firms. It is considerably higher than what most Big Pharma currently spend, however.

More generally, Scodari expressed concern over comments aired in the press by Elliott board nominee James Shannon, formerly global head of pharmaceutical development at Novartis AG, that "the company needs fixing." For one thing, he noted, "it suggests that they are jumping to conclusions without knowing anything about the company. They have done no due diligence; they have no access to the confidential information that the board does."

He went on to point to Actelion's track record of generous top and bottom line growth during each of the 13 years since its foundation, and a share price performance well superior to that of the NASDAQ biotech index.

Short Term vs. Long Term Interests

At the crux of this battle is the conflict between short-term investors seeking relatively near-term value creation and long-term shareholders - including founding shareholders - with skin in the game that want to give the company all the chance to continue to flourish independently. It's a battle that has been repeated, in one form or another, at several U.S.-based biotechs, including MedImmune, ImClone and Biogen Idec Inc., although seldom, to date, in Europe. (MedImmune and ImClone were sold in the end.) (Also see "Agreement Averts Another Proxy Fight Between Biogen Idec, Icahn" - Pink Sheet, 22 Mar, 2010.).

Scodari acknowledges that if macitentan fails, with hindsight, "you could then say that we should have sold" the company before that crucial data.

But he and Actelion's management want to wait for that data and take that risk. After that, if it's bad news, "we'll re-examine." Actelion only became the leader it did because its management took risks, after all. And there was failure on the way: Tracleer failed in a far larger indication, congestive heart failure, before it shone through in PAH (Also see "Actelion: A Model for European Biotech" - In Vivo, 1 Sep, 2003.).

Elliott isn't a specialist biotech investor. It's a professional investment firm seeking to make money; that's its prerogative, and having bought low, it could make a nice return even if the company's sold at only a moderate premium to its current price.

Actelion's management, including co-founder and CEO Jean-Paul Clozel, may not agree with Elliott's position. But the shareholder is following the rule book: if its nominees (who must, by law, act independently of the minority shareholder) get the majority support they need on May 5, Elliott and its ilk may yet force a change of direction at Actelion.

Elliott has already drawn the Swiss company onto the defensive, prompting it to attempt to sweeten unsure shareholders with a maiden dividend (with a promise of more) and a CHF 800 million buyback program, initiated before Elliott's campaign began (Also see "Actelion Sweetens Shareholders With Maiden Dividend" - Pink Sheet, 18 Feb, 2011.). Actelion also felt the need to prove its corporate governance credentials via a white paper ('Actelion On The Defensive: Corporate Governance White Paper,' The In Vivo Blog, Mar. 9, 2011).

But while Elliott has clearly caused management to sit up and justify its course, the hedge fund's failure to articulate a coherent alternative strategy -- it won't explicitly admit it simply wants a sale -- and the apparent holes in its stated arguments, may yet scupper its plans to take the reins at Actelion.

There's a lot at stake on May 5.

- Melanie Senior ([email protected])