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More than zero

21 October 2014 By Robert Cyran

Amgen’s boss makes a prime breakup target for Dan Loeb. Former Morgan Stanley banker Robert Bradway has run the $109 billion biotech being eyed by the activist investor for the past two years. The idea of splitting such companies into a cash cow and a growth arm comes up often, but rarely happens. Amgen may be the exception.

Its stock has significantly lagged rivals Gilead, Biogen Idec and Regeneron over the past decade. Sales of its blockbuster drugs for anemia have sharply fallen after safety concerns emerged. Loeb’s primary target are the company’s weaknesses; he wants Bradway to cut expenses – its prodigious R&D has generated more expenses than hits – and improve capital allocation. But the activist also wants the company to consider the more radical idea of splitting in two.

It’s not a new idea for the industry. Sanofi studied it a decade ago. Merck and Pfizer mulled it over more recently. The idea is that one company takes the drugs already on the market, generating cash and paying dividends. The other focuses on drugs under development.

The problem is that most drugs have a finite earnings shelf life. Once patent protection is lost, sales rapidly fall to zero. The other danger is that the declining business decides it wants to live and starts spending heavily on R&D or M&A. Meanwhile, the unit responsible for all the growth matures and starts paying a dividend. Keeping them together tends to make more sense.

If any company is amenable to a split, though, it’s Amgen. The company’s biological drugs are hard to copy so are likely to face limited competition even when patent protection expires. That means sales revenue from established medicines ought to decline slowly.

The two businesses could be worth up to $120 billion in total according to a Sanford Bernstein research note put out this summer that Loeb referenced. The stock has jumped by more than a fifth since.

Bradway’s past as an investment banker means he more than many of his rival CEOs should appreciate the benefit of deploying some Wall Street-style financial engineering if it can create value. The idea may be a long shot, which may explain why Loeb is pulling his punches. But he has picked the right target.


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