And is your company prepared for what may be coming next?
As biotech and pharmaceutical companies work to stabilize their clinical programs and business strategies during the significant disruptions caused by the COVID-19 pandemic, one of the potential challenges that public companies may encounter is aggressive moves by activist investors looking to leverage the economic turmoil for corporate takeovers.
COVID-19 and Shareholder Activism
The COVID-19 pandemic has led to unprecedented volatility in equity markets. Sharp gains and losses in share prices, together with significant changes in share ownership mean that few companies, particularly those in the life science sector, are immune from the potential disruptions of shareholder activism.
And while public company management and boards are focused on the immediate issues affecting their businesses, employees and customers, they are likely to face a number of follow-on consequences of this crisis from activists. Companies should be ready to address hostile short selling and unsolicited takeover bids, to develop rapid responses to special meeting and activist demands, and to vigorously engage with institutional shareholders, proxy advisory firms and potentially even regulators – all within the new environment of social distancing, quarantine and isolation that forms the new normal for businesses.
Targeting: Alexion Pharmaceuticals
In the spring of 2020, in the heat of the COVID-19 crisis, just such a scenario played out. In a STAT article for The Boston Globe, John Chesto reported on the intense pressure Alexion Pharmaceuticals faced from one of its significant investors, Elliott Management, led by internationally known hedge fund investor and founder Paul Singer. In a detailed, 10-page letter addressed to Alexion’s Board of Directors, Elliott pointedly identified what it considered flaws in the abilities of Alexion’s Board and executives to close a years-long gap between market perceptions of the Company and the actual positive fundamentals of the Company. Elliott contended that investors’ lack of trust in Alexion had created this gap and resulted in a much lower share price and market cap than was warranted. This disconnect was dramatically exacerbated by Alexion’s recent acquisition of Portola Pharmaceuticals that, in the words of Elliott, erased “approximately $1.7 billion in the Company’s market capitalization in a single day” and caused the Company’s valuation to “collapse by an amount in excess of the total value of the announced transaction.” collapse by an amount in excess of the total value of the announced transaction.”
Elliott demanded quick action: a sale of the Company coupled with wholesale replacement of the Board and executive management. And although this rapid escalation in demands from an activist investor is by no means unique, it appears to have been intensified by the market realities of the COVID-19 pandemic. For example, one reason Elliott ascribed to the market’s negative reaction to Alexion’s acquisition of Portola was that Portola’s products are not in rare disease, Alexion’s wheelhouse, but in fact are used in the acute hospital setting – a potentially risky market segment in light of the pandemic, in which non-COVID-19 procedures have fallen off dramatically. Elliott noted that there was a global opportunity now for potential acquisitions in biotech and pharmaceuticals, given the high hopes and intense demands created by the pandemic. And last, Elliott noted that, after the March market debacle, many industry players have rebounded quickly as the pharmaceutical sector grows in importance and are ripe for making a purchase.
The current activism landscape, H1-2020
Given the number of public companies – including many blue-chip pharma and biopharma large caps – that have seen their stock prices swing wildly, from this strict valuation perspective alone, the current environment seems as if it should present a historic opportunity to activist investors. Many would consider the current situation analogous to the 2008 financial crisis, which unleashed a surge in shareholder activism.
However, the statistics we are seeing to date do not support this scenario. According to Lazard’s Q1-2020 quarterly review of global trends in shareholder activism, while global activism in January and February of this year was in line with historical averages, in March — coinciding with the worldwide shutdowns in Europe, the U.S. and the Asia Pacific Region — activist campaign initiations were the slowest since 2013.
And this lower level of activity is continuing, with Lazard’s April flash report showing only 8 campaigns initiated, an activity level that is some 54% lower than the prior six-month average. Not surprisingly, however, Elliott Management, along with Starboard Value LP, have remained the most prolific activists with seven and three campaigns initiated this year, respectively.
This would seem to indicate that larger activists, potentially those with deeper pockets, have been able to take advantage of current conditions. Others with lower cash buffers or shorter lock-up periods may not have the flexibility to hold positions long enough for the market to recover. The data indicate that a number of activists have opted to settle, postpone or otherwise withdraw campaigns. March and April saw 17 campaigns settle; however, as proxy season continued, some 50 Board seats at 11 different companies remained “in play.”
Two key drivers of these trends, as compared to the 2008 financial crisis, have been the significant drop in overall M&A activity due to the inevitable challenges of doing deals during the pandemic, and a historic focus by corporations on capital preservation. To date, more than 80 U.S. companies have suspended or canceled their dividends – more companies than in the previous 10 years combined. Activists with an M&A or capital return thesis have been slowed by these two trends.
What will the impacts of COVID-19 be on activism going forward?
It would seem that levels of activist activity would eventually increase as the overall economy starts to normalize and that M&A market activity would return as a viable way again for value creation. But will the target companies remain the same and what will the new activist tactics be?
Lazard suggests that the pandemic may create a new set of activist targets, namely those that may have complex or vulnerable supply chains. And activist tactics may focus on companies with governance failings regarding human capital, executive compensation, disaster preparedness and risk management. Along these lines, in June Lazard saw a higher proportion of activist actions during the second quarter that target under-performing management teams in particular.
Steps to take now to prepare for the post-pandemic activist landscape
While it’s difficult to predict accurately the actions of shareholder activists post-pandemic, public companies are not waiting to find out. According to researchers at Duke University and Ohio State University, public companies through April 2020 have launched an unprecedented 49 “poison pill” campaigns. That’s compared to just 19 for the entire previous year.
These “shareholder rights” plans have been one of the most effective anti-taker devices historically, although they have been generally opposed by most proxy advisory firms because, in limiting opportunities for corporate takeovers, they also potentially reduce management accountability. However, in a recent policy note, leading governance services advisor Glass Lewis states that the firm is not totally opposed to such measures, provided that the duration of the “pill” is limited and that the company discloses a sound rationale as a result of COVID-19.
In addition to this rather dramatic step, and considering the uncertainty of the environment going forward, companies and their Boards need to consider a number of “evergreen” measures to help defend themselves. These include:
- Establishing an activist defense team responsible for monitoring the Company’s shareholder profile for early warning signs of unfriendly accumulations. This team should be made up of the CEO, CFO, General Counsel, IRO outside legal counsel, investor relations firm, proxy solicitor, etc.
- Monitoring the Company’s shareholder profile for indications of unfriendly accumulations. This could include the use of stock surveillance services to look for early warning signs for activist presence and also to better understand who is moving in and out of the Company’s shareholder base.
- Anticipating the Company’s vulnerabilities and conducting scenario planning aroundhow an activist could potentially criticize the company, including its response to the COVID-19 pandemic, particularly the aforementioned issues of supply chain, governance and human capital management.
- Identifying activists who are the most prominent in the Company’s “space” or who have targeted companies that may be a close proxy to the Company’s particular situation or characteristics.
But ultimately, having a strong, consistent messaging and IR communications strategy is key to presenting a company’s value to the marketplace. Especially in times of crisis, being able to thoughtfully convey how you’re managing through the challenges, the overall health of your business, and its long-term strengths, opportunities and investment thesis going forward will go a long way to prepare you for what can be known in the future, as well as being better able to handle the unknowns.
LaVoieHealthScience offers integrated communications in life sciences, with specializations in strategy consulting, investor relations and corporate communications, and public relations and marketing.