Actelion On The Defensive: Corporate Governance White Paper

First, there were just words. Then there was a maiden dividend, the first of regular payouts to shareholders. Now there's a white paper on good corporate governance. Whether or not Elliott Advisors, a new-ish, almost-6% shareholder in Actelion, succeed in their (apparent) mission to force the sale of the company, they've certainly done a good job, it seems, reminding the company of its duties to its shareholders.

We're not taking sides here. Far from it. We dislike short-term, profit-seeking hedge funds just as much as the next (average) man (or woman) who isn't getting part of the spoils. (And Elliott, for the record, claims it's a long-term investor).

But Actelion's responses thus far to Elliott's Feb. 3 public missive, calling for CEO Jean-Paul Clozel and for Chairman Robert Cawthorn to step down from the board, and accusing the Swiss biotech of poor corporate governance, hint that perhaps management wasn't quite doing enough previously to explicitly reassure investors that they do, indeed, consider all the strategic options and judge each in terms of shareholder value, rather than against Clozel's personal, and well-documented, drive for long-term independence.

To the latest defense weapon, then: two dozen slides highlighting the company's super-high corporate governance standards, by Cawthorn.

"Eight out of nine of our board members are independent," shouts the slick slide-deck (Clozel is the odd-man out, which is why Elliott wants him off). We meet regularly and consider input and feedback from shareholders, it says. (We're paraphrasing a little.)

But not content with emphasizing its own (high) standards, Actelion's board is arguing that it's corporate governance is BETTER than your average U.S. standards. Under Swiss law, the full board is called to make more major strategy decisions than is the case for U.S. companies; Swiss companies need shareholder approval for many more actions than their U.S. counterparts, the deck claims, including dividends and issuing new equity.

If that isn't enough, the white paper goes on to essentially remind Elliott and their ilk of the power that they do have, as significant shareholders, over the composition of the board. Firstly, investors owning at least 1.5% can submit proposals for adoption at the AGM. Second, Swiss law allows a majority of voting shareholders to force directors out without cause, giving them "a powerful tool to assure their ongoing satisfaction with the Board." (In the U.S. removing directors requires a supermajority vote in most cases, says the paper).

It seems the corporate governance system is working rather well, then; no doubt Elliott will continue to leverage all the rights granted to it as a large shareholder. The company's May 5 AGM should be an interesting event.

Meantime, Actelion's board will be hoping that enough other investors join Rudolf Maag's camp: the 4.2% shareholder on March 7 became the first to speak out in support of the company's standalone strategy.

image by flickrer Ran Yaniv Hartstein under creative commons

"We ARE Creating Shareholder Value," Argues Actelion's Clozel

Actelion's CEO Jean-Paul Clozel clashed entertainingly with one of the Swiss biotech's biggest (and newest) shareholders during the company's full-year results announcement Feb. 17.

The clash came despite Actelion's management unashamedly using the event to reassure investors that the company DOES have their interests at heart, that it IS creating optimal long-term value and that"to consider a sale at this time [in the company's evolution] would be the worst time imaginable" for existing shareholders.

The context: a Feb. 3 letter from Elliott Advisors, a hedge fund that only months before had become among the largest shareholders. The letter called for Clozel's resignation, accused management of stifling several alleged take-over approaches, thereby denying investors the chance to cash in, and claimed poor corporate governance (CEO on the board; board Chairman a supporter of CEO).

Actelion, we felt, fended off the letter rather well. (It also retorted that "there have been no offers for the company".) But it is surely no coincidence that the company chose today to declare its first ever dividend, the first of regular payouts to its shareholders? And that each member of the management team presaged his talk with a quick big picture sketch to drive home the "we're committed to unlocking shareholder value" message?

"I feel I'm a little closer to my shareholders as a result of this dividend distribution," said Clozel. "It's a way for us to share with our long-term investors what we have been able to build up." CFO Andrew Oakley seemed to suggest it was entirely normal for Actelion to pay a dividend given the company's strong profitability, commercial muscle and its healthy pipeline. "It's a logical step for the company."

This is a company staunchly defending its independence. Fighting off the sharks. It's a company arguing that it has gone through the start-up and build-up phases of a biotech's evolution and is now entering the 'leverage' stage, when it has its pipeline, its infrastructure, its buildings (including a spanking new five-storey steel business center, opened in Dec. 2010), and is now waiting for the rewards to pour in.

As such, to sell out now would "deprive all the employees and loyal shareholders the possibility of sharing in the rewards" that they're due, said Clozel, "for the benefit of a few people wanting to make a quick profit."

This dig at the hedge funds was picked up by a member of Elliott Advisors in the audience -- which is when the real fun began (fun that Actelion management had wanted to avoid, by allegedly barring some hedge funds from the presentation). "We're here for the long-term," the Elliott representative claimed, so don't accuse us of looking for quick gains. After pointing out that there weren't many shareholders in the room (it was an analyst and media event, mind you), he went on to ask about the company's processes for receiving and reviewing takeover approaches (read our letter, said Clozel), about how the company dealt with conflicts of interest generated by Clozel's being on the board (it's very useful and important that management is represented on the board, he said) and ....how the company justified building such an expensive building...when pharma is facing severe regulatory challenges and when shareholders are being asked to finance hundreds of millions in R&D that have led to failures?"

This was getting funny: Clozel, who's built up Europe's most profitable and successful biotech company, was being saddled with all of Big Pharma's productivity woes. And being asked to justify his new business center (it came in "within budget" and "before it went up, Otto [Schwarz, BD and Operations] had been sitting in a container since 2008").

There was more entertainment to come. Did the audience like the building, Clozel asked. (We weren't there, but we gather hands were raised). Who didn't like it? Well, this Elliott guy, surprise surprise. Who was then, in the grand finale to this extraordinary -- public -- exchange between CEO and shareholder, accused of being "the son of Prince Charles." An allusion, we hasten to add, to that British royal family member's well-known disregard for modern architecture.

What about the numbers? Ah, the numbers. Revenues up 13% in local currencies, EBIT up 19% in local currencies, lots about managing the cost base, lots about how wonderfully the shares have done over the long-term...and plenty of reminders about the CHF 800 million share buy-back program, initiated in Nov. 2010.

image by flickr user USFWS Pacific used under a creative commons license.

Deals of the Year Nominee: GSK/Actelion

Ah, awards season. Why should film critics have all the fun? And voting! It's not just for presidential elections. This year your IN VIVO Blog team is nominating a handful of alliances, acquisitions, financings, regulatory negotiations and legislative compromises in our First Annual DOTY competition. And then you, dear readers, will vote (early and often, we hope) for the winner. Imaginary federal and international biopharmaceutical statutes prohibit us from awarding a monetary prize. But our winners, when they die, on their deathbeds, they will receive total consciousness. So they've got that going for them, which is nice.

Actelion’s worldwide licensing deal with GlaxoSmithKline for Phase III sleep drug almorexant isn't in this competition because of the alluring multi-billion biodollars associated with it. We know that potential regulatory and commercial milestones equal, for the most part, non-existent ones.

It’s in there because the July deal is one of those rare (and post-crisis, even rarer) partnerships where the biotech calls the shots. And where Big Pharma is very happy for biotech to call the shots because a) it keeps risk under control and b)—here’s the good bit--it’s picking up a tip or two on the way about how to run R&D.

Actelion remains fully in charge of the clinical program (unusual, not unique) and gets to further its own ends of creating a sales force by borrowing an appropriate GSK drug for a short time. Now sure, 'biotech hanging onto control' equals 'Pharma hedging its bets'. Small wonder: as we reported here, this compound is a novel mechanism, primary care pill for a non-life-threatening disorder. No wonder GSK is only funding 40% of the development costs. It won’t book sales, just 50% of profits. And while the $148 million upfront money for the Phase III candidate isn’t bad, it’s not blowaway. Nor are the slightly-less-blue-sky pre-commercial milestones of CHF 415 million associated with the drug’s first indication, primary insomnia. (Remember, this deal was signed pre-meltdown, just.)

But in a sense Actelion wanted GSK to hedge its bets because the biotech wants its own bets to hedge too. It reckons it's the one that can make a success out of a compound that it knows best, and, as a spokesperson claims, it's a “long-term deal" based on industrial logic, "not market logic” (thank goodness for that, then). The Swiss group can afford that luxury, with a market cap of CHF 7.1 billion ($5.9 billion) and CHF 1 billion in cash. This in itself makes Actelion a beast as rare as the novel-mechanism PC pill it's touting.

And it’s a company that GSK’s management apparently wants to learn a thing or two from. According to Actelion, its chief Jean-Paul Clozel was invited to speak to GSK R&D heads while the deal was being negotiated (see this post). That's significant: GSK is acknowledging that it might need to learn a few things about how Actelion does R&D, 'so please, biotech, come in and show us. And that means we can’t squash you or take you over, we need to watch you flourish and invite you to share your secrets.' Which explains why Actelion can boast about the wide-open, smiling communication channels right to GSK's boss Andrew Witty, and the origins of an anecdote about an email Witty sent to senior management in both companies essentially declaring that Actelion is in charge of the co-development program and for anyone who's got a problem to take it up with GSK's R&D chief Moncef Slaoui.

This deal also points to the alleged bureaucracy-slashing, crap-cutting going on under Witty’s watch at GSK. “This is a CEO willing to get his hands dirty,” notes one analyst.

Is the pharma leopard finally changing its spots? Who knows, but this deal might point to tantalizing evidence that it is. That’s why its one of our deals of the year. (And if Long-Awaited Change within Big Pharma doesn’t float your boat as a once-in-a-lifetime thing, how about this: a European biotech with sights set on building its own primary care sales force and with sufficient fuel to think about long-term investment in the pipeline. A rare sight.)

image from flickr user lu lu used under a creative commons license.