IN-DEPTH: Activism targeting healthcare reaches 5-year high
The number of healthcare companies around the world publicly subjected to activist demands reached a five-year high in 2023 as the sector grapples with prolonged underperformance.
According to Diligent Market Intelligence (DMI) data, 28 companies faced demands last year compared to 26 in 2022 and 20 in 2021.
Referencing a popular biotech index, David Johnson, founder of Caligan Partners told DMI that such activism tends to follow periods of underperformance. “When you look at the XBI Index, it has underperformed the S&P 500 for three consecutive years. So, if you have periods of prolonged underperformance, you're generally going to have a relatively unhappy shareholder base, which is therefore setting you up for an increase in activism.”
The increase in activity is also linked to the number of early-stage and pre-revenue life science companies which have attracted dissidents. “If the target cannot publicly defend its cost structure or its capital allocation strategy inherent with business models typically dependent on multiple programs advancing down a pipeline at different stages of development, it often gets activist attention,” said Chris Young, Jefferies managing director and global head of contested situations.
Fresh oversight
In the five-year period since 2019, the most common demands brought forward by activists targeting the healthcare sector have been focused on leadership changes with many dissidents focused on what they viewed as poor strategic decisions.
In one of 2023’s most divisive campaigns, Carl Icahn brought forward a three-person slate in his bid to overhaul the board of U.S. biotech Illumina and blamed its CEO Francis deSouza and the board for closing the $7.1-billion acquisition of cancer detection test maker Grail in 2021 despite opposition from regulators. He promised his nominees would bring “financial and legal acumen, common sense, and a history of fixing companies in crisis.’’ At a May meeting, Icahn succeeded in unseating Illumina’s chair and although deSouza survived the vote, he resigned less than a month later as the company noted plans to “embark on the next chapter of Illumina's great journey.” Illumina has since decided to divest Grail after an order issued by EU regulators and Icahn has now turned his attention to “legacy conflicted” directors who he hopes to replace in a fresh proxy fight.
In one of three Europe-focused healthcare companies targeted last year, German drug manufacturer Bayer faced off against multiple activists seeking fresh leadership and a break-up of its business divisions. It named former Roche top executive Bill Anderson as its new CEO last February after pressure from Inclusive Capital Partners and Deka Investment to part ways with the incumbent chief executive. Pushing for a candidate outside of management ranks, Deka had argued that "Bayer needs a new strategic positioning, which cannot be credibly accomplished under [then-CEO] Werner Baumann.”
Jefferies’ Chris Young told DMI that in recent years, activists targeting the sector have launched “more nuanced attacks than a simple calculation of cash per share and whether a target company should be liquidated or not.”
“Instead, these fights have often been over the ultimate leadership of the target - to increase alpha by merely inserting new leadership at a target, a new team to take the target company to the next level.”
An M&A revival
After two years of muted activity, a recent survey led by Jefferies found that 68% of healthcare executives expected the volume of M&A deals in the sector to rise in 2024. Institutional investors were found to be more cautious on the M&A outlook with just 56% predicting an increase and 35% seeing activity remain at current levels.
Tommy Erdei, Jefferies global co-head of healthcare investment banking, told DMI that private equity (PE) investors are likely to start evaluating exit alternatives as the macroenvironment and interest rates stabilize. “The healthcare sector has seen a significant level of private equity driven M&A in the past several years. Some of those investments from PE investors are reaching the end of their usual investment cycle period.”
He also noted that several private equity firms are still keen to deploy further capital towards the healthcare sector and as interest rates stabilize, the debt markets will also become more active and willing to support PE investors in buyout deals.
Industry sources have also observed an increase in large-cap pharma companies looking to acquire biotech companies with promising product pipelines or to divest their non-core segments to improve their growth outlook.
“Healthcare remains one of the most resilient and defensive sectors for public investors,” Erdei concluded. “As the macroeconomic environment stabilizes, we expect a pick up in capital raising activity. We are already seeing strong momentum, especially in the biotech sub sector where year-to-date we have seen around $3.5 billion of capital raised across 20 transactions.”
