IN-DEPTH: Health scare

While the number of activist campaigns at healthcare companies fell slightly in 2019, the sector remains a fruitful hunting ground for activists. 2019 saw 62 U.S.-headquartered healthcare firms publicly subjected to activist demands, compared to 64 in 2018, according to Activist Insight Online.

However, the number of companies publicly subjected to M&A demands reached its highest level since 2013, when counting started.

The sector has become far more attractive to certain funds in recent times. Since 2015, Starboard Value has publicly disclosed positions in 17 healthcare firms, while Engine Capital had disclosed a position in one before 2019. Starboard disclosed five of those positions since the start of 2019 and Engine disclosed three new positions in the same period, underlining a newfound interest in the sector.

Diagnosis merger

The increased interest in M&A activism within healthcare could be symptomatic of the types of stocks popular among investors.

Since the start of 2019, 66 U.S.-headquartered healthcare companies have been publicly targeted by activists. Of those 66, 20 were biotechnology companies, and another 10 were drug manufacturers.

“There’s been a lot of capital formation in biopharma in the last five years,” Caligan Partners co-founder David Johnson told Activist Insight Online, pointing to the almost 400 companies that have gone public across the pharmaceutical and biotech sector during that period. “That’s an enormous number and all of that capital raised probably isn’t all going to be invested well.”

Indeed, some of the largest deals last year involved biotech companies and pharmaceuticals. Bristol-Myers Squibbs’ $93 billion acquisition of Celgene last year stood as the highest acquisition of the year, while the sales of Allergan and Pfizer meant that healthcare M&A dominated the biggest U.S. M&A deals in 2019, according to Centerview Partners.

Those price tags alone are enough to attract activists looking to profit from a sale and even get involved when companies do not follow their preferred path.

Bristol-Myers’ deal with Celgene was heavily criticized by Starboard Value, which claimed that Bristol-Myers should be considering selling itself instead.

Still, support remains for companies hoping to remain independent. In February, Sigma Technologies shareholders Esopus Creek Management and Hutch Capital Management urged the flailing biotech firm to launch a 10% share buyback in order to protect itself from a discounted takeover bid.

Tech your medicine

More recently, Engine Capital pushed CymaBay Therapeutics to begin a liquidation process following failed clinical trials. The fund said that “everything should be on the table to reduce the cash burn,” as it pushed to salvage a $2 per share valuation for the company. CymaBay recently said that if a review of its failed clinical trial proved unsuccessful, it would consider strategic alternatives.

Engine’s calls, which followed an identical path at PDL BioPharma, are emblematic of the dangers surrounding investments in parts of the healthcare sector. Speaking about smaller cap healthcare firms, Caligan’s Robert Laman noted that a standalone strategy can lead to a difficult future. “The small-cap healthcare companies often lack diversification, and if there is a hiccup on either commercial execution, product launch, or a pipeline failure, there’s not a lot for these companies to fall back on,” he said.

That fragility of pharmaceutical pipelines may mean that activists are looking elsewhere in the healthcare sector for investments and may have found it in the medical technology industry.

Firms like Electromed, Athenahealth, and Harvard Bioscience were all targeted by funds last year and 2020 has already seen three such companies publicly subjected to activist demands, suggesting that the industry is becoming more interesting as the value of data in healthcare increases.

Starboard Value disclosed a position in Merit Medical in January, while Pershing Square Holdings disclosed a position in Agilent Technologies in February, and claimed the firm poses a “substantial margin improvement and capital allocation opportunity.” Most recently, U.K. activist Gatemore Capital Management disclosed a 5% position at data-driven Sensyne Health. Other than Starboard, neither fund has made any public demands at the companies.

Medical technology may be a brave new world for investors to explore, though Caligan urges caution over the finer points of the industry. “It’s harder to predict the competitive landscape of some of those companies,” Johnson said, noting that medical technology, in particular, is an unknown entity “in terms of treatment paradigm and what new technologies are coming down the road such that we can feel comfortable making a long term investment.”