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May 12, 2011
Icahn's Biotech Adventure
Posted by Derek
So how well has raiding the biotech sector (Biogen, Genzyme) worked out for Carl Icahn? According to this estimate in the Boston Globe, he's made a lot of money. But (and here's a big point that the article doesn't, in my view, make enough of). . .he hasn't really made more than he would have made by investing in the biotech sector as a whole.
Naturally, he's beaten the S&P all to pieces, as private equity fund darn well should if it can. But the Biotech stock index has been on a tear, too, and he hasn't beaten it by much. So how would it have been if he'd just stayed home with his money and bought the basket of stocks, eh? Not nearly as much fun, and not much chance to influence the directions of whole companies, which is what a mover and shaker like Icahn lives for. But still. . .
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1. Frank Adrian on May 12, 2011 2:11 PM writes...
It might not just be fun. He could also be lowering his risk by taking control of the corporation rather than leaving his investments to the vagaries of the market.
Permalink to Comment2. Anan345 on May 12, 2011 2:17 PM writes...
I suspect there are errors in the logic used in the article. The biggest ow which would be the "biotech index" used as the comparison probably includes Biogen Idec and Genyzme and I suspect a big chunk of the return you see on the index is due to these two companies. You can argue that if Icahn was not on the board of BIIB and GENZ then the index would not have performed as well.
If you want to make a comparison then it might be better to look at the return on the biotech index without including GENZ & BIIB.
Permalink to Comment3. Fishy Fish on May 12, 2011 2:26 PM writes...
My 2-cents is that investing in biotech/pharma is more like "going to Vegas" than in almost any other sector. It is quite black and white: either you get FDA approval or not. There is no middle ground. By the time when it becomes quite "clear" that FDA approval is pretty much "sure thing", it is already priced-in the stock price. Before the smoke is clear, it is a gamble. Carl Icahn becomes a whale as a corporate raider/grave dancer. He either slices and dices companies or buys bankrupted companies and fixes them. That kind of strategy works way less often in biotech/pharma sector. When a biotech bites the dust, you can't make a killing by buying and selling a couple of used 1GHz NMR machines or that patent portfolio.
Permalink to Comment4. Anonymous on May 12, 2011 4:21 PM writes...
Actually, it may be more impressive that that Biotech index hasn't out-performed him! Some might argue that staying home and investing in a diversified portfolio would be a safer bet to make money than focusing in only on a couple of companies.
Permalink to Comment5. Student on May 12, 2011 7:55 PM writes...
@ (3) Fishy Fish,
Permalink to CommentI somewhat agree. You can't push biotech/pharma with management and marketing the way you can with Blockbuster, Walmart, etc...It is needed, but it shouldn't be built as the sharp edge of the sword. In scientific companies, the sharp edge should be the scientists and engineers. A Walmart brand widget can be made from a generic design and resold with clever marketing and ruthless business tactics to knockdown manufacturing costs...You can't do that with drugs, its an all-or-nothing product.
6. Still Scared of Dinosaurs on May 13, 2011 7:06 AM writes...
Student,
In biotech as an investment the clinical development folks should come way before anyone else. Not because their work is inherently more valuable but because (1) this is where simple errors can translate into huge amounts of money, (2) it's where timelines compress to something comparable to other industries, and (3) the process seems as much art as science.
A bad Medical Director can undo the work of hundreds of people and I've seen it happen.
Permalink to Comment7. alf on May 13, 2011 11:02 AM writes...
I think the comparison to the biotech index is a bit of a stretch. First the ~94% return from BIIB blows away the biotech index. Second Ichan's "investments" were in established companies that have billions of dollars in revenues and make money. These are not companies that have yet to make a dime like some of the companies in the index. My point being that these "underperforming" companies have real tangible assets that limit his downside. Apples and oranges.
Permalink to Comment8. caveat bettor on May 13, 2011 11:03 AM writes...
The benchmark is almost everything. David Tepper and Appaloosa's win of the hedge fund derby in 2010 can be approximated by a slightly levered bet on the XLF Financial Select Sector.
Permalink to Comment9. Rick on May 13, 2011 1:52 PM writes...
The index game always reminds me of baseball games in the comic strip "Calvin and Hobbes". If one set of rules doesn't give you the result you want, just change the rules. If the new rules don't give you what you want, make them more convoluted. If that doesn't work, just use so many words to describe your rules that eventually mom calls you home for dinner and the other guy doesn't get to refute anything you said. If you're not familiar Calvinball and would like a good Friday afternoon chuckle, google Calvin and Hobbes baseball.
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