Amgen Inc. (AMGN) jumped 4.79% as Third Point, a hedge fund firm, increased its stake in the company. Third Point also discussed the company’s position and even suggested that Amgen split into two, at an investor conference and in its third quarter letter to the investors.
Amgen issued a statement in response stating that it appreciates all the views of its shareholders including Third Point. However, the company did not discuss specifics and said that it will provide an insight into its strategic priorities and restructuring plans on Oct 28, 2014. In Jul 2014, Amgen had announced a restructuring plan which involved reducing 12%–15% of its total work force.
Third Point mentioned in its letter that it is now one of Amgen’s highest stakeholders. The hedge fund suggested that Amgen should consider separating into two companies – a mature company (containing legacy assets which will be valued on its dividend yield and will focus on efficiency and cash flow), and a growth company (comprising a promising pipeline focusing on product development and innovation).
As per Third Point, such a split would create a value of almost $249 per share in two years, far above (approximately 81%) Amgen’s undisturbed price before Third Point’s views reached the market. Third Point believes that concerns about potential revenue erosion for certain products in Amgen’s portfolio are overstated and the company’s pipeline is under appreciated.
Apart from the split, Third Point also made a few other recommendations to Amgen for enhancing its value. The hedge fund suggested that Amgen should focus on its research and development efforts and provide long-term margin guidance reflecting its restructuring initiatives. Third Point also stated that Amgen should provide more visibility on shareholder returns.
Our Take
We believe that investors would react positively if Amgen takes Third Point’s advice of splitting into two companies. We have seen several splits in the past few years. Last year, Abbott Laboratories (ABT) separated its research-based pharmaceuticals business by creating a new company. More recently, Theravance Inc. (THRX) split into two companies.
For now, we expect investor focus to remain on Amgen’s third quarter results and an update on its strategic initiatives.
Amgen carries a Zacks Rank #3 (Hold). Ligand Pharmaceuticals Inc. (LGND) is a better-ranked stock in the biotech sector with a Zacks Rank #1 (Strong Buy).
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