Friday, December 18, 2009
Carl Icahn, the famed corporate raider, is one of my favorite investors.
His estimated $9 billion net worth puts him among the top-50 richest people in the world. Icahn built his fortune by taking control of struggling public companies and demanding drastic changes to revive stock prices. Icahn is notorious for firing management, initiating large special dividends, launching a new share-repurchase program, or simply breaking companies up to sell the parts to the highest bidders.
While his track record isn't perfect, his aggressive style often scares incompetent management and board members into adopting new shareholder-friendly tactics.
Over the last five years, Icahn has focused much of his efforts on biotechs – my specialty. He targets companies with breakthrough drugs... and questionable management. His most recent triumph was ImClone, maker of the blockbuster cancer drug Erbitux (and the stock that sent Martha Stewart to jail).
Icahn ousted ImClone's corrupt, incompetent management and made himself chairman. In 2008, he engineered a bidding war and sold the company to Eli Lilly for over $6 billion. In the process, he booked $500 million profit. My FDA Report subscribers pocketed 100% gains in one month from his triumph.
While he was working his magic with ImClone, Icahn also turned his attention to Amylin, a $2 billion biotech. Amylin markets the breakthrough diabetes drug Byetta, which pulls in $650 million in annual sales.
Derived from the saliva of the Gila monster (a venomous lizard), Byetta is the first in a new class of diabetes drugs. It can lower blood sugar without the risk of overshooting, a serious side effect of many current diabetes medications. Even better, unlike most diabetes drugs, Byetta helps patients lose weight – an average 11 pounds.
Despite its clinical advantages, Byetta's twice-a-day injection has limited appeal except for the sickest patients. So sales have stalled. To overcome these problems, Amylin and its partner, Eli Lilly, developed a long-acting formulation of Byetta, also known as "LAR." It's twice as potent as the original and patients only need to inject it once a week.
Amylin has submitted a new drug application for LAR with the FDA. The decision date is March 5. If approved, LAR will be a mega-blockbuster, with worldwide peak sales surpassing $2 billion. This huge potential is what attracted Carl Icahn to Amylin.
After a nasty confrontation in June, Icahn ousted Amylin's chairman and put two of his people on the board. The current management has taken notice and started trimming excess costs as the first move to boost shareholder returns. But the biggest potential rests with LAR...
If the FDA approves the drug in March, Amylin shares could soar 50% in a single day. And Icahn would likely engineer a sale to partner Eli Lilly. A rejection, on the other hand, could result in a 20%-40% beating.
I think the odds favor an approval... But at current prices, Amylin stock still has too much downside risk. I'd be willing to speculate at $10 per share or below. And as March approaches, I'll be looking for a cheap option trade.
Even if we never get a shot at Amylin, we've got plenty of ways to follow Icahn into profits next year...
He's been making noise at large biotechs like Genzyme, Biogen, and Forest Labs. You can bet those management teams will have a nerve-wracking 2010. Hopefully, that'll be to our benefit.
Natural gas stockpiles shrink... natty races 6% higher.
Gold slips 2.5%... down 9% from December 3 high of $1,218.30 per ounce.
Big hospital managers HealthSouth and LifePoint reach new highs... up over 10% this month.