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Third Point ups its stake in Amgen

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Third Point and Amgen

In 4Q14, activist hedge fund Third Point built up its position in Amgen (AMGN). According to its fourth quarter 13F, the fund increased its position in the biotech firm by 9.35 million shares, taking its tally to 10.7 million shares in the company. In dollar value, Amgen accounts for $1.7 billion of Third Point’s $11.1 billion portfolio, which translates to 15.34% of the total fund size.

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Overview of Amgen

Amgen’s roots trace back to 1980, and the company is a pioneer in the biotechnology industry. Through its discovery, development, and marketing of therapeutic drugs, the firm has made meaningful contributions to human health in the areas of oncology, hematology, inflammation, bone health, nephrology, cardiovascular, and general medicine worldwide.

Between 1989 to 2002, Amgen grew five revolutionary drugs into blockbuster products in the fields of oncology, nephrology, and inflammation. Now, Amgen is one of the leading biotech firms with market capitalization of $116 billion and revenues in excess of $20 billion.

Amgen has been a big win for Third Point

In its letter to investors in the third quarter, Third Point described Amgen as a hidden value situation due to structural hurdles. The fund had stated that Amgen’s valuation discount to its peers was unjustified considering its attractive revenue and earnings growth profile. Third Point had recommended three specific actions to enhance shareholder value:

  1. focus on R&D (research and development) efforts
  2. reduce its bloated cost structure and provide a long-term margin guidance
  3. provide clarity on capital allocation

The company recognized these concerns and addressed skepticism on operating margin guidance and additional shareholder returns. Amgen has rolled out a disciplined expense plan up until 2018, which it believes will drive an improvement in its margin profile to 52% by 2018 from its current operating margin of 38%.

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The firm also intends to increase its quarterly dividend payout by 30% and accelerated its share repurchase program. In the fourth quarter, the company repurchased 0.9 million shares for a total cost of $153 million. The company currently has $3.8 billion remaining under its stock repurchase program.

This long-term strategy together with positive clinical pipeline events and financial discipline helped Amgen in delivering 45% returns to shareholders in 2014, which is the best performance of all large cap US healthcare companies since 1999.

Third Point believes that if Amgen can provide visibility on R&D spending at a granular level, it would provide more comfort to its investors, and quite possibly further maximize value.

Amgen is a constituent of the Health Care Select Sector SPDR Fund (XLV) and has a 4.44% portfolio weighting.

Third Point’s top trades in 4Q14

In addition to Amgen (AMGN), Third Point increased its stake in Alibaba (BABA) and eBay (EBAY). As we discussed earlier, the fund also added new positions in Citigroup (C), EMC (EMC), and Phillips 66 (PSX). The fund exited its position in Coca-Cola (KO) and reduced its stake in Dow Chemical (DOW).

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