TheChek News Flow

Wellington’s intervention in Bristol-Myers M&A battle could prove a turning point

Once upon a time, big institutional shareholders would wait for an official vote to express their opinion on a deal, or a board appointment by a company in which they have invested billions of dollars. Not any more.

The decision by Wellington Management to speak out against Bristol-Myers Squibb’s $90bn takeover of rival drugmaker Celgene has shocked many on Wall Street. The intervention by the Boston-based firm, which manages about $1tn in assets, could kill one of the largest ever deals in the pharmaceuticals sector.

Many believe it could also herald a new dawn for stockpicking firms such as Wellington, which are under pressure to prove their worth in a world increasingly dominated by cheaper, passive investment strategies. BlackRock, Vanguard and State Street, the biggest beasts in passive investing, are the largest investors in about 90 per cent of companies in the S&P 500, according to Jan Fichtner at the University of Amsterdam.

“This is historic,” says Jim Woolery, head of the mergers and corporate governance practices at law firm King & Spalding. Wellington has made “a business decision that being more active, more vocal, will help them protect and grow their assets under management. The fundamental economics of asset management are driving it”.

It is a view echoed by Jim Rossman, the head of shareholder advisory at Lazard, the investment bank. “These guys are not just going to sit on the sidelines waiting to vote on an issue,” he says. “They want to be more involved in the conversation.”

Wellington is not the first stockpicking firm to emulate the activists muscling in publicly on an issue at a company in which they own shares. Neuberger Berman and Glenview Capital Management, for example, have launched proxy contests similar to those pursued by the likes of Carl Icahn or Bill Ackman of Pershing Square. But the salvo from Wellington on a high-profile, multibillion-dollar acquisition is the most striking yet.

It is one that could have serious fallout for the breed of activist hedge funds whose own business models are based on promises to shake up the strategy of the companies they target. Why would a pension fund hand over money to an expensive activist fund, if cheaper institutional investors such as Wellington begin to act more like them?

“A few years back the Wall Street establishment investors like Wellington had distaste for shareholder activism,” says Mr Woolery. “Long investors don’t need activist investors like Bill Ackman because they can do it themselves.”

Wellington, which owns about 8 per cent of Bristol-Myers, appears to be supported by some prominent activists. Starboard Value, a New York-based activist hedge fund that owns about 0.25 per cent of Bristol-Myers*, has also said it will vote against the Celgene deal.

Another large activist hedge fund, which did not want to be named, welcomed Wellington’s decision to speak out. “We love it when these guys come out; it makes us look good,” says a senior executive at the fund. But he admits that smaller activist funds, whose performance has been poor, could suffer from the trend.

Mr Rossman says that it is too early to tell whether other asset managers such as Fidelity and T Rowe Price will find their voices when the companies they own embark on major strategic moves, such as acquisitions. But there are risks in doing so — and the biggest is regulatory.

The Securities and Exchange Commission has in recent months made clear that it wants to make sure large asset managers are held accountable for the way they cast their votes, according to several people familiar with discussions.

Mr Woolery points out that Wellington sold its Celgene shares before Bristol-Myers announced its takeover plan, while many other investors — both stockpickers and passive holders — continue to hold the shares of both companies. It means that Wellington risks making a lower return on its Bristol-Myers holdings if the Celgene acquisition goes though and fails to add value.

When Wellington last week rebuffed the deal in a statement, it did not disclose that it had sold its shares in Celgene.

“That is material information for other investors evaluating Wellington’s actions,” says Mr Woolery. Wellington declined to comment.

If the economics of the asset management industry provide the likes of Wellington with the motivation to speak out on company’s strategy in a way that passive investors cannot, doing so carries dangers. It risks damaging a respected investor’s reputation by being drawn into a public and potentially ugly battle. Even so, most Wall Street analysts are convinced that the benefits will outstrip the costs.

“For major institutions, while it is not common historically, there are few risks in speaking out against a deal,” says Rich Grossman, a partner at New York law firm Skadden Arps, which defends companies against activist campaigns.

“Companies, of course, should listen to them and explain the rationale of their deals.”

Policymakers take dovish tilt amid rapidly worsening outlook for global growth

The world’s leading central banks were heading for the exit from crisis-era stimulus policies as recently as December. But in just a few weeks, global monetary policy has gone into reverse, with the Federal Reserve putting rate rises on hold and peers — from the Bank of England to the Reserve Bank of Australia — following its dovish lead.

This week’s decision by the European Central Bank to make a new offer of cheap loans to eurozone banks, and signal that interest rates would stay at record lows for longer, completed the transformation.

But as ECB president Mario Draghi admitted, central banks cannot solve the underlying problem: “pervasive uncertainty” that has hit confidence and left policymakers groping in the dark.

Central banks are doing their best to respond to a rapidly worsening outlook for global growth. This week, the OECD club of mostly rich nations cut its growth forecasts for almost every large economy, warning that the global expansion was losing steam as a result of China’s slowdown, policy uncertainty in Europe and the risk of further trade conflicts.

On Friday, US data showed jobs growth almost stalled in February, fuelling fears that recent signs of weakness in the world’s largest economy might turn into a more persistent slowdown. Chinese data for the same month showed a steep decline in trade, with both exports and imports contracting.

Some economists are encouraged by the ECB’s unexpectedly swift action.

Florian Hense, economist at Berenberg, said the shift in stance by central banks had been “one of the big factors that needed to be met as a condition to get the global expansion back on track”, adding that the risk of overly tight monetary policy could now be “taken out of the equation”.

Lydia Boussour, senior US economist at the consultancy Oxford Economics, said: “Monetary policy may be more of a cushion to growth than previously thought.”

The dovish tilt by the Fed, in particular, has had a big effect on financial markets, with investors paring back their expectations of rate rises and share prices recovering from the sharp falls they suffered towards the end of last year — although bond markets tell a slightly different story.

However, the early action from the ECB rattled investors because it suggested policymakers were acutely worried by external risks.

Mr Draghi took a sanguine view of domestic developments, noting on Thursday that nominal wage growth was picking up, labour markets improving and consumption “by and large in good shape”. The ECB’s downgrade for 2019 was largely due to the fall in German and Italian output and staff expected growth to pick up this year, with the outlook for 2020 almost unchanged.

Yet even after a downgrade and policy action, the ECB warned the risks were still on the downside. This is highly unusual — and has unsettled markets.

“We usually say when we take some policy actions, the risks get back into balance,” Mr Draghi said. But now, while the ECB could increase the eurozone’s resilience, it was powerless to address the geopolitical risks of trade conflict and a disruptive Brexit, or the uncertainties of Italian politics, which were weighing on business investment.

“If politicians do dumb things that lower trend growth, then there is nothing central banks can do,” said Erik Nielsen, chief economist at UniCredit. “All they can do is ease the pain a little.”

Shweta Singh, economist at the consultancy TS Lombard, said the latest round of cheap loans would ease funding pressures on Spanish and Italian banks and help them to continue lending to the real economy. But it would make little difference if Italian businesses did not want to borrow — the main problem in recent months.

Carsten Brzeski, economist at ING, has observed a similar lack of confidence among the mid-sized German businesses most exposed to the global downturn in trade — and said some were nearing the point at which they would start laying off staff if orders from multinationals did not pick up.

In the UK, the looming Brexit deadline has led businesses and households to postpone big financial decisions. The Bank of England has repeatedly warned it could only soften the blow if politicians decided to erect trade barriers that made the country poorer.

Laurence Boone, the OECD’s chief economist, said one of the main reasons for the organisation’s downbeat global outlook was the damping effect on business investment of trade conflicts, which represented “a prolonged change in the certainty multilateral rules were providing and aren’t providing any more”.

Ms Boussour acknowledged that even the US economy — the main anchor for global growth — could be vulnerable to a sharp slowdown in its main trading partners.

The dovish tilt by central banks made a US recession unlikely, she argued, but if global growth did slow abruptly, the “high level of global policy uncertainty could accelerate and amplify the confidence shock and lead to severe pullbacks in consumer spending and investment”.

Scientists are hopeful for a breakthrough but there has been spectacular progress made in the treatment of Aids

For 10 years Timothy Ray Brown was a lone living legend among Aids activists. The “Berlin patient”, as he is generally called, was the only person known to have had HIV, the virus responsible for the disease, cleared permanently from his body.

This week Mr Brown was joined — at least provisionally — by a second man, the anonymous “London patient”. He has been free of HIV infection for 18 months after undergoing a bone-marrow transplant from a donor with a genetic mutation that makes him resistant to the virus.

A scientific team from several UK universities reported details of the case at the Conference on Retroviruses and Opportunistic Infections in Seattle, describing it as “long-term remission”, although they added that “it is too early to say with certainty that he has been cured of HIV.”

Even a decade ago, there would have been a flurry of excitement about the announcement of a potential cure for a disease that is normally present for life — and which once inspired unique fear because of the death toll it left behind, among largely gay communities in western countries and across big swaths of sub-Saharan Africa.

The disease remains a potent threat. According to the most recent figures from UNAids, 36.9m people worldwide were living with HIV in 2017; 1.8m were newly infected with the virus and almost 1m died of Aids-related illnesses.

Yet the relatively muted response to this week’s news about the London patient speaks volumes about the course of the disease over the past decade — both false dawns about potential cures but also spectacular successes in treating HIV. Once considered a death sentence, the reality is that most patients with access to Aids drugs are now able to live almost symptom-free.

“Yes there are people seeking a cure but we have to do this in a responsible scientific manner — and not rush out to give people false hope, as some journalists have done,” says Carl Dieffenbach, director of the Aids division of the US National Institute of Allergy and Infectious Diseases. “The [London patient] is important but not the game-changer.”

Although the news about the London patient has raised hopes about the potential for a cure, experts have been careful to give several reasons for caution. One is that drastic radiotherapy or chemotherapy is required to wipe out the patient’s own immune system, killing all white blood cells, before rebuilding it with transplants from a donor with a rare protein variant called CCR5. HIV uses CCR5 as a gateway into cells, which is closed in a small minority of people who are naturally resistant to Aids.

The procedure has been carried out only on people with HIV who need bone marrow transplants because they are suffering from cancer (leukaemia in the Berlin patient and Hodgkin’s lymphoma in the London patient), and the proportion of successful outcomes is low.

“There are two people now who appear to be in virological remission,” says Dr Dieffenbach. “As far as we can tell the number in whom this procedure has been attempted is in the order of 20 or more.”

The Berlin patient does appear to be permanently rid of HIV, but it is too soon to be certain about his London counterpart. Aids researchers remember past cases in which cures were claimed but turned out not to be durable. Celebrated disappointments include two “Boston patients” and the “Mississippi baby”, in whom infection returned after apparently disappearing for long periods.

At the same time, some of the urgency that once surrounded the search for a cure for Aids has been muted by striking achievements in treating the disease. Clinicians point to the remarkable success of antiretroviral therapy, or ART — conventional drugs taken by mouth once a day — in suppressing HIV to levels that are undetectable by normal clinical testing and have no effect on the patient’s health.

According to UNAids, 21.7m people worldwide receive ART. The global market for HIV medicines is worth about $28bn a year; Gilead Sciences of the US has the largest share, followed by GlaxoSmithKline of the UK. The medicines are so safe and effective that increasing numbers of people who are at high risk of HIV exposure but not infected are taking them, a procedure known as pre-exposure prophylaxis, or PrEP.

“An HIV vaccine is still a long way away and cure strategies are pretty brutal at the moment, yet antiretroviral therapy today allows you to live a normal, healthy life,” says Chloe Orkin, an Aids specialist at Queen Mary University of London.

Prof Orkin and Susan Swindells of the University of Nebraska Medical Centre presented two clinical studies on Thursday at the Seattle conference, showing that a long-acting antiviral injection once a month suppresses HIV as effectively as daily tablets.

compared an injectable combination of two drugs — developed by ViiV Healthcare, GSK’s HIV division, with Johnson & Johnson of the US — with a standard daily oral treatment combining three different drugs. A vast majority of participants preferred monthly injections to daily tablets.

“The positive safety and efficacy results reinforce the potential of [this] first long-acting, injectable option for people living with HIV,” says Prof Swindells. “This novel approach may help alleviate the burden often associated with daily oral treatment regimens and contribute to making HIV a smaller part of peoples’ lives.”

Following the success of the trials, Viiv expects to apply for regulatory approval to market the monthly injectable combination this year. A further clinical study is evaluating a longer-acting version of the therapy injected every two months.

“In terms of treatment, HIV is easier to control than diabetes,” says Prof Orkin, who chairs the British HIV Association. She makes the further point that more than 98 per cent of people on antiretroviral therapy have no detectable virus in their blood — and “evidence over the past few years makes it absolutely clear that a person with sustained, undetectable levels of HIV in their blood cannot transmit HIV to their sexual partners”. Hence a slogan heard increasingly in the Aids field: U=U, meaning undetectable equals untransmittable.

Making antiretroviral therapy available to everyone who needs it is therefore a worldwide public health priority. Aids campaigners at the Seattle conference were encouraged to hear the results of a study covering a million people in South Africa and Zambia — the world’s most extensive HIV prevention trial — which showed a 30 per cent decline in new infections through a combination of counselling, testing and then referral to care and treatment for those who were HIV-positive.

“This important study clearly demonstrates the critical impact of community-based HIV prevention, testing and linkage to treatment,” says Michel Sidibé, executive director of UNAids. “It reinforces UNAids’ call for more community healthcare workers across Africa and the need for increased investment in HIV prevention and treatment, including new and better tools and systems to deliver them.”

Even so, the excitement felt by many people about this week’s news of the London patient reflects a yearning for a cure that would reliably eradicate HIV from its hiding places deep inside the immune system and avoid the need for life-long medication, whether taken as pills or injections.

The London team accepts that the complexity of its procedure and the toxicity of chemotherapy mean that it cannot become a standard HIV treatment. But it offers hope for developing simpler and gentler strategies that might eliminate HIV by targeting the CCR5 “receptor” on which the virus depends.

“Continuing our research, we need to understand if we could knock out this receptor in people with HIV, which may be possible with gene therapy,” says Ravindra Gupta, a professor at University College London, the project leader.

Coincidentally the HIV-resistant CCR5 mutation introduced to the London patient through his bone marrow transplant is the same one targeted by He Jiankui, the controversial Chinese scientist who made the world’s first genetically modified babies last year. Dr He drew worldwide condemnation on ethical and safety grounds when he revealed the birth of twins whose CCR5 genes had been altered with the editing technique known as Crispr.

No one is suggesting that HIV-proofing of future generations justifies the risky and unethical procedure carried out by Dr He, but research is already under way to investigate the potential of Crispr as gene therapy for Aids.

For instance, the Seattle conference heard about studies on monkeys where scientists are investigating Crispr to edit HIV genes out of infected cells. Dr Dieffenbach calls it “the first really profound experiment that has been reported using Crispr” in Aids research.

“The group at Temple University [in Philadelphia] put a Crispr system into non-human primates . . . and it was surprisingly effective,” he says. “That gives us hope that down the road Crispr could be used in people in a similar way but, again, it’s early days.”

Even those who are preoccupied with more immediate issues such as HIV testing and access to medicines in the developing world are fascinated by the scientific promise.

“To find a cure for HIV is the ultimate dream,” says Dr Sidibé. “Although the [London patient] breakthrough is complicated and much more work is needed, it gives us great hope that we could potentially end Aids with science, through a vaccine or a cure.”