[WSJ] Biotechnology companies, in a sign of the industry’s maturity, are increasingly coming under the microscope of shareholder activists, who want the sector to act more like traditional businesses.

In recent years, well-known activists like Carl Icahn and Ralph Whitworth have questioned whether larger biotechs, which tend to have good cash flow and diminished competition, are doing enough for their investors. Frequently, the activists question the company’s spending habits, often obscured by the biotech’s rapid growth.

For investors, an activist’s interest is usually seen as positive because it could foreshadow better returns. Within biotech, though, the actual results are less conclusive, possibly reflecting how the sector’s business model–which features years of heavy research costs but potentially gigantic returns on a successful drug–differs from traditional industries.

The most notable activist success in biotech was Icahn in turning around ImClone Systems. He bought shares in the low $40s in early 2004, took control of the board and sold the company to Eli Lilly & Co. (LLY) for $70 a share in 2008. He also pushed for the sale of Medimmune in 2007, and the company was sold to AstraZeneca at a huge premium only two months after he reported an activist position.

However, in several situations–such as Amylin Pharmaceuticals Inc. (AMLN), Biogen Idec Inc. (BIIB), and PDL Biopharma Inc. (PDLI)–the stocks have suffered when activists became involved.

Paul Wagner, co-manager of the Allianz RCM Wellness fund, notes that activists’ involvement in biotech can be problematic or distracting if they lack insights into specific company issues or their goals are too short-term oriented.

“I am not sure I agree that putting an underperforming company on the auction block necessarily maximizes long-term shareholder value,” he said.

Activists, attracted by biotech’s high profit margins and lack of competition, frequently point to the companies’ accrual of massive amounts of cash, which they say has led to lax financial management, including aggressive compensation, high research spending, and bad deal decisions.

“In this industry they usually use to try and extend their growth, but a lot of times they overreach and it becomes wasteful,” said Whitworth, whose firm–Relational Investors, a $6 billion investment fund–recently has made noise at Genzyme, which has suffered from manufacturing and regulatory woes.

Also, the industry is getting older, as many biotechs have had products on the market for several years; however, the companies are still regarded as growth stocks, and none pay a dividend, something that is standard among large pharmaceutical companies.

“As they have grown so fast, they have not taken on the accoutrements of a mature business,” Whitworth said.

Amgen Inc. (AMGN), with its almost $60 billion market capitalization and $13.4 billion in cash, is the most obvious candidate to pay a dividend, but recently said it wouldn’t happen “any time soon.”

Traditional pharmaceutical companies also produce a lot of cash but face competition in a given class of drugs and from generic companies. Biotech drugs, made from complex biologic processes, often face no competition and have high prices with no regulatory pathway for generic versions.

Biotech drugs, especially those treating unmet medical needs, can bring in a lot of cash, making it harder to notice missteps because profitability remains high and market share doesn’t suffer.

Activists argue that it is important to think about what the company “could be” rather than simply reward management for high performance when compared with other industries.

Whitworth projects that Genzyme will generate 60% of its current market capitalization, or more than $8 billion, in discretionary cash over the next five years, compared with the S&P 500 average of about 30%.

But that contrasts with the $10 billion that Genzyme has invested in the past 25 years, which has generated a loss of $1.3 billion, according to Whitworth, who recently reached an agreement that could put him on Genzyme’s board this year.

Icahn has made similar arguments against Biogen, highlighting that it hasn’t launched a new product since 2004 and criticizing the 2003 merger that created the company. He recently laid the groundwork for his third consecutive proxy fight, but the stock is down 9% since he revealed his stake in 2007.

-By Thomas Gryta, Dow Jones Newswires; 212-416-2169; thomas.gryta@dowjones.com