By Joseph Walker
As drug maker Allergan Inc. scrambles to prevent itself from
being taken over, it is taking a page from its pursuer: Valeant
Pharmaceuticals International Inc.
The Botox maker says it is laying off workers and cutting drug
research--exactly what Valeant said it would do if it managed to
acquire Allergan--as it tries to convince investors that it is
capable of ensuring strong earnings growth as an independent
company. The layoffs will represent 13% of Allergan's workforce,
the company said Monday, adding that it will also discontinue some
early-stage research and development programs.
The cost-cutting moves appeared similar, though smaller in
scale, to the steps Valeant Chief Executive J. Michael Pearson has
proposed taking to improve Allergan's financial performance.
Allergan had previously said Valeant's plan to slash R&D and
other overhead costs would hinder Allergan's long-term sales and
earnings growth.
Allergan Chief Executive David E.I. Pyott said the cuts were
"pragmatic" and made in response to the demands of large
shareholders, whose votes Allergan will need to prevent Valeant's
takeover proposal from being approved. Mr. Pyott said he had had
more than 50 meetings with investors in recent months that
convinced him spending cuts were necessary.
"When we went out to investors, they said, 'Look, we appreciate
all the value you created, we appreciate the numbers you put up,
but we're not sure we could finally vote for you relevant to the
Valeant offer, and you need to put more value on the table,'" Mr.
Pyott said in an interview.
One of Allergan's top shareholders recently sold nearly all of
its holdings in the stock. Mutual-fund giant Capital Research and
Management Co., Allergan's largest holder as of the end of March,
sold the shares after meeting with Mr. Pyott, people familiar with
the matter said, although the exact timing of the share sales isn't
clear. The sales signal at least in part that the Los Angeles
investment firm, which manages $1.2 trillion in assets across some
52 funds, didn't see Allergan's shares heading much higher than
Valeant's offer, said people familiar with the move.
As of Friday, Valeant's cash-and-stock offer valued Allergan at
roughly $173.24 per Allergan share.
Allergan and Valeant are each engaged in tense campaigns to
gather support from Allergan shareholders. Activist investor
William Ackman, head of Pershing Square Capital Management LP, has
built a position of about 9.7% of Allergan and is attempting with
Valeant to call a special meeting of Allergan shareholders. At the
meeting, Pershing Square will seek to remove six of Allergan's nine
directors and open the door for shareholders to vote on Valeant's
cash-and-stock offer. The special meeting is likely to be held
sometime between mid-October this year and early-February of next
year, Mr. Ackman said recently.
In a statement, Valeant's Mr. Pearson said Allergan's new cuts
"validate our view that Allergan's management has a poor record of
managing costs." He added: "We continue to believe that the
greatest value for both Allergan and Valeant shareholders will be
achieved through a combination of the two companies and realization
of the synergies afforded by that combination."
Allergan said its restructuring would save the company $475
million next year and lift its earnings above Wall Street analysts'
expectations in 2015 and 2016. Allergan now forecasts earnings per
share of $10 in 2016, compared with analysts' estimates of $8.19,
according to data provider FactSet Inc.
"We understood shareholders wanted a number like $10 from an
earnings per share perspective and we put it on the table," Mr.
Pyott said.
Mr. Pyott said Allergan continues to evaluate targets for a
"meaningful strategic acquisition" of a specialty pharmaceutical
company. "We are very determined that something will be
transacted," he said. Other options for the company's $18 billion
in expected free cash flow over the next several years include
share repurchases and issuing a special dividend, he said.
In all, Allergan said it would reduce its workforce by about
1,500 employees and permanently eliminate an additional 250 vacant
positions. The company is also discontinuing at least four
early-stage drug development programs in eye-care and
dermatology.
Mr. Pyott said the cuts would reduce research-and-development
spending to about 13% of its annual sales, compared with its
historical rate of 16% to 17%. Still, Mr. Pyott said, Allergan will
continue to spend far more on research than Valeant, which has
reported research expenses as low as 3% of annual sales.
In addition to the job cuts, Allergan reported on Monday a
stronger-than-expected second-quarter profit, while also boosting
its earnings outlook for the year.
Those disclosures, meanwhile, coincided with Valeant's move to
contact regulators in Quebec and the U.S. about what it described
as false statements made by Allergan in their continuing
tangle.
Valeant said Allergan falsely claimed in a regulatory filing
last week that pharmaceutical sales for its eye-care unit Bausch
& Lomb were stagnant or declining, comments it said were
intended to mislead investors and manipulate the market for
Valeant's stock. An Allergan spokesperson said: "Allergan stands by
its comments. We call on Valeant to report complete and transparent
details on its business on an ongoing basis. At the end of the day,
investors will make their own decisions."
Shares of both Allergan and Valeant rose in afternoon trading on
Monday, with some analysts predicting Valeant would have to improve
its offer price to match the earnings growth Allergan promised as a
stand-alone company.
"Allergan showed they can institute their own cost-efficiency
program without impacting their revenue growth," Shibani Malhotra,
an analyst with Sterne Agee, said in an email. "It makes it harder
for Valeant to give investors that differential that investors
would need to see to agree to a merger."
Anna Prior contributed to this article.
Write to Joseph Walker at joseph.walker@wsj.com
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