Steep cutbacks in the research and development staff of Allergan Inc. would likely be the most immediate local byproduct of the Irvine-based drug maker’s $47 billion sale to Valeant Pharmaceuticals International Inc. if the hostile takeover comes to pass.
More than 5,500 job cuts could result from the two drug companies combining, according to Valeant executives.
Allergan reported nearly 2,500 local employees—many of them R&D staffers—and nearly 11,500 companywide as of earlier this year.
“I’d expect to see a significant reduction in headcount” at Allergan’s headquarters if the company is sold, said one area medical company chief executive who requested anonymity. “That’s how [Valeant has] handled all their other acquisitions.”
The deal is a long way from done, though—and there’s another side to the potential job cuts when it comes to OC’s healthcare sector. An increase in hiring at other area drug makers and medical product manufacturers—established companies and startups—could be spurred by layoffs at Allergan, according to industry sources.
It would be a tall order for the remaining local industry to offset all the layoffs entirely, though.
“I’m sure there would be a lot of net beneficiaries” in terms of a boost to the local pool of available talent, said a local healthcare executive.
Allergan’s local employee count is nearly double the combined total of the next 10 largest drug companies based here, according to Business Journal records.
Open Question on HQ
Allergan had $6.3 billion in sales in 2013 and is Orange County’s largest public company by market value.
The role of the company’s Irvine operations in a combined Valeant-Allergan remains very much in play, according to statements from the potential acquirer. There appears a chance that a combined company could end up keeping its U.S. headquarters in OC, which might minimize job losses in areas such as sales and marketing.
Laval, Quebec-based Valeant’s U.S. operations are based in Bridgewater, N.J., where it leases about 110,000 square feet of office space. Allergan has nearly four times as much overall space counting its nearly square-block campus near John Wayne Airport and other locations in the area.
“We are not proposing any changes (to relocating headquarters) at this time,” Valeant said in a letter to employees last week. “We have informed Allergan that we are open to discussing all social issues, including our U.S. headquarters location.”
Valeant last week made an unsolicited bid, in coordination with activist investor Bill Ackman, to acquire Irvine-based Allergan in a $47 billion cash-and-stock deal.
A deal at that price would far surpass the $6.8 billion sale in 2011 of Brea-based Beckman Coulter Inc. to Danaher Corp. of Washington, D.C., not to mention last month’s announced $5.6 billion sale of Anaheim-based Questcor Pharmaceuticals Inc. to Mallinckrodt PLC in Ireland (see related story, page 1).
Allergan countered Valeant’s offer with a poison-pill defense, which “aims to provide the board with adequate time to fully assess any proposal,” the company said last week.
The so-called “stockholder rights plan” would be in effect for one year and could give Allergan the time to align itself with what it perceives to be a friendlier merger partner, reject Valeant’s bid outright, or devise another plan to keep itself independent.
Potential white-knight partners include Paris-based Sanofi SA, GlaxoSmithKline of the U.K., and Novartis International AG in Switzerland, according to analyst reports and market watchers.
It’s also possible that Allergan could fend off a hostile takeover by making an acquisition of its own, by taking on a major share repurchase effort, or other maneuvers.
“We believe that Allergan will likely do all it can to resist a hostile takeover by Valeant,” said an analyst report from Sterne Agee last week.
Allergan Chief Executive David Pyott hinted as much in a letter to employees.
“It is important to note Valeant has not always completed transactions that it has proposed,” Pyott said in a letter to employees last week.
ICN
Valeant has its roots in ICN Pharmaceuticals Inc., founded in Costa Mesa in the early 1960s by immigrant Milan Panic, who went on to serve a stint as prime minister of Yugoslavia in the 1990s. ICN changed its name to Valeant in 2003 after activist shareholders forced out Panic.
In 2010, Canada-based drug maker Biovail Corp. combined with Valeant, which had moved from Costa Mesa to Aliso Viejo, in a $3.2 billion deal and took on the Valeant name.
Valeant now is known for seeking profits by slashing R&D and other overhead of companies it acquires, and similar actions may take place at Allergan if it’s bought. The company has said it sees close to $2.7 billion of synergy-related savings if the companies were to combine.
As much as $2 billion of those savings could be job-cut related, healthcare industry sources speculate.
Allergan’s R&D department appears to be the most ripe for layoffs, based on public comments by Valeant officials last week, as well as the company’s recent operating history.
Allergan, the maker of Botox and other drugs, had 2,100 employees who were involved in its research and development efforts at the end of 2013. Much of that R&D work is done at its Irvine headquarters.
The company reported spending nearly $1.1 billion, or 16% of its revenue, on R&D this year.
Valeant, by contrast, shuns R&D work and instead emphasizes aggressive sales, cost savings, and tax benefits related to its corporate home in Canada and subsidiary in Bermuda.
“Most drugs get discovered by universities and entrepreneurs, not by large drug companies,” Valeant Chief Executive J. Michael Pearson said last week.
Pearson estimated that about 20% of the combined companies’ 28,000 employees would be cut if a sale were to go through.
An unspecified portion of those cuts could include Valeant staff, he said.
Valeant officials have “analyzed the cuts. These are not people touching the customers, these are people sitting in offices. And you know, we don’t need people sitting in offices,” Pearson said.
Frosty Feelings
Pearson’s roll-up strategy for growing business has long been at odds with that of Allergan. Pyott and Pearson are said to have had a frosty relationship.
“It’s fair to say that I’ve never seen them chummy,” said an industry executive who knows Pearson and Pyott.
A potential gutting of Allergan’s R&D staff and other positions could end up being as big of a roadblock to getting a deal done as the price Valeant offers for the company.
Pyott and the rest of Allergan’s management team “would be loath to watch their company downsized for operating cost synergies,” said a Stifel Nicolaus analyst report last week.
A letter sent to Allergan customers last week said the company would “do what is in the best interest of our stockholders, our employees and (to) our customers.”
“Allergan has built a long and proud history over the past 60 years based on our commitment to research and development, to bringing new and innovative products to market, and to investing to build new markets in our endeavor to serve you, our customers,” the letter said. “You have our assurance that we will remain focused on these same priorities.”
