A letter from activist shareholders Appaloosa LP in Miami, Fla., and New York-based Senator Investment Group LP to Allergan PLC (NYSE: AGN) last week is a short-term blessing in disguise. Shares of the pharmaceutical company, which traded at about $163 each last week when the news broke, were trading at $173 per share late last week for a nearly $59 billion market cap.
The letter didn’t change analysts’ outlook on the company. Several told the Business Journal that they remain bullish on Allergan because of the strength of its aesthetics business.
The way Sanford C. Bernstein & Co. LLC senior analyst Aaron “Ronny” Gal sees the situation, it’s a bit premature to talk about the most radical changes activist investors outlined in the letter, including management change or breaking up the company.
“Allergan is looking at two critical readouts in the next nine months … ”—late-stage clinical drugs designed to treat migraines and depression, respectively—according to Gal in a recent analyst note. “If these are successful, future growth of the business will be a lot more secure. If they fail, then … it would be time to seek breaking up the company as a way to unlocking value,” he wrote.
The Lowdown
Appaloosa and Senator Investment, long-term investors in Allergan with approximately $16 billion and $9 billion in assets under management, said they are deeply concerned with the substantial value destruction occurring at Allergan, pointing out that the stock has declined by approximately 33% in the past 12 months, 46% since its peak three years ago.
They called for the company to either split the office of chief executive and chairman or get a new, outside chairman or chief executive—positions Chief Executive Brent Saunders holds. They also said the company should replace at least two additional directors on the board, as well as “upgrade” management personnel in critical operating units.
“I do feel like most investors missed the old [legacy] Allergan and want to get back to that,” said Credit Suisse research analyst Vamil Divan, referencing products such as Botox, both cosmetic and therapeutic uses, dermal fillers and eye care.
The activist investors also said the company needs to abandon an “everything on the table approach” and focus on its core therapeutic areas.
Divan said investors are supporting some changes but that it’s unlikely that activist shareholders will get all of their demands.
Appaloosa and Senator Investment issued the letter after Saunders publicly outlined a strategic review on May 30 that considered options such as splitting up the company, selling and acquiring assets, and buying back shares.
While Allergan announced it’s selling two of its smallest businesses—women’s health and infectious disease—the pair said the measures aren’t enough and “betray the Board and management’s desire to cling to a status quo that has produced three years of steadily declining stock performance and a fire-sale market valuation.”
Shortly after the letter was issued, billionaire Carl Icahn took an undisclosed position in Allergan, according to Bloomberg. He had a hand in Saunders being appointed in 2013 as chief executive of Forest Laboratories, which was sold to Allergan less than a year later.
Allergan declined to provide additional comment besides a June 5 statement responding to the public shareholder letter. It said directors and management welcome and take into account all of its shareholders’ views. Last week Allergan announced the addition of Thomas Freyman to its board as part of an earlier-announced board refreshment process. Freyman previously served as executive vice president of finance and administration at Abbott Laboratories.
Director Patrick O’Sullivan, who joined the board in 2013 following the company’s acquisition of Warner Chilcott PLC, is scheduled to retire next month. Following the two changes, Allergan’s board will continue to have 12 members, of whom 10 are independent.
To Diversify or Not
Appaloosa and Senator Investment said in the letter that Allergan has been struggling “to operate its existing set of disparate franchises” and should focus on reducing portfolio complexity and “concentrating on the core therapeutic areas of medical aesthetics, neuroscience and ophthalmology.”
Appaloosa is led by Chief Executive David Tepper. The hedge-fund billionaire has a reputation for being candid and at times controversial, according to media reports. Together, Appaloosa and Senator Investment hold a nearly 2% stake in Allergan.
But owning a diversified portfolio can have its positives, especially in light of Allergan potentially losing patent exclusivity on top-selling dry-eye drug Restasis.
Allergan fell from investor favor after it announced its patent deal with the Saint Regis Mohawk Tribe in New York in September. The transaction, originally intended to leverage the Native American tribe’s sovereign immunity protection to prevent Allergan from fighting out a Restasis patent dispute with generic drugmakers on two fronts—the federal court and through an inter partes review at the U.S. Patent and Trademark Office—backfired badly. A federal district court ruling last year invalidated exclusivity protections for the eye drug. Allergan said it anticipates generic competition will enter the market this year.
“Given the company’s depressed stock price, we’re not particularly surprised to see activists circling, but it doesn’t change our view that the company possesses unique wide-moat assets and remains undervalued,” wrote Morningstar Inc. analyst Michael Waterhouse in an analyst note.
Waterhouse wrote that splitting the business further could lead to “potential dis-synergies from separating the remaining medical aesthetic, ophthalmology, [central nervous system] and gastrointestinal segments.”
Gal pointed out that breaking up the company is risky, writing, “Companies usually ‘leak value’ as people exit and secondary assets are sold at deep discounts.”
Portfolio Outlook
It’s a no-brainer that Allergan’s aesthetic business deserves a much higher multiple that’s not reflected in the stock—the unit generated more than $2.4 billion last year and demonstrated strong year-over-year growth—but whether that value can be realized with a corporate shakeup, like replacing the chief executive or splitting or selling the company in pieces, is debatable.
The company’s evergreen top-seller, Botox, continues to dominate the aesthetics market. As for therapeutics, it will soon add ubrogepant and atogepant, oral anti-calcitonin gene-related peptide therapies, or CGRP, to its portfolio.
Ubrogepant is designed to treat migraines, Atogepant to prevent them.
Last week Allergan announced the completed the first of two phase-three clinical trials. Divan of Credit Suisse wrote that “we do not assume commercialization until 2022 (consistent with [Allergan’s] prior guidance), but we view this as an important positive data readout given questions investors have had on the strength of [Allergan’s] pipeline and their ability to compete in an increasingly crowded migraine market.”
Atogepant follows ubrogepant, Allergan’s first oral investigation CGRP antagonist. The company plans to submit a new-drug application to the Food and Drug Administration in 2019.
Depression treatment candidate Rapastinel is pending approval from the FDA.
Berstein’s Gal advised that the best action for Allergan is to stay the course and that the next few quarters will tell where the company is headed.
