TheChek News Flow

01 MAY 2018

Allergan [NYSE:AGN], the Ireland-based pharmaceutical company, is looking at five options during its strategic evaluation, CEO Brenton Saunders said Monday. He also commented on Shire [LON:SHP].

During his prepared remarks on the 1Q18 earnings call, Saunders noted that Allergan announced in March its decision to review strategic actions to unlock shareholder value. He said the company is deep into the process and has engaged multiple financial advisors to assist. The CEO explained that while anything is possible, the company’s options fall into five broad categories: an aggressive share buyback; divestitures; splitting the company; acquisitions or mergers; and operating in its current configuration.

“While we like our business as it exists today, we do believe there are strategic and financial merits for a more focused Allergan and are currently evaluating options that would enable us to concentrate more on key therapeutic areas where we have the strongest competitive advantage,” Saunders said. “Therefore, if economically prudent, we would look to divest certain assets.”

He said splitting the company would take the longest time to complete and be the most disruptive of all the options, but it is still being considered.

Regarding M&A, the CEO said the key is to find the right strategic fit and financial rationale.

“Given the current environment, a large combination or merger is an unlikely outcome at this time,” he said. “However, small bolt-on transactions including product and pipeline acquisitions that could strengthen our key areas of therapeutic focus are on the table, but once again the mandate is right strategy, right asset, right price.”

In terms of buybacks, Saunders said the company’s stock disconnect remains despite a robust buyback program and it does not believe this would be a primary conclusion to the review.

“While the board continues to evaluate the options, my preliminary view is that a fundamental shift in the overall business strategy is not necessary,” the CEO said. “Running the company in large part as it exists today is not only an option, but also the baseline against which all options need to be considered.”

In the Q&A session, J.P. Morgan's Chris Schott asked Saunders to elaborate on the pros and cons of potential divestitures versus a split of the company. The CEO reiterated that all options are on the table, with divestitures needing to make strategic and financial sense.

He stressed that Allergan would not do a garage sale of important assets, noting that the company does not consider any of its current portfolio to be a distraction to management.

Earlier on the call, Citi analyst Liav Abraham asked about the timeline for the completion of the strategic review. Saunders said it is an ongoing process in which the board is deeply involved. He explained that Allergan continuously looks for ways to simplify the company, noting the previous sales of its respiratory, contract manufacturing and generics businesses as examples.

Asked by Cowen analyst Ken Cacciatore about the feedback Allergan had received from shareholders regarding the strategic review, Sanders said there were some shareholders that supported each of the five options.

The CEO addressed Allergan’s falling share price at March's Barclay’s Global Healthcare Conference. At that time, Saunders said the company was “undertaking a full, fresh look” at all available options and would do this with a sense of urgency. At the March conference, the CEO noted that current financial performance was progressing according to plan, but there appeared to be an extreme disconnect between fundamentals and current valuation.

A published report in early April said Allergan had held talks with advisors regarding the strategic options for its women’s health unit.

Shire evaluation

Separately on Monday’s call, UBS analyst Marc Goodman noted that the CEO said no big deals are under consideration and asked how talk of Allergan’s potential interest in Shire relates to this decision. Saunders reiterated that large transformational buys are not a top priority, adding the caveat that it could not rule anything out in the dynamic healthcare environment and the company would maintain flexibility for opportunities that present strong strategic and financial rationale.

“Because Takeda [TYO:4502] put Shire in play, we felt we had an obligation to at least do a cursory review and look to see if there was a probability that we could create value for shareholders,” the CEO explained. “We did that. It was leaked, as you saw in the press, and we were forced within minutes to make a presets disclosure as required by the UK Takeover Panel. But to be clear, we work very quickly with the takeover panel in the UK to clarify that and we are not going to make an offer for Shire.”

He added that Allergan’s business development teams were always active and it had made a cursory review of Shire as part of its standard operating practice to look at every company in play, regardless of whether there was a possibility of pursuing a deal or not.

“We have to look at other things to make us smarter about the things we want to buy and that’s what happened here,” the CEO said.

On 19 April, a newswire report said Allergan was in talks to buy Shire, emerging as a rival to Japan's Takeda. Later that day, Allergan confirmed it was in the early stages of considering a possible offer for Shire. Hours later, Allergan announced that it did not intend to make an offer for Shire, stating it was making the second statement in order to comply with the requirements of the UK Takeover Code.

Bolt-ons

Asked on this week's earnings call about which verticals Allergan was interested in regarding bolt-on buys, CEO Saunders said the company is committed to four main areas: medical aesthetics, eye care, central nervous system [CNS] and gastrointestinal [GI]. He said it also has a strong view of its women’s health and anti-infectives businesses, though they are less strategically important.

“In terms of bolt-ons, I think, you’ll see us generally focusing like we have in the past on the areas where we follow our strategy, which is to create market leadership positions in each of our therapeutic areas,” the CEO said, noting its LifeCell and ZELTIQ deals in the medical aesthetics space as examples. “If we could find things in eye care that made both strategic and financial sense, that would be a hot area for us. In GI and CNS, equally so. So those are the four we tend to focus on.”

Allergan is focused on developing, manufacturing and commercializing branded pharmaceutical, device, biologic, surgical and regenerative medicine products. Its brands are used for the central nervous system, eye care, medical aesthetics and dermatology, gastroenterology, women's health, urology and anti-infective therapeutic categories.

In February 2017, Allergan announced it had agreed to buy ZELTIQ, a Pleasanton, California-based medical technology company, for USD 2.475bn.

In late 2016, Allergan said it had entered an agreement with Texas-based Acelity to buy regenerative medicine company LifeCell of Bridgewater, New Jersey, for USD 2.9bn in cash.

Allergan used Moelis for ZELTIQ, with Barclays and Guggenheim Partners advising on LifeCell. J.P. Morgan, BofAML and Greenhill were used on prior deals.

Debevoise & Plimpton, Weil Gotshal & Manges and Covington & Burling have been used on several recent acquisitions, according to the Mergermarket M&A database.

Allergan has a market capitalization of USD 56bn.