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Allergan Responds to Investor's Call for CEO/Chair Role Split

Zacks Equity Research

Allergan plc AGN issued a statement in response to a letter from one of its public shareholders, Appaloosa, disagreeing with the latter’s request of a separation of Chief Executive Officer (“CEO”) and Chairman roles, both currently held by Brent Saunders.

Allergan has indicated in its statement that a separation of roles may happen upon departure of Saunders anytime in future. The company also stated that it has transformed itself over the years from a generic drugmaker to a global biopharmaceutical leader with strong positions in its four key therapeutic areas. The company added that it has also appointed Bob Hugin, former CEO and chairman of Celgene, for strengthening the role of independent director. Last year, it planned to divest Women's Health and Infectious Disease units to focus on key areas. However, on its fourth-quarter earnings call the company announced it may only sell the Infectious Disease unit while retaining the other.

We remind investors that activist investor Tepper from Appaloosa has been insisting on the separation of CEO and chairman roles since early 2018. He is of the view that Allergan needs fresh ideas to support growth and that is not possible with one person holding two key positions.  The letter from Appaloosa alleged that Allergan’s balance sheet write-downs have amounted to billions of dollars over the past four years, along with the acquisition of underperforming products and excessive compensation to management. These factors have resulted in stock price decline, which Appaloosa believes will continue if the requested management changes are not made.

In the past year, Allergan’s share price has declined 13.4% compared with the industry’s decline of 15.8%.

We note that Allergan has a significant and expanding branded pharmaceutical business, which includes products like Botox, Restasis, Viibryd, Linzess, Ozurdex among others along with new products with solid potential to support its long-term growth. In 2016, the company sold its generic business to Teva Pharma TEVA to focus on its branded segment. The company has also been repaying its debt significantly over the past three years, reducing a major burden on its margins. It also undertook job cuts and other cost-savings measures, which led to annual savings of $400 million in 2018.

On the flip side, Allergan is facing or set to face generic competition for several of its drugs including its second best-selling drug, Restasis. The company is set to lose $1.4 billion in sales due to loss of exclusivity in 2019. Moreover, the approval to Evolus, Inc.’s EOLS Jeuveau injection for glabellar or frown lines earlier this month is disappointing as it will compete with Allergan’s lead product, Botox, which is approved for the same indication as well as other aesthetic and therapeutic indications.

In the therapeutic area, the drug is set to face competition in the migraine space with recent approval to three anti-CGRPs – Amgen’s Aimovig, Teva’s Ajovy and Eli Lilly’s LLY Emgality. However, the company expects the migraine market to expand significantly to support co-existence of Botox and anti-CGRPs. But it also expects growth rate for Botox to moderate due to competition.

Meanwhile, the company’s outlook for 2019 is not quite encouraging. The 2019 sales outlook, provided at the fourth quarter conference call held last month, missed market expectations and suggests a decline from 2018. Allergan’s initiatives in 2019 are going to be crucial for the company’s growth as it will face competition for some of its top drugs. It remains to be seen how the company tackles the challenges and offsets any sales decline.

Allergan plc Price


Allergan plc Price | Allergan plc Quote

Zacks Rank

Allergan currently carries a Zacks Rank #3 (Hold).

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