2Q EARNINGS: Allergan boosts sales, cuts jobs, provokes Valeant
This article was originally published in Scrip
With a 23.8% rise in second quarter earnings and a plan to cut $475m in 2015 expenses, including 1,500 jobs, Allergan thwarted an unsolicited $54bn acquisition bid by Valeant Pharmaceuticals with its continued assertion that the company doesn't need Valeant's money to increase its value.
Irvine, California-based Allergan announced as part of its second quarter earnings report on 21 July that the company will reduce its global head count by 13%, among other costs cuts, and generate double-digit annual sales growth for the next several years to boost shareholder value. And Allergan chairman and CEO David Pyott used the company's second quarter conference call to urge investors, once again, to question Valeant's own sales figures and growth projections – a plea that's generated a new round of complaints from Valeant.
Mr Pyott continues to question the growth potential for Bausch & Lomb's assets following Valeant's $8.7bn acquisition of the ophthalmology company last year (scripintelligence.com, 28 May 2013). Valeant said on 21 July that it contacted the US Securities and Exchange Commission (SEC) and the SEC's equivalent in Canada, where the company is headquartered, regarding misleading statements that Allergan has made about its Bausch & Lomb portfolio.
"We can no longer tolerate unjustified attacks on Valeant's business and strongly believe we are obligated to take action to protect Valeant shareholders from Allergan's apparent attempts to mislead investors and manipulate the market for Valeant stock," Valeant chairman and CEO Michael Peterson said in a statement from the company.
The Bausch & Lomb portfolio generated 11% organic growth during its first 11 months under Valeant ownership. The company said most of that has come from higher sales volume, not increased drug prices, as Allergan has asserted for the past two months.
By comparison, Allergan's eye care pharmaceutical sales increased 7.4% from $2.69bn in 2012 to $2.89bn in 2013, but second quarter ophthalmology sales jumped 14.5% from $722.4m in 2013 to $827m for the same period this year.
Allergan's growth
Allergan's net product sales increased 15.9% on a year-over-year basis to $1.83bn in the second quarter, including a 13.2% increase to $1.53bn for specialty pharma and a 31.4% increase to $301.2m for medical devices. Non-GAAP diluted earnings per share (EPS) jumped 23.8% to $1.51, which was $0.07 above the top of the company's second quarter guidance.
Second quarter sales for Allergan's wrinkle-reducer and migraine headache therapy Botox (onabotulinumtoxinA) rose 12.9% from the same period in 2013 to $579.4m. Sales for the dry eye drug Restasis (cyclosporine) jumped 24.4% to $269.3bn.
Based on high-than-expected pharma and medical device sales in the second quarter, Allergan raised its 2014 sales guidance by $100m to a range of $6.9bn to $7.1bn. The company's full-year non-GAAP diluted EPS forecast was increased from a range of $5.64 to $5.73 to a range of $5.74 to $5.80.
Mr Pyott said during Allergan's second quarter earnings call that the company's sales growth and its $475m, research-and-development-heavy, cost-cutting plan should deliver EPS between $8.20 to $8.40 in 2015 and $10 EPS in 2016.
"The careful yet creative approach in developing this plan serves the twin goals of minimizing the impact of cost reductions on our ability to grow sales at a double-digit rate in the period up to 2019, as well as preserving the strength of our R&D pipeline," Mr Pyott said.
Cost cuts
Allergan will continue to invest in "high-value" research and development, meaning product candidates that already are in the clinic. R&D cost cuts will be limited to discovery functions and preclinical programs.
The company maintained its position that cost cuts as big as those proposed by Valeant would compromise Allergan's double-digit sales growth and R&D prospects (scripintelligence.com, 23 April 2014).
Between the "operational excellence" that Allergan emphasized when it rejected Valeant's first offer worth $48bn in May and the company's new budget cuts, Allergan will reduce expenses by $1.1bn versus the $2.7bn that Valeant would shave from Allergan's balance sheet, mostly from research and development (scripintelligence.com, 13 May 2014).
Still, under Allergan's own budget reduction plan, R&D will be cut by 33%, or 700 employees; sales staff will be reduced by 6%, or 250 workers; and all other functions will decline by 550 jobs, or 10%. In total, Allergan's global head count will be reduced by 13% from 11,700 to 10,200 people.
Reinvestment
Mr Pyott was careful to note that Allergan's projected EPS growth through 2016 is based on the company's "deep" cost cuts and double-digit sales increases, but does not include any returns from reinvesting Allergan's projected $18bn in free cash flow during that period. The company is reviewing business development opportunities, including license and acquisition deals.
Allergan did not disclose specifics about the kinds of businesses or products that it intends to buy or license, but Mr Pyott suggested that targets may be outside the company's current specialty areas – aesthetics, dermatology, neuroscience, urology and ophthalmology – since Allergan already has a leading position in most of its markets.
"When I've been speaking to investors, I've been very clear that to find a strategic acquisition of scale and fit within our existing pillars is relatively difficult, because we have very large market positions within them," he said. "So the likelihood is that [our acquisition strategy] is much more directed to a new pillar or pillars, depending on what the profile of the acquisition candidate would be."
And depending on the size of the deals that the company pursues, Allergan also may buy back stock from its investors to boost shareholder value. The specifics of such transactions were not disclosed, but investors seemed to approved on the company's strategy.
Allergan closed up 2.2% on 21 July at $171.14 per share, near the stock's latest high of $174.49 in the aftermath of Valeant's hot pursuit. The company's $50.9bn market cap exceeds Valeant's $42.1bn market cap, but Valeant's stock price also closed up on 21 July with a 2.9% increase to $125.54.
It remains to be seen if Valeant's hostile buyout strategy in partnership with Allergan's biggest shareholder Pershing Square Capital will be successful. The timing of Pershing Square's attempted shareholder vote to institute a new Allergan board of directors is unclear (scripintelligence.com, 18 July 2014).