Cost cuts are coming for Allergan, CEO says. But a breakup isn’t

Allergan won't be splitting up right away, according to executives.

Heading into Allergan’s third-quarter conference call, executives knew investors were skittish about the prospect of Restasis generics. So they spelled out their solution loud and clear: Cost cuts are coming, and “rapidly.”

Executives are currently sifting through the details of cost-squeezing proposals they drew up earlier this year, CEO Brent Saunders said on the call. And considering Allergan’s experience wringing savings out of its many M&A deals, investors shouldn’t worry. When it was Actavis, the company slashed 577 jobs at its Irvine, CA headquarters alone as part of the $1.8 billion in savings it plotted when it took over Allergan.

“This team is up for it,” Saunders said. “I hate to say we know how to take costs out of the business, but we do, and we know how to do that in a way that protects the long-term growth drivers.”

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One thing it’s not up for? The companywide split that analysts have been mulling. “That’s not on the table,” Saunders said. “Splitting the company is ... at least a few years of work, and that’s not something that we’re focused on right now.”

Later, of course, could be a different story. “We don’t have conviction about whether or not you should or shouldn’t split,” Saunders said, pointing to “bold” actions—such as its $40.5 sale of its generics unit to Teva—that Allergan’s taken in the past.

For right now, though, Allergan doesn’t see a patent cliff as reason to shake things up strategically. “We’re not the first nor will be the last biopharmaceutical company to have to deal with loss of exclusivities on products. That in and of itself is not a reason to change course,” Saunders said.

Allergan isn't the only drugmaker working to pare down costs right now. Pharma has seen a wave of layoffs, including 1,800 to Merck's sales team. Before that, Eli Lilly announced 3,500 cuts in September, and Teva unveiled a whopping 7,000.

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With Allergan’s stock price currently in the doldrums, the Dublin drugmaker’s mission for Wednesday was to reassure them. Saunders pledged to keep generating strong free cash flow and pull back on dealmaking so the company could preserve cash to return to shareholders.

“That’s what we get paid for as management,” he said, adding that, “We need to manage this business to protect our shareholders while not sacrificing future growth.”

And the way Evercore ISI analyst Umer Raffat saw it, the company nailed it. I think the call went well. Mgmt was very clear about expectations into next year,” he wrote to clients, while Bernstein’s Ronny Gal wrote in his own investor note that “we like it here.”

Of course, a “decent” showing for the quarter, as Gal put it, also helped. Allergan met revenue projections with $4.03 billion in sales, buoyed by beats from products including Restasis and Linzess. They helped fill the holes left by Viberzi, which continues to struggle since receiving a contraindication, and Kybella, which hasn’t lived up to expectations.

Earnings per share, meanwhile, topped expectations by 11 cents at $4.15.