As Allergan shares languish, Icahn unloads most of his $700M stake

Allergan HQ

When activist investor Carl Icahn picked up a big stake in Allergan in May, it was one of his biggest buys of the year—and far from a move against current management, as is his wont. It was an endorsement of CEO Brent Saunders.

Now, Icahn has cashed out.

At the end of June, according to securities filings cited by The Wall Street Journal, Icahn had $700 million socked into Allergan shares. By the end of September, that stake had dwindled to just $98 million.

Saunders has enjoyed Icahn’s confidence before. During a proxy fight with Forest Laboratories’ board several years ago, Icahn and his supporters helped bring in Saunders to take over from longtime chief Howard Solomon.

When Forest sold soon after, shareholders reaped “massive gains,” Icahn said earlier this year—including, of course, Icahn himself. Apparently, Icahn figured he’d see the same sort of boon from Allergan under Saunders’ leadership.

Unfortunately, Allergan doesn’t have a megamerger partner on tap to deliver quick M&A gains, now that Pfizer and its $160 billion takeover is off the table. Rumors now put Allergan in the buyers’ seat for deals big and small. And the company’s shares haven’t performed at their best this year. Starting the year trading at $300-plus, Allergan closed at $202 Monday.

After word of Icahn’s big investment surfaced in May--when shares stood at $253—the company’s stock has mostly traded below that number, and have declined markedly since late October.

It didn’t help, of course, that third-quarter results, reported Nov. 2, didn’t come up to standard. Defending the numbers, Saunders pointed to growth for most of Allergan’s “top-level products,” some of which turned in double-digit increases. “It's a very good picture to have so many products growing so strongly,” Saunders said.

“The results are far from great. The question now is whether this is an aberration or a new trend line,” Bernstein analyst Ronny Gal wrote in a note to clients after earnings were released.

Does Icahn’s selloff mean he feels differently about Saunders these days? Not necessarily; Allergan has some specific challenges in the short term, including generic competition for a big seller, the Parkinson’s disease therapy Namenda XR. It has new competition for its big-selling eye drug Restasis. Plus, the pipeline deals Saunders has made lately are longer-term payoffs, if potentially large ones.

So, Icahn just might not want to wait around for returns as Allergan works its way forward. Then again, he might not want to take the chance that those long-term hopes don’t pay off.

Gal seems to think that Allergan will soon be on its way up, and that some critical evaluations of its business don’t hold up on analysis. The emphasis is on the decline in older products, he said in a Tuesday note, and that’s too limited: “[T]he market is ignoring a material mix-shift in earnings toward high quality durable products.”

“Allergan will gradually transition to growth as it overcomes the loss of Namenda XR and decline of Restasis,” he predicted in his Q3 note. “[T]his quarter will likely serve to set the floor on this transition.”