Proxy advisers back Allergan in leadership fight, but investors may not be happy: analysts

Saunders
Brent Saunders has served as Allergan's CEO since 2014 and chairman since 2016. (Saunders)

Allergan has been warring with upset investors who are pushing for a change to the company's leadership structure, but leading proxy adviser firms aren't on board.

Proxy advisers Institutional Shareholder Services and Glass Lewis Monday recommended that Allergan investors vote against hedge fund Appaloosa’s proposal to split the drugmaker's CEO and chairman positions, both currently held by Brent Saunders. The issue is set for a vote at Allergan's May 1 annual shareholder meeting.

In making the split suggestion, Appaloosa’s David Tepper wrote in February that the company “requires a fresh approach to its business strategy and an unbiased review of its capabilities, opportunities and way forward.” An independent chairman with deep pharma experience "could exert a favorable influence on executive decision-making," Tepper argued. But Allergan hit back and said such a change wasn’t warranted right away. Instead, the drugmaker plans to split out the roles as part of its next CEO transition. 

That concession was enough for ISS, which noted in its recommendation that the board has been “responsive” to investor requests. Plus, the drugmaker introduced a lead independent director and has “substantially refreshed itself” with half a dozen new directors since 2016, the firm said. Glass Lewis said the company’s commitment to add an independent chair at the next CEO transition “essentially implements the request of this proposal.” 

RELATED: Hedge funder renews call for Allergan CEO-chairman split, citing 'chronic underperformance'

Still, the recommendations are a surprise and "would seem to contradict both firms' proxy voting guidelines, which generally support voting for shareholder proposals that require the chairman's position to be filled by an independent director," RBC Capital Markets analyst Randall Stanicky wrote in a note Monday. Further, the recommendations "come contrary to the views of the vast majority of investors we have spoken with." The analyst conducted a survey and found that 90% of investors favored a separation within a year. The number could be high, Stanicky wrote, but the new recommendations are "likely to frustrate a sizeable group of shareholders," he noted.

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Credit Suisse analyst Vamil Divan echoed the sentiment in a note of his own, writing that investors "may be disappointed by today’s update as many have been looking for a management change sooner than later."

On Monday, Allergan’s board said in a statement the proxy advisers’ recommendations “affirm our position that our plan to adopt separate chair and CEO positions with the next leadership transition is the best approach for Allergan shareholders.” As part of its response, Allergan additionally formed an M&A committee, tapping former Celgene CEO Bob Hugin to lead the group.

But Appaloosa, unimpressed, called that move and others, “no more than a meaningless series of gestures intended to preserve the current system of lax oversight and further entrench management.”  

RELATED: Allergan taps Celgene vet Hugin for M&A guidance, but proxy brawlers aren't impressed

Tepper's split request—which followed up on a campaign from last year—came amid a period of "chronic underperformance" for the company, as he put it back in February. Allergan's share prices have fallen about 56% since the summer of 2015. When the drugmaker reported fourth-quarter results, Allergan said it was taking a $1.6 billion pretax impairment charge related to chin fat med Kybella and canned a previously planned sale of its women’s health unit after an FDA rejection for uterine fibroids drug Esmya. Allergan also recently suffered a pipeline setback for depression drug rapastinel and faces competitive threats to top-selling products such as Botox. 

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