Allergan, following years of turmoil and resistance, heads for split: analyst

Saunders
Allergan Chairman and CEO Brent Saunders this spring survived an investor campaign to strip at least one of his job titles. (Allergan)

Allergan has grappled with numerous setbacks and plenty of investor uproar in recent years, but so far it's resisted serious change. But now, the company seems ready to embark on a split, according to analysts.

In a Tuesday note, Evercore ISI analyst Umer Raffat wrote that following a recent call with the company's general counsel, “I walked away with the sense that Allergan is heading towards a split and may likely lay out timelines.” Raffat wrote that he thinks the company will announce the split on the second-quarter conference call. Allergan’s shares jumped 4% Tuesday after the note amid a yearslong downward trend. 

Also on the call, Allergan's VP of investor relations and strategic initiatives Manisha Narasimhan said there's a "continued sense of urgency from both management and the board for ways which we think would unlock value."

"In terms of timing, we’re working as quickly as we can, and we hope to be in a position to be able to make an announcement over the next couple of months," she added.

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

The company’s shares have tumbled about 65% since the summer of 2015, fueling analyst and investor pressure for change. Allergan has resisted a split in favor of cost-cutting and other measures, but so far its efforts have not improved its fortunes. 

In lieu of a breakup, activist investors have pushed to split up Allergan’s CEO and chairman roles—both currently held by Brent Saunders. David Tepper, manager of hedge fund Appaloosa, queued up a battle that Allergan won in early May as shareholders sided with the company and against Tepper’s role-split proposal.

But soon after the vote, Saunders said the company was reviewing “all options” to turn things around—and doing it with a sense of urgency. Now, Raffat believes a split announcement is coming within the next “couple of months.” 

RELATED: After investor attacks, Allergan's reviewing 'all options'—and this time it's urgent, CEO says 

In his own note, RBC Capital Markets analyst Randall Stanicky—who has been advocating a breakup for years—wrote that the possibility of a split announcement “shouldn’t come as a surprise" given the company’s recent history.

“The reality is we're not sure what else management can do at this point with stock pressure persisting and sentiment as low as it is,” he added. “Street attention on break-up is picking up as this remains the primary bull case for the stock.” 

The “growth company” created from a split would likely include aesthetics, central nervous system treatments and eye care, Stanicky wrote. Gastrointestinal, primary care and women's health—a unit Allergan tried unsuccessfully to hive off—would go into the “mature company," he added. One question the analyst raised is who would run the growth company, as investor unease around Saunders and the current management team has swelled recently.  

RELATED: Allergan investors, rooting for a breakup, cheer rapastinel's phase 3 flop

Meanwhile, regulatory and development hurdles have made matters worse for the Dublin drugmaker. After Allergan’s cost-cutting didn’t improve share prices, the company explored the women’s health sale. But after the FDA rejected uterine fibroids treatment Esmya, which Allergan had billed as a potential blockbuster, the company called the sale off. It’s also suffered recent pipeline setbacks, including a triple flop on closely watched depression drug rapastinel. And 2017's controversial tribal patent deal on Restasis has lingered with the company through a blow from the Supreme Court.

Tepper, in pushing for management changes, said the current team is responsible for more than $13 billion in balance sheet write-downs in recent years, plus "embarrassing legal initiatives," a "failed acquisition strategy resulting in an underperforming product pipeline," a lower stock price and "stunningly excessive" management compensation.

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