Allergan to Lay Off 13% of Workforce, Cut Drug Research -- 3rd Update


By Joseph Walker

As drug maker Allergan Inc. scrambles to prevent itself from being taken over, it is taking a page from its pursuer: Valeant Pharmaceuticals International Inc.

The Botox maker says it is laying off workers and cutting drug research--exactly what Valeant said it would do if it managed to acquire Allergan--as it tries to convince investors that it is capable of ensuring strong earnings growth as an independent company. The layoffs will represent 13% of Allergan's workforce, the company said Monday, adding that it will also discontinue some early-stage research and development programs.

The cost-cutting moves appeared similar, though smaller in scale, to the steps Valeant Chief Executive J. Michael Pearson has proposed taking to improve Allergan's financial performance. Allergan had previously said Valeant's plan to slash R&D and other overhead costs would hinder Allergan's long-term sales and earnings growth.

Allergan Chief Executive David E.I. Pyott said the cuts were "pragmatic" and made in response to the demands of large shareholders, whose votes Allergan will need to prevent Valeant's takeover proposal from being approved. Mr. Pyott said he had had more than 50 meetings with investors in recent months that convinced him spending cuts were necessary.

"When we went out to investors, they said, 'Look, we appreciate all the value you created, we appreciate the numbers you put up, but we're not sure we could finally vote for you relevant to the Valeant offer, and you need to put more value on the table,'" Mr. Pyott said in an interview.

One of Allergan's top shareholders recently sold nearly all of its holdings in the stock. Mutual-fund giant Capital Research and Management Co., Allergan's largest holder as of the end of March, sold the shares after meeting with Mr. Pyott, people familiar with the matter said, although the exact timing of the share sales isn't clear. The sales signal at least in part that the Los Angeles investment firm, which manages $1.2 trillion in assets across some 52 funds, didn't see Allergan's shares heading much higher than Valeant's offer, said people familiar with the move.

As of Friday, Valeant's cash-and-stock offer valued Allergan at roughly $173.24 per Allergan share.

Allergan and Valeant are each engaged in tense campaigns to gather support from Allergan shareholders. Activist investor William Ackman, head of Pershing Square Capital Management LP, has built a position of about 9.7% of Allergan and is attempting with Valeant to call a special meeting of Allergan shareholders. At the meeting, Pershing Square will seek to remove six of Allergan's nine directors and open the door for shareholders to vote on Valeant's cash-and-stock offer. The special meeting is likely to be held sometime between mid-October this year and early-February of next year, Mr. Ackman said recently.

In a statement, Valeant's Mr. Pearson said Allergan's new cuts "validate our view that Allergan's management has a poor record of managing costs." He added: "We continue to believe that the greatest value for both Allergan and Valeant shareholders will be achieved through a combination of the two companies and realization of the synergies afforded by that combination."

Allergan said its restructuring would save the company $475 million next year and lift its earnings above Wall Street analysts' expectations in 2015 and 2016. Allergan now forecasts earnings per share of $10 in 2016, compared with analysts' estimates of $8.19, according to data provider FactSet Inc.

"We understood shareholders wanted a number like $10 from an earnings per share perspective and we put it on the table," Mr. Pyott said.

Mr. Pyott said Allergan continues to evaluate targets for a "meaningful strategic acquisition" of a specialty pharmaceutical company. "We are very determined that something will be transacted," he said. Other options for the company's $18 billion in expected free cash flow over the next several years include share repurchases and issuing a special dividend, he said.

In all, Allergan said it would reduce its workforce by about 1,500 employees and permanently eliminate an additional 250 vacant positions. The company is also discontinuing at least four early-stage drug development programs in eye-care and dermatology.

Mr. Pyott said the cuts would reduce research-and-development spending to about 13% of its annual sales, compared with its historical rate of 16% to 17%. Still, Mr. Pyott said, Allergan will continue to spend far more on research than Valeant, which has reported research expenses as low as 3% of annual sales.

In addition to the job cuts, Allergan reported on Monday a stronger-than-expected second-quarter profit, while also boosting its earnings outlook for the year.

Those disclosures, meanwhile, coincided with Valeant's move to contact regulators in Quebec and the U.S. about what it described as false statements made by Allergan in their continuing tangle.

Valeant said Allergan falsely claimed in a regulatory filing last week that pharmaceutical sales for its eye-care unit Bausch & Lomb were stagnant or declining, comments it said were intended to mislead investors and manipulate the market for Valeant's stock. An Allergan spokesperson said: "Allergan stands by its comments. We call on Valeant to report complete and transparent details on its business on an ongoing basis. At the end of the day, investors will make their own decisions."

Shares of both Allergan and Valeant rose in afternoon trading on Monday, with some analysts predicting Valeant would have to improve its offer price to match the earnings growth Allergan promised as a stand-alone company.

"Allergan showed they can institute their own cost-efficiency program without impacting their revenue growth," Shibani Malhotra, an analyst with Sterne Agee, said in an email. "It makes it harder for Valeant to give investors that differential that investors would need to see to agree to a merger."

Anna Prior contributed to this article.

Write to Joseph Walker at joseph.walker@wsj.com

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