Allergan Slides as Street Fears Management Will Do Nothing

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(Bloomberg) -- Allergan shares have taken a turn for the worse, falling as much as 4.9 percent, after CEO Brent Saunders told investors today that the company was looking at all options, including breaking itself apart, but “running the company in large part as it exists today is not only an option, but also the baseline against which all options need to be considered.”

Saunders said Allergan would look at three other options in addition to a breakup or leaving things as they are. The other options included “aggressively” buying back shares, divestitures, and mergers or acquisitions, although “transformational” M&A was not a top priority.

RBC analyst Randall Stanicky, who’s been calling for the drugmaker to breakup or sell off assets since at least October writes, “this is going to increase debate which we have already seen based on incoming emails and add risk that a ‘do nothing’ option or resumption of bolt-on deals could be the answer.”

RBC, Randall Stanicky

“Given the negative investor reaction we heard from the recent Shire news that Allergan was ‘temporarily’ looking at the asset we suspected strategic thinking would be addressed -- Allergan explained Shire as having an obligation to take a cursory look at the asset given that it was put into play.”

“Importantly, we think that exiting a solid quarter will help bring some investor focus back to fundamentals but it will not remove the focus that currently exists around need for strategic action -- and the negative stock reaction today on a solid quarter is evidence of that.”

“Bottom line, this is going to increase debate which we have already seen based on incoming emails and add risk that a ‘do nothing’ option or resumption of bolt-on deals could be the answer - we would expect push-back from investors if either were the case.”

Rates AGN outperform, PT $213

Cowen, Ken Cacciatore

“There is no other way to analyze this quarter than that it was strong, confirming of the underlying operations and confidence building in the cash generation. We are confused by this initial share price reaction, but are guessing that it could be due to confusion/frustration about management’s commentary regarding the ongoing strategic review. If this is the case, we believe it is a misinterpretation.”

“Despite management articulating that a split/spin could prove ‘difficult’ we do believe that what shareholders ultimately want will prevail, which is to divest fewer core assets, or ultimately spin those fewer core assets into another entity. We believe that patience as management works through this process will be rewarded.”

Rates AGN outperform, PT $255

Piper Jaffray, David Amsellem

“We remain skeptical regarding a number of later-stage pipeline shots on-goal that Allergan continues to tout. That dynamic combined with loss of exclusivity headwinds both near- and longer-term (i.e., Bystolic and Viibryd in 2021 and 2022, respectively) and what in our view has been uninspiring deployment of capital does not augur well for longer-term value creation (i.e., if this management team has not gotten it right since the Actavis divestiture, why should we be confident they will get it right going forward?)”

“Management’s preliminary view is suggestive that nothing transformative is necessary. We disagree. Remarkably, the company still is significantly levered post-Actavis (that’s what happens when you buy back $17B worth of shares...)”

“In broad strokes, we believe an aggressive approach to divestitures that enables an acceleration of de-leveraging, followed by a pivot to a more thoughtful build-out of the pipeline (and approach to therapeutic verticals) would be sensible.”

Remains neutral, PT $161 from $171

Bloomberg Intelligence, Elizabeth Krutoholow

“Allergan’s 2018 outlook is improved now that Restasis generics aren’t expected until the May-July time frame, though we think there may be additional upside based on FDA approval timelines.”

“The company’s strategic review, which ranges from share buybacks to splitting the company, leaves some questions though improves overall sentiment regarding valuation. Top-line growth, coupled with lower operating expenses as part of the restructuring, will drive earnings growth in the year. Guidance of $4.00-$4.20 a share for 2Q is achievable.”

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