(Bloomberg) -- In just about two years, Allergan PLC has gone from a pharma darling on the verge of a massively lucrative Pfizer Inc. buyout to something of a pariah.
Its stock has fallen 38 percent in the past nine months. Shareholders are reportedly recruiting activists. On its first-quarter earnings call on Monday, Allergan said it is in the midst of an “urgent” strategic review. But it also made it clear it doesn’t think the company needs a reinvention. It shouldn’t be so sure.
Much of Allergan’s share-price weakness has been due to looming competition for blockbuster dry-eye drug Restasis, a situation the company has managed poorly. Its drug pipeline could be a source of new growth but has delivered inconsistent results. And potential competitors to its backbone product Botox are on the rise.
Allergan has had chances to shore up its growth prospects. CEO Brent Saunders deserves credit for selling its legacy generics business to Teva Pharmaceutical Industries Ltd. at a handsome $40 billion price as the generic market began to crash.
But just $6.9 billion of the proceeds went to M&A, and only a small and somewhat questionable subset of that went to Allergan’s shaky pharma division. The biggest pharma-focused deal – the $639 million acquisition of Vitae Pharmaceuticals Inc. – appears to be a bust. The company has spent $17 billion on largely underwater buybacks since the Teva transaction.
Allergan has yet to consistently prove that Botox, cryogenic fat-zapping and biopharma should definitively co-exist. Nor has it proved its strategy of focusing on buying drugs other companies develop, instead of discovering its own, is the right one, or that it’s especially good at executing that strategy. Analyst revenue estimates have plunged in the past year, as competition has increased and some pipeline expectations have waned.
Allergan on Monday said it’s considering five possible strategic options. It largely dismissed two of them – buybacks or acquisitions – as strategies that would only be pursued on a small scale. The other three options – staying the course, selling off assets, or a full break-up – seem to be the principal areas of the review’s focus.
But Saunders left the impression that what he really wants is more time to prove he’s been on the right course all along. When speaking about divestitures, he said the company likes the assets it has. When speaking about a break-up, he emphasized this would be the longest, most difficult, and most disruptive option.
But staying the course may be extremely uncomfortable for Allergan. The next year will likely be defined by generic competition and declining or barely growing sales. Unless Allergan’s pipeline and newer products dramatically outperform, that’s not a recipe for share-price recovery. And that means pressure for bigger changes will keep building.
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