- Efforts by Allergan to head off a shareholder challenge to the drugmaker's management failed to placate activist investor Appaloosa, which on Monday reiterated its call for a near-term separation of the CEO and board chairman roles.
- In a proxy statement issued Friday, Allergan said it intended to "phase in" such a change at the next leadership transition, but gave no indication of when that might occur. The pharma, which has seen a steady erosion of its share price, also announced the formation of a new M&A committee led by newly instituted director and former Celgene CEO Bob Hugin.
- "Appaloosa is not the lone voice of dissent or criticism and we are confident that shareholders will recognize these half measures for what they are — a weak attempt to placate discontent and avoid a well-deserved rebuke to management," wrote Appaloosa in response to Allergan's plans. The hedge fund manager has put forward a non-binding shareholder proposal to split the CEO and chairman roles. A vote will be held at Allergan's annual shareholder meeting scheduled for May 1.
Appaloosa's call for change was magnified this month by a late-stage clinical setback for a depression drug that Allergan had pegged as a crucial piece in efforts to recharge its portfolio.
Rapastinel, as the experimental medicine is called, failed to show a significant benefit in three Phase 3 studies, sharply curtailing the drug's potential prospects.
Notably, Allergan had acquired the drug in a 2015 deal to buy biotech Naurex for $560 million net of cash. In its arguments to Allergan shareholders, Appaloosa has heavily criticized the company's "open science" acquisition strategy, highlighting the more than $13 billion in impairment charges Allergan has taken since 2015.
Clinical setbacks have weighed on Allergan's stock, which has fallen by more than 50% since hitting a five-year peak in July 2015.
"There is no sign of a turnaround at Allergan," Appaloosa wrote in a presentation released Monday. Appaloosa says it has owned stock in the drugmaker for more than three years, and claims its stake in Allergan is the second largest equity position in its portfolio.
The hedge fund does not, however, rank among Allergan's largest investors. According to the drugmaker's most recent proxy statement, Wellington Management Group, The Vanguard Group and BlackRock are the only three groups to own more than 5% of Allergan's ordinary shares — together holding about a fifth of the drugmaker.
Appaloosa needs to convince a simple majority of Allergan's shareholders to vote for its proposal in order for the measure to pass.
A similar proposal last year secured 42% of the vote and a recent survey by RBC Capital Markets of 70 Allergan investors showed nearly all supported separating the CEO and chairman roles within the next year or sooner.
However, Appaloosa's proposal is non-binding, making the potential consequences of a "Yes" vote less clear.
"We were surprised to learn, however, in our follow up communication with the company that this proposal is non-binding and, even if the proposal is immediately adopted, the actual separation of the roles would happen at the time of the next CEO transition," wrote Vamil Divan, an analyst at Credit Suisse in a March 24 note to clients.
"We wonder if investors who have been frustrated with the team and the stock's performance will be satisfied with that as an outcome," Divan added.
Allergan has given no guidance on when, or if, a leadership transition might occur. Brent Saunders, the company's current CEO and board chairman, is 49 and has headed the company since July 2014. He became chairman of the board in October 2016.
In addition to conceding an eventual phased-in separation, Allergan said it had adopted "enhancements" to its lead independent director role and announced that Catherine Klema, currently chair of the board's compensation committee, would not stand for re-election at the upcoming shareholder meeting.
Shares in Allergan fell by more than 2% in early Monday morning trading.