42% of Allergan shares were voted in favor of the separation of the company’s Chairman and CEO roles at this year’s AGM.
Q1 hedge fund letters, conference, scoops etc, Also read Lear Capital: Financial Products You Should Avoid?
David Tepper’s Appaloosa Management and Douglas Silverman’s Senator Investment Group are calling on Allergan’s board to shake up the Irish drug company’s management, hiring either a new CEO or a new chairman from outside the firm.
Both those roles are currently held by Brent Saunders, a star executive and one of the pharmaceutical industry’s great survivors. Through two run-ins with Carl Icahn, maneuvering the political minefields of generics pricing and opioid prescription, pressure on research and development (R&D) budgets, and the challenges of integrating more than half a dozen acquisitions in the past two years, Saunders has not only emerged unscathed but championed Allergan’s divergent and expensive “Open Science” approach to R&D.
Not that there haven’t been warning signs of growing shareholder unhappiness as the stock has halved from its 2015 peak.
Support for an investor proposal requiring the separation of the chairman and CEO roles increased from 21% in 2017 to 42% earlier this year. The company detailed in this year’s proxy statement how shareholders had also quizzed it on the multiyear nature of its executive compensation, as well as its use of absolute rather than relative total shareholder return (remember the company is a serial acquirer, even though it sold much of its generics business to Teva last year).
If Allergan’s board is feeling the pressure, it isn’t showing it. In a response to Appaloosa and Senator’s public joint letter, it reiterated the results of its strategic review and pointed to an award its lead director, Chris Coughlin, won from the National Association of Corporate Directors two years ago. The company has also included R&D milestones as a performance metric for Saunders’ pay. R&D is now a $2.1 billion annual outlay for the company, down 19% on 2016.
“Sometimes CEOs see these types of calls as a time to leave a company to allow the company a clean sheet onto which a new team can draw a blueprint for the future,” Wells Fargo analyst David Maris wrote in a client note on Tuesday. Yet Wells Fargo does not believe a change in CEO is required, and already had an “outperform” rating on the stock. “A CEO and board can alternatively see this as a time of reflection and redesign, which if undertaken the right way can garner even greater support.”
Allergan’s future will be worth watching nonetheless for three main reasons. First is that neither of the agitators are considered activists, although Tepper has learnt a thing or two about assertiveness from distressed investing. Their campaign began behind closed doors and has become public gradually, suggesting a cautious approach. Other funds will wonder whether this is enough to guarantee change.
Second is that the focus on Allergan brings us full circle to four years ago, when Pershing Square Capital Management accused the company (prior to its acquisition by Actavis, which Saunders ran at the time) of lazy governance and wasteful R&D. With Valeant painted as the malefactor after 2014’s takeover battle, Allergan may have escaped some of the scrutiny to which it was entitled.
The third is that if there is to be a reckoning, now is the time. In earlier, hitherto private letters, Appaloosa and Senator took issue with Allergan’s Open Science approach and interest in acquiring Shire, urging it to focus on Botox, neuroscience and opthalmology. Absent a shareholder vote for the remainder of this year, earnings releases will take on a greater importance.
Given its focus on innovation, Allergan could be the poster child for BlackRock’s focus on creating long-term value, if its record of delivering new products stands up to inspection. Perhaps that confidence is behind Allergan’s “put up or shut up” response but if it is worth defending it would be better for other shareholders to take some of the punches.
Meanwhile, inconsistency in America’s approach to the combination of CEO and chairman roles runs rife. Empire builders like drugmakers are prime candidates for additional oversight. A clearer statement of policy on this issue would also be good for corporate governance.
Article by Activist Insight
