[August 05, 2014] |
|
Allergan Comments on Valeant's Second Quarter 2014 Earnings Results
IRVINE, Calif. --(Business Wire)--
Allergan, Inc. (NYSE: AGN (News - Alert)) ("Allergan" or the "Company") today commented
on Valeant Pharmaceuticals International, Inc.'s ("Valeant") release of
its second quarter 2014 earnings results.
Following Valeant's earnings conference call on July 31, 2014,
Allergan's financial advisors and forensic accountants analyzed
Valeant's reported financial and operating results, identifying numerous
inconsistencies and omissions. Further, Valeant's 46-page July 31 second
quarter 2014 investor presentation, while extensive in length, failed to
provide investors with sufficient relevant information to gauge the true
performance of Valeant's business or operations.
In Allergan's view, Valeant's ongoing failure to provide complete, fully
transparent information and relevant supporting data for its performance
remains a significant and growing concern among Allergan's stockholders
and the overall investment community. At the same time, there continues
to be an overwhelming divergence between Valeant's reported GAAP and
non-GAAP results, additionally highlighting the opaqueness of Valeant's
financial reporting.
Given that a substantial portion of Valeant's hostile exchange offer for
Allergan's stock consists of Valeant stock, it is crucial that
Allergan's stockholders have all of the information necessary to
evaluate the true performance of Valeant's business, and consequently,
Valeant's equity. To that end, Allergan investors should be aware of the
following concerns:
Continued Obfuscation and Inadequate Clarity (News - Alert) in
Valeant's Second Quarter 2014 Earnings
-
Valeant failed to provide quantitative price/volume sales analysis
and market share statistics for its Bausch & Lomb business.
By
its own admission, the Bausch & Lomb business is Valeant's growth
driver and its "blueprint" for acquiring Allergan; however, Valeant's
July 31 second quarter 2014 investor presentation failed to provide
quantitative price/volume sales analysis and market share statistics.
On
July 18, Valeant announced preliminary second quarter organic growth
of 12% for its Bausch & Lomb business, without providing supporting
dollar results. However, in its July 31 second quarter 2014 investor
presentation, Valeant reported second quarter 2014 revenue of $891
million for its Bausch & Lomb business, which, based on its second
quarter 2013 reported revenue of approximately $812 million, reveals
actual growth of 9.7%. This means Valeant's July 31 second quarter
2014 presentation reported growth for its Bausch & Lomb business at a
rate that is 230 basis points lower than Valeant's July 18 reported
organic growth. When Valeant was questioned about this significant
discrepancy on its second quarter earnings conference call (July 31
Valeant earnings transcript), Valeant indicated that rather than
excluding certain products as discontinued operations from their
calculation, as has been Valeant's convention, they assumed consistent
quarterly performance for those products.
What should be
additionally concerning to Allergan investors is that, after Valeant
changed its reporting methodology and made this uncharacteristic
adjustment, Valeant made no attempt to disclose the alternative
methodology in its investor materials or its Form 10-Q for the period
ended June 30, 2014, and did not mention the change until questioned
on the earnings conference call, at which point Valeant dismissed the
change as (July 31 Valeant earnings transcript) taking "a much more
conservative approach."
-
Valeant provided misleading disclosures regarding sales for its top
20 products
In order to calculate Valeant's second
quarter 2014 year-over-year growth, Allergan investors require the
sales figures for the second quarter of 2014 and the second quarter of
2013. Valeant instead provided a less relevant statistic - first half
2014 performance. Allergan believes that transparent disclosure by
Valeant on the performance of their top 20 products on a
year-over-year and quarter-over-quarter basis is likely to illustrate
a fundamentally different story than the one being told by Valeant.
Further,
Valeant provided the performance of its top 20 products only as of the
second quarter of 2014, which is inherently biased to favor growth and
ignores all products that have experienced rapid decline and fallen
out of the top 20 in the period being evaluated. The lack of
consistent and unbiased disclosure leaves investors without the data
necessary to gauge the true performance of Valeant's top 20 products
over time.
Additionally, four of the products highlighted
as growing or flat on a year-over-year basis had actually declined
sequentially in the second quarter of 2014 versus the first quarter of
2014 (ReNu Multiplus®, Elidel®,
Syprine®, Prolensa™).
Finally,
Valeant's market share presentation of its dermatology product Acanya®
is misleading and incomplete as it deliberately excludes ACZONE®,
a major product in the branded space offered by Allergan. Valeant
showed Acanya® as having 89% market share
among certain competing products in the branded dermatology channel
but excluded from its analysis the dominant product in the space
(Allergan's ACZONE®). When ACZONE®'s market
share of 69% is included, Acanya® falls to a
27% market share. Including the full landscape of branded competitive
products paints a very different picture about Valeant's actual market
share.
Apparent Inability to Forecast its Own Business
-
Valeant made contradicting statements about the facial injectables
business sold to Galderma and its potential impact on guidance
Valeant's
recent decision to sell its filler and toxin assets to Galderma
impacted the growth rates Valeant reported for its ongoing business as
Valeant removed that rapidly declining business from its portfolio,
thereby artificially enhancing its organic growth rate. Allergan
believes that the declining performance of those products under
Valeant is a striking example of the weaknesses of Valeant's business
model of serial acquisitions, underinvestment and resructurings.
On
Valeant's second quarter 2014 earnings conference call, Mr. Pearson
stated (July 31 Valeant earnings transcript), "We recently sold
certain facial injectable products to Galderma for approximately $1.4
billion for a gain of over $300 million…Our sales dropped
approximately 40% in Q2." He then (July 31 Valeant earnings
transcript) attributed the drop in sales to physicians being "confused
as to what products [Valeant] wanted them to buy - our legacy Medicis
products or our soon-to-have Allergan products." Allergan has stated
on numerous occasions that it believed the former Medicis products
were declining rapidly under Valeant's ownership and Mr. Pearson's
statements only confirm that Valeant is not capable of successfully
managing significant products such as those in Allergan's portfolio.
In
addition, Allergan believes Valeant is masking significant decreases
in its earnings within the discontinued facial injectable business.
With sales of $104 million in the first half of 2014 ($57 million in
the first quarter and $47 million in the second quarter), Valeant
noted that it expected revenues for this declining business to somehow
grow approximately 130% in the second half of 2014 to $240 million
(versus the first half of 2014). Since Valeant should write off second
half 2014 revenues as discontinued operations, Allergan believes
Valeant inflated this amount to offset other declining assets.
-
Valeant's revised financial outlook validates Allergan's belief
that growth is declining at Valeant and that its business model is
unsustainable
On Valeant's June 17 conference call, Mr.
Pearson stated (June 17 Valeant business update call transcript), "I
find it very odd that Allergan continues to suggest that our Q2 and,
in particular, our Q3 results will demonstrate weakness. I am very
confident that we will meet expectations in Q2 and the rest of the
year." Just six weeks later, however, Valeant lowered its 2014
guidance, implying a double digit decline from the mid-point of the
implied second half 2014 guidance and confirming Allergan's concerns
regarding Valeant's unsustainable business model.
Persistent Structural Questions about
Sustainability of Underlying Business Model
-
Price continues to be the main growth driver for Valeant
During
Valeant's second quarter 2014 conference call, Mr. Pearson noted (July
31 Valeant earnings transcript), "In total, these [top 20] products
grew 22% year-over-year - - year-to-date with approximately 45% of the
growth coming from volume, which excludes obviously the declining
products such as Zovirax®, which went generic
last year." Therefore, Valeant is admitting, as Allergan has
previously stated, that a majority of Valeant's growth is due to price
increases, which are unsustainable over the long term. Allergan also
questions why declining products were arbitrarily excluded from this
price/volume analysis when they are still part of Valeant's top 20
products.
Additionally, Bausch & Lomb's U.S. Rx
pharmaceutical products are predominantly tracked by IMS (a widely
recognized and independent third party provider of healthcare data)
and based on the most recent IMS data (verified by forensic
accountants engaged by Allergan), approximately 80% of Bausch & Lomb's
second quarter 2014 U.S. Rx pharmaceutical acquisition dollar growth
was due to price growth.
-
Valeant included future acquisitions in its guidance, thereby
confirming that Valeant does not have sufficient organic growth and
needs to rely on acquisitions
In one of its standalone
cases, Valeant's acquisition guidance assumes ~$5 billion of
acquisitions in 2015 and ~$10 billion of acquisitions in 2016. In the
combined Allergan and Valeant guidance, Valeant assumes ~$8 billion of
acquisitions in 2015 and ~$10 billion of acquisitions in 2016. Given
these are hypothetical acquisitions, Allergan and Valeant stakeholders
should be highly concerned about the projections made by Valeant in
creating its strategic plan. Allergan believes it is impossible to
predict contribution from these hypothetical acquisitions because of
various and obvious unknowns, including market conditions, company
valuations, performance, the interest rate and global geopolitical
environments, and the willingness of potential parties to engage in a
sale process, among other risk factors.
-
Valeant acknowledged that its artificially low tax-rate is
unsustainable in the absence of acquisitions
Valeant
management also admitted that without M&A transactions, Valeant's tax
rate will increase, thereby substantiating Allergan's claims that
Valeant's longer-term tax-rate appears unsustainable and like the rest
of the Valeant business, remains highly dependent on successfully
executing multiple large transactions.
Continued Misrepresentation and
Misunderstanding of Allergan
-
Valeant refuses to update its synergy forecasts for Allergan
despite acknowledging that it would support several of Allergan's
initiatives, making it highly unlikely that Valeant will realize its
purported $2.7 billion synergy assumption
Allergan
believes that Valeant's stated $2.7 billion synergy estimate is
unrealistic and not achievable. Further, Allergan believes that
Valeant would only be able to achieve a fraction of its stated SG&A
and R&D synergies without destroying Allergan's near-term and
long-term value.
On July 21, 2014, Allergan announced a
restructuring plan that will reduce annual expenses by ~$475 million
beginning in 2015. Since then, Valeant has reiterated that $2.7
billion in synergies are likely to come from both Valeant's and
Allergan's expenses. Valeant has created its own set of projections
for Allergan, and Allergan believes Valeant may be double counting
certain cost cuts already announced by Allergan.
During
Valeant's earnings conference call, Mr. Pearson also incorrectly
stated (July 31 Valeant earnings transcript), "A lot of [Allergan's
cost cuts] are coming from customer-facing activities and so like
sales forces and some of the marketing programs, those we may actually
put back in." However, Allergan's restructuring plan will actually
preserve 94% of its sales force and the majority of customer-facing
activities.
Given the strength of the business, Allergan expects to produce
double-digit sales growth and non-GAAP diluted earnings per share
compounded annual growth of greater than 20 percent over the next five
years.
Alvarez & Marsal and FTI Consulting are acting as Allergan's financial
consultants and forensic accountants.
Goldman, Sachs & Co. and BofA Merrill Lynch are serving as financial
advisors to the Company and Latham & Watkins, Richards, Layton & Finger,
P.A. and Wachtell, Lipton, Rosen & Katz are serving as legal counsel to
the Company.
About Allergan
Allergan is a multi-specialty health care company established more than
60 years ago with a commitment to uncover the best of science and
develop and deliver innovative and meaningful treatments to help people
reach their life's potential. Today, we have approximately 11,700 highly
dedicated and talented employees, global marketing and sales
capabilities with a presence in more than 100 countries, a rich and
ever-evolving portfolio of pharmaceuticals, biologics, medical devices
and over-the-counter consumer products, and state-of-the-art resources
in R&D, manufacturing and safety surveillance that help millions of
patients see more clearly, move more freely and express themselves more
fully. From our beginnings as an eye care company to our focus today on
several medical specialties, including eye care, neurosciences, medical
aesthetics, medical dermatology, breast aesthetics and urologics,
Allergan is proud to celebrate more than 60 years of medical advances
and proud to support the patients and physicians who rely on our
products and the employees and communities in which we live and work.
For more information regarding Allergan, go to: www.allergan.com.
Forward-Looking Statements
This press release contains "forward-looking statements" within the
meaning of the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, including but not limited to statements
regarding Allergan's restructuring plan. These forward-looking
statements are made as of the date they were first issued and are based
on current expectations as well as the beliefs and assumptions of
management. Forward-looking statements are subject to a number of risks
and uncertainties, many of which involve factors or circumstances that
are beyond Allergan's control. Allergan expressly disclaims any intent
or obligation to update these forward-looking statements except as
required by law. Additional information concerning these and other risks
can be found in press releases issued by Allergan, as well as Allergan's
public filings with the U.S. Securities and Exchange Commission,
including the discussion under the heading "Risk Factors" in Allergan's
most recent Annual Report on Form 10-K and any subsequent Quarterly
Reports on Form 10-Q. Copies of Allergan's press releases and additional
information about Allergan are available at www.allergan.com or you can
contact the Allergan Investor Relations Department by calling
1-714-246-4636.
Important Additional Information
This communication does not constitute an offer to buy or solicitation
of an offer to sell any securities. The Company has filed a
solicitation/recommendation statement on Schedule 14D-9 with the SEC (News - Alert)
that has been mailed to stockholders of the Company. In addition, the
Company has filed a preliminary solicitation statement with the SEC on
July 29, 2014, and intends to file a definitive solicitation statement.
Any definitive solicitation statement will be mailed to stockholders of
the Company. INVESTORS AND STOCKHOLDERS OF ALLERGAN ARE ENCOURAGED TO
READ THESE AND ANY OTHER RELEVANT DOCUMENTS THAT THE COMPANY MAY FILE
WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY BECAUSE THEY WILL CONTAIN
IMPORTANT INFORMATION. Investors and stockholders will be able to obtain
free copies of these documents as they become available and any other
documents filed with the SEC by the Company at the SEC's website at www.sec.gov.
In addition, copies will also be available at no charge at the Investors
section of the Company's website at www.allergan.com.
Copies of these materials may also be requested from Allergan's
information agent, Innisfree M&A Incorporated, toll-free at
877-800-5187. The Company, its directors and certain of its officers and
employees are participants in solicitations of Company stockholders.
Information regarding the names of the Company's directors and executive
officers and their respective interests in the Company by security
holdings or otherwise is set forth in the Company's proxy statement for
its 2014 annual meeting of stockholders, filed with the SEC on March 26,
2014, as supplemented by the proxy information filed with the SEC on
April 22, 2014. Additional information can be found in the Company's
Annual Report on Form 10-K for the year ended December 31, 2013, filed
with the SEC on February 25, 2014, and its Quarterly Report on Form 10-Q
for the quarter ended March 31, 2014, filed with the SEC on May 7, 2014.
To the extent holdings of the Company's securities have changed since
the amounts printed in the proxy statement for the 2014 annual meeting
of stockholders, such changes have been reflected on Initial Statements
of Beneficial Ownership on Form 3 or Statements of Change in Ownership
on Form 4 filed with the SEC.
® and ™ are owned by Allergan, Inc. All other products are registered
trademarks of their respective companies.
[ Back To TMCnet.com's Homepage ]
|