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Allergan Planning Cost Cuts Amid Valeant Defense

Allergan Inc. (AGN), the Botox maker being pursued by Valeant Pharmaceuticals International Inc. and Bill Ackman’s hedge fund, will shelve unpromising pipeline drugs and overhaul management incentives, two people with knowledge of the matter said.

A broad restructuring plan set to be outlined during Allergan’s earnings announcement later this month will also involve companywide cost cuts, including some legacy expenses, said the people, who asked not to be identified because the effort isn’t yet public. Management compensation will be more closely tied to achieving higher forecasts.

The changes are among moves aimed at boosting profit in the coming months as well as forecasts for future years to convince shareholders that the company is better as a standalone investment. Allergan is battling criticism from Valeant and activist Ackman’s Pershing Square Capital Management LP as the hostile bidders seek a shareholder vote this year to oust most of the incumbent board to get a deal done.

Chairman and Chief Executive Officer David Pyott has rebuffed talks with Valeant, pledged to tackle expenses, and said on June 10 the company would provide a more detailed plan including cost reductions when it released its second-quarter earnings at the end of July.

Three Offers

Allergan, based in Irvine, California, has rejected Valeant’s three offers since April, including the latest bid of $72 cash and 0.83 of a Valeant share for each Allergan share, which the company said was a “grossly inadequate” price that failed to value its growth prospects.

The company has considered strategic options including making an acquisition that would add growth product lines or buying back shares to assuage investors and avoid being bought by Valeant, the people said.

Ackman’s Pershing owns 9.7 percent of Allergan shares -- a stake amassed specifically to drive the deal in an agreement with Valeant. The activist fund has called for a special meeting of Allergan shareholders that will include a vote on the board, and proposed six new directors this week.

Allergan closed at $166.07 yesterday in New York, giving it a market value of $49.4 billion.

Cutting Costs

Pyott set five-year cost-cutting targets when Allergan rejected Valeant’s first offer, including selling, general and administrative expenses in the mid-to-high 20s as a percentage of sales. In 2013, those expenses were more than 37 percent, according to the company’s earnings statement.

Allergan recently received U.S. approval for a treatment of vision loss in diabetics. Its migraine inhaler was rejected because of manufacturing concerns that will set back approval by a year, according to a filing on June 30.

The company also said DARPin, its experimental treatment for wet age-related macular degeneration, a disease that causes vision loss, will begin the last of three stages of clinical trials typically required for approval by the Food and Drug Administration. Allergan’s argument for keeping the company independent has included DARPin, which may generate $20 billion in sales over a decade if approved.

To contact the reporters on this story: Beth Jinks in New York at bjinks1@bloomberg.net; David Welch in New York at dwelch12@bloomberg.net; Caroline Chen in New York at cchen509@bloomberg.net

To contact the editors responsible for this story: Mohammed Hadi at mhadi1@bloomberg.net Elizabeth Wollman, Andrew Pollack

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