Appaloosa and Senator Investment Group Send Letter to Allergan's Board of Directors

Business Wire 5-Jun-2018 10:30 AM

Half-Hearted Strategic Review Represents Continuation of Untenable Status Quo

Appaloosa LP and Senator Investment Group LP today sent a letter to Allergan plc's (NYSE:AGN) ("Allergan") Board of Directors.

Previously, Appaloosa and Senator sent letters to Allergan's Board on May 7, 2018 and April 23, 2018.

The full text of the letters are below.

Letter dated June 5, 2018:

Board of Directors Allergan plc Clonshaugh Business Technology Park Coolock, Dublin, D17 E400, Ireland

Ladies and Gentlemen:

We write concerning the conclusions drawn from Allergan's much-heralded strategic review, publicly outlined by Chairman and CEO Brent Saunders on May 30th. Like the rest of the investment community, we were underwhelmed by the Company's half-hearted attempt to restore strategic momentum. The result of this process is all the more disappointing given our previous discussions and correspondence (attached hereto for reference). In view of this outcome, we are compelled to express our views publicly.

The token measures outlined in Mr. Saunders' presentation betray the Board and management's desire to cling to a status quo that has produced three years of steadily declining stock performance and a fire-sale market valuation. It is now clear that fresh thinking is absent from the current regime, thus explaining the market's complete loss of confidence in the stock. To that point, we reiterate our strong suggestion that at a minimum the Company (1) split the office of CEO and Chairman; (2) retain a new Chairman or CEO from outside the Company; (3) replace at least two additional directors on the current Board; and (4) upgrade management personnel in critical operating units.

Concurrent with these measures, we renew our calls for the Company to stop hiding behind an arbitrary debt reduction target as an excuse to preserve the means to pursue a transformative M&A transaction. Prioritizing such flexibility at this time makes no sense given Allergan's undervalued equity currency, its mixed M&A record and the market's loss of confidence in the Company's ability to deploy capital for the benefit of shareholders. More importantly, it will not address the Company's malaise. Instead, it is time for Allergan's management to concentrate on running a world class pharmaceutical and aesthetics business and forego thoughts of, or the exhilaration from, an ambitious acquisition strategy.

In our conversations, Chairman and CEO Saunders has been fond of repeating a famous quotation that "the definition of insanity is doing the same thing over and over again, but expecting different results". Until Mr. Saunders and the Board heed this advice, adopt new governance and renew the Company's operational focus, it appears that shareholders can expect Allergan's stock price to continue to languish.

Sincerely,

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Letter dated May 7, 2018:

Board of Directors Allergan plc Clonshaugh Business and Technology Park Coolock, Dublin, D17 E400, Ireland

Attention: Brenton L. Saunders, Chairman, President and Chief Executive Officer                Christopher J. Coughlin, Lead Independent Director

Dear Brent and Chris,

Thank you for your time last week. We appreciated the chance to meet with you both and share our perspectives on Allergan directly. We believe that there are several immediate steps the Company can take in order to arrest these declines and begin the process of restoring investor confidence:

1. Separate the roles of Chairman and Chief Executive and recruit a well-respected, experienced pharmaceutical industry leader to serve as Chairman. It is critical that this individual, and any other appointees, have a proven track record of creating shareholder value.
2. Accelerate the ongoing Board "refreshment" process by appointing two new Directors (in addition to an independent Chairman) with relevant industry experience and expertise. We would expect these individuals to replace three existing directors in order to maintain an effective Board with an optimal number of seats.
3. Articulate a clear purpose and intent for the Company's much-advertised "strategic review". Allergan must abandon an "everything on the table approach" and commit to a strategic focus that concentrates its resources on core therapeutic areas where it has demonstrable (and considerable) competitive advantage, scale and market position. Sharpening this mandate will help to dispel the notion that the review is merely an excuse for the Company to maintain the existing status quo.
4. Clarify management's position that "transformational M&A" transactions are not a solution for the Company's malaise, and will not be pursued until the objectives of the strategic review have been successfully implemented and the shares restored to a reasonable valuation.

Appaloosa and Senator are fully committed to the Company's success. We hope to continue to work constructively with the Company to accomplish our joint objective of producing value for shareholders.

Sincerely,

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Letter dated April 23, 2018:

Board of Directors Allergan plc Clonshaugh Business and Technology Park Coolock, Dublin, D17 E400, Ireland Attention: Brenton L. Saunders, Chairman, President and Chief Executive Officer

Ladies & Gentlemen,

Appaloosa LP ("Appaloosa") and Senator Investment Group LP ("Senator") are private investment firms with approximately $16 billion and $9 billion in assets under management, respectively. Both firms have been long-term investors in Allergan plc ("Allergan" or the "Company") and are independently substantial shareholders today.

As noted in our separate conversations and communications with management, we have become deeply concerned with the substantial value destruction occurring at Allergan. Senator and Appaloosa both believe that decisive action is required to reverse the significant decline in the Company's stock price over recent years and to drive lasting value for shareholders. In that vein, we were encouraged by recent commentary that Allergan's management and Board have developed "a sense of urgency" and are accelerating the Company's strategic review.

We and the broader investment community were therefore mystified to learn of Allergan's interest in Shire plc. Your subsequent disclaimers notwithstanding, acquiring Shire should never have been considered a viable strategy for Allergan in the first place. To start, Allergan has struggled mightily to operate its existing set of disparate franchises. Adding additional scale and complexity through any large acquisition would not only be highly imprudent, but would also distract Allergan from its core therapeutic competencies. More disturbing, however, is that Allergan might even consider an acquisition of such size that would undoubtedly require issuing our currently depressed stock as currency. In sum, the entire exercise with Shire was a waste of valuable time and corporate resources, as well as a distraction from the Company's much needed strategic review. The resoundingly negative reaction toward this potential transaction bears out this conclusion.

The Shire episode was merely the latest in a long line of miscalculations that have left the investment community without confidence in Allergan and its Board of Directors. Uneven execution, overly ambitious forecasting, and poorly communicated patent expirations have repeatedly reduced financial expectations. Mixed results from Allergan's pipeline activities and "stepping stone" acquisitions also raise serious questions about the Company's R&D capabilities and "Open Science" model. Unnecessary self-inflicted wounds have compounded the investment community's lost confidence and damaged management's credibility. As a result, the stock has declined by approximately 33% and 46% over the past twelve months and three years, respectively, despite strong performance for both the broader equity market and the healthcare sector. At today's stock price of $159 per share, Allergan now trades at less than 10x 2019E EPS and EBITDA, a sharp discount to its historical multiples and materially below each of our respective assessments of fair value.

In spite of this disappointing performance, the Company repeatedly under-appreciates and misjudges the gravity of its situation. Management's compensation in 2017, for example, rewarded the senior executives lucratively, notwithstanding the dramatic under-performance of Allergan's stock and underwhelming long-term financial results. In addition, the "Board Refreshment" that Allergan references in its latest Proxy Statement is highly overstated. Actual "refreshment" has been minimal. The Board remains largely a collection of vestigial directors assembled from a series of legacy acquisitions. At a minimum, we believe that the Company should separate the roles of Chairman and Chief Executive in order to foster a greater sense of accountability and oversight.

Our message to the Company remains consistent – become a more focused and nimble enterprise by concentrating on the core therapeutic areas of Medical Aesthetics, Neuroscience and Ophthalmology. From an operational standpoint, streamlining Allergan's sprawling business activities would reduce portfolio complexity, improve operational execution and financial forecasting, and direct capital and energy toward Allergan's best growth opportunities. The financial benefits would also be considerable. Allergan would transform into one of the fastest growing, most durable, and highest margin businesses in the healthcare industry. Without certain legacy businesses, Allergan would accelerate revenue growth, increase the mix of cash-pay and international business, and extend portfolio duration. Realigning the Company's businesses in this manner should produce a favorable re-rating of Allergan's valuation. Pending a full formulation of this strategy, we believe Allergan should publicly disavow large-scale "transformative" acquisitions as an element of its strategic review and commit to rationalizing its disparate business units.

As substantial shareholders, we are committed to the Company's success and believe the strategic review offers an opportunity for Allergan's management team and Board to produce a compelling business strategy, regain credibility, and generate substantial and enduring value for its shareholders. We wish to play a constructive role in this process and, accordingly, request an in-person meeting in the coming days with Chairman, President and CEO Brent Saunders and Lead Independent Director Chris Coughlin (as well as any other Directors you deem appropriate) to discuss our perspective and analysis with you directly.

We await your prompt response and look forward to a productive meeting.

Sincerely,

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