Botox maker Allergan Inc. said Monday that it will cut 1,500 employees, most of them in Southern California, in a cost-cutting effort the Irvine company hopes will help it fight off a hostile takeover bid by a Canadian rival.
Stung by criticism that it's too fat, Allergan will slash about 650 research-and-development employees, many of them high-paying scientists based in Irvine. The company is also closing facilities in Santa Barbara and Carlsbad, Calif., where a combined 400 employees work.
Allergan chief David E.I. Pyott said the cuts will help the company achieve about $475 million in annual savings, boosting profits in the face of an attempted acquisition by Valeant Pharmaceuticals International Inc.
"Sadly, I have to say, it will be quite a big effect on Southern California," Pyott said in an interview with The Times. Most of the cuts will be made by Thanksgiving, he said.
Valeant and its partner in the attempted takeover, activist investor Bill Ackman, have said Allergan is burdened by unnecessary expenses that hurt profits and shareholder value. If Valeant succeeds in the takeover, the company had promised sweeping cuts at Allergan.
The cuts are part of a restructuring that Allergan said will drive its earnings per share to $10 by 2016, more than twice as much as it earned last year.
Investors cheered the news, driving Allergan's shares up $3.74, or 2.2%, to $171.14 in Monday trading.
The cuts came shortly after reports that Allergan's second-largest stockholder had sold nearly all of its shares.
Mutual-fund giant Capital Research sold the shares after meeting with Pyott this year, the Wall Street Journal reported, citing people familiar with the matter. A Capital Research spokesman declined to comment.
Allergan's board has twice rejected Valeant's buyout offers, calling them too low and not in the best interests of shareholders. Valeant's latest offer is for $72 in cash and 0.83 shares of its own stock for each share of Allergan. Based on Monday's closing price, that would amount to $176.20 per share.
Valeant is trying to schedule a special meeting of Allergan shareholders in an attempt to replace several members of its board with nominees who support the buyout.
Bernstein Research analyst Aaron "Ronny" Gal said Allergan's cuts will increase the value of the company to about $200 a share, while addressing concerns by many that the company was too fat.
"Most Allergan watchers knew for years that Allergan has room for cuts and were frustrated by management's view that the cash is better spent internally," Gal said.
Gal said he thinks Allergan shareholders will reject the offer, unless Valeant significantly increases it.
"They're going to have to raise their bid if they're going to get this," he said.
Ackman, in an interview with CNBC, said he still expects the deal to go through. Investors often are not impressed when companies make cuts under duress.
"What you're really doing is cutting out fat you should have cut out a long time ago," Ackman said. "Typically, shareholders don't believe management because they've been asking for it for years ... and only when the CEO is at the risk of getting thrown out does he get religion."
Pyott acknowledged that the task of cutting so many jobs will be "extremely unpleasant" but is far better than the 5,000 jobs that could be lost if Valeant acquires the company.
He said that institutional investors had told him in private meetings that they'd support a stand-alone company if it could boost earnings. The company's new earnings guidance for 2015 and 2016 exceeds those investors' expectations, Pyott said.
"At the end of the day, we're just going to have to put up some extraordinary results to show we can create value," Pyott said. "And hopefully we can put up enough value on the table that Valeant will have to go away and do something else."
The protracted takeover attempt has sparked concerns among Allergan employees, Irvine merchants and the city's mayor over potential job losses. Of Allergan's global workforce of more than 11,000, about 2,300 are based at its Irvine headquarters.
In addition to Botox, which produced nearly $2 billion in sales last year, Allergan sells ophthalmic medication, breast implants and Latisse, a drug that thickens eyelashes. It reported $6.3 billion in revenue in 2013.
The company spent lavishly on research, about $1 billion last year. By cutting that expense, profits will increase, Gal said.
"We all knew they were under-earning," Gal said. "When you think of the Valeant bid, they forced Allergan to become more efficient."