Allergan Sued Over Growth Forecast : Shareholders Claim Firm Oversold Its Prospects as Independent
Irvine-based Allergan Inc. has been hit by a flurry of federal lawsuits by shareholders alleging that the company gave an overly optimistic portrayal of its business prospects before its emergence two months ago as an independently traded firm.
The suits were filed in federal courts in Philadelphia and Santa Ana after Allergan’s downward revision Sept. 6 of its sales-growth forecast for 1989.
A spokesman for Allergan, which makes eye-care and skin-care products, said the company told industry analysts earlier this year that Allergan expected sales growth of 15% to 16%. But that has since been revised to 10% to 12% because of several factors.
After the sales forecast was lowered, the price of Allergan stock plummeted 15% to $20.75 from $24.50 a share on Sept. 7. At the close of trading Wednesday, the stock was selling at $19.25 on the New York Stock Exchange.
Allergan was spun off as a separate company July 26 when Philadelphia-based SmithKline Beckman merged with London-based Beecham to form SmithKline Beecham PLC. At that time SmithKline made a distribution to its shareholders of all the outstanding shares of Allergan. The company said in a statement Wednesday that two shareholder complaints--one by Melrose Investment Club and Plato Paper Products Inc. on Sept. 8 and the other by Hyman and Elaine Greenspan on Sept. 12--had been filed against it in U.S. District Court in Philadelphia. Allergan also said it had been informed that “additional, similar lawsuits may be filed.”
Blake Harper, an attorney in the San Diego office of Milberg, Weiss, Bershad, Specthrie & Lerach, said his firm and others have filed a total of seven shareholder suits against Allergan in the federal court in Santa Ana over the last two weeks. However, he said, Allergan has not yet been served with the suits.
The Philadelphia suits, which are seeking class-action status, accuse the company, Allergan Chairman and Chief Executive Gavin S. Herbert Jr., and SmithKline Beecham of violations of federal securities laws.
The suits charge that the defendants, before and during the initial public offering of Allergan’s stock and in later weeks, were responsible for having Allergan issue “various statements and documents to the investing public, the purpose and effect of which was to lull the public into having a belief in the soundness and future prospects of Allergan despite the fact that the opposite was true.”
The suits say the defendants misled investors to believe that “Allergan, which fared well under SmithKline, would be given added incentive by its independence.”
Howard J. Sedran, an attorney representing the Greenspans, said he will be seeking damages for all those who purchased Allergan stock from June 20, the date of Allergan’s prospectus for its public offering, through Sept. 6. He said he had not yet calculated the total damages, which he estimated “in the millions of dollars.”
Sedran and other lawyers representing Allergan shareholders said they expect eventually to consolidate their suits in one action.
Allergan said Wednesday that it “denies the allegations” and “will vigorously contest the actions.” SmithKline Beckman spokesmen refused to comment on the litigation.
On Sept. 6, Allergan said its sales forecast revision was caused by lower than anticipated sales in its optical division because of increased competition, the delayed release of a new diagnostic product and strengthening of the dollar, which has reduced the company’s revenue from overseas business.
The company has reported strong revenue and earnings growth under SmithKline Beckman. In Allergan’s prospectus for its stock sale earlier this year, the company reported net earnings of $72.7 million on revenues of $755.8 million in 1988, compared to net income of $68.8 million on sales of $553.7 million in 1987.
Jeanine Heller, a securities analyst with Stifel Nicolaus in St. Louis said it is not unusual for companies such as Allergan that are created as spinoffs to go through an early period of stock volatility.
“The market reacts more sharply positively or negatively” to any change in the company’s business, she said, as investors go through “a learning process.”
Heller said she is still recommending the purchase of Allergan stock. “I think Allergan has terrific management and a very interesting position in the eye-care market place. . . . I think it is a very good investment,” she said.