May 6, 2015
By Mark Terry and Riley McDermid, BioSpace.com Breaking News Staff
As part of a plan to cut $300 million in annual costs by the year 2017, Zoetis announced it will lay off about a quarter of its workforce, firing almost 2,500 people. It will also close or sell 10 manufacturing plants. Plans also include downsizing its geographical division to two from four.
Much of the change is motivated by pressure by activist investor Pershing Square, run by Bill Ackman. In November 2014 Pershing scooped up more than 8 percent of Zoetis shares. The company also brought on two board members backed by Pershing Square and Ackman.
This isn’t much of a surprise. BioSpace covered the story on Nov. 13, 2014, noting that when Pershing acquired 8.5 percent of Zoetis stock, there were rumors that Ackman might force the company into a sale to Bayer AG , Merck & Co. , or Eli Lilly and Company , or even a sale to Laval, Quebec-based Valeant Pharmaceuticals International, Inc. .
Discussing Pershing Square and Valeant immediately brings to mind Pershing and Valeant’s acrimonious hostile takeover bid of Allergan Inc. in 2014, which brought on lawsuits and an investigation of Pershing by the Securities and Exchange Commission (SEC) for insider trading. This eventually drove Allergan into the arms of Dublin, Ireland-based Actavis plc . Actavis bought Allergan for $66 billion in a combination of cash and stock.
Headquartered in Florham Park, N.J., Zoetis was a spinoff from Pfizer and focuses on animal science-related pharmaceuticals and feed products. “For the past two years, our focus has been on delivering our operating and financial targets, while successfully establishing Zoetis as a standalone company,” said Juan Ramon Alaix, chief executive officer of Zoetis in a statement .
“Now having entered the final stage of our stand-up projects and building on the strong momentum in our business, we are announcing plans to further improve our operations and better position Zoetis to drive long-term profitable growth. The implementation of our plans will allow us to become more competitive by being more focused and cost-efficient, while taking full advantage of our scale and business model.”
The company announced first quarter revenue in the U.S. of $521 million, an increase of 9 percent compared to the first quarter of 2014. Global first quarter revenue was $1.102 billion. It projects full year revenue of $4.675 billion to $4.775 billion, with an earnings per share (EPS) between $0.79 to $1.02 per share.
The job cuts and reorganizing are expected to have a one-time charge of $500 million, but are projected to increase operating profit by 2017 by $200 million.
In light of Ackman and Pershing Square’s activism, Zoetis appears to be making plans to fend off a potential takeover and announced a $500 million share buyback and set up a plan to block any bid.
“We’re burdened with the cost of being a stand-alone,” said Paul Herendeen, Zoetis chief financial officer at the company’s shareholder meeting. “You can cherry pick and say, ‘Your gross margin is too low, and your SG&A is too high,’ but that’s not realistic.”
In early February, Ackman finally had his way with Zoetis (ZTS), after the firm said it would take on a representative from his Pershing Square Capital Management to sit on its board of directors—a prime perch from which to watch Ackman’s significant stake in Zoetis.
As such, Zoetis said William Doyle, an Ackman acolyte, will now be appointed to its board of directors. It’s a plum job for Doyle, who is likely being rewarded for initiating Pershing’s top trade last year when he pushing the hedge fund to bet on a hostile takeover of Botox maker Allergan Inc. (AGN). That deal ultimately fell through, but because of Ackman’s 9.7 stake in the company, Pershing walked off with a cool $2.7 billion.
“We welcome Bill to the Zoetis Board,” Zoetis CEO Juan Ramón Alaix, said in a statement, referring to Doyle.
Ackman has long meditated on Zoetis’ future. He told traders in October that Allergan and Zoetis (ZTS) are his first healthcare positions in 11 years, but that he’s “open to more healthcare situations in the future.” Ackman said that Zoetis in particular had been educational, saying Pershing views ZTS as “strategically valuable, good durability of cash flow, able to work with management, and opportunities in cost cutting.”
Ackman said he was “concerned” Zoetis would be a distraction to the Allergan situation and “confusing to the market” but has apparently put those concerns to rest now that Allergan is safely married off.
Indeed, the post-mortem of the attempted 10-month takeover for Allergan Inc. (AGN) has continued well into 2015, after the chief executive of its main pursuer, Valeant Pharmaceuticals International, Inc. , told the Financial Times last month that he has significant regrets about how the deal was pursued.
Valeant’s bruising fight for Allergan Inc. began at the beginning of 2014 following an unusual alliance with Ackman, who had already amassed a 10 percent stake in Allergan. He and Pearson then teamed up on an effort to unseat Allergan’s board—and are currently the focus of multiple lawsuits and an investigation into whether or not their partnership was collusive by the U.S. Securities and Exchange Commission.
Valeant CEO Mike Pearson told the paper that he was “naive” and made a “major miscalculation” over possible rivals in the chase (such as Actavis plc , who eventually bought Allergan for $66 billion). He said he did a “poor job” overall of strategizing the buyout.
“Part of our thesis was that no one else would come in, and we were wrong,” he said. “We were looking more at the bigger companies — like Johnson & Johnson , GlaxoSmithKline and Sanofi — and largely thinking they could pay all-cash, which we couldn’t.”
“So when Actavis came in, I was naive and thought we had a better fit strategically — more synergies and a lower tax rate. But whenever there’s an auction we are likely to lose, because we are so strict on price, so that was a major miscalculation.”
Pearson said he still feels the sting of scrutiny from outsiders critical of the deal, who were convinced it was a bad deal for Valeant shareholders and a shocking waste of a resources.
“No one likes to be criticized, and in particular no one likes it when it’s not true. I really felt for our employees,” he said.
Still, Pearson said Ackman was a “very good partner who kept his word” but was clear about his current relationship: “It’s over,” he said. Commenting on Ackman’s recent suggestion that Valeant scoop up Zoetis (ZTS), Pearson said the company remained uninterested.
“We have no interaction or contact with them. I think it’s highly unlikely anything is going to happen with Zoetis,” Pearson says. Valeant would, however, be interested in buying an animal health group focused solely on pets.
Will Hungry Pfizer Make a Play for Struggling GlaxoSmithKline?
Almost a year after its $119 billion offer for AstraZeneca PLC fell apart in the face of massive opposition from regulators and internal dissent, global drugmaker Pfizer Inc. is once again being floated as a potential buyer of another marquee-name British pharmaceutical company: GlaxoSmithKline . We at BioSpace want to know your thoughts: With cash to burn, will Pfizer go hunting for Glaxo?
