March 25, 2023

As Sales Fall, Allergan Seeks a Buyer for Lap-Band

The falling sales “do not fit the profile of a high-growth company like Allergan,” David E. I. Pyott, the company’s chief executive, told analysts Tuesday morning on a call announcing the company’s third-quarter financial results.

In an interview, Mr. Pyott said Allergan had already hired an investment banking firm, which he would not name, and was sending letters to other medical device companies and private equity firms seeking a buyer for its obesity business, which also includes a balloonlike device that is not approved in the United States but is used in some other countries.

The Lap-Band, a silicone ring that is wrapped around the stomach and can be inserted in an outpatient procedure, once appeared to have a bright future as a less drastic, if less effective, alternative to gastric bypass, which involves rerouting the digestive tract.

But Allergan’s obesity business sales have fallen from a peak of $296 million in 2008 to an expected $160 million this year. In the third quarter, the sales fell by 25 percent to $37.4 million from a year earlier.

The obesity business, while still profitable, represents less than 3 percent of total product sales for Allergan, which is known most for its Botox treatment for wrinkles, migraine headaches and other conditions.

Although one-third of American adults are obese, the number of weight loss surgeries in the United States — about 160,000 a year — has stopped growing, largely because of the economy, Mr. Pyott said. Many patients pay out of pocket for weight loss surgery, and even when the procedure is covered by insurance, there can be a co-payment of thousands of dollars.

Mr. Pyott said Allergan had made progress in the last year in lowering barriers to insurance coverage, but it was not sufficient to reverse the decline in sales of the Lap-Band.

But gastric banding has also lost market share among weight loss surgeries, falling to about one-third from 44 percent a year ago, Mr. Pyott said. Lap-Band has most of the market among bands, although Johnson Johnson also sells such a product.

Gaining in popularity has been sleeve gastrectomy, which involves cutting out part of the stomach. It is considered midway between banding and bypass in terms of both effectiveness and the degree of invasiveness of the surgery.

Dr. Marc Bessler, director of the center for metabolic and weight loss surgery at Columbia University, said that Lap-Band had lost some luster among bariatric surgeons because studies suggested it was not effective in the long run for one-third to two-thirds of patients.

“You had data coming out that 10-year outcomes are not what we were expecting,” Dr. Bessler said.

One study in Europe, for instance, published in The Archives of Surgery last year, reported that over 12 years, 60 percent of patients needed another operation, often to remove the band, because of complications or lack of weight loss. Allergan has said that techniques have improved since the patients in that study received their bands.

In 2011, Allergan succeeded in getting the Food and Drug Administration to approve use of the Lap-Band for patients with lower weight than had been previously required. But that did not bolster sales, in part because of difficulty getting insurance to pay.

The company dropped efforts to get the Lap-Band approved for use in teenagers after controversy arose about the product’s safety.

There have been news reports about problems, including deaths, from the band.

Allergan said its overall product sales for the third quarter rose 6.1 percent from a year earlier to $1.39 billion. Earnings per share, after adjustments, rose to $1.06 from 92 cents.

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You’re the Boss Blog: One Way to Close the Sale of a Business

Jane JohnsonJane Johnson


Putting a price on business.

I once worked with a man whose license plate read BCRE8VE (translation: Be Creative). It was the perfect mantra for a director of advertising — and equally fitting for business owners and deal makers navigating today’s business-for-sale marketplace. While there has been a slight uptick in business sales of late, getting a deal done with tight credit markets, depressed valuations and skittish investors continues to require as much art as science.

There’s a common saying that buyers will pay you only what your business is worth today. If sales and earnings at your company were stellar three years ago but have since dropped off, the buyer is not going to value your business at the previous year’s level. If your business has the potential for growth in the coming years, particularly in the hands of a strategic acquirer, then a buyer may indeed pay you for that future value — but don’t expect the payment today. Instead, be prepared to understand and structure an earnout, a contingency payment that is based on the future performance of the business.

A flexible tool that can be used in combination with other terms of a sale to arrive at a mutually agreeable price, an earnout can serve a number of purposes, including making up the difference between what the seller wants and what the buyer is willing to pay, backing up seller claims about future growth opportunities, and balancing out perceived risk.

Earnouts are used frequently in the sale of high-tech and service businesses like CoActive Consulting Group, a 15-person firm that installed and automated software systems at companies throughout New England and that Jane Johnson and her partners sold in 2004. At first, when a buyer put in a weak initial offer, the deal looked like a nonstarter. But then Ms. Johnson started thinking creatively.

“Rather than give up, I built a spreadsheet that showed the synergies between our companies and future revenue and profits we could make together,” said Ms. Johnson, who started CoActive in 1990 to give herself a more flexible schedule while starting a family. After working with the buyer, a Boston-based accounting firm with more than 250 employees, on several consulting assignments, Ms. Johnson and her partners were confident the two companies would be a good fit. “I was determined to make this deal work,” she recalled.

Most earnouts involve structured payments to the seller that are tied to milestones like gross sales, gross profit or net income, with a typical term of one to five years. “We agreed on the assumptions for the spreadsheet and successfully negotiated an earnout based on both new business as well as recurring revenue from our existing customer list on the date of the sale,” Ms. Johnson said of CoActive’s earnout. “It was based on gross consulting revenue and software margin, not the buyer’s bottom line. We did not want to be penalized for their overhead spending.”

Earnouts work well for the sale of a business whose primary stakeholders are willing to stay on and ensure that the agreed-upon milestones are achieved. “I knew that I could put aside my ego and work for someone, at least for a few years,” said Ms. Johnson, who was CoActive’s chief executive. “I had worked successfully in larger organizations in the  past, so I knew I could do it.” Each of CoActive’s partners had a five-year employment agreement, although the agreement was not contingent on the partners staying on. After selling CoActive, the partners received payments from the buyer every six months for the next five years.

Earnouts have become particularly relevant during the recent economic downturn, as they can also be useful for businesses that have experienced a downward trend in revenues — a situation that many business owners now face. One of the disadvantages of selling your business is that you forgo any benefit from the company’s future growth. An earnout can facilitate a sale today, while allowing the seller to enjoy some of the upside that comes with improved economic conditions. Earnouts can also minimize the tax consequences associated with the sale of a business (be sure to discuss the tax consequences of any deal structure with your advisers early in the negotiation process).

Setting up an earnout does involve certain risks. Chief among these are delaying payment in full, reliance on the buyer’s operational skills, and the prospect of unanticipated disputes surrounding the earnout’s structure and payout. Business owners should try to strike a balance between the potential risks and rewards. “We realized a much larger payout than we could have ever received if we took all cash up front,” said Ms. Johnson, who received the majority of the sales price of CoActive through the contingency. “We decided to shoulder most of the risk, and it paid off.”

Since selling her business, Ms. Johnson has been specializing in exit- and transition-planning for business owners.

Barbara Taylor is co-owner of a business brokerage, Synergy Business Services, in Bentonville, Ark. Here is her guide to selling a business.

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