Allergan’s Fundamentals Look Very Strong

Iv’e been bullish On Allergan (NYSE:AGN) stock for quite a while now despite the recent break down in the Pfizer deal (NYSE:PFE). Why? Well despite the strong drug pipeline it has on its books, I believe the whole biotech sector in general will move higher. The level of acquisitions is actually growing which makes me believe this sector will not penetrate its recent lows. Here are some of my thoughts on why I would be a buyer around these levels.

1) Drug pipeline and acquisition of benefits
Allergan has clearly-defined business strategies for growth, which is why you see every dollar being pumped back into the company. It has its own R&D capabilities and grows its product portfolio organically. Additionally, acquisition and merger is another major route it uses to strengthen its market reach and widen its product portfolio.

2) Organic growth
The Company has its own R&D departments illustrated by the $1.7 billion spent on R&D in 2015. The Company launched 7 new products in 2015 and around 75% of its top global products registered double-digit growth last year laying a strong foundation for 2016. The Company plans to spend $1.5 billion in 2016.

70Source: Company Website

3) Targeting inorganic growth via acquisition and merger (Just look at the company’s activity over the last 5 years or so…)
The Company is enhancing its products portfolio by acquiring and merging with companies at all stages of R&D with a strong preference for high growth targets. In the past few years, the Company has made several acquisitions and mergers and thereby, widened its product portfolio. It merged Forest Laboratory into itself. Watson Pharmaceuticals bought Actavis in October 2012, which made it the third-largest, generic pharmaceutical business in the world.

In October 2013, Actavis bought Warner Chilcott for $9.2 billion and extended the product portfolio into the women’s health business. In February 2014, Actavis merged with Forest Laboratory for $8 billion in cash which brought Namenda, Bystolic and Linzess under its umbrella. At the same time, the Company also announced its intention to sell its generic business to Teva for $33.75 billion in cash and stock. In 2015, it acquired Kythera, along with its double-chin treatment, worth $2.1 billion. The acquisition of Topokine and its XAF5 technology adds an innovative technology to Allergan’s industry-leading, mid-to-late stage pipeline of more than 70 programs and bolsters the leadership in medical aesthetics.

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Source : Company Website

 
4) Divert funds from the Teva deal for clearing debt and enhancing cash reserves for more acquisitions
In 2015, the Company finalized the deal of selling its generic business to TEVA for $33.75 billion in cash and $5.6 billion in TEVA stock. The deal has been finalized in Europe and regulatory approval is pending in the U.S., which expects it to be completed by June. The capital inflow would be useful for the Company in order to clear its debt. As of December 2015, the debt on the company’s balance sheet stands at $42.722 billion, of which term loans are $8.256 billion.

The company would use the cash inflow to clear its debt on the books while the balance would be held on the balance sheet to fund future acquisitions. Additionally, the merger agreement between Pfizer and the company has been terminated and Pfizer has agreed to pay Allergan $150 million for reimbursement of expenses associated with the transaction. This will further strengthen the balance sheet of the Company going forwardl. Excluding the generic business, consensus estimates the value of the business at over $100 billion which means there is plenty of upside potential

5) Botox – the largest foundation product is now widening its scope in the therapeutic category
Allergan is charging ahead with its new product launches and increasing its global reach. Botox (the largest product and the foundation of the Company’s moat) is ubiquitous and its most famous consumer brand. Botox is the largest contributor to the total revenues of the Company, accounting for 17.2% of total sales in 2015. It enjoys a leading 76% market share of the $2.3 billion global market for neuro-modulators which is growing at a whopping 16% per annum. Botox also enjoys a 42% share in the breast aesthetics market which is growing by 5.9% . The brand is growing continuously as a result of branding as well as finding new uses and applications.

According to management, currently half of Botox sales are for aesthetic use and the rest is for therapeutic indications. Despite competitor pressure on cosmetic Botox sales, management continues to utilize new therapeutic indications for Botox to expand into new treatment categories where the Company faces almost no competition for the time being. Along with recent Food and Drug Administration approvals for Botox to treat chronic migraines, adult upper limb spasticity and urinary incontinence, management is adding complementary products, such as Levadex for chronic migraines and Apaziquone for bladder cancer, to dovetail with the Company’s entry into the neurology and urology markets.

Furthermore Allergan also has other new potential indications for Botox in its pipeline, including treatment for cerebral palsy (Phase III) and osteoarthritic pain (Phase II). Moreover, Allergan has developed Senrebotase, a novel biologic molecule derived from Botox that only affects pain receptors, and has initiated two Phase II clinical trials for the drug in targeted pain and overactive bladder treatments. Allergan’s expansion into the neuro-modulator therapeutic market should preserve the Company’s dominance in this industry and overcome the competitive pressures it faces in the cosmetic neuromodulator market.

6) Eye Care – growing segment with high entry barrier due to cost and time constraints.

Allergan is likely to face branded competition on some of its other key products, like its Juvéderm facial filler, but its portfolio of difficult-to-manufacture biologic and ophthalmology drugs should keep the generic competition minimized. The stringent regulatory approval criteria on Allergan’s dry-eye drug Restasis, which makes up nearly 8.9% of sales (2015), removes the substantial risk of generic entrants.

Allergan has a long record of avoiding generic competition by defending its patents and transitioning patients to new product formulations. The company’s patents for Alphagan, its alpha-2 agonist for Glaucoma, were upheld beyond 2020, which leaves sufficient time for the Company to avoid most of its remaining patent exposure, such as Lumigan for Glaucoma. Even when generic competition occurs, the requirements for clinical trials on generic ocular drugs limit generic releases, which should help protect Allergan’s profit margins going forward.

All in all, this company is primed for more growth and I would be very surprised if it didn’t manage to recover $300 a share in the near term

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One Response to Allergan’s Fundamentals Look Very Strong

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