Intrinsic Value: $330.89
Overview: Allergan is a global specialty pharmaceutical company which manufacturers branded pharmaceuticals, medical aesthetics, biosimilar and over-the-counter products. AGN’s most well-known product is Botox, which contributed about 17% of the company’s total sales. Botox, recognized as the leading anti-wrinkle face injection, has been approved to treat various non-cosmetic therapeutic areas, including chronic migraine headache, overactive bladder, and involuntary muscle spasms. However, AGN’s biggest franchise is Eye Care products, which represent 22% of total sales and includes treatments for dry eye, glaucoma, eye inflammation, infection, allergy and disease of the retina. The Aesthetics franchise (18% of sales) includes breast implants, facial fillers, and double chin treatment Kybella. CNS products (15% of sales) that help treat Alzheimer’s disease, Namenda, and antipsychotic, Vraylar, are increasing sales from new product launches. The Gastrointestinal products make up 11% of sales, while the Women’s Health, Urology and Infectious Disease products make up the remainder.
Divesting Generics Business: AGN has agreed to sell its generics business to Teva Pharmaceutical Industries Ltd (TEVA) for $40.5 billion, to be received in $33.75 billion in cash and $6.75 billion in TEVA stock. The soon-to-be divested business sells and distributes hundreds of generic drugs globally, while its pipeline is very strong. AGN has filed 230 Abbreviated New Drug Applications with the FDA, awaiting regulatory approval, while 92 of those filings are First-to-File, which can provide 180 days of market exclusivity. Internationally, more than 1,000 filings for generic products are waiting to be approved. The generics business will be well-managed under Teva’s control, which provides for a more attractive pharmaceutical focus for AGN in branded drugs. Regulatory approval for the deal has been received in all markets, except the U.S. To help with antitrust issues, AGN and TEVA agreed to sell some generic products and product rights to Mayne Pharma Group for $652 million, to Impax Laboratories for $586 million, to Dr. Reddy’s Laboratories for $350 million, and to Prasco Laboratories for an undisclosed amount. The $40.5 billion TEVA transaction is expected to close in early July with almost 100% certainty.
Stronger Growth Profile without Generics: AGN’s sales in Q1 2016 grew 48% y-o-y, when the generics business is excluded. Top growth drivers include an extended version of its Alzheimer’s disease treatment, Namenda XR. Additional line extensions for Botox, which is now approved for 11 indications, also helped grow sales. AGN’s business without the generics franchise (reported as Discontinued Operations) will have faster sales growth and much higher EBITDA Margins, as evidenced by the 27 points improvement in y-o-y margins during Q1 2016. In contrast, the generics business has experienced price erosion in the single digits during Q1 2016, despite launching 13 new products in the U.S. and 62 in international markets. Going forward, the products acquired during the March 2015 Actavis/Allergan transaction (Botox, Restasis, Lumigan, facial fillers, etc.) will continue to contribute strongly to sales in 2016. In addition, several new product launches will grow at very strong double digit rates, though from a very small base: Vraylar (antipsychotic) is projected to grow 50% CAGR through 2020, Dalvance (skin infections) is likely to grow 40% CAGR through 2020, and Viberzi (irritable bowel syndrome) may grow 30% CAGR through 2020. Operating Margins are expected to continue to improve to above 50% by the year 2020, much higher than the company’s previous operating margin record of 24% in 2011.
Catalyst: In the short term, we believe AGN will benefit from the completion of the generics business sale, whose proceeds will help improve its capital structure.
The TEVA transaction will provide $36 billion in after-tax proceeds, which AGN plans to utilize to pay down debt, repurchase common stock and focus on smaller, tuck-in acquisitions. AGN has targeted $8 billion in debt repayment, reaching its debt/adjusted EBITDA target of under 3.5x, a goal it stated at the announcement of the Actavis/Allergan deal, which will help maintain an investment grade debt rating. Additionally, AGN plans to exhaust its new $10 billion share repurchase program by 2017, with $4-5 billion buy back to be executed in 2016, just under the Irish law limits. At today’s stock price, the $10 billion share buyback represents 10% of AGN’s shares outstanding. AGN management decided, after the Pfizer deal was scrapped, that there is currently no better investment than in Allergan’s future. We believe that AGN shares will rise from this smart use of the divestment proceeds and look forward to the final transaction, originally targeted to close by the end of June.