Last week we highlighted a list of 25 attractive ADRs from around the world for our readers who may be looking to add some exposure to non-US companies in their client portfolios. Today we will highlight one company from last week’s list, Allergan, provide a brief qualitative explanation of why we like AGN as an investment idea and some potential concerns to be aware of. Overall we think AGN looks very attractive and the company currently earns an AFG Investment Grade of “A”.
Allergan plc (AGN) is a growth pharmaceutical company headquartered in Dublin, Ireland. AGN operates in 3 segments: U.S. Specialized Therapeutics (40% of sales); U.S. General Medicine (40% of sales); and International (20% of sales). Some of the company’s well-known brands include Botox, Restasis, Namenda, Bystolic, Asacol, Lo Loestrin, and Juvederm. The company operates in all key global markets.
Corporate evolution from acquisitions: After the 2013 acquisition of Warner Chilcott, the company incorporated in Ireland to take advantage of a lower tax structure. The 2014 acquisition of Forest Laboratories provided access to specialty brand sales for therapeutic enhancement into new areas such as central nervous system, cardiovascular, respiratory and infectious disease. In 2015, the company transitioned into a Growth Pharma business model when it acquired Allergan’s leading opthalmology franchise as well as Botox, which is used not only for cosmetic purposes but also for central nervous system and urology treatments. These transactions helped the company focus on its brand portfolio and on international growth opportunities.
Generic business divestitures to TEVA: On August 2, 2016, AGN sold its generic pharmaceutical business to Teva Pharmaceutical Industries Ltd. (TEVA) for $33.3 billion in cash and $5 billion worth of TEVA stock. In addition, on October 3, 2016, AGN sold its Anda Distribution business to TEVA for $500 million. Following the divestitures, AGN finalized its exit from generic operations and became a branded growth pharmaceutical company. Since the TEVA transactions, AGN has repurchased $15 billion of its common stock. By August 2017, AGN will decide whether to sell the TEVA stock it acquired from the generics divestiture. AGN has stated that they are not long-term holders of TEVA stock.
Successful new product launches: In 2016, AGN launched several new products. Botox Vista, a treatment for crows feet lines was launched in Japan. Other product launches include Liletta, an intrauterine device to prevent pregnancy for up to 3 years, Natrelle Inspira, breast implants with a medium firmness gel, a multidose preservative-free form of Restasis to treat dry eye, and Rhofade cream, a treatment of redness associated with rosacea. In 2017, AGN expects to launch 9 new products across 4 therapeutic areas.
First quarterly dividend: AGN announced that it will begin paying a dividend of $0.70 per share per quarter to common shareholders on March 28, 2017, the first time in the company’s history. The announcement shows the company’s confidence in its cash flow generation capacity.
Healthy pipeline: Investing in the future helps pharmaceutical companies sustain their value. One way to look at how successful a company is investing for the future is by looking at the pipeline of drug candidates currently being studied in clinical trials. Late stage (for example Phase III studies) trials have years of data that support the drug candidates’ safety and efficacy for treating an ailment. AGN is currently conducting 6 late-stage clinical trials for potential new drugs that may be launched between 2017 and 2020.
New product launch costs create fluctuations in margins: When the company launches a new drug, it has to spend on promotion and product placement. EBITDA margins are often negatively affected until the new product launches are able to add substantially to sales.
Increased regulatory scrutiny around the world could result in lost sales: AGN now operates in many international regions. Unfamiliarity to foreign regulatory approval procedures could negatively affect sales in those regions. Additionally, increased scrutiny, or lower pharmaceutical reimbursement from government agencies – as has been the case in Germany and Japan – could hurt AGN’s financial operations.
M&A transactions may be stopped, altering strategic plans: AGN and Pfizer (PFE)’s planned merger was stopped, following the U.S. Treasury Department’s rule changes governing corporate inversions. Similar industry-specific targeting may cause AGN to alter its M&A plans.
Conclusion: Overall we believe that AGN is an attractive investment idea and should be considered as a potential addition to client portfolios as it exhibits many of the characteristics of a company likely to outperform sector peers and benchmarks. AGN currently earns an AFG Investment Grade of “A” and looks very attractive from a valuation perspective.