Allergan
Allergan’s history entails several mergers and acquisition over the recent years and had also involved a Swiss drug maker Actavis, among others, in the process.
2012
In review, Actavis was acquired by a New Jersey pharmaceutical company, Watson, for €4.5 billion back in 2012. The deal, according to the Wall Street Journal, facilitated the newly formed Watson Pharamaceutical-Actavis, later known as Actavis, to be the world’s third-largest maker of generic drugs. Actavis then grew sales by 28.26% to $5.9 billion in fiscal year 2012 (2).
2013
In 2013, Actavis acquired Warner Chilcott, headquartered in Ireland, for $5 billion (1). One of the reasons for the deal was to lower Actavis’ ongoing tax rate from about 28% to 17% that can result into further improvement in the company’s global competitiveness.
Allergan, formerly known as Actavis, was then incorporated in Ireland in 2013 for the purpose of facilitating the business combination between Actavis and Warner Chilcott, according to company filings.
Allergan was then expected to have an amazing 86.4% sales growth to $11 billion in fiscal 2013 after the Warner Chilcott deal (2, 3). As reported, Actavis rejected a $15 billion takeover bid from Mylan (MYL, Financial), and had put Valeant Pharmaceutical (VRX, Financial)'s approach prior to the Warner Chilcot acquisition.
2014
Actavis engaged in two major acquisitions in 2014. In February, Actavis acquired Forest Laboratories for $25 billion. The former spent another $70.5 billiob in November that year to acquire Allergan.
The Ireland-based Actavis acquired the New York-based Forest Laboratories to enhance its scale and improve its pharmaceutical business in the U.S. The combined company was expected to have more than $15 billiob in sales for fiscal 2015 (6).
Actavis acquired the Botox® drugmaker, California-based, Allergan. Botox is an anti-wrinkle biologic medication that was approved by the U.S. Food and Drug Administration in 2002. More than a decade later, Allergan seemed to have taken good use of the drug as it has been able to discover new applications for it over time, making it less susceptible to patent cliff.
The new company, later known as Allergan, was expected to deliver $23 billion sales in fiscal 2015 (4). Part of the deal was to have Allergan lower its corporate tax from 26% to Actavis’ 15% (7).
2016
In late 2015, Pfizer (PFE, Financial) and Allergan confirmed talks about a $160 billion merger. In April, the U.S. Treasury Department had made a rule change making the agreed deal between the two pharmaceuticals no longer beneficial. As a result, Pfizer (PFE) did not pursue the deal.
Watch a video about it here.
(Failed Pfizer-Allergan Deal, Wall Street Journal)
On Sept. 14, Allergan acquired a clinical-stage biotechnology, Washington-based company, Vitae Pharmaceuticals for $639 million.
"The acquisition of Vitae is a strategic investment for Allergan that adds strength and depth to our innovative medical dermatology franchise."
"Vitae has pioneered the discovery and development of highly differentiated first-in-class compounds in atopic dermatitis, psoriasis and autoimmune diseases, areas of medicine where innovation is needed for patients."
-- Brent Saunders, CEO and president of Allergan
About six days later, Allergan acquired another clinical-stage biopharmaceutical, California-based company, Tobira Therapeutics for as much as $1.7 billion, or 19 times Tobira’s previous market value. Allergan defined Tobira as a biopharmaceutical focused on developing and commercializing therapies for non-alcoholic steatohepatitis (NASH) and other liver diseases (8).
"The acquisition of Tobira is a strategic R&D investment within a white space area of our global Gastroenterology franchise and an opportunity to advance the development of novel treatments for NASH."
"With the increasing rates of diabetes, obesity and other metabolic conditions in the U.S. and in developed nations globally, NASH is set to become one of the next epidemic-level chronic diseases we face as a society. It is important that we invest in new treatments today so that healthcare systems, providers and patients have treatment options to face this challenge in the coming years."
"With this acquisition, Allergan will now have one of the strongest portfolios of development stage programs for the treatment of NASH, with Cenicriviroc as the cornerstone. We will continue to look for differentiated development-stage assets that can bolster this position and enhance our commitment to innovation in this disease."
-- Brent Saunders, CEO and president of Allergan
Earnings performance
On Nov. 2, Allergan delivered its third-quarter earnings results. The $82.7 billion pharmaceutical company delivered an outstanding sales and profit growth of 17.9% to $10.7 billion and 229.3% to $14.98 billion, in nine months into 2016. As a result, its share price closed -5.16% that day, while the broader Standard & Poor’s 500 index closed -0.65%.
Notably, Allergan’s Botox® delivered tremendous growth for the period with 55.1%, or $727 million to $2 billion in net sales. Botox, a musculoskeletal agent in terms of therapeutic classification, contributed 19% to total Allergan sales.
Other sources of strong growth for Allergan’s top line were: Restasis® with 57.5% growth, Fillers with 62.2%, Lumigan®/Ganfort® with 43.3%, Linzess®/Constella® with 41.7%, Alphagan®/Combigan® with 47.5%, Ozurdex® with 75.2% (9).
Overall, Allergan had a five-year sales and profit growth averages of 33.4% and 84.25%, respectively.
Outlook
(Allergan FY 2016 Outlook, Quarterly Filing)
In GAAP, Allergan expects for it to grow its sales and earnings-per-share figures by about -3.46% and -138%, respectively.
Allergan had a five-year sales and profit growth average of 33.4% and 84.25%, respectively.
Cash, debt and book value
As of Sept. 30, Allergan had $27.39 billion in cash and marketable securities. The company also had $33.2 billionin debt with a debt-equity ratio of 0.37 (10). Allergan also had 76%, or $109.6 billion, of its $143.6 billion assets in product rights, goodwill and intangibles. The company also had a book value of $89.7 billion.
Cash flow
(Allergan Cash Flow, Quarterly Filing)
Allergan grew its operational cash flow by -49.3% to $1.5 billion three quarters into 2016. One major reason for the supposed cash flow reduction was the company’s $24.2 billion pre-tax gain sales of generics business. The pharmaceutical company still recognized a $33.3 billion cash flow for the sale.
For the period, Allergan allocated $250.5 million in capital expenditures, leaving it with $1.26 billion in free cash flow. Allergan also allocated $15.4 billion in additional investments.
Allergan also reduced its debt by $10.8 billion while providing 236%, or $2.97 billion, of its free cash flow in dividends and share repurchases. On average, Allergan allocated 10.3% of its free cash flow in payouts in the past three years.
As observed, Allergan performed its biggest share buyback activity during the three recent quarters with $2.76 billion. In fiscal 2015, Allergan focused more on using debt for acquisition, taking in $35.58 billion in debt, net share issuance and payments in fiscal 2015.
Valuations
According to Gurufocus data, Allergan had a trailing 12-month P/E ratio of 5.51 times (industry median: 27), P/B ratio of 0.86 times (industry median: 2.97), P/S ratio of 4.79 times (industry median: 2.8).
Conclusion
With a moderately leveraged balance sheet with good amount of goodwill, Allergan initially seemed unfit for a conservative investor’s portfolio. However, the pharmaceutical company delivered industry-leading growth figures, led by what it seemed as prudent business developments, and therefore warrants further attention to eager investors.
Interestingly, the company trades with earnings multiple (about five times) that indicated that its share price is at a good bargain right now. This, maybe, is secondary to what ongoing the ongoing political activities had done to the pharmaceutical industry so far, and also what reaction Allergan took after it announced a negative outlook on its business for fiscal 2016 compared to its previous year.
(Allergan Share Price, Google Finance)
Barclays has Allergan shares labeled as equal weight, as of Oct. 31, with a target price of $250 a share. On Nov. 3, RBC Capital Markets has an outperform rating on the company with a price of $279, lowered from $300.
Nonetheless, conflicting assumptions may result in reduced conviction over the long term. In conclusion, Allergan is a speculative BUY for aggressive investors with a target price between $250 and $279.
(Read: Allergan’s Recent Quarterly Filing)
Notes
(1) Wall Street Journal.
(2) Reuters.
(3) Morningstar data: The outstanding sales growth expectation was not met in FY 2013, Allergan had $2.6 Bil in total sales.
(4) Morningstar data: As assumed, the figure was in addition to the earlier expected sales in combination with Forest Laboratories. Nonetheless, the sales figure expectation was not met in FY 2015; Allergan had $15.07 billion in total sales during the period.
(5) Wall Street Journal.
(6) Wall Street Journal: Forest Laboratories, in January, agreed to buy a specialty-pharmaceutical company Aptalis Holdings Inc. for $2.9 billion from private-equity firm TPG.
(7) Author: As understood, additional clout in the drug offerings that were derived from the combination of the companies were not mentioned.
(8) Allergan: NASH is a severe type of non-alcoholic fatty liver disease (NAFLD), which is characterized by the accumulation of fat in the liver with no other apparent causes.
NASH occurs when the accumulation of liver fat is accompanied by inflammation and cellular damage. The inflammation can lead to fibrosis (scarring) of the liver and eventually progress to cirrhosis, portal hypertension, liver cancer and eventual liver failure.
(9) Annual filing: therapeutic classification;
Restasis®: Topical immunomodulator
Lumigan®/Ganfort®: Prostaglandin analogue
Linzess®/Constella®: Irritable bowel syndrome
Alphagan®/Combigan®: Selective alpha2 agonist
(10) GuruFocus data.
Disclosure: I do not have shares in any of the companies mentioned, except for PFE.
