Allergan (NYSE:AGN) is a global specialty pharmaceutical company focusing on the development, manufacturing, marketing and distribution of brand name, biosimilar and over-the-counter (OTC) pharmaceutical products. One week after closing the sale of Actavis generics to Teva Pharmaceuticals, Allergan reported mildly disappointing top-line results for the quarter. Importantly, however, Allergan’s “core” products continue to grow nicely, with five of the company’s seven core therapeutic categories growing by double digits (in constant currency) versus the prior year. Our base case valuation of $350-360 per share does not depend on Allergan hitting CEO Brent Saunders’ goal of double- digit organic growth. However, strong, high single-digit organic sales growth appears achievable, as the company’s recently launched products continue to scale. One near-term positive of a lower share price is that Allergan’s $5 billion in share repurchases between now and year end will go further, and deployment of a portion of the company’s nearly $28 billion in cash remains a possible catalyst for the stock. The re-emergence of drug pricing as a political issue is not surprising to us as we enter the home stretch of the presidential election. We believe Secretary Clinton’s plan to control and eventually lower prescription drugs costs could negatively impact Allergan’s long-term earnings trajectory (perhaps by $2-3 per share on a base of $18), should she win the election, but with the stock at $240, we believe the risk of permanent loss is low. In short, Allergan’s risk/reward ratio (upside to base case vs. downside to low case) continues to be skewed in favor of the long-term owner.
- From Weitz Balanced Fund third quarter 2016 commentary.
