Allergan PLC (AGN, Financial) is one of the largest specialty pharmaceutical manufacturers. It specializes in aesthetics, ophthalmology, women's health, gastrointestinal and central nervous system products. In 2016, Allergan sold its generics and distribution segments to Teva Pharmaceutical Industries Ltd. (TEVA, Financial).
Financial position
Allergan's balance sheet currenty looks like an optimized affair, run by an agent operator who wants to get the value creation engine humming. There isn't a lot of redundancy left, however. The company owns a sliver of cash and equivalents. Its debt load of $23.6 billion looks large, but if you consider it is generating $6 billion in operating cash flow over trailing 12-month periods, it starts to look a lot less threatening.
Management
Management does own some shares, but I'm not completely satisfied with the amount. Some of its historical decisions look very good, like its sale of its generic segment to Teva. Teva's stock price, however, subsequently cratered. The money was used to reduce debt, buybacks and acquisitions. Its the latter that worries me because management really shelled out on some of its acquistions, like the $1.7 billion it laid out for Tobira Therapeutics. We'll see how that deal works out.
Brent Saunders has been CEO of Allergan since 2014 and has lots of experience in the industry, including as CEO of Bausch & Lomb, now part of Buasch Health (BHC, Financial). Metrics that help judge a CEO haven't been impressive over this timeframe:
Allergan doesn't score well on price performance, return on invested capital or return on equity, but given that I consider it quite undervalued, these metrics could improve in the future. It's a short timeframe to make judgements.
Valuation
The primary reason to own Allergan is its strong defensive portfolio. It is best known for selling Botox. Botox is not going to dissapear anytime soon and I can't imagine customers risking it with a lesser-known brand. The company also has a rich pipeline of products with no less than six product launches coming up in the next two years.
If we combine that with its undemanding valuation at less than 10 times free cash flow, it is very attractive.
The metrics are not exactly comparable as cash flow is more valuable than earnings, but the health care industry on average is trading at a price-earnings ratio of 34. In comparison, the S&P 500 is trading at 22.5 times. Regardless, I believe Allergan has more growth potential (through its pipeline) as well as a more robust revenue profile in case of a cyclical downturn compared to most S&P 500 companies. You should think it deserves a richer multiple.
Risks
Allergan's recent acquisitions look like they were done at very rich multiples. I am a bit worried they may continue to make value-destructive purchases, but I am comforted by the knowledge they have very little money left to do so.
Pharmaceuticals remain a prime target among populist movements that are running wild across the world. There is always the risk Allergan gets caught up in the crossfire and will need to amend pricing or grow it very slowly.
The pipeline has been hit-and-miss, as can be expected. Tere are a lot of misses that could become a threat over time, but likely not before we are well into the 20's.
Outlook
There are a number of gurus invested in Allergan, including Seth Klarman (Trades, Portfolio), David Tepper (Trades, Portfolio) and John Paulson (Trades, Portfolio), among others.
Allergan trades at an undemanding free cash flow multiple, but owns a very resilient portfolio of therapies and a pipeline that is brimming with potential. You shouldn't expect major home runs out of its portfolio, but chances are above-average products will get developed into something that's ultimately commercially viable. The share price may swing wildly, but as long as cash flow remains healthy, the debt load should not be a threat in the least.
Disclosure: Author is long AGN.
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