Why Allergan PLC (AGN) Is Poised To Rise Further?


Third-Point LLC’s Dan Loeb wanted Allergan to be sold to Valeant Pharmaceuticals Intl Inc (NYSE:VRX) before Actavis acquired it. Now, he believes that the newly combined Actavis-Allergan, which goes by Allergan PLC (NYSE:AGN), is worth much more than what it is currently. There are a number of reasons to believe that he is right in coming to a conclusion. As if to prove the point right, the company delivered second quarter results that exceeded the Street analysts’ expectations. The most interesting point is that the company is not averse to making some tough decisions when it matters the most. The company is also in the safe hands of the chairman, Paul Bisaro, and the CEO, Brent Saunders. Let’s look at some of the factors that will contribute to the upside potential.

Ideal Management

For a company size like that of Allergan PLC (NYSE:AGN), it is very important to have an ideal team of management. They should have a clear focus in terms of a proactive approach to allocating capital, as well as being thoughtful in drawing up a tactical vision. Aside from that, there is a need for strong alignment with the shareholders, whose backing is key to realizing greater value. That will set the stage for the growth potentials to be realized completely. As far as Allergan is concerned, there is a strong feeling that all these qualities seem to exist. That is probably due to the two top management professionals in Bisaro and Saunders.

The practice of clear-cut vision and thoughtful investment has been the hallmark of the formerly known Actavis. The company with the new name, Allergan PLC (NYSE:AGN), has closed the Warner Chilcott acquisition and might indulge in more accretive transactions. The old Actavis management was responsible for closing big deals like Forest Laboratories for $21 billion, and even Allergan for $65 billion. However, they have also kept adding smaller transactions. The combo of Bisaro and Saunders were not bothered about the critics and focused on articulating a strong tactical vision for the company. Aside from that, they have developed a logical framework for pursuing any transactions.

The duo has obviously set their mission very clear. That is to develop a growth-oriented pharmaceutical firm. And that should come up with attractive assets of long-duration. At the same time, they were also focused on executing plans for having control over expenses. That included high-risk spending, as well as undisciplined spending towards R&D. Their focus landed them with good buys in the process to create assets apart from building a wider pipeline. That was also in line with their objectives. The management is commended for forward-thinking by activist investor, Dan Loeb.

Bold Decision To Exit Generic Business

Allergan PLC (NYSE:AGN)’s management should be complemented for taking a bold decision to exit itself from the generic drug business. The company sold the generic division to Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) for $40.5 billion in a cash and stock deal. In terms of valuation, the matured business was sold for 17X2015 EBITDA. At the same time, the transaction de-leveraged its balance sheet from net debt of $41.32 billion at the end of the second quarter. The deal has brought the debt level to a miniscule level. The tactical vision of the deal is also looking attractive.

There was no doubt that generic drugs remained the original business for Allergan PLC (NYSE:AGN). However, the company’s chairman, Bisaro, and CEO, Saunders, felt that the inherited division had been an anchor on valuation. Both seemed to have felt that its sale would be the correct perspective from the shareholders’ point of view. When the company made the bold decision, the shareholders backed it by lifting its stock in the following days. However, Third-Point’s Loeb believes that there existed a meaningful gap to close on valuation. That is more upside potential.

Pure-Play Pharmaceutical Firm

As a result of the divestiture, which is expected to be closed in the first quarter of the next year, Allergan PLC (NYSE:AGN) will become a pure-play pharmaceutical company. That will mean that the company will have branded assets of long-duration in seven therapeutic areas. That is not fully tapped and remains an under appreciated pipeline.

Though the stock appreciated recently, shares are only trading around 16.5X estimated adjusted EPS of $20. The current valuation is considered below considering where other pharmaceuticals firm stocks are trading. For instance, Celgene Corporation (NASDAQ:CELG), Bristol-Myers Squibb Co (NYSE:BMY), Novo Nordisk A/S (ADR) (NYSE:NVO), and Biogen Inc (NASDAQ:BIIB) are all trading at an average of the year 2017 earnings multiple of 19X. Allergan PLC (NYSE:AGN)’s management has also kept an aspirational earnings target of $25 a share in 2017.

Fresh Takeaways

The company’s CEO, Saunders, said that the company will keep strengthening its leadership position in therapeutic areas. That will be done through a focus on organic productivity and also execution of business development deals to support, as well as create its position in the therapeutic areas. Its recent deals to buy Naurex, Oculeve, and Kythera, besides its deal to license Merck & Co., Inc. (NYSE:MRK)’s CGRP migraine program, will support its current products in the area of Central Nervous System, Aesthetics, and Eye Care.

Allergan PLC (NYSE:AGN) has over 70 novel products in mid-to-late stage development among the seven therapeutic areas. That included biosimilars. Therefore, there is enough in the pipeline to ensure growth potential.

Conclusion

The company seems to be well-placed to grow further, despite selling the generic business to Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA). The net debt would have been a bigger concern. Now, the cash portion of the agreement could be used either for repaying the debt or for fresh acquisitions. Both are beneficial for Allergan PLC (NYSE:AGN). The management also enjoys the complete confidence of the investors. On top of everything, the company will have to pay lower taxes since it is now shifted to Ireland. With the forward thinking management at the helm, there appears to be less risk in having the stock in one’s portfolio.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

You may also like...

More in AGN
Deltec Asset Management
Allergan PLC (AGN), AbbVie Inc (ABBV) and United Continental Holdings Inc (UAL): How Deltec Asset Management LLC Handled These Stocks In 2Q2015

Deltec Asset Management LLC took the opportunity in the second quarter 2015 to launch fresh positions in 14 stocks and...

Close