Monday, April 10, 2017

A current AIM International Fund holding: Allergan (AGN) by Brian Holland. “Allergan deserves to stay in the AIM portfolio"

Allergan plc (AGN, $238.34): “Allergan’s Strong Pipeline Cures Q3 Fall”
By: Brian Holland, AIM Student at Marquette University


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary
  • Allergan plc (NYSE: AGN) is a global pharmaceutical company focused on the research, development, and manufacturing of pharmaceutical products for patients around the world.  Allergan operates in 3 segments: US Specialized Therapeutics, US General Medicine, and International.  The company is Headquartered in Dublin, Ireland.  Allergan was found in 1984 and operates in over 100 countries.
  • The Allergan brand delivers treatment in areas such as: Dermatology, Aesthetics, Central Nervous System, Eye Care, Urology, Gastroenterology, Cardiovascular and Infectious diseases.  Two of Allergan’s leading drugs are Restasis, with 393.1 million in revenue in Q4 of 2016, and Botox, totaling 199.4 million in revenue in Q4 of 2016.  Restasis is a part of the Eye Care franchise and Botox is a part of the Facial Aesthetics.
  • Allergan recently received positive results from a Phase III studies.  The drug being tested, sarecycline, is used in the treatment of moderate to severe acne.  After news of the success, Allergan plans to file a New Drug Application (NDA) by the end of 2017.  Allergan estimates that peak sales could reach 250-300 million.
  • Allergan also received approval from the FDA on the drug Rhofade in January.  The drug is used to treat facial erythema associated with rosacea.  Rosacea is the flushing or reddening of the face, resembling sunburn.  The drug is expected to be available for commercial supply in May of 2017.
  • Allergan has consistently hit earnings over the last 2 years, only missing earnings in 1 quarter during that time period.  This quarter was Q3 of 2016.  Allergan rebounded nicely posting earnings of $3.90 in Q4 of 2016, up from $3.32.
Key Points
Allergan’s management had an announcement in November of 2016 that could symbolize strong feelings about the future.  This announcement was the initiation of a 10 billion dollar accelerated share repurchase.  The repurchase of 10 billion dollars in shares could symbolize that the company believes the stock is undervalued.  Allergan plans to complete the repurchase by Q3 of 2017 at the latest.  Since the beginning of November, the stock has risen almost $30.

Another positive sign for investors came when Allergan announced the declaration of their first dividend.  The ex-dividend date was scheduled for February 24, 2017 and the dividend was paid March 28, 2017.  The cash dividend is to be paid quarterly at $0.7 per share.

Allergan currently has an Open Science Pipeline of over 70 programs.  This shows Allergan’s dedication to developing new drugs and an extraordinary opportunity for growth.  At the end of fiscal year 2016, Allergan had 6 drugs in Phase III testing and 6 more in Phase II testing.  As reported above, 1 of these drugs, sarecycline, has already returned positive results in Phase III.  Rhofade has already been approved and is almost ready for release.  The success seen in previous years, coupled with the positivity surrounding the drug pipeline, demonstrates Allergan’s strong and diversified portfolio of treatments.

On January 11, 2017, the SEC sent a letter to Allergan criticizing the industry’s use of non-GAAP accounting.  The SEC believed that companies in the industry were using non-GAAP measures in order to overstate performance.  However, Allergan came out with a statement on February 13, 2017 explaining they would amend the reporting methods used.  Both the fiscal year and Q4 of 2016 were reported in accordance with the SEC change.  The change did not seem to have a large effect on the performance of Allergan.

What has the stock done lately?
Allergan’s stock has reacted well to the FDA approval of Rhofade.  Since the announcement of the approval on January 19th, the stock has risen from $214.58 to $238.84.  This resembles an 11% jump in price.  Looking back further, the company has fluctuated between $184.50 and $261.27 in the last year.  Recently, the stock has slowed down quite a bit.  In the last month, the stock has ranged from $233.99 to $240.34.  This represents a maximum of a 3% change in the last month.

Source: FactSet

My Takeaway

Allergan is a company with a strong and diverse drug portfolio and pipeline.  With a new drug coming to market in around a month, as well as positive results from Phase III testing, investors should feel confident.  The large stock repurchase in November revealed the confidence in management that the stock was undervalued.  With strong base products, new products soon to be in supply, and management’s decision to repurchase shares, I believe Allergan may reach a new 52 week high in the coming future.  For these reasons, I believe Allergan deserves to stay in the AIM portfolio.


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