January 17, 2018 - 10:16pm EST by
2018 2019
Price: 176.72 EPS 15.20 16.5
Shares Out. (in M): 333 P/E 11.6 10.7
Market Cap (in $M): 62,669 P/FCF 11.2 10.4
Net Debt (in $M): 24,894 EBIT 7,300 7,560
TEV (in $M): 92,500 TEV/EBIT 12.7 12.2

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Allergan is a leading specialty pharmaceutical company.  The existing portfolio spans CNS/neuroscience, ophthalmology, medical aesthetics, gastroenterology, women’s health, urology, cardiovascular, and anti-infective therapeutics. Unlike most other pharmaceutical companies, Allergan is focused in niche markets with the goal of being the No. 1 or No. 2 player in its key therapeutic areas. This differentiated strategy is designed to maintain strong and sustainable revenue growth, customer intimacy, operational excellence, and a new push toward Open Science R&D by developing a pipeline to sustain therapeutic area leadership through developmental candidates.

Allergan is branding itself as a new class of industry model, called “growth pharma,” which delivers on five characteristics, with performance measured on revenue growth, unlike in the discovery based biopharmaceutical sector:

·       Diversified revenue stream and global commercial footprint

·       Sustainable commercial franchises

·       Productive investment in R&D

·       Efficient SG&A spending

·       A management team focused on growth.

As a result of the niche focus and the differentiated growth strategies, we expect Allergan to deliver high single digit to double digit revenue and earnings growth over the next 5 years.

In the near term, Allergan’s experienced a perfect storm that created the buying opportunity. With the Restasis patent challenge and a few scheduled LOEs (loss of exclusivity), 2018 will be a challenging year. The way Allergan vigorously defended Restasis created a public relation crisis even though all pharmaceutical companies deploy all types of strategies to defend their patents. Negative headline news specifically related to Revance’s claimed longer duration botulinum toxin, while very misleading, generated some negative sentiment against the company.

Restasis Issue:

1.       Restasis was the only approved prescription eye drops indicated for dry eye syndrome. The drug has very limited efficacy and takes a long time for the effect to kick in, if effective at all. But prior to Xiidra’s launch by Shire, Restasis had a monopoly position and as dry eye syndrome became prevalent with modern lifestyle, the demand was strong and Restasis achieved blockbuster status soon after launch.

2.       Dry eye is a big market. Shire’s Xiidra has better efficacy and takes less time to be effective. There are many other innovative OTC eye drops and gels, some have proven mildly effective. Furthermore, a costly non-covered minor surgical procedure and a tear-gland stimulating device are also available treatment options among others.

3.       Restasis had a first mover advantage but as competition gets better and more intense, it’s only a matter of time before Restasis’ sales fall off the cliff with or without the patent challenge. The patent challenge merely accelerated Restasis’s revenue decline.

4.       The way Allergan defended the patent was unorthodox and creative. Management probably went too far and this created a PR crisis. The PR crisis is over and management has prepared for the worst case (generic Restasis entry on Jan 1st 2018).  


Revance Issue as addressed by AGN’s management team:

1. Botox has 12-15 approved indications - overactive bladder, neurogenic detrusor overactivity, Glabellar lines, crow’s feet lines, axillairy hyperhidrosos, chronic migraine, cervical dystonia, upper limb spasticity, lower limb spasticity, juvenile cerebral palsy, strabismus, biopharospasm, forehead lines. Botox has a few other indication that’s near approval - premature ejaculation, major depression, knee osteoarthritis, massetet hypertrophy.  Revance’s RT002 is tested against one indication only: glabellr lines.

2. It is not clear at this point that the data support Revance’s claim of longer duration as the only composite data is at 30 days, not 6 months. Even if the data does support the longer duration eventually, whether they can get the label for every 6 month is also unclear.

3. Revance plans to submit the BLA in the first half of 2019 and if approved, launch RT002 in the US in 2020. That’s still 3 years away and I would bet Allergan can improve Botox to match Revance’s longer duration.

4. On the aesthetic side use of botulinum toxin, there are two or three potential toxins. Two of them are undifferentiated and unbranded and Botox is an iconic brand. Consumers are highly critical of their aesthetic outcome and dermatologists and plastic surgeons are going to think twice before switching someone from Botox to a low-cost alternative. The lower cost toxins, which is a segment of the market that AGN doesn’t compete in, will take from Dysport and XEOMIN and not from Botox. This is likely the case with Revance's RT002.

5. The aesthetic market is not about a market share battle between Allergan and other smaller companies that have toxins. It's about market expansion. AGN has a multi-billion dollar business growing at a double-digit rate and only 10% penetrated. There are literally tens of millions of people, both in the United States and internationally that want to receive an aesthetic treatment, but don't know how or where. Allergan is going more directly to the consumer. They will go to the consumer in a way that they haven't gone in the past.

6. Even if Revance RT002 is as good as they claim to be and they are approved for longer duration for Glabellar lines, plastic surgeons and dermatologists are going to have to balance convenience with a longer-acting toxin, to the extent it is longer-acting, with the aesthetic outcome. It's unclear how that's going to play out. It'll have a role.  RT002 can reduce the number of customer touch points over the course of the year, which is one of the number one problems that aesthetic practice has to solve for, which is to get consumers and customers to return. Botox is a gateway for a practice, and the more people return to the practice, the more opportunities there are for that practice to upsell or cross-sell. A long-acting toxin, in some respects, cuts against that.

7. Some articles have cited CGRP monoclonal antibodies are a risk to Botox in chronic migraine. 40% of Botox sales comes from migraine. If you compare Botox to the CGRPs, just based on the facts, nothing is more effective than Botox with a 50% reduction in headaches. The benefit-risk ratio of Botox is probably the best understood in the industry, you can't say that on any other class of medications. And it's highly economical, both for the patient and for physician practices. And remember, neurologists have built an entire infrastructure and capability around buying Botox, injecting it, and then receiving reimbursement. There are 200,000 people using Botox today. Three million to five million people suffer from frequent or chronic migraine. These two treatments are going to coexist.

Free Options:

1.       Other pipelines with potential of $6-15 billion peak sales.

2.       Botox indication expansion.

3.       Bolt-on value adding acquisitions in the niche markets.

4.       Biosimilar partnership with Amgen. 


Allergan’s financial statements are complicated as the company went through several large acquisitions including the Actavis merger to fend off Valeant’s hostile take over led by Bill Ackman. The core franchises derive from the integration of Forest Pharmaceuticals, a leader in the development of central nervous disease therapies, and “legacy” Allergan, the leader in medical aesthetics and ophthalmology. The company recently completed the divestment of its legacy Actavis generics business to generics industry leader Teva Pharmaceutical Industries.


As a result of the acquisition and divestitures, Allergan’s assets side is mainly intangible assets. The income statement has numerous acquisition related charges and intangible amortizations. And the cash flow statement also has one-off items that affect comparability. The company provides detailed reconciliation of the GAAP –Non GAAP income. But understanding balance sheet and cash flow require detailed “peeling the onion.”

Earnings Expectation:

Allergan’s 2017 adjusted EPS is expected to be just over $16 a share. In the WC , 2018’s EPS is expected to be at least $15 a share. And if things turn out to better adj EPS could be higher than $16. I expect 2022 adj EPS to be between $22 and $25 per share.



As of the most recent closing, Allergan is trading at just over 11x worst case 2018 earnings. Once the LOEs and Revance issues are forgotten, investors will most likely to shift their focus back on Allergan’s strong core business and promising pipeline, which is expected to generate multiple billion dollars of peak revenues. A 16x multiple would get the share to $240 even on a WC earnings expectation for 2018, ~40% higher than today’s price.  And a 18x multiple would get the share to $270, ~60% higher. 


Total market cap includes ~5 million non-trading shares 

2018 2019 FCF and EBIT are consensus numbers.  

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


1. Easing conceron of LOEs. 

2. Pipeline upside surprise. 

3. M&A news or break-up announcement. 

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