Allergan (AGN) is another healthcare company that grows via acquisition. If its acquisition machine comes to a halt then the market could determine its growth is dead. That juncture might already have arrived. Allergan’s Q2 revenue of $4.0 billion was up 9% Y/Y. All of that growth was not organic as the company made key acquisitions over the past year. Also, operations representing about 45% of the business showed declines. Generics suffered a 1% revenue decline as it lost exclusivity for Asacol HD and Minastrin. This segment represents 35% of the company’s total contribution margin.

Restasis, the company’s second-best selling drug (9% of total revenues) saw its top line fall by 9% Y/Y. It dominates the $1.8 dry eye market, yet its share is being encroached upon by Shire’s (SHPG) Xiidra. It will likely fall further as Xiidra continues to ramp up. Allergan made major headlines when it agreed to sell Restasis to St. Regis Mohawks to protect the patents. It is under siege by generics competitors like Teva (TEVA), Pfizer (PFE) and Mylan (MYL). Myland called the move “desperate” and we agree.

Shocking The Street, a premium service we lead in conjunction with Seeking Alpha, agrees with Mylan. Allergan is desperate and its sum-of-the parts value is $95 or about 53% overvalued. The analysis valued each of the company’s segments individually: [i] Therapeutics (ex-Restasis), [ii] Restasis, [iii] Generics and [iv] International. As investors begin to parse through the special dynamics of each one of these segments and their growth prospects, we believe they will agree with Shocking The Street.

Morgan Stanley Already Agrees

Morgan Stanley agrees that Allergan is overvalued. It recently downgraded the stock from “Overweight” to “Equal Weight”. It is unusual for an investment bank to downgrade a stock. In doing so, it co-signed the Shock Exchange verbatim. Morgan Stanley also believes that Allergan’s move to sell Restasis creates a risk:

It is a creative maneuver. It is also untested, says David Risinger, an analyst with Morgan Stanley who argues that Allergan’s efforts to sidestep IPR action could mean more patent risk for Restasis.

There are bulls and bears on each side of this name, but then again, that’s what makes a market. It should be interesting to see where Allergan’s earnings and the shares head. We implore you to read the article and tell Shocking The Street where they are wrong.

On Shock Exchange

Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead explains the stock market and U.S. economy through the eyes of the New York Shock Exchange, a financial literacy program Ralph Baker started in 2006 to share his passion for investing and basketball with his 11-year-old son and other boys his age. The book predicts the “pain ahead” for the U.S. economy, the demise of China, the pending stock market crash and social unrest.

Shock Exchange has been trumpeted by President Obama, the Senate Finance Committee and House Ways and Means Committee. However, they conveniently forgot to cite the source. Critics try to make and unmake authors, but the market always decides. The book was also recently added to Trump Syllabus K12, crafted by Dr. Kaye Wise Whitehead of Loyola University Maryland. Shock Exchange is the best book on Wall Street in the past 20 years, and on economics, it may be the most important book since the Great Depression.

 

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