Monday morning Allergan (AGN) announced it had authorized a $2 billion share repurchase program and reaffirmed its Q3 2017 revenue projections:
Allergan plc (AGN) today announced that the Company’s Board of Directors has authorized a new $2 billion share repurchase program, and has affirmed its commitment to increasing its regular quarterly cash dividend annually for shareholders as part of the Company’s capital allocation strategy … As part of its commitment to maintaining investment grade credit ratings, the Company also reaffirms its commitment to pay down $3.75 billion of debt in 2018.
Per Reuters the company’s CFO, Tessa Hilado, is also retiring. The company has made major headlines over the past few weeks with the sale of its Restasis patents to St. Regis Mohawks. The narrative appears to be constantly changing. Below is my takeaway on the recent news.
Buybacks Confirm Growth Is Dead
Allergan is another healthcare company that grows via acquisition. It also earned a reputation as a growth company. Its Q2 revenue growth of 8% would appear to confirm that reputation.
Two of the company’s business segments grew revenue by double-digits while the Generics segment fell 1%. After parsing through the company’s revenue I determined that organic growth (similar to same store sales) was practically flat.
Acquisitions helped the company’s top line, though offset by revenue declines in Restasis (9% of total revenue) and Generics (36% of total revenue). Competing drug makers have seen their generics segments hard-hit by a loss of pricing power with big customers, and an acceleration of new drug approvals by the FDA. Restasis dominates the $1.8 billion dry eye market, but is losing share to Shire’s (SHPG) Xiidra which entered the market in the second half of 2016. It is also under siege by generic competitors Mylan (MYL), Teva (TEVA) and Pfizer (PFE). If generics are allowed to enter the market then it could punish Allergan’s revenue, earnings and share price.
In effect, about 45% of the company’s revenue is facing strong headwinds that might not subside any time soon. AGN trades at 14x EBITDA, which might not be justified by its growth prospects. In my opinion, the share buyback program could be an admission that it is better to return money to shareholders than invest in more R&D with an uncertain outcome. If growth is dead then AGN could be hard-pressed to justify a 14x EBITDA multiple.
Replacing The CFO Is Paramount
This is a crucial time for Allergan. If buybacks mean that the company’s acquisition spree has come to a halt then it needs a strong CFO to help sell the story to investors. Secondly, if growth is dead then will it impact how Allergan accounts for the value of prior acquisitions? The company has $125 billion of total assets, of which $112 billion is made up of goodwill and intangibles. If expected growth from prior acquisitions like Tobira (“NASH”) or Vitae (expected to compete in crowded psoriasis market) are less robust than when those deals were announced then could it negatively impact how their related intangibles are valued?
How Far Should AGN Fall?
I would compare Allergan to other serial acquirers like Valeant (VRX), Mallinckrodt (MNK), Teva (TEVA), and Endo (ENDP). These companies (including AGN) trade at a mid-point of 7.4x EBITDA. The low-end of the range (ENDP) is 6.6x and the high-end (AGN) is 14.3x. Allergan is believed to have vaunted R&D capabilities. However, the company has been making deep cuts to R&D, reducing spend by over 20% Y/Y. If it traded at the 7.4x mid-point of other hedge fund hotels its share price would be less than 35% of Friday’s closing price.
Conclusion
Share buybacks confirm Allergan’s growth is dead. AGN remains a strong sell.
