Allergan: Is Revance The Botox Killer?

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Allergan (AGN) bulls recently received some bad news. Revance Therapeutics (RVNC) reported two SAKURA Phase 3 trials for its next-generation neuromodulator DaxibotulinumtoxinA for Injection (ROO2) were positive pursuant to moderate-to-severe glabellar lines:

Both SAKURA 1 and SAKURA 2 met the primary composite endpoint by delivering highly statistically significant improvement against placebo in reducing the severity of glabellar lines, i.e., the frown lines or wrinkles between the brows. The percent of RT002 – treated patients who had none or mild wrinkles and achieved at least a two – point improvement from baseline on both validated physician and patient assessments were 73.6 percent in SAKURA 1 and 74.0 percent in SAKURA 2 compared to placebo (p < 0.0001) at Week 4. Also at that time point, 88 percent of RT002 – treated patients in SAKURA 1 and 91 percent of RT002 patients in SAKURA 2 said they were very satisfied or satisfied with their treatment experience.

All secondary endpoints measuring reduction in severity of glabellar lines with RT002 compared to placebo were highly statistically significant at every time point evaluated to 24 weeks. On an additional key secondary endpoint, median duration for patients treated with RT002 to return to baseline wrinkle severity was nearly 27 weeks (SAKURA 1: 27.7 weeks and SAKURA 2: 26.0 weeks) as assessed by both physicians and patients.

SAKURA 3, a longer-term safety trial, is expected to be completed in the second half of 2018. If that is successful then Revance is expected to submit a Biologics License Application in the first half of 2019, and launch RT002 in 2020 once the application is approved. It could put RT002 in direct competition with Allergan’s blockbuster wrinkle treatment Botox.

The Situation

The Phase 3 trials could prove it is clinically possible to create a neuromodulator that could out-perform competing products which last three to four months. SAKURA 1 and SAKURA demonstrated that RT002 could last six months, making it longer-lasting than Botox which loses efficacy around four months. AGN bulls worst nightmare – a legitimate threat to Botox could be on the horizon. AGN hit a 52-week low of around $160 shortly after the trial results were released, but have since rebounded 5%.

Allergan’s Botox treatment employs botulinum toxin – one of the most dangerous poisons known to man:

It is a neurotoxin – it enters nerves and destroys vital proteins. This stops communication between nerves and muscles. Only the growth of new nerve endings can restore muscle function, and that can take months. Its main claim to fame is that it will iron out wrinkles in ageing faces and does so by destroying the nerves that cause frowning.

Botox has become synonymous with removing wrinkles, much in the way “Xerox” became synonymous with making copies. Botox is so effective that Allergan controls 90% of the medical-use market for neurotoxins in the U.S. and 76% globally.

Source: Bloomberg

The Botox brand recognition gives it a huge advantage over RT002 which is not even out yet. AGN bulls argue that by the time RT002 is expected to reach the market in 2020, Allergan could have developed additional products to help diversity away from Botox. That could be a stretch given recent hits to Allergan’s pipeline. At a minimum, it gives the company another two years to enjoy the more than $800 million in quarterly revenue generated by Botox. At about 20% of Allergan’s total revenue, Botox is of immense importance to the company.

Revance Could Change Allergan’s Current Narrative

Since Allergan sold its Restasis patents to the St. Regis Mohawk Tribe, AGN has fallen over 25%. Management and analysts have attempted to change the narrative in order to stem the decline. None have worked. The new narrative is that Allergan’s sum-of-the parts is much greater than the whole:

Our assumption remains that Growth-co holds more value as a separate, durable high-growth business (Aesthetics/Botox/CNS/Urology/Eye care) that on our updated analysis is worth ~$209 per share (current share price ~$175) based on a 14x 2019E EBITDA multiple…Beyond valuation and unlocked value potential, we think a more focused and high-growth platform can draw greater capital flows from those who are unwilling to commit capital to the existing platform, based on meetings/calls we have been having with investors.

Allergan’s Q3 revenue grew 11% Y/Y. The results were driven by 19% growth in U.S. Specialized Therapeutics which Botox is a major part of. It would be hard to make the case that Botox will continue its high-growth rate with RT002 is on the horizon; I also find it difficult that a potential acquirer would pay up for Botox when the value of the franchise could be eroded in 2020 when RT002 is expected to arrive. In my opinion, Allergan’s sum-of-the parts value has not only been dampened, it could now be difficult to defend its current value of over 10x run-rate EBITDA. Organic growth is dead and now an important anchor (Botox) faces a real threat.

Allergan Faces Other Headwinds

Allergan also faces other headwinds. After Judge William Bryson invalidated its Restasis patents, Restasis could face generic competition as early as 2018. The drug currently represents about 9% of Allergan’s revenue and 12% of its income could. A pending inter partes review of the patents could be the only thing standing in the way generics rivals Mylan (MYL) and Teva (TEVA) entering the market. Analysts believe the event is priced into the stock, but I highly doubt it.

Restasis buyers recently hit AGN with an anti-trust lawsuit claiming the company blocked low-cost generics from entering the market at customers’ expense. I believe the plaintiffs are credible and the lawsuit could result in a pay out from Allergan. The company is known as one of the more litigious pharmaceutical companies pursuant to protecting its intellectual property. Who is to say it will not get hit by similar lawsuits in the future? I do not believe potential hits to Allergan’s liquidity from such lawsuits are priced into the stock.

Lastly, Allergan is currently locked into a patent battle with Teva and Mylan pursuant to Linzess; the drug treats irritable bowel syndrome with constipation (“IBS-C”) and chronic idiopathic constipation (“CIC”) and represents about 5% of Allergan’s total revenue. In 2016 Allergan sued TEVA for infringing uponĀ  Linzess’s nine underlying patents. Earlier this year Allergan sued Teva for infringing upon a new Linzess patent (patent ‘371) that was only issued in July 2017. If lawmakers determine Allergan’s behavior is a ploy to artificially prolong Linzess’s exclusivity then it could create more negative sentiment for the stock.

Conclusion

The Revance threat to Botox, in addition to headwinds in Restasis, make AGN a sell.

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