Patent Losses Could Sink Allergan

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Judge William C. Bryson. Source: GW Law - The George Washington University
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Allergan (AGN) reports Q4 earnings Tuesday. Investors expect revenue of $4.28 billion and eps of $4.74. The revenue estimate implies 6% growth sequentially. Investors should focus on the following key items:

Loss Of Exclusivity For Key Products

Allergan is known for its vaunted R&D pipeline. While hits from its pipeline may not materialize until the second half of 2018 and beyond, the company currently faces a loss of exclusivity (“LOE”) for key products. Allergan made major headlines for its patent battle with Mylan (MYL) and Teva (TEVA) over dry eye drug Restasis. Judge William Bryson invalidated the Restasis patents in Q3 2017. If Allergan loses an inter partes review (“IPR”) it could clear the way for generic Restasis to enter the market by the second half of 2018. The drug represents about 9% of Allergan’s sales.

In December the company lost an appeal in its attempt to protect its Combigan eye drug from generic competition posed by Novartis AG (NVS), (NVSEF). Combigan currently represents 3% of sales; the adverse patent ruling could move Novartis one step closer to launching generic Combigan. Lastly, Mylan and Teva recently launched a generic version of Allergan’s vaginal cream Estrace. The cream represents about 3% of Allergan’s total revenue. I expect the generic version to cause a hit to Allergan’s revenue and earnings starting in Q1 2018.

Potential Decline In Sentiment

The question remains, “How many hits can Allergan take before bulls abandon the stock?” Generic competition could reduce revenue and EBITDA at a sensitive time for the company. Allergan’s $30 billion debt load is at 4.0x. A hit to the company’s EBITDA could hurt its credit metrics and potentially call into question Allergan’s debt servicing ability. Allergan recently raised prices for several of its drugs by over 9%. Such hikes might not be able to overcome LOE and the fact that organic growth has been practically nil.

Q3 revenue and EBITDA were up Y/Y by 11% and 32% respectively. Revenue from U.S. Specialized Therapeutics was up 19%, International was up 16% and U.S. General Medicine was a laggard. Botox represents 32% of Allergan’s total revenue and could grow at double digits over the near term. I expect therapeutics like Botox and Coolsculpting to be Allergan’s main growth drivers going forward.

All of its revenue growth was not organic, however. Sales from Coolsculpting (body contouring) and Alloderm (regenerative medicine) were a combined 5% of total sales. These products were recently acquired and were not reflected in sales during the year earlier period. They helped goose Allergan’s top line growth during the quarter. Allergan currently trades at around 11x run-rate EBITDA. Stagnant organic growth and LOE could cause bulls to question whether Allergan is still a growth company and if its 11x EBITDA multiple is justified.

Conclusion

LOE, stagnant organic growth and plans to lay off about 1,000 employees suggest Allergan’s growth is dead. Sell AGN into earnings.

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