Mylan/Revance Partnership Could Hurt Botox’s Revenue Growth
Allergan is one of the more diversified drug companies. Botox has traditionally represented anywhere from 19%-20% of its total revenues and is highly-important to the company. It is also part of the U.S. Therapeutics segment which generates the lion’s share of Allergan’s revenue growth. While total Q4 2017 revenue grew by 12%, U.S. Therapeutics revenue was up 20%. As I pointed out in my previous article all of that growth was not organic:
Sans acquisitions of CoolSculpting and regenerative medicines, revenue growth from U.S. Therapeutics would have been 6% Y/Y; total revenue growth would also have been 6%.
If you take away the noise from acquisitions and add in the risk from the Mylan and Revance collaboration, long-term revenue growth from U.S. Therapeutics could be in the low single-digits. Allergan’s total revenue growth could also be flat to low single-digits.
Botox has a very strong brand name and controls 90% of the medical-use market for neurotoxins in the U.S. and 76% globally. If the Mylan/Revance collaboration put up a competitive fight for new customers it could potentially stymie Botox’s revenue growth.
Allergan’s Valuation Could Come Under Scrutiny
Allergan currently trades at 10x run-rate EBITDA. AGN bulls imply the valuation is justified by U.S. Therapeutics’ out-sized growth and the company’s strong R&D pipeline. If U.S. Therapeutics’ long-term revenue growth is in the single-digits then it might not be worth 10x EBITDA standalone. Secondly, FDA approval for Allergan’s Esmya drug (uterine fibroids) could be delayed for potential links to liver injury. Outside of Esmya new launches from the pipeline might not materialize until 2019 or 2020.
The company has cut its R&D outlay to help protect its EBITDA margins. Q4 2017 R&D was a mere 9% of total revenues down from around 17% in the previous year. It might have to cut R&D further due to loss of exclusivity (“LOE”) or potential LOE for certain products like Restasis (9% of revenue) and Estrace (2% of revenue). Allergan has an enterprise value of about $75 million, of which net debt makes up $24 billion. That said, a hit to Allergan’s EBITDA multiple could punish its share price.
Conclusion
The Mylan/Revance collaboration could cause investors to challenge Allergan’s growth prospects and its valuation. Due to questions over the pipeline and exposures to LOE I do not see a reason to own AGN at these levels. AGN remains a sell.
