Allergan (AGN) hit a 52-week low of about $143 on March 5th and the stock has been on a tear ever since. It closed at $167 on March 14th – a 17% bounce of its low. The bounce had been explicable. I assumed it was due to short covering since nothing about Allergan’s outlook or its earnings fundamentals had changed. Wednesday we found out why. Management came up with a new narrative:
Investors are literally buying into management’s focus on building shareholder value. At Barclays’ healthcare conference in South Florida, CEO Brent Saunders and CFO Matt Walsh said the company was taking a fresh look at all available options to boost the company’s valuation and will “move as quickly as an idea warrants” if it makes sense.
RBC’s Randall Stanicky (OUTPERFORM/$213) is on board, citing management’s “sense of urgency” with the task.
Another encouraging comment from Mr. Saunders pertained to the potential encroachment of biosimilar versions of flagship product BOTOX in what he called an “incredibly hard and long process.” He does not believe a biosimilar will be commercially available for about 10 years.
AGN is still off 30% Y/Y even with the recent bounce. This too shall pass. This new narrative likely will not help the stock for long.
Another Day Another Narrative
Since September 2017 Allergan has devised several different narratives in order to boost the share price. Still, nothing has worked.
We Sold Restasis To The Mohawks
In September I highlighted how Allergan’s Restasis (dry eye) was under siege from TEVA (TEVA) and Mylan (MYL). Restasis represented 9% of Allergan’s total revenue, so generic encroachment could have been particularly damaging. Secondly, Q2 2017 earnings implied growth was dead. Declining revenue for the U.S. General Medicine segment was was slightly down Y/Y, while total organic growth was practically nil.
Allergan must have heard me. Less than two weeks after voicing the Mylan and Teva threat Allergan announced it had sold Restasis to the St. Regis Mohawk Tribe; the plan was to protect it from a pending inter partes review (“IPR”). Some praised CEO Brent Saunders for thinking outside the box. I saw the move as an act of desperation. Since, the Restasis patents have been invalidated in federal court and the Mohawk deal has been put out of its misery.
We Will Buy Back Stock
At the end of September the company announced the authorization of a $2 billion share repurchase plan and reaffirmed its Q3 2017 revenue projections. Management also reaffirmed its commitment to repay $3.75 billion of debt in 2018 and announced its CFO was retiring. The announcement came after AGN had fallen over 10% since the consummation of its Mohawk deal. In my opinion, the buybacks proved growth was dead and the company needed to resort to financial engineering to boost the stock. AGN was trading at over $200 at the time of the announcement. Buying shares in that range seems to have been a waste given a current price below $170.
We Will Restructure
In response to LOE for key products company vowed to restructure its operations. Earlier this year Allergan announced it would lay off 1,000 employees; it expected to incur $125 million in restructuring charges and benefit from $300 – $400 million in cost savings. In Q4 2017 Allergan cut R&D and selling expense to a combined $1.7 billion from $2.2 billion in the year earlier period. I suspected the cost cuts could improve or protect margins, yet cause investors to question whether AGN was still a growth stock.
