Monday, May 20, 2013

Is Allergan a Buy?

It’s been a varied reporting season with a general uptrend in markets accompanying more than a few profit warnings. If you’ve been holding some of these names before the disappointments then it has been painful. The good news is that these situations can create buying opportunities. I think Allergan (NYSE: AGN) is a case in point, and here is why.

Allergan’s Outlook

It was almost a tale of two reports. On the one hand Allergan's ongoing operations are performing a bit better than expected while on the other, there was some disappointing news with regards clinical trials. The stock promptly sold of aggressively as the market discounted future revenues from the two problematic programs. I will come to the trial issues in a bit, but first here is how Allergan adjusted its full year guidance for product sales.




As the table demonstrates there was a slight increase in the bottom end of the revenue ranges, so obviously the mid-point of guidance has been increased. The only product that saw the top end of guidance hiked was Restasis (therapeutic dry eye). In addition there was quite a bit of positive news on its key neuro modulator Botox. So if the guidance remains upbeat, what happened in the current quarter?

 What Allergan Reported

Despite the positive guidance, sales in the quarter for its ophthalmic products (47% of total product sales) were below long term trends at just 3.2% in local currencies. While Botox sales (32% of total product sales) came in with a much healthier 15.4% increase, ophthalmic sales were affected by a decrease in Lumigan (eye pressure) sales thanks to the discontinuation of a formulation of Lumigan. No matter--sales should recover going forward as the inventory channel gets filled up again.

All of this should interest Novartis (NYSE: NVO) shareholders because it is engaged in a legal battle with Allergan over Lumigan patents. Novartis is believed to be able to get a generic version to the market in the next few years, provided it can avoid infringing any patents.  Restasis sales increased by 11.2% in local currencies amidst an increase in consumer awareness, partly promulgated by Allergan investing in direct-to-consumer marketing.

However, the really good operational news was with Botox. I confess I was somewhat concerned going into these results as two competitors appeared to be shaping up to try and grab some market share from Allergan and Botox. First, Merz Pharma was able to start re-commercializing Xeomin for aesthetics in the quarter. Meanwhile, Valeant Pharmaceuticals' (NYSE: VRX) purchase of Medicis was partly intended to integrate Dysport into its dermatology unit. As it turned out –at least according to Allergan- Xeomin sales only increased slowly in the quarter and its market share was cited as being just 5%. Meanwhile Dysport’s share was reported to have dropped to 13% from 16% last March. Valeant will surely invest in Dysport in time, but for now Botox has the momentum.

Moreover, the overall market is growing at 14% and Botox’s overall market share is believed to be about 78%. It is also able to generate future growth in areas like spasticity, chronic migraine and urology indications. Aesthetic growth remains very strong--despite a weak global economy--as the stretchy face look seems to show no signs of losing popularity.

What Went Wrong?

The stock got hit thanks to delays to its DARPin (macular degeneration) program. The Phase II data suggests product differentiation with the control (Roche’s Lucentis), and this is believed to have put the program back by up to two years. This is great news for Regeneron Pharmaceuticals (NASDAQ: REGN) shareholders because its rival product Eylea will now have more time to entrench its market share. It is difficult to predict whether the DARPin program is a bust or not, and Allergan was understandably tight-lipped over giving an opinion before they release a comprehensive examination of the data. My general view is that delays tend to decrease the chances of success rather than increase. Regeneron should sleep a bit more comfortably over the issue.

In addition the Bimatoprost (scalp hair loss) Phase II trial failed to demonstrate sufficient efficacy in order to proceed to Phase III, but the Phase II trial is now being extended to include a ten times higher concentration. Enrollment with male patients will begin in Q3. All of which leads me to wonder –if safety doesn’t appear to be a issue- why it wasn’t tested in the high concentration anyway?

Where Next For Allergan?

Investors need to recall that neither DARPin nor Bimatoprost were inside the time frame of Allergan’s five year plan. In other words this company can go on generating mid-teens earnings growth for the next few years and at least high mid-single digit revenue growth. In addition its existing long term growth drivers are excellent and, from here, I think any good news with the two clinical programs discussed here will provide upside.

In conclusion you are getting as high quality, highly cash generative name that has been sold off aggressively and I think it’s worth picking Allergan up.