Why Allergan's 2017 Guidance Is Encouraging And Conservative

| About: Allergan plc (AGN)
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Summary

Allergan reported better than expected Q4/2016 results and an encouraging guidance for 2017.

In terms of Non-GAAP EPS, the company guided for a range of $15.80-16.30. The midpoint of $ 16.05 is 1% above Bloomberg consensus of $15.90.

With the stock trading at slight discount to 5 years average historical P/E and vs. peers and solid management execution expected in 2017, I believe Allergan could strongly outperform.

This morning, Allergan (NYSE:AGN) reported better than expected Q4/2016 results and an encouraging guidance for 2017. The stock is up around 2% premarket on light volume.

The question now is whether the reporting season has provided any encouraging news related to the key issues I pointed in previous articles on Allergan and if the guidance for 2017 is actually conservative.

Q4/2016 results

Allergan reported Q4/2016 sales of $3.86B, 2% above consensus expectations, while Core EPS of $3.90 were 4% higher than consensus, mainly for a strong performance of the key growth drivers, as for example Botox Cosmetic, which was up 18% YoY. FY 16 guidance has been achieved, as expected.

Source: Allergan's FY 2016 Results Presentation

2017 Guidance

2017 guidance is really encouraging and I think it's also conservative.

Allergan guided to $15.5-15.8B for Revenue, which is 3% above Bloomberg consensus of $15.3B.

In terms of Non-GAAP, the company guided for a range of $15.80-16.30. The midpoint of $ 16.05 is 1% above Bloomberg consensus of $15.9 and it equates to more than 18% growth compared to 2016 EPS.

In addition to that, I think there are few key positive elements in the FY17 guidance, which should reassure investors:

  • The guidance is above street expectations, comforting investors that the negative earnings momentum seen in 2016 has come to an end.
  • Management has assumed in the guidance that Namenda XR will suffer from generic competition in Q4/2017, but this seems a worst case scenario. As I said in my previous article:

"Allergan had settlements on Namenda XR locked for 2020 with Amneal, but Amneal lost its first-to-file advantage in 2016, exposing Allergan to earlier-than-expected competition. Yet, that decision is under appeal to the U.S. Court of Appeals for the Federal Circuit, who could still reverse the District Court's decision, giving Allergan a few years of additional patent protection for XR."

  • Allergan's 2017 guidance has been based on the assumption of stable Restasis revenue in 2017. Despite the launch of Shire's (NASDAQ:SHPG) Xiidra, Q4/2016 results showed a very healthy growth for Restasis, up 13% YoY driven by strong demand and pricing benefit. In addition to that, as I said in my past analysis:

"I discussed here why I think Xiidra is better than Restasis and it's likely to gain further market share in 2017, but it's also worth noting that the company will launch in 2017 a new version of Restasis, called Multi Dose Preservative Fee (MDPF), offering an innovative delivery technologies for Dry Eye with 60-doses in one vial, instead of one vial for each dose. A successful switch to Restasis MDPF is not included in Allergan's guidance and it represents an upside risk".

  • Allergan's pipeline optionality is underappreciated by the market. The company has six key products, which are entering or are currently in Phase III and that could translate in multi-billion blockbusters, as for example Cenicriviroc in NASH.

Source: Allergan's FY 2016 Results Presentation

Conclusion

The key investor takeaway is that the 2017 will be a year of strong EPS growth for Allergan, driven by a solid base business and the accretion from LifeCell's acquisition. With the stock trading at slight discount to 5 years average historical P/E and vs. peers (i.e. DRG Index) and solid management execution expected in 2017, I believe Allergan could close the valuation gap with peers and strongly outperform.

Allergan's Current vs. 5 years average P/E (absolute and relative analysis). Source: Bloomberg.

Disclosure: I am/we are long AGN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Not investment advice