Allergan: Botox Sales A Game Changer?

| About: Allergan plc (AGN)
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Summary

Allergan stock is trading at about 15 times earnings, at no discount to 5 year P/E ratio, and retracting off of 25% gains since November lows.

Allergan has one of the most respected pipelines in pharma with 10%+ annual sales growth.

Can botox revenues move the needle for Allergan, and reward shareholders going long?

Evaluation of biotechnology and pharmaceutical companies is a complex endeavor, and when weighing the same market basket considerations, individual conclusions may vary. Warren Buffett is quoted from a 1974 interview in Forbes as saying, "You're dealing with a lot of silly people in the marketplace; it's like a great big casino and everyone else is boozing. If you can stick with Pepsi, you should be O.K.". Broken down and paraphrased, he says buy good companies, ignore the ups and downs, and make money in the long run. Allergan (NYSE:AGN) is a good company in the pharma space and regarded by most (including this article by Cramer) as qualified for any portfolio.

However, StrongBio has learned the hard way to emphasize timing of entry, because it makes a big difference in profitability. As a young investor remembering comments dad would make with a frustrated face trying to get us to hold cash, which we rarely did, because we wanted to get that money "working". Holding cash is all about economic opportunism. Even if one does not intend to trade and wants to be in AGN for a long time, maximizing market share by buying at the right time can determine if the first year is a profit, loss, or break-even for the portfolio. So while StrongBio was rushing into what later proved to be good speculative biotechnology companies, it felt like holding losers because the prices were often manipulated down for a year or two. Being a dividend stock with strong revenues, AGN is not a likely downward manipulation scenario.

Yet some experts advise against holding cash, referring to it as a safety net, especially in times of high interest rates. We know we are entering a period of increasing interest rates. Timing is more important now than ever. Even portfolios reported by brokerages to produce respectable early year gains often leave out inflation-relative information. So the idea behind this article in evaluation of AGN is also to evaluate the sector and the market in an attempt to maximize return. If AGN does not provide this opportunity over the next year, there is likely to be an existing or emerging member into the sector that will. Rationale: pick up stocks when you know they are undervalued and not when it remains to be seen.

Looking at the past 5 months AGN performance, it is up nearly 25%. A chartist might look at the AGN 6 month chart and try to determine if it has formed a bullish second successive cup and handle or if it will demonstrate a bearish head and shoulders pattern. The market is literally painting its decision on the outcome as we speak. As with all chart analysis, volume will determine the forward looking trend. There is no doubt that the volume in large cap pharma has been strong, (that is how the price per share lifted from the first cup and handle).

AGN is an 80 billion dollar market cap company and has a dividend yield of about 1.2%. Looking at this sector, Eli Lilly (NYSE:LLY), with a 2.5% dividend, trades at 21 times earnings, which is pricey compared to other AGN, trading at 15x earnings per Cramer and others. According to this article on seeking alpha it's time to take profits on AGN, citing DCF and perpetuity growth methods, which are not undervalued by much (13%), especially recent historically, and supported by the fact that AGN is not trading at a discount to its 5 year P/E on absolute and relative basis. StrongBio regards this as a very strong article and paper, and would certainly need some highly encouraging guidance with evidence the pipeline can move the needle to purchase AGN at current levels (238 per share), especially in lieu of the fact that rising interest rates make bonds more attractive and dividend stocks tend to start selling off.

In spite of fairly convincing evidence the time may not be the best to buy AGN, there are those who claim pharma companies are attractive buys even when considering strong recent upward trends. This author of seeking alpha is bullish on AGN. On the day of that article, AGN traded at 229. Citing AGN trading at a 35% discount to the overall market, an encouraging pipeline, and a decrease of 10 billion in long-term debt over the last year, recommended considering a purchase with a target of 245. Given we are just under that target, StrongBio is going to closely evaluate the pipeline and company guidance to warrant a purchase at current levels. It may be noteworthy to say that big pharma may have been oversold entering the presidential election, with both candidates threatening to hammer drug prices.

When examining the pipeline for AGN, it is generally quite healthy. The company is expected to add about 13 billion in sales going forward. The number one standout acquisition, LifeCell, will add revenues in the Aesthetic, plastic surgery, regeneration, and dermatology space. FDA very recently approved Juvederm Volure (NYSE:TM) XC for correction of facial wrinkles and folds in adults over 21 years of age. One injection was shown to reduce wrinkles in clinical studies for over 18 months, in contrast to botox injections which usually require reinjection every 3 to 6 months. This can be attributed to its injection matrix of hyaluronic acid, a glycosaminoglycan commonly found in soft cartilage, that absorbs slowly and is assimilated into the body. Side effects looked quite manageable. Let's look at botox, another AGN product, and its market in more detail to determine if this is a needle-mover.

Botox, a toxin secreted from bacteria, has a number of uses. FDA approved uses include: excessive sweating, spasm, eyelid twitching, chronic back pain, over-active bladder, cross-eye, tennis elbow, Bell's palsy, and MS; and even has some non-FDA approved uses including depression, chronic migraine (in parts of Europe), abnormal heartbeat, cleft pallet in babies, premature ejactulation, and even painful sex. However, what botox is best known for is its cosmetic use to reduce wrinkles. It is administered via injection and is not curative; as the toxin mediates its effect it is resorbed and cleared, and must be readministered. Side effects are numerous and sometimes controversial. Investors look for treatments that must be administered continuously or over time because more product is sold, thereby generating more sales. However this opens the door to competition, since most people don't enjoy getting shots, so a longer lasting treatment injection is probably greatly preferred. Yet one cannot help but see a breach in the revenue stream coming when these technologies become topicals. For patients that need botox injections for muscle spasm or other needs, the benefit greatly outweighs the injection discomfort.

The annual market for global cosmetic surgery is estimated to be nearly 30 billion dollars per year, with facial aesthetics markets reported to be growing rapidly. 2017 botox revenues for AGN are estimated to be stellar. It was recently reported that botox quarterly sales nearly doubled. Bernstein rated Allergan at outperform with a December 2017 275 price target that will gradually build, and estimated an annual growth rate of 350% for the treatment revenue, which could provide a whopping 25% growth in company revenue this year.

AGN 2017 guidance is encouraging (and conservative). AGN full year 2016 presentation of results showed increases versus previous year of approximately 10% in eye care, CNS, Aesthetics/Dermatology, GI, and urology products, with nearly 20% growth of sales in WH (Estrace and Minestrin) and anti-infective products. CEO, Brent Saunders, continues in the style of success with a less talk more deliver motif (dad would approve), including making a pledge that drug price hikes will be under control at AGN. Combine this positive growth outlook with the recent September 2016 decrease in long-term debt of 10 billion dollars, and AGN is probably going to perform solidly this year and through 2019 per Goldman. Saunders refers to AGN as a growth company and not a specialty niche company, stating that shareholders actively seek growth.

If one wants to be hasty, dad shaking his head now, it's likely AGN is a good buy, and will get money working in 2017. However, with market optimism outweighing economic recovery in real terms, rising interest rates sucking the gas from dividend stocks in favor of bonds, market corrections likely due to record S&P rises, and with a lot of pressure on drug companies to keep product pricing low, there may be a better opportunity in the future. With key readouts coming in mid 2018 for pipeline candidates, there still may be some time to find an optimal entry, if one is not inclined to rush. Strategies for taking a position include a very small initial position followed by reinforcing positions at better prices. If AGN runs wild one has to be satisfied with that small amount in favor of other market options that look more opportune. That being said, AGN should be on the watch list as a great opportunity candidate.

AGN continued into the ocular field by teaming up with gene therapy focused Editas for five ocular programs. This makes 3 companies purchased in 2016 by Allergan for ocular therapy development, including RetroSense Therapeutics, ForSight VISION 5. With a huge unmet needs market of dry macular degeneration, some past setbacks may be overcome to yield strong growth. Other smaller market and rare disease therapies show promise too in the eye, with diabetic macular edema being a larger market AGN hopes to serve. Having gone the gene therapy route and not the stem cell route, AGN will have a lot of catching up to do with Astellas, which bought Ocata's revolutionary dry macular degeneration stem cell transplant technology of Dr. Robert

Articles that evaluate AGN pipeline since the failed merger with Pfizer focus on ulipristal acetate, heralded to be a "flagship" product of its woman's health program. Phase 3 results show lower bleeding in women with uterine fibroids, or noncancerous growths that affect about 80% of all pre-menopausal women. The medication's mechanism of action is to reduce fibroid size as an alternative to surgery and other medications. It is estimated that uterine fibroids cost the medical system over 30 billion dollars per year.

A migraine drug product is also in the pipeline, finishing off the pipeline highlights that caught the attention of StrongBio.

AGN is amazingly 91%+ institutionally owned. There was one fairly sizeable insider executive sale of 70,000 shares recently but there are some small buys as well. With no foreseeable sell catalysts in the near future, one would not expect the price per share to decline much in lieu of the positive catalysts. It's certainly hold rating worthy at this point, as StrongBio agrees upside reward to negligible risk ratio is positive.

StrongBio is not one to chase after the trendy and superficial. The bottom line is our society has become obsessed with youth and appearance, so why not make money from that? The company can use these funds to develop treatments and cures that do matter in life-preserving ways to society. It's unlikely AGN will pull back much but it is likely a great entry position at 220 per share, and that is the entry StrongBio may find it too tempting to resist.

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: Primary ticker AGN