Allergan (AGN) - Taking a calculated risk at right price

DISCLAIMER
Copyright 2016 Intelligent Investors.co.uk. All rights reserved. This document is provided for information purposes only and should
not be construed as an offer or solicitation for investment.
Intelligent Investors.co.uk
Allergan (AGN)
Taking a Calculated Risk at Right Price
Investment Thesis:
Allergan is a global specialty pharma company, with operations in over 100
countries. Through a series of acquisitions, the company has expanded its
therapeutic areas to include ophthalmology, neurosciences, and medical
aesthetics/dermatology/plastic surgery, which complements its existing CNS,
gastroenterology, women's health, and urology franchises.
AGN has dominant growth franchises in several areas (e.g. Botox), a potential
pipeline upside and capable management organization.
AGN generates annual free cash flow of >$5B in 2016 with potential growing to
>$7B in 2017/18. Allergan has a strong base business that could grow mid-
single digits over 2015-2020. Pfizer agreed to aquire AGN for $150bln, current
valuation closer to $100bln.
Key risks to the thesis
- Sale of generic business: Management remains confident that sale of
generics business to Teva for est. $35bln will close allowing repayment of
debt ($38bln) and delivery on $10bln buy-back plan
- Future pipeline risks: If AGN is unable to successfully develop or
commercialize new products, operating results will suffer.
- Generics competition: If generic products that compete with any of AGN
branded pharmaceutical products are approved and sold, sales of AGN
products -will be adversely affected
Economic Model and Competitive Position
GN has been a serial acquirer sourcing majority of it’s products through
acquisition of mid-to-late stage R&D assets. The model is based on de-risking
of R&D efforts through purchase rather than in-house development. This
doesn’t necessarily mean that AGN is not innovative, however it does mean
that AGN is dependant on external sources for discoveries available at
reasonable prices.
Financial Framework
AGN would typically acquire external discover and focus on development and
commercialisation, see exhibits 1-3. AGN spends roughly $1.4bln on internal
R&D or 7% and therefore has to source approximately 1/3 of discoveries in lieu
of basic research, in order to bring the total R&D spend as % of sales to
approximately 17%, in line with pharma peers.
Valuation Scenario analysis
AGN is trading at 14.4 2017 PE, falling to 12.4 2018 PE. AGN has capacity to
grow free cashflow to $7bln by 2017/18. TEVA deal would repair balance sheet
and allow for share buy-back of $10bln.
Company Research
US
Specialty Pharma
3 Year Opinion Growth
Competitive Adv. Wide
Fair Value Potential $300.00
Price $249
Consider Buying at $220
Date 24 July 2016
Market Data
52 Week Range 195.50-340.34
Market Cap. $98.49bln
Shares Outstanding 417 mln
Volatility High
Balance Sheet Data
Shareholder equity $77.4bln
Price/Book Value 1.27
Net Debt/(Cash) $38.5bln
Debt/EBITDA 5.3x
Forecast Earnings
Potential price appreciation 20%
Dividend Yield/Share rep. 0.0%
EPS / PE Cons.
Period EPS PE
Dec 2015 $13.43 18.5
Dec 2016 $14.14 17.6
Dec 2017 $17.31 14.4
Dec 2018 $20.03 12.4
5 Year Share Price Chart

DISCLAIMER
Allergan (AGN)
Scenario Price target Triggers
Bull case $330 Higher pipeline potential. Strong growth of key
franchises e.g. Botox continues at >10% annually
Base case $300 Secular growth in P&W with 7,000 GTF engines
on order. Multi-decade after-market services and
fleet management services opportunity.
Stabilization of OTIS sales in Europe and
resumption of growth in China. Assuming growth
of 3-4% in line with historical trends and
historical margins.
Bear case $200 Intense generic competition for key products,
integration challenges with the Actavis/Allergan
Transaction; market opportunity for upcoming
brand launches being smaller than expected or
these products facing regulatory delays, inability
to deploy capital on favorable terms.
Risk profile
Pharma is a highly complex and risky business. AGN operates a differentiated model compared to the
traditional pharma with external acquisition of discoveries. This model is inherently more risky as AGN
depends on quality discoveries being available at reasonable prices. There’s nothing stopping others from
replicating this approach. Therefore, PE multiple on AGN should be lower than traditional pharma with in-
house proprietary capabilities.
Author’s opinion
AGN share price must be low enough to warrant committing capital. Author suggests investors to consider
modestly adding to AGN position starting from $220 level at no more than 1/3 of the target purchase
value and execute any additional purchases at 10% intervals i.e. at $200 and $180 in the event of decline.
$330.00 (+32%)
$200.00 (-20%)
$300.00 (+20%)

DISCLAIMER
Allergan (AGN)
We put our money where our mouth is as the author(s) of the report may presently or in the future hold
a common stock investment in the securities mentioned in this report.
Exhibit 1 – Sources of external innovation and discovery
Exhibit 2 – Process of discovery, development and commercialization

DISCLAIMER
Allergan (AGN)
Exhibit 3 – Allergan positioning vis-à-vis other pharma

DISCLAIMER
Allergan (AGN)
This report has been prepared by Intelligent Investors.co.uk.
DISCLAIMER
Copyright 2016 Intelligent Investors.co.uk. All rights reserved. This document is provided for
information purposes only and should not be construed as an offer or solicitation for investment.
All information used in the publication of this report has been compiled from publicly available
sources that are believed to be reliable; however we do not guarantee the accuracy or completeness
of this report. Opinions contained in this report represent those of the research department of
Intelligent Investors.co.uk at the time of publication. The author(s) of the report hold a common
stock investment in the securities mentioned in this report. The research in this document is not
intended for retail investors. This is not a solicitation or inducement to buy, sell, subscribe, or
underwrite securities or units. This document is provided for information purposes only and should
not be construed as an offer or solicitation for investment. Intelligent Investors.co.uk is NOT
regulated by the FSA. A marketing communication under FSA Rules, this document has NOT been
prepared in accordance with the legal requirements designed to promote the independence of
investment research and is not subject to any prohibition on dealing ahead of the dissemination of
investment research. The value of securities mentioned in this report can fall as well as rise and are
subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or
obtain accurate information about the value of securities mentioned in this report. Past
performance is not necessarily a guide to future performance.

Allergan (AGN) - Taking a calculated risk at right price

Recomendados

Recomendados

Mais conteúdo relacionado

Mais procurados

Mais procurados (19)

Destaque

Destaque (14)

Semelhante a Allergan (AGN) - Taking a calculated risk at right price

Semelhante a Allergan (AGN) - Taking a calculated risk at right price (20)

Último

Último (20)

Allergan (AGN) - Taking a calculated risk at right price