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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.
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