Monday, December 17, 2012

Allergan Has Good Growth Prospects

Allergan (NYSE: AGN) should interest investors looking for a healthcare stock for their portfolio. Its long term growth drivers are largely driven by demographics and increasing adoption of its market leading Botox product into other indications than aesthetics. Moreover, it has a strongly growing portfolio of eye care products that give it earnings stability and an aggressive R & D plan to develop future products. On the down side, it faces some headwinds from austerity measures and a competitor re-commercializing a rival product in January. In summary, I think the risk/reward balance is now in favor of the stock, and I picked some up.

Allergan Gives Good Visibility

Forgive the atrocious pun in the sub-heading but it happens to be true. I’ve tracked how Allergan forecasts end-of-year guidance throughout the reporting year.

There are some downgrades with things like Lumigan (high eye pressure) and upgrades with Restasis (chronic dry eye) and Alphagan (intraocular pressure), but in general there is a comforting consistency in guidance. This is somewhat surprising because there are actually quite a few moving parts to Allergan’s prospects.

Allergan’s Growth Dynamics

According to company statements, Allergan’s best selling product is its neuromodulator Botox, for which it has 84% market share within the largest markets. Globally, this market is growing in low double digits, and Allergan claims to be holding market share. This is likely to change in January as Merz is allowed to start to re-commercialize its rival Xeomin product for aesthetics.

Indeed, Allergan estimates it gained share in therapeutics but lost some in aesthetics. Going forward, Botox sales are likely to expand further into other indications, such as chronic migraine, spasticity and bladder treatments. These are key examples of how Allergan is expanding Botox sales, although there were some issues in Europe with austerity measures eating into profitability. On a more positive note, it does take a while before reimbursement is approved in certain countries in Europe so Allergan can look forward to some growth from Botox for migraine, spasticity and bladder indications in the old continent.  Going into 2013 the company hopes for approvals for Botox in idiopathic overactive bladder.

Competition is expected to emerge from Valeant Pharmaceuticals' (NYSE: VRX) purchase of Medicis (manufacturer of Botox competitor Dysport), as it is expected to step up investment and marketing know-how in order to expand sales in dermatology. Another competitor is Johnson & Johnson (NYSE: JNJ), which has anti-wrinkle products as part of its acquisition of Metnor. JNJ hasn’t been doing great in its consumer products division and reported only a .2% rise in worldwide skin care sales in the last quarter. No matter, with the industry growth in double digits there is enough opportunity for everyone.

However, it’s not just about Botox, Allergan has an attractive product portfolio in eye care. Sales increased 12.5% on a constant currency basis in the quarter and are up 10% year to date. Allergan has 15% of the global ophthalmic market, which has been growing in the mid single-digits this year. Competitors include companies like Novartis (NYSE: NVS), whose Alcon unit competes across many of Allergan’s product lines.  A quick look at Alcon’s latest results reveals its net sales expanded 5% on a constant currency basis for the first nine months this year. This is slightly below overall industry growth, but not enough to suggest any significant market share shifts.

The Bottom Line

I think the risk/reward calculus is favorable right now and bought some stock. Allergan faces some headwinds from competition for Botox, but it also has plenty of growth potential. Austerity measures also will create pricing pressure, but Botox sales are being expanded in other indications, and I like the long term growth prospects. Eye care should also see good long term growth as it benefits from an aging demographic.

The stock trades on 27x earnings, but its cash flow generation is pretty good, and R & D expenditures should see a bigger pipeline developing in the future. The stock looks fairly valued right now and is possibly only capable of ‘doing its earnings’ in the coming year. In other words, mid-teens returns. That’s fine with me.

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