Why Allergan Shares Flopped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Allergan (NYSE: AGN  ) , a pharmaceutical drug and medical device maker, fell as much as 10% after the Food and Drug Administration released a draft of guidance that suggests that a generic form of Allergan's dry-eye treatment, Restasis, could come to market sooner rather than later.

So what: What really has shareholders up in arms is the guidance that the FDA plans to allow generic forms of the drug to be approved without having to run human trials as long as they are similar enough in make-up to Restasis. Allergan plans to counter the FDA's guidance by pointing out how human clinical trials help determine effectiveness and safety. Based on the fear that generic competition could be on its way, Deutsche Bank downgraded Allergan to "hold" from "buy" and sliced its price target to $98 from $113.

Now what: With Allergan expecting sales of approximately $6 billion this year, and Restasis expected to contribute anywhere from $850 million to $890 million of that total, it's no wonder why shareholders are skittish. It's inevitable that a generic competitor will soon make it to market, but if Allergan can somehow convince the FDA to require these generic companies to run human trials, it'll at least buy itself some time. Overall, though, it's been a miserable few months for Allergan. Its inhaled migraine medication, Levadex, which it acquired when it purchased MAP Pharmaceuticals, received another complete response letter due to manufacturing concerns, and its highly touted vision-loss drug DARPin didn't live up to the hype in mid-stage trials. With this being its third strike in a hair over two months, I think it's time to take a step back and let Allergan be in the interim.

Craving more input? Start by adding Allergan to your free and personalized watchlist so you can keep up on the latest news with the company.

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