Can Allergan's Growth Continue?

Allergan offers uncommon growth for a large-cap drug company.

Mar 4, 2014 at 6:30PM

In the world of Big Pharma, growth is a precious commodity these days. Allergan (NYSE:AGN) is a noteworthy exception, though, as the company continues to see strong demand for cornerstone products like Botox an Restasis, as well as its facial aesthetics line. Allergan's pipeline is somewhat more limited than an investor might normally prefer, but the company has been active in pursuing follow-on indications for existing drugs and has had a higher than normal "hit" rate for its pipeline. Though there are frustratingly few true bargains in the pharma space today, Allergan continues to look at least as though it will remain a solid holding.

Botox still the big dog
Botox is a good example of how Allergan works on already-approved products to find new applications and markets. Botox is probably still best known for its cosmetic applications (reducing lines/wrinkles), but it is also approved for applications like migraine and overactive bladder.

The buildup in overactive bladder has been slow, as Botox has had trouble gaining mindshare against Astellas (Myrbetriq and Vesicare) and Pfizer (NYSE:PFE) due to reimbursement issues. Reimbursement started improving in 2013, though, and Botox's profile in the market has improved to a point where Medtronic mentioned it as a competitive issue for its Interstim device in overactive bladder.

Allergan appears to also be slowly improving acceptance and demand for Botox in the migraine market. Generic topiramate and sumatriptan (Imitrex) still make up a large part of the market, but it is one of the relatively few branded drugs (including Pfizer's Relpax) actively marketed for migraine right now.

Even in its core aesthetic markets, Botox continues to do well. It would appear that Merz is gaining share with Xeomin mostly at the expense of Valeant (NYSE:VRX), and that Botox is holding its own. Looking a bit ahead, trials in indications like premature ejaculation and depression could further expand the sales potential of what is already an exceptionally profitable drug for Allergan.

Looking to sustain Restasis
One of the biggest uncertainties around Allergan in 2013 (and stretching now into 2014) is the fate of Restasis, the company's dry eye drug that produces about 17% of its total product revenue. The company's initial patent is expiring soon and Actavis has filed for a generic version. It is unclear whether the Actavis filing will past muster, though, and Allergan is still hopeful that Restasis X could make it to market and preserve a meaningful portion of this franchise. Further down the road, AGN-195263 could become a viable treatment for evaporative dry eye/blepharitis, and it is worth noting that developing effective dry eye treatments has proven difficult for would-be challengers like Shire and Valeant's Bausch & Lomb.

Holding or growing existing markets, and looking for new opportunities
As indicated above with Botox, Allergan is always looking to maintain or build its existing franchises. Botox holds solid share in aesthetics despite competing with Valeant, and the same has been true in the dermal filler market. Likewise in the OTC artificial tears market – Allergan competes with well-known eye care franchises like Johnson & Johnson, Novartis, and Valeant, but continues to hold its own with a product that contributes a meaningful (5%-plus) portion of revenue.

None of this should be taken to mean that Allergan isn't also looking to enter new therapeutic areas. The company's anti-VEGF compound DARPin isn't a sure thing by any stretch, but the company will be releasing more Phase II data later this year. A launch before 2017 is probably not likely, but it is possible that DARPin will require fewer injections than existing wet AMD treatments and could offer blockbuster potential.

Buy, or be bought?
Unlike Valeant or Actavis, it may be challenging for Allergan to launch a tax inversion deal. Management has been consistent about targeting deals that augment the company's growth profile, and that's not a low hurdle given the company's good present day growth prospects. Moreover, with the rules for tax inversion deals calling for target company shareholders to own 20% of the combined company, there aren't many targets left for Allergan.

I don't believe Allergan is an imminent takeover target, but I wouldn't rule out the possibility. Companies with existing eye care and/or aesthetic businesses like Johnson & Johnson and Valeant could certainly realize synergies from such a deal, and Allergan's above-average growth would be attractive to Valeant, Pfizer, and many other pharmaceutical companies.

The bottom line
As I am looking for Allergan to grow revenue at a 6% long-term rate and free cash flow at an even faster rate (around 9%), Allergan is one of the best growth prospects in the large-cap pharmaceutical space. The shares do not trade at much of a discount to fair value, but the company's growth and healthy balance sheet (which it can use to acquire smaller companies in aesthetics, eye care, dermatology, urology, and so on) do seem to offer more opportunities for upside than slower-growing Big Pharma names trading at or around fair value.

3 more buy-and-hold stocks for your portfolio
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

Stephen D. Simpson, CFA has no position in any stocks mentioned. The Motley Fool recommends Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers