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Is Allergan plc a Bargain After a $7.6 Billion Dip in September?

By George Budwell - Oct 6, 2017 at 11:00AM

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Allergan continues to be a victim of Teva's downfall.

What happened

According to data from S&P Global Market Intelligence, Botox-maker Allergan (AGN) shed 10% of its value -- which equates to approximately $7.6 billion of its market cap -- last month. This sizable drop appears to be the result of two underlying issues:

  • Allergan reportedly still owns 100.3 million shares of the struggling generic drugmaker Teva Pharmaceutical Industries Ltd. (TEVA 2.67%). As Teva has been absolutely plummeting lately because of the ongoing price erosion in the generic drug space, as well as the entrance of generic competition for its top-selling multiple sclerosis medicine Copaxone, Allergan's hefty stake in the company has weighed heavily on its own valuation over the past few weeks.
  • Equally as important, the market appears to be increasingly concerned about Allergan's ability to protect the revenue stream of its second best-selling drug Restasis -- a medication for dry eye disease -- that's presently under threat from generic competition. 
A female researcher inspecting a pill

Image source: Getty Images.

So what

Allergan has reportedly been looking to dump a good chunk of its share in Teva, but that route no longer looks feasible. Teva, after all, has been a bad news machine lately, with the U.S. Food and Drug Administration granting approval for both doses (40 mg 3x/week injection and the 20 mg/daily injection) of Mylan's (MYL) generic version of Copaxone last week.

This earlier-than-expected entrance of Mylan's generic Copaxone is forecast to knock-off $1 to $1.3 billion from Teva's top-line next year, according to analysts at Mizuho Securities. And in anticipation of this pivotal event, investors have steadily been marching out of Teva's stock, resulting in a stunning 56.7% decline in the drugmaker's value so far this year. So, Allergan probably isn't in a hurry to sell its Teva shares following such a rapid decline in value. 

On the Restasis front, Allergan cut a controversial licensing deal with the Saint Regis Mohawk Tribe last month to block a so-called "inter partes review" from both Mylan and Teva. As the Saint Regis Mohawk Tribe is considered a sovereign nation, it is theoretically immune from such a challenge to its intellectual property -- resulting in the Tribe seeking a dismissal of the ongoing inter partes review immediately after executing its deal with Allergan.   

Now what

The big picture issue is that Allergan is still a fundamentally sound company that sports multiple new growth products. However, the Teva and Restasis headwinds are probably going to continue to put pressure on its stock in the near-term. Although Teva is arguably grossly undervalued after losing over half of its value this year, the market doesn't like uncertainty. So until the magnitude of generic competition to Copaxone's sales is quantifiable, Teva is almost certainly going to have trouble rebounding. 

The Restasis patent issue is also far from resolved. Mylan, among others, are expected to challenge Allergan's transfer of the drug's patents to the Saint Regis Mohawk Tribe on the basis that this deal is nothing but a "sham arrangement" designed to block competition. That argument could indeed gain traction in U.S. courts because of the widespread ramifications of Allergan's actions. Other drugmakers with key drugs facing inter partes review, after all, are likely to follow suit if Allergan's unorthodox strategy pays off.  

In all, Allergan probably isn't a great stock to own if you're looking for quick profits due to these two major headwinds that don't appear to be going away anytime soon. But patient investors with a long-term outlook may want to consider grabbing some shares based on Allergan's highly diverse branded pharma product portfolio and pipeline that should eventually overcome even these noteworthy risk factors. 

George Budwell owns shares of Allergan. The Motley Fool recommends Mylan. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Allergan plc Stock Quote
Allergan plc
AGN
Teva Pharmaceutical Industries Limited Stock Quote
Teva Pharmaceutical Industries Limited
TEVA
$10.97 (2.67%) $0.28
Viatris Inc. Stock Quote
Viatris Inc.
MYL

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