Allergan (AGN) - Taking a calculated risk at right price

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Intelligent Investors.co.ukAllergan (AGN)

Taking a Calculated Risk at Right Price

Investment Thesis: Allergan is a global specialty pharma company, with operations in over 100

countries. Through a series of acquisitions, the company has expanded its

therapeutic areas to include ophthalmology, neurosciences, and medical

aesthetics/dermatology/plastic surgery, which complements its existing CNS,

gastroenterology, women's health, and urology franchises.

AGN has dominant growth franchises in several areas (e.g. Botox), a potential

pipeline upside and capable management organization.

AGN generates annual free cash flow of >$5B in 2016 with potential growing to

>$7B in 2017/18. Allergan has a strong base business that could grow mid-

single digits over 2015-2020. Pfizer agreed to aquire AGN for $150bln, current

valuation closer to $100bln.

Key risks to the thesis - Sale of generic business: Management remains confident that sale of

generics business to Teva for est. $35bln will close allowing repayment of

debt ($38bln) and delivery on $10bln buy-back plan

- Future pipeline risks: If AGN is unable to successfully develop or

commercialize new products, operating results will suffer.

- Generics competition: If generic products that compete with any of AGN

branded pharmaceutical products are approved and sold, sales of AGN

products - will be adversely affected

Economic Model and Competitive Position GN has been a serial acquirer sourcing majority of it’s products through

acquisition of mid-to-late stage R&D assets. The model is based on de-risking

of R&D efforts through purchase rather than in-house development. This

doesn’t necessarily mean that AGN is not innovative, however it does mean

that AGN is dependant on external sources for discoveries available at

reasonable prices.

Financial Framework AGN would typically acquire external discover and focus on development and

commercialisation, see exhibits 1-3. AGN spends roughly $1.4bln on internal

R&D or 7% and therefore has to source approximately 1/3 of discoveries in lieu

of basic research, in order to bring the total R&D spend as % of sales to

approximately 17%, in line with pharma peers.

Valuation Scenario analysis AGN is trading at 14.4 2017 PE, falling to 12.4 2018 PE. AGN has capacity to

grow free cashflow to $7bln by 2017/18. TEVA deal would repair balance sheet

and allow for share buy-back of $10bln.

Company Research

US

Specialty Pharma

3 Year Opinion Growth

Competitive Adv. Wide

Fair Value Potential $300.00

Price $249

Consider Buying at $220

Date 24 July 2016

Market Data

52 Week Range 195.50-340.34

Market Cap. $98.49bln

Shares Outstanding 417 mln

Volatility High

Balance Sheet Data

Shareholder equity $77.4bln

Price/Book Value 1.27

Net Debt/(Cash) $38.5bln

Debt/EBITDA 5.3x

Forecast Earnings

Potential price appreciation 20%

Dividend Yield/Share rep. 0.0%

EPS / PE Cons.

Period EPS PE

Dec 2015 $13.43 18.5 Dec 2016 $14.14 17.6 Dec 2017 $17.31 14.4 Dec 2018 $20.03 12.4

5 Year Share Price Chart




Scenario Price target Triggers Bull case $330

Higher pipeline potential. Strong growth of key franchises e.g. Botox continues at >10% annually

Base case $300

Secular growth in P&W with 7,000 GTF engines on order. Multi-decade after-market services and fleet management services opportunity. Stabilization of OTIS sales in Europe and resumption of growth in China. Assuming growth of 3-4% in line with historical trends and historical margins.

Bear case $200

Intense generic competition for key products, integration challenges with the Actavis/Allergan Transaction; market opportunity for upcoming brand launches being smaller than expected or these products facing regulatory delays, inability to deploy capital on favorable terms.

Risk profile Pharma is a highly complex and risky business. AGN operates a differentiated model compared to the

traditional pharma with external acquisition of discoveries. This model is inherently more risky as AGN

depends on quality discoveries being available at reasonable prices. There’s nothing stopping others from

replicating this approach. Therefore, PE multiple on AGN should be lower than traditional pharma with in-

house proprietary capabilities.

Author’s opinion AGN share price must be low enough to warrant committing capital. Author suggests investors to consider

modestly adding to AGN position starting from $220 level at no more than 1/3 of the target purchase

value and execute any additional purchases at 10% intervals i.e. at $200 and $180 in the event of decline.

$330.00 (+32%)

$200.00 (-20%)

$300.00 (+20%)




We put our money where our mouth is as the author(s) of the report may presently or in the future hold

a common stock investment in the securities mentioned in this report.

Exhibit 1 – Sources of external innovation and discovery

Exhibit 2 – Process of discovery, development and commercialization




Exhibit 3 – Allergan positioning vis-à-vis other pharma




This report has been prepared by Intelligent Investors.co.uk.

DISCLAIMER

Copyright 2016 Intelligent Investors.co.uk. All rights reserved. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable; however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Intelligent Investors.co.uk at the time of publication. The author(s) of the report hold a common stock investment in the securities mentioned in this report. The research in this document is not intended for retail investors. This is not a solicitation or inducement to buy, sell, subscribe, or underwrite securities or units. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment. Intelligent Investors.co.uk is NOT regulated by the FSA. A marketing communication under FSA Rules, this document has NOT been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance.

Allergan (AGN) - Taking a calculated risk at right price

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