Recent Acquisition by Actavis (ACT) Strengthens Value Proposition for Shareholders

Allergan, Inc. (NYSE: AGN) is a global specialty pharmaceutical company with headquarters in Irvine, California, and operations in the US, Europe, Latin America and Asia Pacific regions, with the proven ability to build and sustain leading brands through a multi-targeted sales and marketing approach, appropriate to each product line.

On November 18, 2014, Allergan agreed to be acquired by Actavis plc (NYSE: ACT), an Irish specialty pharmaceuticals company, for $66 billion, or $219 per share. Allergan shareholders will receive $129.22 in cash and 0.3683 Actavis shares for each Allergan share held. The merged entity will be a top-10 pharmaceutical company with pro forma revenues of over $23 billion in 2015, a strong balance sheet and a large portfolio of specialty drugs in over 100 international markets. With the merger, the combined entity expects to organically grow revenue and non-GAAP earnings by at least 10% annually over the long-term, with synergy cost savings of $1.8 billion and over $8 billion in free cash flow in 2016. The merged company will retain its investment grade credit rating after the merger, and expects to significantly reduce debt to less than 3.5x Adjusted EBITDA. The acquisition is expected to close in Q2 2015.

Allergan develops therapeutic treatments for eye care (ophthalmology) and neurology, dermatology and urology diseases, with products sold in over 100 countries. In addition, the company develops medical aesthetics and devices, and built a portfolio of such products through past acquisitions. Allergan has a strong R&D core, which it plans to significantly retain after the merger, and which was part of Allergan’s refusal of multiple buyout offers from Valeant Pharmaceuticals (VRX). Allergan was founded in 1950 and went public in May 1989.

Strategic Product Mix Drives Double-Digit Sales Growth

Over the past 60 years, Allergan has built a solid portfolio of specialty pharmaceutical treatments for a variety of conditions. The company currently has 14 eye care treatments for patients with dry eye, glaucoma and other retinal diseases. This segment holds #2 market share and is expected to generate $3.3 billion in 2014 sales. Allergan has two blockbuster neuromodulator treatments – BOTOX and BOTOX Cosmetics – for patients with overactive bladder symptoms, chronic migraine headaches, muscle stiffness and eye muscle problems. This segment holds #1 market share and is expected to generate $2.2 billion in 2014 sales. Its Aesthetics segment, ranked #1 in the market, has 7 treatments for patients that would like to alter their physical appearance. Aesthetics has two categories – Facial Aesthetics and Breast Aesthetics – and is expected to generate $1.1 billion in 2014 sales.


Allergan operates in large and growing markets with market leadership developed through careful R&D and strategic investments.


Over the years, Allergan has also steadily gained market share from rivals in its two top markets, from 13% in 2009 to 15% in 2014 in the ophthalmic segment, and to over 40% in its Aesthetics segment (see chart below).


Strong R&D Core Has Built Impressive Pipeline

In addition to market leading approved products, Allergan has a solid pipeline of promising products in various stages of maturity from pre-clinical trials to Phase III trials, registration and post-approval.


SEMPRANA, OZURDEX Offer Strong Revenue Upside

One treatment, SEMPRANA, an acute therapy to treat migraines in adults, has been filed for US FDA approval. Allergan is currently addressing US Food and Drug Administration concerns over canister filling process issues related to the inhaler delivery of SEMPRANA which is ahead of current nasal sprays and injectables. Analysts fully expect SEMPRANA approval after Allergan capably addresses FDA concerns, and project initial SEMPRANA sales of $150 million in 2017, with $0.24 per share in adding earnings.

On September 2, 2014, the European Commission extended marketing authorization for diabetic vision impairment treatment, OZURDEX. OZURDEX received a positive opinion from the European Union Committee for Medical Products for Human Use and gained US FDA approval on September 29, 2014. Currently 560,000 Americans are at risk and could benefit from long-term OZURDEX use. Moreover, with obesity on the rise in the US, diabetic vision impairment is a growing affliction.

LiRIS Acquisition Promises Accretion to Future Earnings

On August 13, 2014, Allergan acquired worldwide rights to LiRIS, a cystitis and bladder pain treatment from medical therapeutics company TARIS Biomedical. LiRIS is currently in Phase II trials and will expand Allergan’s urology portfolio. Allergan will initially pay $67.5 million in cash and up to $295 million on drug development milestones and $225 million on commercial milestones being met.

LiRIS is positioned for a large and growing global market and is expected to add to earnings over the long run, after it’s been approved.

 

Botox Litigation Reopened – Modest Drag on Management Focus

On September 2, 2014, San Francisco’s 9th Circuit Court of Appeals reopened a 2010 shareholder lawsuit against Allergan for improperly marketing and labeling Botox for cosmetic applications. Shareholders had originally charged the company with overstating the benefits of Botox but their case was previously dismissed because their allegations were not specific enough. Now, the 9th Circuit Court judge disagreed with the earlier ruling and sided with shareholders. This litigation has been factored into the Actavis acquisition and is expected to be no more than a minor distraction going forward.

Acquisition by Actavis Creates Top 10 Pharmaceutical Company

As mentioned above, on November 18, 2014, Allergan agreed to be acquired by specialty pharmaceutical company Actavis plc (ACT) for $219 per share, ending a 7-month hostile takeover drama, mostly headlined by hedge fund Pershing Square Capital Management and Allergan rival Valeant Pharmaceuticals. Valeant initially offered $47 billion, or $153 per share, then raised their offer all the way to $191 per share amid much rancor and drama. Aside from inadequate valuation, Allergan was concerned that Valeant would slash Allergan’s R&D staff and budget and hamper its history of pharmaceutical innovation.


Finally, activist investor William Ackman of Pershing Square Capital, announced support for the Actavis deal and cancelled a planned December 18, 2014 special shareholders’ meeting. Ackman owns a 10% stake in Allergan which has delivered paper gains of over $2.3 billion at the $219 acquisition price.

Shares Up 49.71% since Pershing Square Stake Disclosure

Allergan shares closed at $212.59 per share (as of 11/19/2014), up 91.4% year-to-date and near the high end of the company’s 52-week range of $94.98 – $214.20, and well ahead its 50-day moving average of $189.18 and 200-day moving average of $171.45. At $212.59 per share, the company has a market capitalization $63.33 billion and a price-to-earnings ratio of 49.7x on annual earnings of $4.28 per share.


On October 27, 2014, Allergan’s Board declared a nominal quarterly cash dividend of $0.05 per share, $0.20 annualized at, to be paid December 11, 2014, to shareholders on record November 20, 2014, for a meager dividend yield of 0.10% and a payout ratio of 3.2%.

Visionary, Gutsy Leadership Focused on R&D, Innovation

David Pyott, Chairman and Chief Executive Officer, has grown Allergan from a small eye care company in 1988 (when he joined) to a leading global specialty pharmaceutical company by focusing on breakthrough R&D and strong sales and marketing. Pyott also held tight through the Valeant acquisition drama and preserved the company’s R&D culture while getting the best valuation.

James Hindman serves as Executive VP – Finance and Business Development and Chief Financial Officer. Hindman has 29 years of financial experience with Allergan and has held various senior positions with the firm.

Scott Whitcup serves as Executive VP – Research and Development and Chief Scientific Officer. He joined the company in 2000 after several years of scientific experience from serving as Clinical Director at the National Eye Institute.

After the acquisition, the merged entity will be led by Actavis CEO Brent Saunders.

Strong Revenue, Margin Growth

Over the past year, Allergan has steadily grown sales at increasing double-digit rates, with a sharp 45% quarterly jump in Q3 2014. In parallel, earnings per share have steadily grown, from 11% in Q2 2013 to 18% in Q3 2014.


Allergan also has solid gross margins which give it a sizable competitive advantage, and has consistently grown gross profit margins since 2012 to 88.5% in Q3 2014, well ahead of top competitor Valeant’s 75% gross margin.


Updated Q4 and FY2014 Guidance by Management Shows Strength

Since February 2014, management has steadily ramped up guidance and, as of 10/27/2014, expects net sales of $7 billion – $7.2 billion, with non-GAAP diluted earnings of $6.27 – $6.30 per share and year-over-year earnings growth of 31% – 32%.


Solid Q3 2014 Sales and Earnings Growth, Handily Beat Guidance

For the three months ended September 30, 2014. Allergan reported total revenues of $1.82 billion, up 17% from $1.56 billion in Q3 2013 with a 17% increase in product net sales offset by a 13% decrease in other revenues. Sales gains were led by a 14% increase in specialty sales and a 30% increase in core medical device sales. On a non-GAAP basis, operating income increased 36% from $531.6 million to $725.2 million (primarily after excluding restructuring charges), and non-GAAP net earnings increased from $368.8 million to $540 million.

Results handily beat guidance issued in July 2014.


As of September 30, 2014, Allergan had $3.91 billion in cash and cash equivalents, $11.7 billion in total assets, $2.09 billion in long-term debt and $7.12 billion in total stockholders’ equity, with a debt/equity ratio of 23.1%.

Summary

Allergan’s recent acquisition by Actavis offers significant value to shareholders. While some analysts are skeptical of the merger, several others see the merged entity’s shares climbing above $300 per share range, so holding on to Actavis shares (post acquisition) could deliver further upside though one can’t blame investors for wanting to book profits after a very solid runup. Through synergies and matching future growth visions, the merged entity will be a dominant player in the pharmaceutical industry with a pipeline that could push revenue growth far ahead of competitors. Dividends are fairly slim and not expected to rise significantly over the near-term, but shares offer significant upside through synergies, global market expansion and debt reduction.

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