On November 1, 2017, Allergan (NYSE: AGN) reported better-than-expected Q3 2017 results, fueled by a solid performance from the key growth drivers and management rebased down the expectations for 2018 EPS assuming a worst case scenario for Restasis.
With the stock trading below 11x on NTM P/E, I think that the current valuation of Allergan is irrational.
Q3 2017 results
Allergan reported Q3 2017 sales of $4.03B, in line with consensus expectations, driven by a solid performance in the Aesthetic franchise, thanks to Botox, Fillers, LifeCell and CoolSculpting.
Non-GAAP Performance Net Income Per Share of $4.15 was 3% higher than consensus, mainly driven by a lower-than-expected SG&A spending.
FY 17 guidance has been updated:
Product sales guidance has been tightened to $15.875-16.025B from $15.85-16.05B. EPS guidance has been upgraded to $16.15-16.45 from $16.05-16.45, mainly driven by a better-than-expected Opex management. Main takeaways from the quarter
The corporate signals from the Q3 2017 results have been really strong. In details, I think there are few key positive elements in Allergan’s Q3/2017 results, which should reassure investors:
The performance of the key growth drivers of the Aesthetics franchise has been excellent. Botox sales were $816M, in line with consensus, driven by a healthy performance in both the cosmetic and the therapeutic spaces, while Fillers sales were $242M, up 20% YoY, driven by an exceptional performance ex U.S. In addition to the strong performance of the legacy aesthetics drivers, Allergan reported a solid performance of LifeCell and Zeltiq, acquired over the last 12 months. The only disappointment was related to Kybella, which generated only $11M of sales, as a result of a limited uptake in the asthetic community for a product that reduces the double chin.
Thus, as summarized by the following slide, in Q3/2017 Allergan achieved a good sales performance in the majority of the therapeutic areas in which they operate.
Source: Allergan’s Q3/2017 Results Presentation
Related to Restasis, sales were $382M, 2% below consensus, driven by a solid volume dynamic despite the competition of Xiidra.
I think that the most important takeaway from the quarter is related to the preliminary comments provided by the management on 2018 outlook. After the unfavorable federal court decision related to the patent protections for this key drug, Allergan assessed two potential scenarios related to the competition from generics on Restasis.
In details, management affirmed to expect an EPS of at least $15, assuming a generic launch in January 2018 or an EPS of at least $16, assuming a launch in mid-2018. In addition to that, the management provided some preliminary comments about a cost cutting program that will be implemented in 2018, and they also affirmed to expect, in any scenario, a 2019 EPS higher than 2017 EPS.
These key comments are really important because they give visibility on the trough earnings in 2018 and pointed towards a healthy EPS growth in 2019 and beyond.
Lastly, GAAP Free Cash Flow Generation was $1.47B, approximately equal to non-GAAP Adjusted Net Income, consistent with the guidance of $3-4B of FCF generation in H2/2017. This is a key point to dismiss the bear case of a poor cash flow conversion for Allergan. SOTP Approach
To support my bull thesis on Allergan, I have updated my SOTP (Sum-of-the-parts) to show what multiple is implied in the current 10.9x P/E NTM (next twelve months) valuation of the company, looking at a 2018 EPS in l