Update May 10. Allergan (AGN) reported first quarter 2016 earnings and revenue today. These results are really the first chance that investors in Allergan have to assess the state of the company since its merger with Pfizer (PFE) died at the hands of changes in tax treatment for companies trying to cut their tax rate by moving their headquarters to lower tax jurisdictions. (Ireland in this case in a process know as “inversion.”) The easiest thing to understand about today’s results was that the company’s board of directors has authorized a share repurchase plan of up to $10 billion. Of course, like most repurchase plans there’s no guarantee that the company will actually buy $10 billion in stock. In fact, Allergan will initially buy $4 to$5 billion in shares over the next four to six months and then see if the share price then lends itself to more purchases. The shares are down 28.58% in 2016 through May 10 so a share buyback now seems a good use of some of the $36 billion that Allergan will receive in June from the sale of its generics business. So does the company’s indication that it will use $8 billion to pay down debt. (Adding in the $2.2 billion in cash already on Allergan’s books, the company will still have $20 billion to so for acquisitions.) From here the quarterly results get really hard to parse thanks to all the one time items listed in the quarter: amortization, acquisition-related expenses, research and development expenses resulting from the acquisition of R&D assets, Pfizer-related expenses, acquisition accounting valuation related expenses and severance associated with acquired businesses. Accounting for those items according to GAAP rules (Generally Accepted Accounting Principles) shows a loss from continuing operations of 38 cents a share. (The GAAP loss in the first quarter of 2015 was $2.80 a share.) The non-GAAP pro forma earnings per share, however, were $3.04, up 15% from $2.65 in the first quarter of 2015. Net revenue is somewhat clearer, but thanks to all Allergan’s acquisitions and mergers, the picture is only somewhat clearer. Revenue from continuing operations rose by 48% in the first quarter to $3.8 billion from $2.6 billion in the first quarter of 2015. But that included the revenue from all those acquisitions and mergers. I think investors can get a better picture of current growth by looking at individual branded products such as the company’s Botox business. First quarter 2016 revenue for Botox rose to $637.5 million, up 17% from $558 million in the first quarter of 2015. The future for revenue growth depends on existing branded products such as Botox, and the Restatis eye treatment (sales up 22% year over year) and from three recently launched drugs to treat irritable bowel syndrome (Linzess) , sagging chins and chin fat (Kybella), and schizophrenia (Vraylar). The recently launched Linzess irritable bowel syndrome drug showed 46% sales growth in the first quarter. The company projects that these three recently launched drugs have the potential to reach annual revenue of $1 billion. The challenge for Allergan and CEO Brent Saunders is to convince investors that Allergan isn’t just only a merge and acquire rollup built around financial engineering, but that it should instead be valued on the cash thrown off by the Botox franchise and by new drugs that extend that franchise (Kybella, an injectable to remove chin fat), and by the promise of the newly approved drugs and of drugs in the pipeline. (An interesting early stage drug candidate is Heptares for the treatment of Alzheimer’s.) From that perspective, the decision to use up to $10 billion on buying back shares and $8 billion to pay down debt are important indicators that Allergan doesn’t intend to chase another block buster deal just for the sake of making a deal. Same goes for management’s talk about looking for smaller bolt-on product acquisitions. The market is reasonably skeptical and Allergan will have to stay its new course. But the raw materials are certainly there. The stock closed up 5.28% on May 10. I’m setting a new and lower intermediate target price of $255 for these shares, down from my prior target price of $350 on April 5. (There’s resistance at that level that will take a while to work through. How long a while? It depends on general market conditions, I’m afraid.) I think it will take a while for the market to get over the collapse of the Pfizer deal, but it will get over it. The shares closed at $225 today, May 10.
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