For many large pharmaceutical companies, the past few years have been a struggle; the two below are turnaround candidates that have focused on stabilizing their businesses. Both have attractive valuations, making them worth a fresh look, asserts George Putnam, editor of The Turnaround Letter.

Allergan (AGN), with $16 billion in revenues, owns the valuable Botox franchise, along with a portfolio of high-margin patent-protected ophthalmology, aesthetic and other treatments. 

However, several key products, including Restasis (just under 10% of revenues), will lose patent protection soon and likely see sharp revenue declines, putting heightened pressure on Allergan’s research pipeline. Its financial condition is strong with a reasonable level of debt, healthy profits and large incoming cash flows from asset sales. 

Frustration over its low valuation has led activists including Appaloosa Management and Carl Icahn to question its upcoming divestitures and overall strategic direction. With its share price down 50% from its 2015 peak, Allergan is worth a closer look.

While Merck (MRK) is arguably among the highest quality companies in the industry, its flat stock price (unchanged in 19 years) and 14.5x earnings multiple don’t reflect it. 

Since 1999, revenues have increased about 22% and adjusted earnings per share will likely be about 100% higher, but its market cap and enterprise value have barely budged. 

Today, Merck’s impressive research and development capabilities are producing a steady stream of new patent-protected products. 

Keytruda (cancer treatment) could be a $10-15 billion blockbuster, complementing the strong Januvia diabetes franchise.  With limited patent expiry concerns and a sturdy balance sheet, combined with a safe 3.1% dividend yield, Merck appears undervalued.

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