Allergan: Life After Pfizer?

04/26/2016 7:00 am EST


Bret Jensen

Editor, Biotech Gems

We are adding an old friend back into our model portfolio; we had sold earlier this year for a decent profit as we felt the shares were getting close to being fully valued, asserts Bret Jensen, editor of Blue Chip Gems

However, thanks to its recent selloff, Allergan (AGN) is compelling once again as it is back to being a standalone entity. This is because the company recently had its mega-merger plans with Pfizer (PFE) derailed.

The stock has declined some 20% since this news was announced earlier this month which presents a more than solid entry point for long-term investors on this solid growth play.

In the second half of 2015, the company agreed to sell its generics business to
Teva Pharmaceuticals (TEVA) for just over $40 billion.

When this deal closes in June, as expected, Allergan will get $33.75 billion in cash and $6.75 billion in Teva stock, which is also undervalued in my opinion and a holding in my own portfolio.

Meanwhile, Allergan has a well-diversified product lineup with major contributors that include Botox and Anda.

The company continues to find new uses for its fast selling Botox product including for migraines and overactive bladders. These new indications are patentable and there is no significant patent cliff across the portfolio in the foreseeable future.

In addition, just because "tax inversion" has been turned into an ugly word this election year, the company’s headquarters in Ireland continues to produce a much lower tax rate.

This translates into higher retained earnings, improved cash flow, and attractiveness either as a purchaser or at some point a buyout target itself.

The bottom line is that we are buying shares of a company that should be able to grow revenues at about 10% annually going forward with earnings growth in the mid-teens.

After the Teva transaction is completed, Allergan’s debt profile and growth prospects will be improved.

This is not reflected in a stock that goes for under 13 times the consensus for fiscal 2017’s earnings per share estimates -- a discount to the overall market multiple despite the company’s superior growth profile.

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By Bret Jensen, Editor of Blue Chip Gems

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