Allergan: An Undervalued Powerhouse
- By Hoang Quoc Anh
Allergan (AGN) is one of the largest pharmaceutical powerhouses, operating in many areas including eye care, facial aesthetics, plastic surgery, skin care and neuroscience and urology. Allergan's history is quite interesting as the company has grown via many big acquisitions.
Allergan, previously known as Actavis, has spent $8.5 billion to acquire Warner Chilcott plc. With this acquisition, Allergan set the strong foundation in several key areas including women's health, urology, gastroenterology and dermatology. In 2014, the company acquired Forest Laboratories for $25 billion. Forest Laboratories was considered a good fit for Allergan due to its strong legacy in branded specialty and primary care pharmaceuticals. In the same year, Actavis and Allergan decided to merge with the total deal value of $66 billion, creating a new industry model called Growth Pharma, with world-class brand franchises, a global generics business and a premier pipeline of pharmaceutical development.
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The intrinsic value of AGN
Because of those acquisition growths, Allergan's intangible assets and goodwill has grown exponentially. Since 2011, its goodwill has jumped from $1.5 billion to more than $46.5 billion, while the intangible assets skyrocketed from $3.3 billion to $110 billion. Its debt level has risen accordingly, from $849 million to $37 billion. This goodwill will not be bad if Allergan's acquisitions prove to be profitable. Since 2011, its operating cash flow has grown by nearly 10 times to more than $5.2 billion.
Allergan's main branded products, such as Botox, Restasis, Linzess/Constella and Fillers, experienced huge double-digit top line growth, enhancing the company's leadership position in therapeutic categories.
Source: Q2 Allergan Earnings Presentation.
In order to focus on branded products, Allergan has decided to divest generic businesses to Teva Pharmaceuticals (TEVA) for more than $40 billion, including $33.75 billion in cash and $6.75 billion in Teva's stock. The generic unit's divestment will strengthen the company's balance sheet, meaning a lot of liquidity and flexibility as well as opportunity for Allergan's future. Its net debt to adjusted EBITDA would drop dramatically, from 4.2x to only 0.74x. From the first quarter, Allergan has reduced debt by $9 billion and committed $10 billion in share repurchases. CEO Brent Saunders mentioned that he would use $10 billion to $20 billion to invest for growth. With a lot of experience in pharmaceutical businesses such as Schering-Plough, Bausch + Lomb, Forest Laboratories and Actavis, I am quite confident that he would make good growth acquisition choices.