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Allergan Beats on Q2 Earnings, Ups View & Plans 13% Job Cut

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Allergan, Inc. (AGN - Free Report) reported second quarter 2014 earnings of $1.51 per share, much above the Zacks Consensus Estimate of $1.44. The company had guided second quarter earnings in the range of $1.41–$1.44 per share. 
While earnings climbed 23.8% from the year-ago quarter, revenues increased 16.1% to $1,854.5 million, above the Zacks Consensus Estimate of $1,720 million.
Specialty pharmaceuticals sales increased 13.2% to $1,526.1 million, with eye-care pharmaceuticals, Botox and skin-care sales driving growth.
Eye-care pharmaceutical sales increased 14.5% to $827.0 million with Restasis (up 24.4%) contributing significantly to growth.
Alphagan franchise sales went up 4.5% to $125.4 million in the reported quarter. While Latisse sales decreased 9.4% to $25.1 million, Lumigan franchise went up 10.5% to $174.7 million.
Allergan narrowed its Lumigan franchise sales guidance. The company now expects Lumigan franchise sales to be in the range of $600 million to $620 million in 2014 (previous guidance: $590–$620 million). Meanwhile, Alphagan franchise sales are expected in the range of $460–$480 million in 2014.
Restasis sales are expected to increase to $1,040–$1,070 million in 2014. Allergan expects Latisse sales to be approximately $100 million in 2014.
In the second quarter of 2014, Botox sales increased 12.9% year over year to $579.4 million. Allergan expects 2014 Botox sales in the range of $2,220 million to $2,280 million.
Meanwhile, Allergan’s medical devices segment posted sales of $301.2 million, up 31.4%. While breast aesthetics sales increased 3.2% to $110.2 million, facial aesthetics sales increased 45.6% to $178.3 million.
Other Details
Selling, general and administrative (SG&A) expenses increased 12.9% during the quarter to $683.8 million. Research and development (R&D) expenses amounted to $288.1 million, up 8.4%.
Restructuring Initiatives
Along with the second quarter 2014 results, the company also announced its restructuring plans. Allergan plans to reduce its workforce by 13% (1,500 employees) and eliminate 250 vacant positions. The company stated that approximately 94% of all the customer-facing personnel will be unaffected by the restructuring. 
The restructuring plan will be carried out over the rest of the year and is expected to deliver annual pre-tax savings of approximately $475 million in 2015. Allergan plans to streamline its organizational structure and focus on high value opportunities.
The company plans to reduce its expenditure related to commercial organization, general and administrative functions, manufacturing and the R&D organization. These reductions are expected to have a modest impact on net sales growth. The company has reiterated its double-digit sales growth target for the period 2014 to 2019. The company expects to deliver an earnings growth rate of more than 20%. 
Guidance Up
Allergan now expects 2014 earnings of $5.74–$5.80 per share as compared to the prior guidance of $5.64–$5.73 per share. The earnings guidance is well above the Zacks Consensus Estimate which is currently at $5.70 per share.
Allergan estimates earnings in the range of $8.20–$8.40 and approximately $10.00 in 2015 and 2016, respectively. 
The company expects product net sales in a band of $6,900–$7,050 million in 2014 (previous guidance: $6,775–$7,000 million). The guidance excludes revenues from transition services agreements related to the sale of the obesity intervention business.
For 2014, Allergan expects total specialty pharmaceuticals net sales of $5,865–$5,975 million (previous guidance: $5,835–$6,000 million).
The company expects medical devices net sales of $1,010–$1,050 million (previous guidance: $930–$990 million). Here performance will be driven mainly by facial aesthetics. Facial aesthetics sales are expected in the range of $610 million to $630 million, above the previous guidance of $540 million to $570 million.
Breast aesthetics sales are expected in the range of $400 million to $420 million (prior guidance: $390 million to $420 million).
The company continues to expect cost of sales to product net sales ratio of about 12.5%. The company maintained its guidance for SG&A expense to product net sales ratio at 37%–38% and R&D expense to product net sales ratio at 16.5%.
Allergan expects third quarter earnings in the range of $1.44–$1.47 per share on product net sales of $1,675 million to $1,750 million. The Zacks Consensus Estimate currently stands at $1.44, at the low end of the company’s guidance range.
Our Take
Allergan’s second quarter results were once again above expectations with the company beating the Zacks Consensus Estimate as well as exceeding its guidance. We are also positive on the restructuring initiatives undertaken by the company. We believe that the initiatives will boost shareholder value.
Although Allergan’s presence across different segments will help maintain growth, we remain concerned about the generic and competitive challenges being faced by the company. At present, we expect investor focus to remain on further updates from Valeant Pharmaceuticals International, Inc. (VRX - Free Report) and Allergan on the acquisition proposal. Allergan had rejected Valeant’s revised acquisition offer.
Allergan carries a Zacks Rank #2 (Buy). Investors can also consider stocks like AstraZeneca (AZN - Free Report) and AbbVie Inc. (ABBV - Free Report) carrying the same rank as Allergan.

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