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Allergan (AGN) to Report Q4 Earnings: What's in the Cards?

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Allergan plc (AGN - Free Report) will report fourth-quarter and full-year 2017 earnings on Feb 6, before the market opens. Last quarter, the company delivered a positive earnings surprise of 2.22%.

Allergan’s share price has declined 21.4% in the past year while the industry witnessed a decline of 22.9%.

Allergan’s earnings performance has been strong, with the company beating expectations in each of the past four quarters. The average positive earnings surprise over the last four quarters is 1.95%.

Allergan PLC. Price and EPS Surprise


Allergan PLC. Price and EPS Surprise | Allergan PLC. Quote

Let’s see how things are shaping up for this announcement.

Factors to Consider

Allergan’s established products like Botox, Linzess, Lo Loestrin and Restasis and new products like Vraylar and Namzaric should support sales in the fourth quarter. In fact, label expansions for Botox (FDA approval for forehead line treatment) and Vraylar (FDA approval for maintenance treatment of schizophrenia) are likely to boost sales of these drugs in the fourth quarter. However, we believe sales erosion from Namenda XR due to lower demand and loss of exclusivity, mainly from Asacol HD and Minastrin, will again hurt the top line. The Zacks Consensus Estimate for Botox, Linzess and Namenda XR are pegged at $837 million, $206 million and $103 million, respectively.

In third quarter, some new products like Viberzi and Kybella performed below expectations. It remains to be seen if sales of these products rise this time around

The addition of Alloderm from LifeCell (January 2017) and CoolSculpting body contouring system from ZELTIQ (April 2017) is expected to support the top line in the quarter.

Higher promotional expenses for key products, increased costs to support an advancing pipeline and the acquisition of lower margin LifeCell and ZELTIQ can put pressure on Allergan’s margins.

Investor focus will be on management’s comments on the impact of new competition for key growth drivers, Restasis and Linzess. We remind investors that on the third quarter call, Allergan said that it will refrain from any M&A activities for the next few months until its gets a better handle on the Restasis situation. Allergan is facing potential loss of exclusivity for Restasis, its second-best selling product. In October 2017, a Texas federal district court invalidated four of the six patents covering Restasis, potentially opening doors for early generic competition. Though Restasis patents are scheduled to expire in August 2024, a generic version may be launched in the second quarter of 2018.

Also, the company said that a split of the company is not in the cards at the moment. An update on these strategies is expected on the fourth-quarter call.

We expect management to also comment on the cost-saving and restructuring program it announced earlier this year. In the regulatory filing, Allergan said it is laying off over 1,000 employees to protect it from potential revenue declines. Allergan also said that it plans to eliminate an additional 400 open positions. While the company estimates to incur costs of approximately $125 million, the job cuts and other cost-savings measures are expected to save operating costs between $300 and $400 this year. Also, the majority of the costs, primarily due to severance, will be reflected in the fourth-quarter results.

Also, investors expect management to comment on the weaker-than-expected sales outlook for 2018, which Allergan announced in early January.

Earnings Whispers

Our proven model does not conclusively show that Allergan is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: The Most Accurate estimate stands at $4.75, while the Zacks Consensus Estimate is pegged lower at $4.74. This results in an Earnings ESP of +0.19%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Allergan has a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Some stocks in the biotech/pharma sector that have a positive Earnings ESP and a favorable Zacks Rank are:

Alexion Pharmaceuticals, Inc. (ALXN - Free Report) with an Earnings ESP of +3.45% and a Zacks Rank #3. The company is scheduled to release results on Feb 8. You can see the complete list of today’s Zacks #1 Rank stocks here.

Novo Nordisk A/S (NVO - Free Report) has an Earnings ESP of +2.66% and a Zacks Rank #3. The company is scheduled to release results on Feb 1.

Astrazeneca PLC (AZN - Free Report) is slated to announce financial figures on Feb 2. The company has an Earnings ESP of +1.87% and is a Zacks #3 Ranked stock.

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