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Why Is Allergan (AGN) Down 4.1% Since its Last Earnings Report?

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A month has gone by since the last earnings report for Allergan plc (AGN. Shares have lost about 4.1% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is AGN due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Allergan Beats on Q1 Earnings & Sales

Allergan’s first-quarter 2018 earnings came in at $3.74 per share, beating the Zacks Consensus Estimate of $3.36 as well as the guided range of $3.20-$3.40. Earnings rose 11.6% year over year driven by higher revenues and lower operating costs.

Revenues came in at $3.67 billion, which marginally exceeded the Zacks Consensus Estimate of $3.59 billion as well as the guided range of $3.5 billion and $3.6 billion. Revenues rose 2.8% from the year-ago period. On an organic basis, excluding the impact of M&A and foreign exchange, sales grew 6% in the quarter.

Key products like Botox, Juvéderm collection of fillers, Linzess and Lo Loestrin continued to do well in the quarter. However, lower sales of Namenda XR, Estrace, Minastrin and Asacol due to generic competition hurt first-quarter sales by $200 million.

First-quarter revenues also benefited from the addition of Alloderm from LifeCell (January 2017) and CoolSculpting body contouring system from Zeltiq (April 2017) acquisitions.

Segment Discussion

Allergan reports revenues under three segments – U.S. General Medicine, U.S. Specialized Therapeutics and International.

U.S. Specialized Therapeutics’ net revenues increased 6.5% to $1.58 billion driven by continued strong performance of its facial aesthetics products, Botox and Juvéderm collection of fillers.

In Facial Aesthetics, Botox (cosmetic) raked in sales of $196.7 million, up 7% year over year while Juvéderm collection of fillers rose 2.5% to $122.8 million. However, sales of Botox (cosmetic) and Juvéderm were hurt by unfavorable timing of promotional offers and year-end physician rebate program in the quarter. However, Allergan is optimistic that their sales trends will normalize over the remainder of the year. On the call, Allergan said that sales for Botox (cosmetic) and Juvéderm are expected to increase at double-digit rates in 2018.

In Eye Care, while Ozurdex sales rose 13.3% to $25.5 million, Restasis’ sales decreased 17.2% to $255.8 million hurt by unfavorable trade buying patterns and lower selling price. Botox Therapeutic revenues were $358.5 million, up 16.1% driven by demand growth. In Plastic Surgery, breast implants sales increased 11.8%, which contributed to the upside. In Medical Dermatology, Aczone sales plunged 60.6% in the reported quarter to $16 million due to generic pressure on the branded acne category and higher discounts to maintain formulary coverage and a generic launch of Aczone 5%.

LifeCell’s Alloderm added $99.5 million while Zeltiq’s CoolSculpting business added $87.1 million to sales in the quarter.

U.S. General Medicine net revenues were down 9.1% year over year to $1.22 billion in the reported quarter with sales declining in the Diversified Brands, Central Nervous System (CNS) and Women's Health franchises. Anti-Infectives sales rose 28.5% to $71.6 million and Gastrointestinal inched up 0.3% to $388.7 million.

Lower sales of Namenda XR, Estrace, Minastrin and Asacol due to generic competition hurt sales in this segment, which were partially offset by strong growth from Vraylar, Linzess and Lo Loestrin.

Linzess’ sales rose 7.9% to $159.3 million, driven by strong demand. Lo Loestrin sales rose 14.8% to $114.6 million driven by higher average selling prices and increased demand.

Among the newer products, Namzaric, a once-daily, fixed-dose combination of Namenda XR and Aricept, recorded sales of $33.4 million, less than $36.8 million in the previous quarter. Viberzi recorded sales of $35.9 million, also less than $42.9 million in the previous quarter. Vraylar sales were $84.4 million in the first quarter, lower than $87.7 in the previous quarter due to first quarter seasonality and unfavorable payer dynamics. However, Vraylar volume grew 11% on a sequential basis supported by demand growth.

Namenda XR sales slumped 66.8% to $40.5 million in the reported quarter due to generic competition following loss of exclusivity in February.

Estrace cream sales declined 91.3% to $6.4 million in the quarter.

Asacol/Delzicol sales declined 33.7% to $38.2 million due to loss of exclusivity.

In the Women’s Health segment, Minastrin 24 revenues plummeted 87.3% to $5.2 million in the quarter due to loss of exclusivity last March.

The International segment recorded net revenues of $864 million, up 17.2% (up 9%, excluding foreign exchange) from the year-ago period, driven by growth in Medical Aesthetics, Botox (therapeutic) and Eye Care.

Profits Rise

Adjusted gross margin declined 110 basis points (bps) in the quarter to 86.2% hurt by unfavorable product mix due to loss of exclusivity of higher margin products.

Adjusted operating income increased 8.7% to $1.76 billion in the first quarter. Adjusted operating margin rose 260 bps in the quarter to 47.9% due to lower operating costs.

Selling, general and administrative (SG&A) expenses decreased 5.2% to $1.05 billion in the first quarter owing to a substantial reduction in selling and marketing spending from the successful execution of the restructuring program.

Research and development (R&D) expenses also declined 9.7% to $355.8 million due to pipeline re-prioritization.

Other Details

In the first quarter, Allergan paid down $3.6 billion in net debt and completed its $2 billion share repurchase program announced in September 2017.

2018 Outlook

Allergan raised its earnings and sales guidance range for 2018. A better-than-expected first-quarter performance, lower share count and a delay in generic Restasis entry led to the increase in the guidance. A generic version of Restasis is now expected to be launched between May and July versus April to July expected previously, adding $80 million per month to the top-line projections.

Allergan lifted its sales guidance to an approximate range of $15.15-$15.35 billion compared with the earlier forecast of $15.0-$15.3 billion.

Meanwhile, the company also raised its adjusted earnings expectation in the band of $15.65-$16.25 per share from $15.25-$16.00 guided earlier.

The company maintained the guidance range for adjusted tax rate, gross margin, SG&A and R&D costs.

Adjusted tax rate is still expected to be approximately 14% in 2018.

Adjusted gross margin guidance is expected in the range of 85.5% and 86% which is lower than 2017 levels. Gross margins are expected to be hurt by loss of exclusivity of high-margin products — Restasis, Estrace and Delzicol — and unfavorable product mix.

Adjusted R&D expenses are expected to be approximately $1.5 billion while SG&A spend is expected to be approximately $4.25 billion.

Operating margins in 2018 are expected to be in line with 2017 levels.

Share count in 2018 is expected to be approximately 345 million shares versus the prior guidance of 350 million shares attributable to the earlier completion of the buyback.

Strategic Options

On the call, Allergan said it is conducting a strategic review of its business due to the disconnect between its business performance and stock value. Management discussed several strategic options including incremental aggressive share buyback, divesting certain assets to concentrate more on key therapeutic areas, splitting the company and making smaller bolt-on acquisitions. Regarding M&A activity, Allergan said that though a large merger is unlikely, it may make product/pipeline acquisitions that could strengthen its key areas of therapeutic focus. Allergan’s CEO Brent Saunders also said that splitting the company is not quite likely to be the outcome of the strategic review as it could prove complicated and costly

Second-Quarter 2018 Outlook

In second-quarter 2018, revenues are anticipated between $3.85 billion and $4.0 billion while earnings per share are likely to be between $4 and $4.20.

On the call, Allergan clarified that first-quarter earnings benefited from favorable timing of operating expenses, which will reverse in the remaining quarters of the year. This suggests that operating costs could be higher in the second quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been 16 revisions higher for the current quarter compared to three lower. Last month, the consensus estimate has shifted by 5.3% due to these changes.

Allergan plc Price and Consensus

 

VGM Scores

At this time, AGN has a great Growth Score of A, though it is lagging a bit on the momentum front with a B. Following the exact same course, the stock was also allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for growth investors than those looking for value and momentum.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Notably, AGN has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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