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Why Is Allergan (AGN) Down 2.1% Since Last Earnings Report?

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It has been about a month since the last earnings report for Allergan (AGN - Free Report) . Shares have lost about 2.1% in that time frame, underperforming the S&P 500.

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

Allergan Beats on Q3 Earnings & Sales

Allergan’s third-quarter 2018 earnings came in at $4.25 per share, which comprehensively beat the Zacks Consensus Estimate of $4.01 and also came ahead of the guided range of $3.80-$4.10. Earnings rose 2.4% year over year as lower operating costs made up for the sales decline. Lower interest expense and share count also pulled up earnings in the quarter.

Revenues came in at $3.91 billion, which exceeded the Zacks Consensus Estimate of $3.84 billion as well as the guided range of $3.75 billion to $3.90 billion. Revenues, however, fell 3% from the year-ago period primarily due to loss of exclusivity on some brands. Excluding currency impact, sales declined 1.8%.

Key products like Botox, Juvéderm collection of fillers, Vraylar, Alloderm aand Lo Loestrin pulled up the top line in the quarter. However, lower sales of Namenda XR and Estrace cream due to generic competition hurt third-quarter sales. Sales of Allergan’s blockbuster eye drug, Restasis also declined in the quarter. Also, the effects of the international Ozurdex recall, unfavorable foreign exchange and divesture of medical dermatology assets hurt the top line in the quarter.

Allergan said that its core business (Medical Aesthetics, CNS, Eye Care and GI), comprising 90% of total revenues, grew 5.9% year on year on a reported basis and 7.4% at constant currency in the quarter.

Segment Discussion

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

U.S. Specialized Therapeutics’ net revenues declined 1.1% to $1.71 billion. Strong sales growth of its medical aesthetics products, Botox and Alloderm were partially offset by decline in sales of Restasis.

In Facial Aesthetics, Botox (cosmetic) raked in sales of $216 million, up 13.9% year over year. Juvéderm collection of fillers rose 10% to $127.2 million.

Alloderm sales grew 25.1% to $105.8 million while CoolSculpting sales added $84.9 million to sales, up only 1.8% year over year as higher sales of consumables were partially offset by discounts for system placements.

In Eye Care, while Ozurdex and Alphagan sales rose 16.3% and 2.9% to $28.6 million and $95.4 million, respectively, Restasis sales decreased 18.8% to $298 million due to lower selling price and demand.

Botox Therapeutic revenues were $407.4 million, up 10.4% year over year, driven by demand growth.

On the call the company said that Botox Therapeutic growth is coming from all indications: migraines, spasticity and overactive bladder; across all channels and all specialties including neurologists, physiatrists and urologists.

Allergan also said that Botox demand has remained strong despite Aimovig launch. However, the company did mention that it expects the growth rate for Botox Therapeutic to moderate due to competition from CGRPs. The growth rate is expected to remain near mid- to high-single digit rate. At the same time, the company said that that the introduction of the CGRPs should expand the migraine market and Botox and the CGRPs can coexist in the larger market.

U.S. General Medicine net revenues were down 7.8% year over year to $1.38 billion in the reported quarter, hurt by lower sales of Namenda XR and Estrace, which were partially offset by strong growth from Vraylar, Linzess and Lo Loestrin.

Linzess sales rose 7.3% to $204.8 million. However, on the call, Allergan said that it expects Linzess growth to slow down to a low- to mid-single-digit range going forward as the U.S. sales of the drug are likely to face pricing pressure.

Lo Loestrin sales grew 17.9% to $141.5 million while Bystolic sales fell 7.9% to $151.2 million. Vraylar sales were $138 million in the third quarter, 72.1% higher than the year-ago quarter figure, while Viibryd sales were $88.5 million, up 2.3% year over year.

Namenda XR sales slumped from $114.3 million to $16.2 million in the reported quarter due to generic competition following loss of exclusivity in February.

The International segment recorded net revenues of $821.6 million, up 7.8% from the year-ago period, excluding the impact of foreign exchange, driven by growth in Facial Aesthetics and Botox (therapeutic), partially offset by the unfavorable impact of Ozurdex recall in certain markets. Excluding the impact of the Ozurdex recall, international sales growth would have been 11.8% in constant exchange rate.

On the call, the company said it plans to restart the supply of Ozurdex in the impacted markets before the end of the year.

Profits Rise

Adjusted gross margin declined 90 basis points (bps) in the quarter to 85.2% hurt by unfavorable product mix due to loss of exclusivity of higher margin products as well as impact of the Ozurdex recall.

Adjusted operating income decreased 3.2% to $1.91 billion in the third quarter hurt by lower revenues. Adjusted operating margin was flat at 48.7% due to lower operating costs related to Allergan’s restructuring activities.

Selling, general and administrative (SG&A) expenses declined 6.2% to $1.03 billion in the third quarter owing to lower promotional/advertising costs, impact of previous restructurings and reduction in foreign exchange losses.

Research and development (R&D) expenses declined 2.9% to $393.7 million due to pipeline re-prioritization.

Regarding its plan to sell its Women's Health and Infectious Disease units, Allergan said on the call that it has initiated processes to sell both the businesses. However, the bids that it has received for them are below management expectation.

2018 Outlook

Allergan raised its earnings and sales guidance range for 2018 backed by a strong underlying business momentum and due to an additional three months of delay in launch of Restasis generics. These factors offset the expected negative impact in the fourth quarter of Ozurdex recall, currency translation and lost revenues due to the sale of the medical dermatology assets in September 2018.

Allergan lifted its sales guidance to an approximate range of $15.575-$15.725 billion compared with the earlier forecast of $15.475-$15.625 billion. A generic version of Restasis is now expected to be launched between Nov 1, 2018 and Jan 1, 2019, delayed from the previous expectation of between August and October and the original expectation of April to July.

The company also raised its adjusted earnings expectation to the band of $16.20-$16.60 per share from $16.00-$16.50 guided earlier.

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

Adjusted tax rate is expected to be approximately 14.5% in 2018. Adjusted R&D expenses are expected to be approximately $1.55 billion and SG&A spend is expected to be approximately $4.35 billion.

Adjusted gross margin is now expected to be approximately 85.5% compared with 85.5 expected previously. Gross margin is expected to be hurt by loss of exclusivity of high-margin products — Restasis, Estrace and Delzicol — and unfavorable product mix.

Share count in 2018 is expected to be approximately 343 million shares.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Allergan has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. Charting a somewhat similar path, the stock was 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.


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

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