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Morningstar | Allergan Looks Oversold Following Mixed Third Quarter as Overall Thesis Remains Intact

With a generic version of Restasis still not approved in the U.S., wide-moat Allergan unsurprisingly raised its year-end outlook for $15.6 billion to $15.7 billion in revenue and adjusted EPS of $16.20 to $16.60. Despite the ongoing positive on Restasis, Allergan did face a few negative surprises this quarter from an Ozurdex recall in some international markets and below-expected CoolSculpting sales on promotional activity. Additionally, recent data for abicipar in neovascular AMD also suggest the product may have a tough time gaining share despite its quarterly dosing benefit, especially if management can’t improve the reported 15% inflammation rate on an updated formulation (with data expected on this version in the first half of 2019). However, the recent positive safety data for ubrogepant in acute migraine--which reaffirms previous positive atogepant results in episodic migraine--keeps our pipeline outlook stable. Overall, we anticipate a few minor changes to our model will shave just a few dollars off our fair value estimate, but we think the current stock price decline looks like an overreaction.

Despite some of the issues seen this quarter, there were a number of positives, especially in Allergan’s aesthetics business. Botox sales climbed 16%, with an impressive 22% growth in cosmetic sales and 12% in therapeutic sales. Botox’s 10.4% therapeutic sales growth in the U.S. was slightly better than we anticipated and suggests little effect from recently launched CGRPs for migraine. Management noted most CGRP chronic migraine prescriptions stem from previously untreated patients, which supports our view of the large unmet medical need in this market. Facial fillers and regenerative medicine grew 14% and 15%, respectively, and we anticipate the promotional activity for CoolSculpting is a non-recurring issue with consumables growth and instrument placements still suggesting an encouraging trend.

Aside from the aesthetics business, most of Allergan's other product categories continue to track our forecasts with the exception of Ozurdex. Vraylar, which grew 72% this quarter, should sustain an impressive trajectory with the bipolar depression indication approval likely next year. Lastly, while the outlook for Ozurdex remains uncertain, management expects to resupply the market by the end of the year.

Lastly, management noted buyer interest but at unacceptable valuations for its women’s health and anti-infective segments up for sale, but we still anticipate successful buyers to eventually emerge. We generally feel Allergan has a good track record of selling assets on favorable terms, and we’d prefer management to continue to take a patient approach. Proceeds from the sale of the medical dermatology business during the quarter went to debt reduction and share repurchases.