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Morningstar | Allergan Posts Impressive 2Q While Awaiting Generic Restasis; Shares Still Look Undervalued

We don't anticipate any major change to our forecast or fair value estimate for wide-moat Allergan, especially as the launch of a generic Restasis is potentially imminent. As we anticipated, management raised its year-end guidance to reflect no generic Restasis launch in the second quarter, while the new updated range in adjusted EPS between $16 and $16.50 (versus our current estimate of $16.04) reflects the timing of a third-quarter launch. While the current stock price likely still reflects concern with the near-term earnings hit on Restasis, as well as existing generic headwinds on products such as Namenda XR and Estrace this year, we found Allergan's second-quarter results mostly in line with our expectations. Management also announced a new $2 billion share repurchase authorization while using proceeds from sale of Teva shares to pay off approximately $1 billion in debt for the quarter. Last, management noted some progress on divesting its anti-infective and women's health divisions, which should eventually help further improve the company's balance sheet.

Generic headwinds make 2018 a transitional year for Allergan, but the company's aesthetics business remains a resilient source of growth. On a constant currency basis, Botox posted impressive 14% growth along with 11% growth in facial fillers. Botox was led by particularly strong growth in U.S. therapeutic sales, but witnessed broad global growth in cosmetic and therapeutic indications. We expect therapeutic Botox sales to slow with the launch of CGRPs for migraine, but management still expects stable mid-single-digit growth in therapeutic sales, which would be above our current near-term forecast. We continue to consider strong international cosmetic Botox growth as evidence competitive fears for the U.S. market are overstated. Plastics and regenerative medicine growth of 16% and pro forma body contouring growth of 11% exceeded our expectations.

Aside from aesthetics, a number of Allergan's other products like Vraylar, Lo Loestrin, and Linzess should help offset current generic headwinds. While we will likely further reduce our estimates for certain products like Kybella and Namzaric, we’ll likely increase our outlook for products like Vraylar and Lo Loestrin, which surpassed our estimates with 72% and 13% growth for the quarter, respectively. Vraylar, in particular, will likely become a major product for the company as management hopes to file for an expanded bipolar depression indication later this year with potential approval near the midpoint of 2019. Last, in gastrointestinal, while Viberzi’s growth continues to fall below our forecast, Linzess' growth of 14% met our expectations.

A number of recent clinical trial readouts--including phase 2 results for atogepant in episodic migraine, phase 3 for sustained-release bimatoprost in glaucoma, and headline phase 3 results for abicipar in macular degeneration--give reason for cautious optimism in the pipeline, in our view. Additionally, we view the recent FDA fast-track status for Allergan's oral NMDA modulator for major depressive disorder as a positive given this product's potential differentiation as an orally administered medicine in an area of unmet need. In the meantime, Allergan should report phase 3 data for its more advanced intravenous NMDA modulator, rapastinel, early next year, which we think could have an advantage in the market due to the clean side effect profile versus ketamine and Johnson & Johnson's esketamine.