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Morningstar | Allergan’s 4Q Doesn’t Quell Investor Concerns, but 2019 Outlook Matches Our Expectations

We plan to leave our fair value estimate for wide-moat Allergan unchanged, as the company’s performance continues to mostly track our expectations. While the company contends with a number of generic entrants, including the likely near-term launch of a copycat version of Restasis, our forecasts fall within management’s outlook for 2019 revenue of between $15 billion and $15.3 billion and adjusted EPS of at least $16.36 when accounting for share repurchases. Some investors may not like management’s announcement that it will keep the women’s health business for now, likely after insufficient bids, but the growth outlook for the segment looks stable. Management did note that it should complete a sale of its anti-infective segment in the near term. Allergan also recognized $5.4 billion in goodwill and intangibles impairments this quarter, which is not too surprising given previously noted weak performance in some products like Kybella.

We still see 2019 as a difficult transition year for Allergan, but we think the resilient aesthetics business and product pipeline keep long-term fundamentals intact. Besides the ongoing competition on Botox and the likely launch of a generic Restasis in 2019, Allergan also faces issues like the recent Ozurdex and textured breast-implant recalls in international markets. There’s also still some uncertainty on CoolSculpting’s growth trajectory after promotional activity during the back half of 2018. This quarter’s weakness in the regenerative medicine business was also a surprise, which management attributed to healthy demand but insufficient supply of donor material. As a key positive, however, Botox maintained a 13% growth rate in both cosmetic and therapeutic indications within the U.S. during the quarter despite the launch of competing CGRPs for migraine. Management noted very limited prescription losses to CGRPs, but we think this might be difficult to sustain even though Botox has so far performed better than we initially expected.

We still see positives on the horizon from the pipeline. Allergan has the potential to expand Vraylar’s label to bipolar depression in the second half of 2019. Meanwhile the company has potential launches for ubrogepant in acute migraine, abicipar for wet AMD, and sustained-release bimatoprost in 2020. Rapastinel for major depressive disorder and atogepant for episodic migraine should follow in 2021. While some products like abicipar may have a difficult time gaining ground, we still view much of Allergan’s pipeline as differentiated, which should help with share gains and pricing power.

For a more detailed discussion of our outlook for Allergan and the pipeline, please see our recent report titled “Allergan’s Outlook to Improve Following 2019 Transition Year.”