- The biotech sector is looking very bullish from a technical and volume standpoint. I believe the correction is over.
- The Teva deal will enable Allergan concentrate on specific areas where generic competition is much less.
- Just another product as successful as Botox would do wonders for earnings growth.
Allergan (NYSE:AGN) share price dipped to $235 a share last week (which is its lowest price since November 2014) due to the break-down in the planned merger with Pfizer (NYSE:PFE). In fact, the stock is down 12% over the last week which presents an opportunity in my eyes for a number of reasons. Firstly and before we discuss the fundamentals of Allergan, take a look at the chart of LABU which is a leveraged ETF in the biotech sector.
Allergan stock behavior has been mirroring biotech sector index iShares NASDAQ Biotech Index (NASDAQ:IBB) closely and what is really interesting is the explosion in volume in this sector recently. Furthermore, the rounded bottom looks very bullish (higher lows and higher highs) which makes me believe that there is a high probability that the downturn in this sector is over. If this is true, stocks such as Allergan have much to gain. Let's go through why I believe this company is a strong buy at any price under $260 a share.
The Teva Pharmaceutical (NYSE:TEVA) deal (where Allergan's generic segment will be sold off) that is scheduled to go through in the summer has definitely taken on more importance as a result of the Pfizer deal now being firmly off the table. The reason is that Allergan needs to shore up its finances with the cash from the sales. This would probably be used to reduce its financial leverage (Moody's currently have it at Baa3) which would keep its credit rating intact. This is important especially for pharmaceutical and biotechnology companies because cash on hand or just mere access to cash at attractive rates is crucial due to the front loading model of this particular industry.
Many trials and research must be done beforehand and Allergan has to pay for this through acquisitions or doing its own R&D. Initiatives such as the recent Heptares collaboration where Allergan has entered into an R&D agreement surrounding the whole area of Alzheimers are crucial and must be continued to drive the company's earnings forward. Furthermore with cash on hand, one would have to back Allergan on an acquisition spree especially considering the success it has garnered from deals such as the Forest Lab for example.
Secondly, there is no doubt that Allergan is strong in a number of principal areas (such as gastrointestinal and urology) as well as smaller higher profit divisions such as aesthetics and ophthalmology. However a strong portfolio of drugs is one thing but marketing them is a whole different ball game. Nevertheless, I feel that the ads that Allergan is coming out will continue to move the needle for Allergan especially with the US government currently granting prescription drug advertising on TV.
It's not something I agree with but it comes as no surprise to me that drug manufacturers advertising budgets have ballooned in the last few years. The longer this continues, the more profitable it will be for the likes of Allergan as the obvious result is the patient invariably going for the more expensive drug that he or she has already been sold on.
Thirdly, investors should remember that as Allergan divests of its generic businesses, what will be remaining will be mostly specific markets where barriers to entry are very high for aspiring competitors. Furthermore, I expect Allergan to keep diversifying its portfolio of drugs to minimize competitor risk going forward. In saying this, Botox continues to perform excellently. The proven neurotoxin brand seems to be a mainstay with doctors bring in over $2 billion in top line sales every year. These are the areas Allergan wants to focus on which is why it is exiting generics. Niche areas where the barriers to entry are high should keep healthy profits rolling at Allergan.
To sum up, I would use the recent fall in Allergan's share price to go long at these levels. The biotech bull is not finished and Allergan's departure from generics, strong marketing presence and diversified portfolio of drugs will all drive this stock back up to its former highs. Use weakness to get long here.