Allergan (AGN) Tops Q3 Earnings Estimates, Tweaks 2017 View – November 1, 2017


Allergan plc’s (AGN Free Report) third-quarter 2017 earnings came in at $4.15 per share, beating the Zacks Consensus Estimate of $4.06 by 2.2%. Earnings rose 25% year over year as higher revenues offset higher costs.

In the quarter, the company recorded an impairment charge of $4.1 billion, primarily related to Restasis and Aczone and another $1.3 billion in impairment charge related to losses on investment in Teva Pharma (TEVA Free Report) securities. Including these charges, the company reported a loss of $12.05 per share compared with a loss of $1.15 per share in the year-ago quarter.

Last month, a Texas federal district court invalidated four of the six patents covering dry eye drug Restasis, Allergan’s second best-selling drug, potentially opening doors for early generic competition. Restasis patents are scheduled to expire in August 2024. However, a generic may be launched much earlier. Along with the earnings release, the company said that it has filed a notice of appeal with the court.

The impairment charge for Restasis was in relation to this adverse ruling while that for Aczone was in response to generic pressure in the branded acne category.

Revenues came in at $4.03 billion, up 11.4% from the year-ago period, and in line with the Zacks Consensus Estimate.

Key products like Botox and Restasis and new products like Vraylar, Namzaric and Viberzi did well in the quarter. However, sales erosion from Namenda XR and loss of exclusivity, mainly from Asacol HD and Minastrin hurt the top line.

Third-quarter revenues also benefited from the addition of Alloderm from LifeCell (January) and CoolSculpting body contouring system from ZELTIQ (April) acquisitions

Segment Discussion

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

U.S. Specialized Therapeutics’ net revenues increased 18.7% to $1.72 billion driven by continued strong performance of Botox and higher sales of Juvéderm Collection of fillers and Restasis.

Botox (cosmetic) raked in sales of $189.7 million (up 8.7%). Botox Therapeutic revenues were $352.1 million, up 15.3%. In addition, Juvéderm Collection of fillers rose 10.1% and Ozurdex sales increased 17.7%, which contributed to the upside. Restasis sales rose 2.9% to $366.8 million in the quarter. Aczone sales declined 32.3% in the quarter to 46.7%.

LifeCell’s Alloderm added $84.6 million while ZELTIQ’s CoolSculpting business added $83.4 million to sales in the third quarter.

U.S. General Medicine net revenues were flat at $1.5 billion in the reported quarter with sales declining in the Diversified Brands and Women’s Health franchises. Anti-Infectives sales rose 28% to $67.2 million, Gastrointestinal rose 2.8% to $443.5 million and Central Nervous System sales rose 9.1% to $355.2 million.

Established products like Linzess and Lo Loestrin as well as new products like Namzaric and Vraylar did well in the quarter. Linzess’ sales rose 16.1% in the quarter to $190.9 million, driven by strong demand and favorable trade buying patterns. Lo Loestrin sales rose 13.5% to $120 million backed by strong prescription growth and higher selling prices.

However, lower Namenda XR sales hurt the performance of the CNS franchise. Namenda XR sales declined 22.5% to $114.3 million in the quarter due to lower demand, lower pricing and shift of promotional efforts to Namzaric.

Namzaric, a once-daily, fixed-dose combination of Namenda XR and Aricept, recorded sales of $37.0 million compared with $33.4 million in the previous quarter. Continued conversion from Namenda XR and higher demand following an expanded label with new dosages pulled up sales of Namzaric.

Asacol/Delzicol sales declined 31.4% to $49.5 million due to a reduction in demand for Ascaol HD, following the launch of an authorized generic in August 2016 as well as lower demand for Delzicol.

In the Women’s Health segment, Minastrin 24 revenues declined 95.8% to $3.6 million in the quarter due to loss of exclusivity in March.

The International segment recorded net revenue of $807.8 million, up 13.7% from the year-ago period, driven by growth in Facial Aesthetics, Eye Care and the addition of CoolSculpting.

Costs Rise

Selling, general and administrative (SG&A) expenses rose 9.2% to $1.10 billion in the quarter, primarily due to higher foreign exchange transactional losses and costs related to acquisitions. R&D expenses increased 4.9% to $405.3 million to support an advancing pipeline.

2017 Outlook Tightened

The company narrowed its previously issued earnings and sales guidance for 2017.

Allergan expects total revenue in the range of $15.875 billion to $16.025 billion compared with $15.85 billion to $16.05 billion previously.

Adjusted earnings per share are expected in the range of $16.15–$16.45 compared with $16.05–$16.45 previously.

Adjusted gross margin guidance was maintained in the range of approximately 86.5% and 87%.

The company maintained its R&D and SG&A expenses guidance. R&D expenses are expected to be approximately $1.6 billion while SG&A spend is expected between $4.5 billion and $4.6 billion.

Our Take

Allergan’s third-quarter results were mixed as the company beat expectations for earnings while delivering in-line revenues. While the company slightly lowered its sales guidance, it raised the lower end of the earnings guidance. This probably boosted investor confidence at a time when Allergan is facing multiple challenges. Shares were up 1.5% in pre-market trading. So far this year, Allergan’s share price is down 15.6% compared with the industry’s decline of 29.4%.

Allergan is facing patent challenges for quite a few of its products including Generess Fe, Namenda XR and Asacol HD.

Other than the adverse ruling related to Restasis, Allergan also recently came under fire for entering into an agreement with the Saint Regis Mohawk Tribe to protect Restasis from generic competition. Lawmakers questioned the unconventional move adopted by the company. The deal with the Tribe has basically raised concerns that it will curb generic competition in the pharmaceutical industry and discourage generic drug makers from making cheaper versions of expensive drugs.

Meanwhile, new competition for key growth drivers, Restasis and Linzess, is an investor concern. Shire’s (SHPG Free Report) dry eye disease drug Xiidra, launched last year, is posing strong competition for Restasis. Meanwhile, Synergy Pharmaceuticals, Inc.’s (SGYP Free Report) Trulance (plecanatide) has been launched this year for chronic idiopathic constipation, which could pose competition to Linzess.

Nonetheless, Allergan’s products like Botox and Linzess and new products such as Viberzi and Vraylar support sales growth. It also boasts a strong branded pipeline while biosimilars also represent significant opportunity.

Allergan carries a Zacks Rank #4 (Sell).

You can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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