Stuck in a trading range, Allergan (NYSE: AGN) needs to win back investors as the company continues to look for new drug products to drive sales growth. Confidence is so bad that activist AGN stock holders are trying to separate the chairman and CEO roles. What must the company do this year to get the shares moving higher?
Dissident shareholders proposed that the company immediately separate the top roles. If successful, this would reduce the power Brenton L. Saunders has over the company. The bad news is that on April 15, ISS and Glass Lewis & Co. recommended that shareholders vote against the proposal. On its 2019 annual proxy statement, the company disclosed that AGN stock price declines triggered a 20% realizable compensation:
“As a result of the decline in our share price, approximately 40% of our CEO’s target total direct compensation opportunity (base salary, target annual incentive and target long-term incentives) for 2016 through 2018 was realizable as of December 31, 2018. In addition, our CEO has realized approximately 20% of his target long-term incentive opportunity for awards granted since 2014 that were based on our stock price (cash-based awards that vest based on total shareholder return and equity-based awards) and for which the performance period was completed as of December 31, 2018.”
Without this change going through, Allergan stock holders will suffer.
Weak Fiscal Year 2018
In fiscal 2018, net revenue fell 1% year-on-year to $15.76 billion. Still, the company managed to improve its gross leverage ratio from 3.7 times in year-end 2017 to 3.0 times last year. It paid down $6.15 billion in debt in that period. It also bought back $2.74 billion, or 5%, of its total shares outstanding at the end of 2017.
From a product level, sales of Botox Tx grew 13% to $231 million, while Vraylar grew 69% to $199 million. The bad news is that CoolSculpting revenue grew just 6% to $28 million. Allergan paid $2.48 billion for Zeltiq Aesthetics in April 2017. Last quarter’s weak performance for the unit is troubling. With such poor results from the acquisitions, it’s no wonder that investors are displeased with Allergan’s recent merger and acquisition performance.
Growth Opportunities
In 2018, Allergan achieved a number of major R&D milestones in four areas: CNS, GI, eye, and medical aesthetics. Among those four key areas, medical aesthetics likely holds the most promise. Its Botox for masseter achieved Phase 2 positive results. And in the CNS space, Ubrogepant, for the acute treatment of migraines, achieved two positive Phase 3 studies and long-term safety.
In the near-term, Allergan has two products set for launch in the second half of 2019: Cariprazine, which treats bipolar depression; and, CoolSculpting CoolTone, as shown in the following pipeline graphic.
source: Allergan
Implant Recall Risk
The recalls of the Ozurdex breast implant will have a negative impact on revenue, albeit small. Allergan planned for $60 million in international sales for the textured implant. With the U.S. market excluded, it will miss out on sales totaling $100 million. The company now needs to rely on its existing product portfolio and new products coming to market to make up for that shortfall.
AGN Stock Valuation Needs Proof
Wall Street is still bullish on AGN stock and has a $184.60 price target (per TipRanks). When Allergan reports first-quarter results, it will need to demonstrate revenue growth of at least 5% for the full-year 2019 to justify its current share price. Otherwise, AGN stock’s fair value is 10% lower (using finbox.io’s five-year DCF revenue exit model).
Allergan stock is trending higher but to solidify a rally past its recent price of $147, the company needs a blowout quarter on its report due on May 7.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.
