Allergan plc (NYSE:AGN), formerly known as Actavis, is a pharmaceutical company formed and shaped by at least five major M&A deals since 2012. This summer, Actavis plc announced that it had adopted Allergan plc as its new global name and would start trading on the New York Stock Exchange under a new symbol, “AGN”. This change followed the acquisition of Allergan back in March 2015, which created one of the top ten pharmaceutical companies by revenue in the world and a leader in a new industry model – Growth Pharma. In the meantime, Allergan retains its spot as the most popular stock among the hedge funds tracked by Insider Monkey, even though the number of smart money investors with positions in the stock decreased to 151 from 157 during the second quarter. By the same token, the value of these stakes shrank to $20.73 billion from $21.97 billion. The shares of what is now Allergan have had a great run throughout the last decade or so. The stock has delivered a return of 582% over the past five-year period, and a return of nearly 15% year-to-date despite being affected by the recent broader market sell-off. In the following article we will discuss what some of the reputable hedge funds in the industry think of Allergan.
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We can now turn our full attention to one of Allergan plc (NYSE:AGN)’s major equity holders and that holder’s thoughts on the company. Daniel Loeb’s Third Point LLC talked up the pharmaceutical company in its letter to investors for the second quarter. The value-oriented investment management firm, which owns 3.3 million shares of the pharmaceutical company valued at $1 billion as of June 30, first cast its eye on the former Actavis back in 2013, when “it was a much smaller company”. At that time, Actavis had recently acquired Warner Chilcott, so Daniel Loeb and his team believed that the company was prepared and set to engage in other accretive transactions. The company has done just that, executing a number of acquisitions including those for Forest Laboratories and Allergan, in addition to many other smaller-sized deals.
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Additionally, the investment firm believes that both Paul M. Bisaro, who currently serves as Executive Chairman of Allergan, and CEO and President Brent Saunders have outlined a “strong strategic vision” for the pharmaceutical giant and “a coherent framework for pursuing deals”. Third Point also remarked that:
Their mission is to create a growth-oriented pharmaceutical company with attractive long-duration assets while implementing strict expense controls and avoiding high-risk and undisciplined R&D spend. Over the past two years, Allergan has used its formidable cash flow to acquire derisked assets and build a broad based pipeline, in line with its stated goals.
The New York-based investment firm also evoked that Allergan’s decision to sell its generics business to Israeli genetics giant Teva Pharmaceutical Industries Limited (NYSE:TEVA) was a financial “home run” considering that “they sold a structurally mature business for ~17x 2015 EBITDA while delevering the balance sheet from $40 billion in net debt to nearly zero”. On July 27, Allergan pocketed $33.75 billion in cash and $6.75 billion worth of Teva’s shares following the completion of the transaction. The letter to investors also noted that:
The strategic vision of the transaction is equally impressive. Despite the fact that generic drugs were Allergan’s original business, Bisaro and Saunders recognized that the legacy segment had become an anchor on valuation and that its divesture was the right course of action for Allergan shareholders. While shareholders applauded the decision, driving Allergan stock nearly 10% higher in the ensuing three days, we believe that there is still a meaningful valuation gap to close. Following the close of the TEVA transaction in Q1 2016, Allergan will be a pure-play growth pharmaceutical company with long duration branded assets in seven therapeutic areas, an underappreciated pipeline, an unlevered balance sheet and most importantly, a bold and forward thinking leadership team.
Meanwhile, Allergan plc (NYSE:AGN) posted phenomenal financial results for the second quarter, reporting net revenue of $5.76 billion, which was up by 116% year-over-year. By the same token, the company’s non-GAAP diluted earnings per share came in at $4.41, compared with $3.42 reported in the same quarter a year ago. Moving back to the fruitful letter, Daniel Loeb’s Third Point asserted its belief that the stock, which traded at $329 per share on July 31 or ~16.5x estimated pro forma earnings of $20 per share, was relatively undervalued at the time. However, the recent broader market pullback has pushed the stock below $300 per share, which makes it an even more attractive investment opportunity.
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