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Allergan Stock Down Since Q1 Earnings Report: Here's Why

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Shares of Allergan plc AGN have declined 4.4% since it reported its first-quarter 2018 results on Apr 30. In fact, so far this year, Allergan’s share price has declined 5.3%, compared with the industry’s decline of 6.8%.

Allergan’s first-quarter 2018 results were strong as it beat expectations for both earnings and revenues. Earnings rose 11.6% year over year, driven by higher revenues and lower operating costs. Revenues increased 6% on an organic basis excluding the impact of M&A and foreign exchange. Not only this, Allergan raised its earnings and sales guidance range for 2018.

Also, this year, Allergan announced successful study results from two late-stage studies on its anti-CGRP acute migraine candidate, ubrogepant and a line extension study on Vraylar in bipolar I depression. Meanwhile, its anti-infective drug, Avycaz gained FDA nod for a third indication in the United States. It gained EU approval for Mvasi, Allergan and partner Amgen’s AMGN biosimilar version of Roche’s RHHBY cancer drug, Avastin.

Despite such strong quarterly performance and positive regulatory updates, shares of this pharma company continue to decline this year.

We believe this is because Allergan is facing loss of exclusivity for several of its key products and it will continue through 2018. This is what concerns analysts. While the first generic versions of Alzheimer’s treatment Namenda XR and Estrace cream were launched in the first quarter, that of blockbuster dry-eye drug, Restasis, Allergan’s second best-selling drug, is expected to be launched in the second quarter.

A generic version of Delzicol is also expected to be launched in early second-quarter 2018. Allergan estimates that the products facing loss of exclusivity were worth$3 billion in 2017. Sales of these products are expected to decline significantly in 2018 with the introduction of generics.

On the first-quarter conference call, Allergan management addressed this disconnect between its business performance and stock value. Allergan’s CEO Brent Saunders said it is conducting a strategic review of its business, which can unlock shareholder value.

Management discussed several strategic options, which included incremental aggressive share buyback, divestiture of certain assets to concentrate more on key therapeutic areas, splitting the company and making smaller bolt-on acquisitions. Allergan has hired multiple financial advisors to help evaluate the different options.

Regarding M&A activity, Allergan said that though a large merger is unlikely, it may make product/pipeline acquisitions that could strengthen its key areas of therapeutic focus. However, Saunders also said that splitting the company is not quite likely to be the outcome of the strategic review as it could prove time consuming, complicated and costly.

We need to wait and see if management’s optimism surrounding these strategic options gets reflected in its share price, going forward.

Allergan currently carries a Zacks Rank #3 (Hold).

A better-ranked drug/biotech stock is Ligand Pharmaceuticals LGND with a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ligand’s earnings per share estimates increased 7.4% for 2018 and 8% for 2019 in the last 30 days. The company delivered a positive earnings surprise in all the trailing four quarters, with an average beat of 31.79%. The company’s shares have rallied 36.7% year to date.

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