Kristine Harjes: Is Allergan, at this point, channeling Kelly Clarkson's, Since U Been
Gone, I Can Breathe, or is Pfizer more like Beyonce's Irreplaceable? What are they going
to do next? Todd Campbell: Yeah, Allergan is ... They
need a few things to go right for them, but they do have some very intriguing drugs that
are in the pipeline. They've got a drug for migraine coming through the pipeline, that
could be a billion dollar seller. They've got some new depression drug coming through
the pipeline, that could be a billion dollar seller. Botox, of course, is a multi-billion
dollar blockbuster, and they think they can get it approved for additional indications
that could move the needle. This year, they're expecting sales to grow
in the low double digits, so they're going to go from $15 billion in sales to roughly
$17 billion in sales. Solid growth, you know. Then of course, how much of that translate
into earnings, just will depend a lot on how good they are at cutting costs.
Harjes: Estimates have them growing earnings at 15% a year for the remainder of the decade.
Campbell: Which would be great. They had talked about, in prior investor calls, they talked
about $25 a share. Today on his call, the CEO of Allergan said, "Hey, you know, we'd
love to get to $30 a share." Right? Harjes: Of course they would.
Campbell: The thing that we have to remember, too, is that we've got non-GAAP EPS and GAAP
EPS, and because Allergan's been so acquisitive it's really hard to say, "Okay, what's their
real earning power absent all these acquisitions?" Okay, if they earn $15 or $20 or $25 on a
non-GAAP basis, what does that mean on a GAAP basis? Last year they lost money, if you do
it on a GAAP basis. Harjes: That's kind of crazy, yeah. That does
of course, demonstrate that you probably should look at both. I think the other maybe yellow
flag for this company is, if you take a look at their balance sheet, they do have quite
a bit of debt, but there's a caveat with that, with the potential sale of their generics
unit to Teva. Campbell: One of the biggest concerns that
I have with this company, because again, I think investors need to always look at these,
"What could go wrong," kind of scenarios. One of the things that I get a little big
nervous about, although of course, Allergan says, "We're on track. This deal is going
to close." They're trying to sell their generics business to Teva, and if that deal goes through
they're going to get a check for $33 billion and some change. They're going to get another
$6.75 billion worth of Teva stock. If they get that, and the deal closes without a hitch,
that makes that huge $42 billion in debt that's on their balance sheet become a lot more manageable.
They've got $1.2 billion in cash and $42 billion in debt. That's not very good. Getting this
money in from Teva would be game-changing for the balance sheet. Of course, that assumes
that this goes through. Harjes: Yeah, I was just going to say, if
I had asked you a couple of days ago which deal was more likely to go through, the Allergan
and Pfizer one or Allergan and Teva, what would you have said?
Campbell: Whoo, great question! I don't know. I was a little bit more ... I was more worried
probably about the FTC review of this generics sale.
Harjes: Really? Okay. Then that's definitely kind of nerve-wracking.
Campbell: Only because there's been a lot of push-back on generic drug price increases.
Last summer, the Department of Justice actually sent an inquiry to Allergan asking about it,
how it was pricing its generic drugs, and other generic drug makers have received similar
subpoenas. They're very concerned about the chance for monopolies in generic drug industry
with that backdrop ... What could happen with generic drug prices.
Harjes: That probably does a lot to explain Allergan's current share price. I have been
scratching my head a little bit because before the Pfizer plans were announced back in November,
Allergan was trading at above $300 a share. They're now at $245. You would think that
they would have traded higher than they had been, previous to this news being announced,
but they dropped a good 15% on the news. To me, that's like, "Well, before when it was
a stand-alone business, you had it valued at one place. They say they're going to merge
with Pfizer and you devalue them. And then the merger breaks up and they're trading even
lower." I think you might have the key there, that it's more doubt about this Teva deal.
Campbell: If Valeant Pharmaceuticals' taught us anything, it's this whole idea of acquire,
acquire, acquire, throw a ton of debt on the balance sheet, it may not be such a good thing,
right? It's good until it isn't. Harjes: Yeah, the Allergan CEO, Brent Saunders,
has been very clear that he does not want his company to be associated with Valeant,
which you could say has a similar model of being very acquisitive. Of course, Allergan,
at least according to Saunders, has much more of a reliance on actual R&D.
Campbell: Yeah, they spent about a $1.5 billion, I think, on R&D last year. It's certainly
not the same level as you'd see with a Pfizer or a Johnson & Johnson or something, but it's
a good amount of money, and they do have some intriguing specialty drugs making their way
through. I would agree with you on that front that their pipeline certainly has more potential,
than say, a Valeant, if you will. Again, deleveraging that balance sheet is going to be important.
One of the things that Allergan CEO really, really hammered home on that conference call
today was, "We're going to do whatever it takes to maintain our investment grade rating."
So keep an eye out there for what Moody’s says about Allergan, after this deal has now
been scuttled. Harjes: Yeah, it's definitely good advice.
I will also put a little bit more of a positive commentary from Saunders in there, just about
how strong their pipeline is. He pointed out that they have 70 mid to late stage programs,
including 14 expected approvals and 16 regulatory submissions in 2016, alone. You do have a
good number of question marks with this business, but hopefully, they don't get hit out of the
blue again with something unexpected, maybe such as the Teva deal falling through. Hopefully
they can be singing the Gloria Gaynor karaoke favorite, "I will survive." That's my last
bad music reference I'm going to make on this show, just so you all know.
Campbell: Yeah, they're going to be fine, just as long as this Teva deal goes through,
I would think. The book value of the company is like $189 a share. You're not paying a
lot more than book. If you're using a non-GAAP EPS estimate, it's about 14, the shares are
trading around 14x for EPS estimates. Not bargain basement, but certainly not a sky-high
valuation.