The following is a presentation by Gabriel Grego, founder of Quintessential Capital Management, from the 2019 Sohn Hong Kong Conference on Allergan.
Q1 hedge fund letters, conference, scoops etc
QCM: Effectiveness As Activist
Allergan: Unlocking Value Through Management Changes
QCM May 2019 –
(QCM is long AGN)
Allergan In A Nutshell
- Market Cap: $46b (NYSE)
- Industry: pharma
- Segments: esthetics, general medicine
- Sales: $15.7b
- EBITDA: $7.1b
- Known for: Botox
Challenging Stock Performance (-58% Since 2015)
History
- Formerly Actavis.
- Redomiciled to Ireland (tax inversion)
- Generics division sale to Teva, deleveraging
- M&A spree
- Recent issues:
- Loss of exclusivity
- Serial write offs
- Looming botox competition
- Activist shareholders involved
Product Portfolio
Not Exactly A Thriving Business At First Sight…
…But Appearances Can Be Deceptive…
AGN: Inexpensive By Most Measures
EV/EBITDA: 9.7 (vs 13.5 Median*)
Valuation: FWD P/E 8.4 (vs. 17.9 Median*)
Why So Cheap? Plenty Of Uncertainty
- Botox: fear of new competitors
- Write offs: poor management?
- Loss of Exclusivity
- High leverage (3.2x EBITDA)
Loss Of Exclusivity: Can Be Managed
- Restasis + other LOE
- Only 9% of sales affected
- Mitigated by core growth*
->little/no impact on valuation
Write Offs: Poor Management?
- Questionable M&A
- Spectacular failures (e.g. Rapastinel)
- No new champions
- $13.4bn of balance sheet write-downs (in 4 years).
- Underperforming pipeline
Botox: Great Franchise, But New Competition Looming
- 24% of total AGN sales
- Fast (9%) growth rate
- Demographic tailwind
- High margin
- Limited regulatory risk (cash-based)
…Still Dominant
…But New Competitive Threats: Jeuveau
- Jeuveau (by Evolus)
- Seems clinically equivalent
- Marketed aggressively
- Discounts to doctors
- Branding
- Social media
…But New Competitive Threats: Daxi
- Daxi (by Revance)
- Might be approved in 2020 for frown lines.
- Seems to lasts significantly longer than Botox*.
Daxi Clinical Studies
Assessing Competitive Threats: Bull Case
- Brand strength
- Some customer lock-in
- cosmetic portfolio synergies
- Resilience vis-à-vis old, stronger competitors
- Competitors provide little/no new benefits, no clinical history.
- Botox upcoming longer-lasting product
Assessing Competitive Threats: Bear Case
- Some Botox clients will switch, if incentives are large enough.
- Product choice usually driven by doctor, not patient.
- Competitors may provide discounts to doctors.
- Safety profile not an issue (products perceived as nearly equivalent).
- New products may be more effective/longer lasting
Botox Worst-Case-Ccenario: Not So Bad
- Cosmetic Botox: only 10% of AGN’s revenue.
- Medical Botox less threatened.
- Doctors store 2/3 products max. Botox must-have.
- Growing market (CAGR 7.6%) should accommodate new supply
Many Ways To Win…
- Management shakeout
- Total vs biz dev
- Stand still, deleverage & buyback
- Botox fears proven unfounded
- Split cosmetic/medical
- Sale
Notable Investors
- David Tepper (Appaloosa)
- Seth Klarman (Baupost)
Why We Believe Management Has To Go
- Failed M&A policy
- Bad buyback timing
- Questionable compensation
- Lack of candor
- Main reason for depressed stock price
Conclusion
- Strong core portfolio.
- Botox threats probably overblown
- Very strong FCF generation
- Deleveraging & buyback underway
- Price multiple depressed
- Activists safeguarding questionable management
