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In This Issue
Allergan (AGN)... 3 Portfolio News ... 5 Current Portfolio ... 7
“Allergan: A Solid Growth Play”
B
Biotech has had a relatively tough slog of it over the past weeks. The main biotech indices are down approximately four percent over that time. It should be noted that we are still about the same amount above previous hard resistance levels. This ceiling was punctured decisively in June after many previous failed attempts over a year and a half. As long as this new ‘floor’ holds, I don’t see a substantial sell-off in biotech from here outside an overall market pullback, which I also don’t see in the cards for the time being.
Second quarter earnings reports have been solid but not spectacular for the major industry giants in the sector. There has been a dearth of M&A activity in the sector outside a few small deals over the past six months. I think we need deal flow to return to take the next leg up in the rally. I do think this part of the market will pick up by end of the year.
My guess is this will happen in the fourth quarter when details of the tax reform are known and investors have a better idea what the chances of passage are as well. Large biotech and pharma concerns are also waiting for this so they know the disposition of the hundreds of billions in cash they have sitting in their overseas operations, and whether they will be able to repatriate these funds at a reasonable cost. This could fuel new acquisitions as well as increases to R&D, dividend payouts and stock buybacks across the industry.
The generic drug sector has come under tremendous pressure in August so far. Two years ago, Valeant
Pharmaceuticals (NYSE: VRX) was a hedge fund hotel and market darling. Mylan (NYE: MYL) was also offered
over $80.00 a share to be purchased by Teva Pharmaceuticals (NASDAQ: TEVA). An offer it turned down for ‘undervaluing’ the company: it now trades just above $30 and will be removed from the Biotech Gems portfolio with this issue. A year ago, the airwaves were full of election driven rhetoric around drug price ‘gouging’ across the industry.
It seems the politicians were closing the barn door after the horses had left. Recently the talk across the generic drug space has been on price ‘deflation’. Cardinal Health (NYSE: CAH) brought investor attention to this during its earnings conference call on Wednesday of last week. Teva then made this trend abundantly clear by
delivering the worst earnings report of any large cap healthcare concern this quarter on Thursday. Not only did the largest generic drug maker miss estimates, it announced it is lowering guidance as well as slashing its dividend and will be laying off 7,000 staff to reduce operational costs.
New leadership at the FDA will also continue to exacerbate the chasm in sentiment between branded drug and generic drug concerns. The agency is moving to speed new drug approvals along while lowering the costs of new
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development. At the same it wants to drive more competition for all drugs that are ‘off-patent’, which should continue the recent trend in deflation in this space and will act as a headwind to these firms.
I am always amazed on how fast things change in this high beta sector of the market even after a quarter century of investing in it. If nothing else, there is rarely a dull moment being a biotech/biopharma investor. Nothing about that is likely to change in the future. Which is why all participants in this part of the market must remain vigilant and well-diversified.
Thank you and Happy Hunting Bret Jensen
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Allergan
(NASDAQ: AGN)
As mentioned earlier in this month’s issue, Mylan
(NASDAQ: MYL) is being dropped from the portfolio. In
its place as a core holding we’re adding branded drug giant Allergan (NASDAQ: AGN) which is based in Ireland.
Its stock has done well over the past year but did not enjoy a strong recent showing on overall weakness in large biopharma stocks even as the company reported better than expected quarterly results last week. The shares are up some 20% this year. Approximately $60 a share from the level Pfizer (NYSE: PFE) was set to tie up with it before the U.S. Treasury Department derailed this combination in April of 2016 after Allergan became the poster boy in an election for so-called “tax
inversions” in an election year. The shares are more than $100 a share away from their all-time highs.
Sale of Generic Drugs Business:
In the second half of 2015 the company agreed to sell its generics business to Teva Pharmaceuticals
(NASDAQ: TEVA) for just over $40 billion. This was a
strategic step on its way to merging with Pfizer and got rid of a low margin business. The deal was officially completed over the summer of 2016.
Allergan received $33.75 billion in cash and $6.75 billion in Teva stock when the deal completed. Given the
recent carnage and drug price ‘deflation’ in the generic drug market, the timing of this transaction is looking better by the day.
The company stated at the time it would buy back $10 billion in stock and pay down some debt with a portion of these proceeds. The company has been good to its word and has bought back a good amount of stock over the past year. Allergan initiated a 70 cent a share quarterly dividend earlier this year as well. This is just less than a 20% payout ratio based on this year’s earnings.
Look for the company to serially deliver significant dividend hikes annually in coming years. This should help it attract more income orientated investors and add extra value to holding the shares.
More importantly, the funds received from the generic drug business to Teva were put to good use by Allergan to make some strategic acquisitions to expand in desired disease areas and boost growth. Given that the biotech and biopharma sectors were just emerging from their deepest and longest bear market since the
financial crisis, it was an opportune time to get some “dry powder” to do some bargain shopping, especially in the smaller cap names that bore the brunt of that brutal decline.
The company has already made several smaller acquisitions including Chase Pharma, Tobira
Pharmaceuticals (NYSE: TBRA), Motus Therapeutics
and Vitae Pharmaceuticals since its generic drug business sale. The purchase of Vitae strengthened the company's portfolio in dermatology through promising compounds for the treatment of psoriasis, atopic dermatitis and autoimmune diseases. Tobira gave Allergan entry into the NASH market, which is one of the potential blockbuster disease areas over the next decade.
4 Chase is pursuing therapies for neurodegenerative
disorders, including Alzheimer's disease.
I particularly liked Allergan’s purchase of ZELTIQ
Aesthetics (NASDAQ: ZLTQ) for around $2.5 billion
earlier this year. This expanded its footprint in the cosmetic side of the business where Botox is a key growth driver for the company. This acquisition added over $80 million in sales to the company’s second quarter results.
Product Portfolio:
Allergan has a well-diversified product lineup with major contributors that include the aforementioned Botox. Anda, which is its distribution business, makes up 15% of sales and is of course never subject to patent expirations. The remaining company should grow faster in the years ahead now that it has jettisoned its slower growing generic drug business.
The company continues to find new uses for its fast selling Botox product including for migraines and overactive bladders. These new indications are
patentable and there is no significant patent cliff across the portfolio in the foreseeable future. The company has numerous new products coming to market over the next few years, not to mention any products it
strategically acquires over that time span.
Recent Results:
On August 3rd, the company reported earnings of $4.02 a share. This was a dime a share above expectations and represented an approximately 20% rise from the same period a year ago. Revenues rose some 9% year-over-year which was also slightly above the consensus and the company bumped up forward guidance a tad as well. It was the third quarter in a row that Allergan had beat on both the top and the bottom line.
Analyst Commentary & Balance Sheet:
The current median analyst price target on Allergan is right at $280.00 a share. Over the past two weeks, five analyst firms including Credit Suisse and Citigroup have reiterated Buy ratings with price targets ranging from
$267 at Mizuho Securities all the way up to Cowen & Co. at $400. Thanks to the proceeds from its ideally timed sale to Teva, Allergan’s balance sheet continues to be rock solid.
I would expect the company to continue to make small strategic acquisitions to boost growth in its branded drug lines. The company’s headquarters in Ireland and its very low corporate tax continues to give Allergan a competitive advantage to other suitors in other parts of the world with significantly higher corporate tax rates.
Outlook & Valuation:
Allergan is not a ‘home run’ stock or even a ‘stand up double’ type of equity. However, it offers just the type of consistent growth at a reasonable value one wants to have in their large cap ‘core’ positions. The company should continue to grow earnings in the mid-teens annually on the back of revenue growth in the high single digits. The shares are more than reasonably priced given growth at approximately 15 times this year’s earnings. A decent discount to the overall market multiple.
Allergan also has the currency and advantageous location to continue to boost that organic growth with small strategic acquisitions. In addition, while its initial dividend level is just above one percent its low payout level means that will be hiked significantly over the coming years in all likelihood. This will just add to the investment case around Allergan.
Recommendation: Buy AGN
up to $260.00 a share.
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Portfolio News
The biotech sector continued its slide from last week. The main biotech indices are down some four percent over the past two weeks. This week, headwinds were felt by the deterioration in the fundamentals and sentiment on the generic drug sub-sector (see Market Commentary).
In addition, there continues to be a dearth of new M&A activity. There have been some frequent buyout rumors but little in the way of new deals. I think M&A will pick up in the fourth quarter. It is hard to see the next leg of the June rally continuing absent given this second quarter earnings season is largely over.
However, the biotech indices are about four percent above hard resistance levels that took 18 months to broach before the breakthrough occurred late in June. That ceiling should be the new ‘floor’ for the indices outside a large market pullback in my opinion.
Performance Update:
Our benchmark the iShares Nasdaq Biotechnology
(IBB) ETF, the largest ETF focused on the biotech sector
with almost $9 billion in assets, is now down 8.23% since we launched the Biotech Gems service at the start of May of 2015.
Our large cap core positions are up 0.89% on average while our small cap portion of our portfolio is now down 4.38% on average, both not including dividends. Using the minimum 50% allocation recommended to our core positions gives us a slight loss of 1.75%, 648 basis points above our benchmark. The most conservative allocation of 75% dedicated to the large cap core positions results in a tiny loss of 0.43%, 780 basis points above the benchmark.
As noted in the beginning of this month’s issue, sentiment and business fundamentals around the generic drug sector has deteriorated rapidly. Therefore, I feel it is better to get out of Mylan (NASDAQ: MYL) despite what looks to be a great value at current prices. Mylan will be replaced by Allergan (NYSE: AGN) as a core large cap holding. It is a consistent growth play at a reasonable valuation. Celgene (NASDAQ: CELG) had a nice gain last week while Gilead Sciences (NASDAQ:
GILD) fell late in the week on new pricing concerns
within the hepatitis C space.
Our small cap holdings continue to offer
encouragement. Neurocrine Biosciences (NASDAQ:
NBIX) reported the first sales from the rollout of its
newly approved drug Ingrezza. Initial revenues were better than the consensus and the stock shot up some 10% on Friday.
Omeros (NASDAQ: OMER) also bucked the downward
trend of the market. Its primary drug candidate in development ‘OMS721’ received Orphan Drug status from the FDA for the treatment of a rare kidney
6 disorder called IgA nephropathy, also known as Berger’s Disease.
Invitae (NASDAQ: NVTA) also moved up some 10% and
is healthily above the $10 level. The company reported better than 150% year-over-year revenue growth when it delivered its quarterly update on July 31st.
TG Therapeutics (NASDAQ: TGTX) pulled back some
this week as the stock remains in roughly the same $10.00 to $12.00 trading range the shares have been stuck in since the stock doubled in March after encouraging trial results.
Finally, ANIP Pharmaceuticals (NASDAQ: ANIP) sold off unfairly late in the week on the carnage in the generic drug space. This was despite posting stellar quarterly results. The company beat on the top and bottom line consensus. Revenue growth year-over-year topped 40%. With the stock now down near 52-week lows and with a pristine balance sheet, this would be my pick for a bounce back in the weeks ahead.
Just to be clear, as of this issue we’re closing our position in Mylan and it will no longer be covered in the portfolio update going forward.
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Current Portfolio
**Recent price is determined by the last "Close" price at the closing of the market on the day before publication; most recent update: 08/07/17. Company Entry Date Entry Price Recent Price Buy Up To Returns
Allergan (AGN) - Core 08/07/17 $242.65 $241.22 $260.00 -0.6%
Zogenix (ZGNX) 07/17/17 $14.30 $13.00 $16.00 -9.1%
Invitae (NVTA) 06/26/17 $9.65 $10.12 $10.50 4.9%
Neurocrine Biosciences (NBIX) 05/22/17 $53.64 $53.80 $57.50 -5.0%
Bellicum Pharmaceuticals (BLCM) 04/14/17 $13.50 $10.88 $15.00 -19.4%
ANI Pharmaceuticals (ANIP) 03/21/17 $45.25 $44.02 $50.00 -2.7%
Omeros Corporation (OMER) 02/15/17 $11.58 $22.15 $13.50 91.3%
Intra-Cellular Therapies (ITCI) 01/17/17 $14.19 $10.98 $16.00 -22.6%
Recro Pharmaceuticals (REPH) 12/16/16 $7.15 $7.51 $9.00 5.0%
Trevana Inc. (TRVN) 11/21/16 $6.48 $2.48 $4.50 -61.7%
Vascular Biogenics (VBLT) 10/17/16 $4.95 $4.15 $6.50 -16.2%
Progenics Pharmaceuticals (PGNX) 07/07/16 $5.44 $5.76 $8.00 5.9%
Artana Therapeutics (PETX) 05/12/16 $5.49 $6.26 $6.00 14.0%
Celgene (CELG) - Core 03/31/16 $100.09 $137.06 $125.00 36.9%
TG Therapeutics (TGTX) 01/13/16 $8.47 $10.15 $10.00 19.8%
AbbVie (ABBV) - Core 09/28/15 $52.50 $71.22 $60.00 35.7%
Lexicon Pharmaceuticals (LXRX) 08/24/15 $11.33 $15.32 $15.00 35.2%
Amgen (AMGN) - Core 07/07/15 $155.39 $174.58 $165.00 12.3%
Synergy Pharmaceuticals (SGYP) 06/05/15 $4.90 $3.85 $5.50 -21.4%
8 Notes:
Positions designated as “Core” represent the large-cap stocks in the portfolio that should make up 50% to 75% of an investors biotech portfolio
depending on each subscriber's individual risk profile.
Entry price is determined by the last "Close" price at the closing of the market on the day before publication, which also serves as the Entry Date. Buy Up To is the upper share price limited recommended for buying new shares. Returns data is share price appreciation or depreciation between entry price and recent price.
This is not real-time data and should not be interpreted as such. All data is subject to change without notice.
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