Standalone Allergan (AGN) Could Be Worth $300 - RBC
Allergan (NYSE: AGN) and Pfizer (NYSE: PFE) have officially called off the proposed combination following Monday night's aggressive Treasury rules that seem aimed to derail the deal. The stock is already reflecting deal break and so from here the focus will pivot to two things (i) what is "standalone" AGN worth and (ii) what is the earnings power. RBC analyst, Randall Stanicky, thinks the stock and Street numbers understate both right now.
AGN will hold a conference call at 10AM ET to discuss outlook from here - dial-in 1-877-251-7980 (ID 8677504).
Five things to think about on the standalone outlook and ahead of the call:
1) RBC believes standalone AGN will hold one of the best growth profiles in specialty pharma with a ~10% top-line outlook and mid-teens bottom line growth and we expect that to discussed on this morning's call.
2) The near-term debate will set up around earnings power in 2017E and current Street estimates are too low - a resumption in the "post TEVA generics sale" cost restructuring could add upside (i.e. a 300bps improvement in SG&A could add $500 million or ~$1.00 in EPS).
3) There are $29 billion in net cash proceeds coming in ~June from the sale of the generics business to TEVA that can be deployed to: (i) reduce some of the $42.7 billion in debt or (ii) share repurchases or (iii) potential M&A. We would not be surprised to see a combination of all three and again, that is not fully reflected in Street outlook.
4) Focus is likely again pick up on pipeline and the early Nov R&D day had driven a lot of enthusiasm that was partially tempered at the time on the understanding that AGN was going to combine with PFE. We expect that pipeline enthusiasm to return and play into thinking around support to the growth outlook (link).
5) There will be a lot of discussion today around what the right valuation for AGN is - while peer group comparison is likely the company has a cleaner capital structure at 0.9x 2017E net debt to EBITDA (before cost restructure, reflecting TEVA locked up equity) - overall at ~11.4x EV/EBITDA and generally in line with higher growth peers (ie. PRGO). The analyst thinks the company deserves a premium. If AGN can trade at ~14-15x P/E (i.e. PEG ~1.0x) on a $20 2017E EPS that reflects capital deployment, the stock can trade towards $300.
The firm reiterated an Outperform rating and $354 price target on AGN.
For an analyst ratings summary and ratings history on Allergen click here. For more ratings news on Allergen click here.
Shares of Allergen closed at $236.55 yesterday.