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Allergan Looks to Salix to Fight Off Valeant

Poor Allergan (AGN). All the company wants to do is develop drugs, and it does it well. Allergan’s most recognizable drug is Botox, but the company has other drugs in the market place as well, even one that helps women grow longer eyelashes — I’ve seen this one in action, it makes a girls eyelashes as long as a runway model’s. AGN is also a solid stock to own. The company grows profits every year, at a rate of 15% a year for a decade, and the stock follows suit.

Alas, Valeant Pharmaceuticals (VRX) is trying to put an end to Allergan’s run. VRX is bidding to acquire AGN, even though AGN doesn’t want to be acquired (it just wants to develop drugs). But VRX wants to take over AGN, move its tax status to Ireland, cut costs, and make some money. AGN replies that the cost cuts will kill its research & development department — and prevent it from developing new drugs. Valeant has paid 3% to 5% in taxes the past few years. AGN paid 26% in taxes in 2013.

Allergan has fought back. Last month it said it plans to cut 13% of its workforce (which caused earnings estimates to jump) and today AGN proposed to buy Salix, a North Carolina company that’s in the midst of aquiring Cosmo Technologies of Ireland. The Salix buy would let AGN  get the lower Ireland tax rate on its own, and fend off Valeant.

One Year Chart

AGN_2014_Q3But enough about the news, let’s look at the profits. AGN has had above average profit growth of 20% and 24% the past two quarters, and Estimates show this should continue.

What’s not shown here is 2015 & 2016 earnings estimates jumped when AGN said it would cut its staff by 1500, which should save $475 million a year. 2015’s estimates jumped from$6.85 –> $8.10 and 2016’s from $8.13 –> $9.65. For a detailed perspective on this check AGN’s Earnings Table.

Fair Value

AGN_2014_Q3_FVAGN’s value is now high with the proposed staff cuts & takeover talks. The P/E is 29, and if AGN get’s a 30 P/E next year and makes the $8.10 expected, then the stock’s going to $243. What’s more likely is a 22 P/E on earnings that are boosted even higher by the proposed Salix acquisition. 

Sharek’s Take

Allergan has a fight on its hands, and the winners will be AGN shareholders. Unfortunately, those of us that don’t own the stock should wait because AGN has already run-up on this news. I don’t like the Valeant deal because I think Allergan would get gutted and won’t be able to make the face-changing drugs it has in the past. If AGN does get with Salix and “moves” to Ireland then these profit estimates could jump higher once again.

View the Earnings Table here.
View the Profit History here.
View the Ten Year Chart here.

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