Value Investing

Quintessential Capital Management – Allergan: Unlocking Value Through Management Changes

The following is a presentation by Gabriel Grego, founder of Quintessential Capital Management, from the 2019 Sohn Hong Kong Conference discussing Allergan plc (NYSE:AGN)’s serial write offs and poor management.

QCM: Effectiveness As Activist

Gabriel Grego

Allergan: Unlocking Value Through Management Changes

(QCM is long AGN)

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Q1 hedge fund letters, conference, scoops etc

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)

Gabriel Grego

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

Gabriel Grego

Not Exactly A Thriving Business At First Sight...

Gabriel Grego

...But Appearances Can Be Deceptive...

Gabriel Grego

AGN: Inexpensive By Most Measures

Gabriel Grego

EV/EBITDA: 9.7 (vs 13.5 Median*)

Gabriel Grego

Valuation: FWD P/E 8.4 (vs. 17.9 Median*)

Gabriel Grego

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

Gabriel Grego

  • Restasis + other LOE
  • Only 9% of sales affected
  • Mitigated by core growth*

->little/no impact on valuation

Write Offs: Poor Management?

Gabriel Grego write offs

  • 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

Gabriel Grego write offs

  • 24% of total AGN sales
  • Fast (9%) growth rate
  • Demographic tailwind
  • High margin
  • Limited regulatory risk (cash-based)

...Still Dominant

Gabriel Grego write offs

...But New Competitive Threats: Jeuveau

  • Jeuveau (by Evolus)
  • Seems clinically equivalent
  • Marketed aggressively

...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

Gabriel Grego write offs

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

Gabriel Grego write offs

  • 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

This article first appeared on ValueWalk Premium