Patent Losses Could Sink Allergan

Allergan (AGN) reports Q4 earnings on Tuesday. Investors expect revenue of $4.28 billion and eps of $4.74. The revenue estimate implies 6% growth sequentially. Investors should focus on the following key items:

Loss Of Exclusivity For Key Products

Allergan is known for its vaunted R&D pipeline. While hits from its pipeline may not materialize until the second half of 2018 and beyond, the company currently faces a loss of exclusivity ("LOE") for key products. Allergan made major headlines for its patent battle with Mylan (MYL) and Teva (TEVA) over dry eye drug Restasis. Judge William Bryson invalidated the Restasis patents in Q3 2017. If Allergan loses an inter partes review ("IPR") it could clear the way for generic Restasis to enter the market by the second half of 2018. The drug represents about 9% of Allergan's sales.

In December the company lost an appeal in its attempt to protect its Combigan eye drug from generic competition posed by Novartis AG (NVS), (NVSEF). Combigan currently represents 3% of sales; the adverse patent ruling could move Novartis one step closer to launching generic Combigan. Lastly, Mylan and Teva recently launched a generic version of Allergan's vaginal cream Estrace. The cream represents about 3% of Allergan's total revenue. I expect the generic version to cause a hit to Allergan's revenue and earnings starting in Q1 2018.

Potential Decline In Sentiment

The question remains, "How many hits can Allergan take before bulls abandon the stock?" Generic competition could reduce revenue and EBITDA at a sensitive time for the company. Allergan's $30 billion debt load is at 4.0x. A hit to the company's EBITDA could hurt its credit metrics and potentially call into question Allergan's debt servicing ability. Allergan recently raised prices for several of its drugs by over 9%. Such hikes might not be able to overcome LOE and the fact that organic growth has been practically nil.

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Ayelet Wolf 2 years ago Member's comment

This news sounds catastrophic to me. Why isn't #Allergan tanking? $AGN

Dean Gilmore 2 years ago Member's comment

Look at where $AGN was a year ago. It has lost a chunk of it's value already. This news won't help.

Alpha Stockman 2 years ago Member's comment

These hits all hurt #Allergan's bottom line but aren't it's cash cows like #Botox which still does very well for the company and will only only generate even more revenue over time. $AGN