What is the stock?
Allergan Plc (NYSE: AGN)
5-year share price chart
Allergan is a specialty pharmaceutical company operating in the research, development and manufacture of pharmaceutical products. The company offers a portfolio of products that provide treatment for the central nervous system, gastroenterology, women’s health and urology, ophthalmology, neurosciences, medical aesthetics, dermatology, plastic surgery, liver disease, inflammation, metabolic syndromes, and fibrosis, as well as Alzheimer’s disease. In addition, the company distributes generic and branded pharmaceutical products primarily to independent and chain pharmacies, nursing homes, mail order pharmacies, hospitals, clinics and physician offices. The company was founded in 1984 and is headquartered in Dublin, Ireland. We own the stock though our listed investment company, Templeton Global Growth Fund Ltd (ASX: TGG).
How long have you held the stock?
Since November 2016
What do you like about it?
Despite the market’s excessive focus on product-specific headwinds, we estimate Allergan as a whole has one of the industry’s most durable drug portfolios when it comes to exclusivity and patent protection. The company also boasts an industry-leading research and development (R&D) pipeline that, in conjunction with its base businesses, should continue to drive strong earnings and free cash flow growth over our investment horizon.
How is it better than its competitors?
As a value investment style manager, it is rare to find highly cash generative, innovative businesses with enormous growth potential trading in deep value territory, but we see a specialty pharmaceutical firm such as Allergan offering just such potential opportunities.
What is your target price?
We don’t have a target price per se, rather as a value investment style manager, our approach to investing is to look for unloved and unappreciated quality businesses which we believe will be rewarded over time. In our experience, the real winners are the stocks that are heavily discounting future growth, and price-to-earnings (P/E) is a good valuation metric. We also look at various other qualitative metrics such as free-cash-flow yield and balance sheet strength.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
The stock is up over 10% for the year to date as at 31 January 2018. However as long-term value investors we are happy to continue to own those companies whose long-term earnings and cash flow potential we believe have been overlooked and undervalued by a narrowly focused market.
Where do you see value?
Templeton Global Growth Fund (ASX:TGG) remains overweight to the healthcare sector in general. The sector continues to be characterised by high barriers to entry, favourable margins and strong innovation potential.
Continued concerns about generic competition, increasing regulatory and political scrutiny on pricing, and a consolidating payer industry all broadly pressured the health care sector throughout 2017. We view such concerns as both myopic and overstated. Generic competition is a fact of life in the pharmaceutical industry, and one best addressed through innovation, which has accelerated following the doubling of R&D investment over the last 30 years. In our analysis, the regulatory and political concerns about pricing ignore data indicating prescription drugs represent a relatively modest portion of US health care costs and actually lower costs elsewhere in the health care system.
The structure of the pharmacy benefits management industry has long been oligopolistic, and drug companies are accustomed to dealing with it; thus, we think a bit more merger and acquisition activity in the industry would be unlikely to meaningfully change bargaining power dynamics. The overblown concerns have depressed valuations such that the sector today has rarely been cheaper historically on free cash flow multiples, according to our analysis.
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