Allergan plc (AGN) - Get Report could raise more than $1 billion from the sale of its anti-infectives business and send a "strong message" on profitability to shareholders, analysts at RBC Capital markets argued Thursday.
Randal Stanicky and Ashley Ryu said that as Allergan's pipeline updates approach, the company's profit potential is starting to improve following a year in which its shares fell by more than 21%. The pair see a "meaningfully better set-up in 2018" in terms of the group's bottom line, but argued in a note published Thursday that assets sales will play a big part in the company's near-term outlook and that it should look at shifting its anti-infectives business.
"Much larger assets that likely come with more internal debate around perceived strategic importance and ability to accept EPS dilution," such as Women's Health and its Gastrointestinal unit, may not be ripe for picking, the note said. "The anti-infectives business on the other hand should not. We see limited strategic benefits in owning the asset, P&L dilution would be minimal, and importantly it would send a strong message to the Street that AGN is continuing to proactively manage its asset base."
"We think the business is worth ~$1.1 billion on DCF or 8.5x EBITDA (plus potential deal premium) which could be applied to de-levering with limited dilution," the note added.
The unit generated $67.2 million in revenue for Allergan over its fiscal third quarter, up 28% from the same period in 2016. Allergan will published its fourth quarter earnings on Feb. 6.
Allergan shares closed at $176.72 each in New York Wednesday after falling 1.09% on the session to extend their three-month decline to 10.6%.
Earlier this week, a federal judge reportedly suggested that he would approve a $290 million settlement reached last month involving an insider-trading lawsuit over an ultimately failed joint effort by Valeant Pharmaceuticals International Inc. VRX and Pershing Square Capital Management LP's Bill Ackman to acquire Allergan plc.
According to the Wall Street Journal, citing sources, the judge said he plans to issue a final version of his opinion he had privately issued last month, rejecting legal arguments that both Pershing Square and Valeant had made. As part of the tentative agreement, first reached in December, Pershing Square will reportedly pay $193 million while Valeant will pay $96.25 million.
Last month, Jim Cramer and the Action Alerts PLUS team in a recent note cite the company's under-appreciated pipeline (hey, it had to buy something to accumulate some $30 billion in debt), an over-reaction to the Revance news and a strong sales strategy (think, loyalty programs for botox) as reasons to hold on. Cramer and the AAP team, as well as much of the sell-side community, warn that headlines will keep Allergan volatile near-term.
This article was written by a staff member of TheStreet.