Invest in Allergan on Weakness, Analysts Say

Pharmaceutical giant Allergan (AGN) looks poised to have a great year in 2017, as long as investors become less skittish about the company's M&A strategy, analysts say.

Allergan's share prices have fallen about 10% in the past year thanks to investor concerns over the company's integration of Tobira Therapeutics (TBRA) , which Allergan agreed to buy in late September for $1.7 billion, as well as uncertainty in competition for key products and the upcoming presidential election.

"Allergan has underperformed large cap biotech and pharma peers since July 31 when much of the negative pricing headline re-emerged," RBC Capital analyst Randall Stanicky wrote in a note.

That negative pricing could be something for investors to take advantage of, though, because Allergan is viewing 2016 as a year to transition to better things, Stanicky noted.

"We see attractive growth without the exposure to the primary headwinds facing the specialty pharma sector such as gross margin uncertainty, pricing headwinds and burdensome leverage," he wrote in a note. Stanicky has an outperform rating on the company's stock and a price target of $300 per share.

So what could get Allergan do to get to that price point?

For one thing, the company could continue to deploy excess capital, which Stanicky said could be up to $10 billion, into acquisitions.

While analyst Louise Chen of Guggenheim Securities identified "M&A integration risks" as one of the downside risks to her neutral rating on the stock, she noted that if the company did a strategic and accretive deal, the stock could jump.

Investor concerns about Allergan's integration of Tobira are currently baked into the stock, and Stanicky noted that if the company is able to provide more information about synergies during its November third quarter earnings call, investors could become less skittish.  

Stanicky wrote that he has a few questions he hopes the company answers.

"First, could we see Allergan pivot to some accretive transactions in what has been a stated interest in doing smaller stepping stone deals consisting of both pipeline and commercial opportunities?" Stanicky wrote in a note. "Second, does this mean that large scale M&A is off the table? And finally, how do we think about potential for increased R&D spending in 2017 from the recent deals?"

Analyst Ronny Gal of Bernstein doesn't expect that any large scale M&A is on the table for Allergan.

"We believe in the outlined strategy of smaller pipeline/growth-focused acquisitions (no transformative deals)," he wrote in a noted. "We also like that management is sticking to its guns on choice of assets (within reason)."

Beyond the company's M&A activity, the company will have to adjust to a competitor for Restasis, it's dry eye drug, called Xiidra, made by Shire plc (SHP) , entering the market. This, though, has proved to be more helpful than harmful to Allergan.

"A potential competitive impact to Restasis on the back of Shire's dry eye product Xiidra has been a real concern but thus far we are seeing market expansion rather than script loss," Stanicky wrote.

The company also could face competition for its drug Namenda XR, which is used to treat dementia in Alzheimer's patients.

"The timing of generic entry on Namenda XR will be unknown as we head into first-time 2017 guidance and Allergan growth needs to be considered independently," Stanicky wrote in a note.

That said, Allergan owns other drugs that could more than make up for it. Interest in the dermatology sector has been high, and Gal said he expects to see double digit growth.

"The company (and physicians) continue to be very upbeat about the trajectory of the aesthetics business and its ability to maintain double-digit growth," Gal wrote in a note.

Allergan, which has a market cap of $91.46 billion, was trading at $231.12 per share Friday, down 0.8% from market's open.

Allergan is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells AGN? Learn more now.

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