Many mutual funds have well-known portfolio managers (some are even household names), managers who pick which stocks or sectors to invest in. Just like mutual funds, however, pharmaceutical companies also have portfolio managers or teams that actively assess the company's products, marketing strengths, and market dynamics to devise and update a game plan. Allergan (AGN) , has been among the most active pharma companies in recent years in portfolio management.
Here, we provide an up-to-date analysis and review of the company's portfolio management game plan and key factors.
1. Feed the Beast. Support the portfolio winners, eye care and aesthetics/dermatology.
Allergan's most-recent quarterly financial report for Q4/2016 showed solid results, most notably in eye care and dermatology/aesthetics, its largest two groups. Both of these sectors benefit from strong demographics, such as the aging of America, and positive economics, for example with a high portion of private-pay for aesthetics. The eye care group is led by Restasis, the company's second-largest product and the leading pharmaceutical treatment for chronic dry-eye disease. Restasis benefited in 2016 from a newly approved multidose bottle as well as improved pricing, posting a 13% year-over-year revenue gain in Q4/16. Boosting the division was newer product Ozurdex, which saw its added indication in diabetic macular edema (DME) in the general population in late 2014 bear fruit last year, with a 24% increase in revenues in Q4/16. For the near future, Allergan is looking to its recently approved Xen45 Gel Stent for glaucoma and True Tear dry-eye treatment (recently submitted for approval) for growth in eye care, while longer term the company is developing its anti-VEGF Abicipar for AMD (in Phase 3) and DME (set to start Phase 3 this year). M&A ideas for Allergan could relate to new technologies in ophthalmology, such as gene therapy developer AGTC (AGTC).
While eye care was Allergan's largest segment in 2016 at $3.7 billion in sales, it won't be the biggest for long, as the No. 2 group aesthetics/derm (2016 sales $3.1 billion) is set to surge to the top, thanks to recent acquisitions of LifeCell (closed in February) and just-announced Zeltiq, expected to close later this year. This group saw 11% revenue growth last year, led by increases in sales of Botox and fillers used in cosmetic surgery, as well as new products, including Kybella injection. Near term, new indications for Botox and recently approved Rhofade for rosacea are expected to boost sales, as will nonorganic contributions from LifeCell and Zeltiq (cited for 17%-20% growth potential in 2017). Longer term, Allergan is focusing on product line extensions and deeper market penetration for this group, rather than heavy R&D, but acquisition opportunities are available in this area, including Dermira (DERM) , Sonoma Pharm (SNOA) or Sensus Healthcare (SRTS) —all in the derm area.
2. Fortify or Forget. Be decisive on the marginal portfolio members, women's health, GI and biosimilars.
While Allergan's Women's Health group showed solid revenue growth in 2016, by 19% to $1.2 billion, led by several products, such as Lo Loestrin, Minastrin and Estrace, a slow decline in this medical indication stemming from concerns over long-term safety as well as a looming generic threat for Minastrin may soon render this portfolio asset less desirable. Allergan does count Esmya, a treatment for uterine fibroids, already approved in Canada and the EU as one its six R&D "stars," with potential approval next year, but in general the level of competition in this older pharma area is stiff, including both large and generic players. Alternatively, Allergan could look to the M&A route to add companies in the space with new therapeutics, including TherapeuticsMD (TXMD) , or new devices or technologies such as OvaScience (OVAS) or Vivive Medical (VIVE) .
Similarly, Allergan makes only slight mention of its biosimilars program, including projects for Rituxin, Avastin, Herceptin and Erbitux, but this space has become much more crowded in recent years, including large pharma entrants such as Pfizer (PFE) (Inflectra/Remicade) and global developers benefitting from lower costs and fewer regulations, for example Biocon in India and Celltrion of South Korea. Look for Allergan to pare this R&D effort, or perhaps delve deeper with a large international acquisition.
Finally, Allergan's gastrointestinal (GI) group has made good strides recently, with a 10% overall increase in revenues in 2016 to $1.8 billion, driven by sales of Linzess for chronic idiopathic constipation and a new launch of Viberzi for irritable bowel syndrome, as well as a new R&D collaboration signed with Assembly Biosciences to delve into the hot new space of the microbiome. Longer term, Allergan's best strategy here could be to double-down on Linzess and buy its partner for the drug, Ironwood Pharmaceuticals (IRWD) ($2.4 billion market cap), thus eliminating future cash obligations related to Linzess.
3. Fill in the Gaps. That includes oncology, hepatology, cardiovascular and others.
Allergan recently dipped its toe into the liver disease market through last year's acquisition of Tobira Therapeutics and its Cenicriviroc program to treat NASH, which recently completed Phase 2b trials and is one of the company's six R&D "stars." However, to penetrate deeper into larger liver disease areas, for example hepatitis B and C, Allergan might have to pony up considerably more than the $500+ million cash (plus future contingent payments) the company paid upfront for Tobira. Allergan also has its tendrils into cardio (bystolic beta-blocker, for example) and oncology (primarily through biosimilars), and there are plenty of smaller acquisitions or licensing deals available in these medical areas should the company choose to broaden its exposure. This strategy could also prove a distraction for the management team and would pit Allergan's sales and R&D teams against many major pharma and biotech players.
4. Take a Breather on the M&A side?
Allergan recently cited its 12 stepping-stone deals completed in 2016, including both acquisitions and divestitures, and this was before this week's announced Zeltiq transaction. This might be a good point in time for Allergan to settle back and reflect on its current state of affairs, perhaps finding some hidden value in new assets. An M&A breather might also help the company's balance sheet, as well, which has seen cash balances dwindle to $13.2 billion at the end of the year from $27.3 billion just one quarter before. What's more, after close to $3 billion needed for LifeCell and over $2 billion to be used for Zeltiq, and cash needed for a newly announced dividend, the completion of the share buyback program earlier this year, about $6.5 billion in debt payments required over the next 18 months, plus potential acquisition/R&D earn-outs, Allergan may have used up its $13 billion on hand by this time next year, even with operating cash flow over $1 billion expected in 2017 and regular shareholder dividends from its Teva (TEVA) holdings.
5. Don't Get Greedy with Drug Pricing
Allergan has been proactive in its drug pricing policies, announcing its social contract in September 2016, in which the company vowed to limit future drug price increases to under 10% per year and not to increase prices for any product more than once a year. This policy comes at a time when several of its pharma competitors were under increasing scrutiny and even investigation related to price increases. So far so good for Allergan, with average list price increases of 8.1% in 2016 and net price increases of only 4.8%. In addition, earlier this month, the company announced average list price increases for certain U.S. branded products of 6.7% for 2017, with no single product price increased by over 10% for this year. Still, company management needs to be diligent in watching product price increases, especially considering the high M&A activity Allergan has undertaken in the past year.