Here's Why Allergan Stock Might Be an Incredible Bargain After Dropping 9.9% in August

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What happened

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Despite a stronger-than-expected second quarter earnings report, Allergan's (NYSE: AGN) two month long rally came to an abrupt halt in August with the stock losing 9.9% of its value, according to data from S&P Global Market Intelligence. The specialty drugmaker's shares were apparently brought down by its loose association with Teva Pharmaceutical Industries Ltd. (NYSE: TEVA) via its 9.9% stake in the Israeli drugmaker, as well as its former ties to the struggling generic drug industry.

As a reminder, Allergan sold its massive generic drug business to Teva last year in an equity and cash deal valued at $40.5 billion. Unfortunately for Teva and its shareholders, generic drugs have come under immense pressure from a margin and pricing standpoint due to higher levels of competition over the past year. The market, in turn, has started to bake these significant headwinds into the valuations of nearly all generic drug manufacturers of late, causing Teva's shares to tumble. 

Allergan, for its part, was apparently punished by the market because of its former dominant position in the generic drug industry, along with its $3 billion-ish stake in Teva -- despite the company firmly rebranding itself as a specialty branded pharma in the wake of its deal with Teva.   

So what

On the bright side, this near double-digit move lower may represent a compelling buying opportunity for bargain hunters. Allergan, after all, did raise its full-year revenue guidance in the second-quarter to $15.85 billion to $16.05 billion, up from $15.80 billion to $16.00 billion previously. As such, the company is now on track to grow its top-line by over 9% this year, making it one of the fastest growing large cap biopharmas. Most importantly, though, Allegan's valuation arguably took a hit for all the wrong reasons last month, implying that this sizable move lower may not end up lasting once the dust settles.   

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Now what

Allergan is still in the process of shedding its image as a generic drug giant, and reemerging as a more tightly focused branded pharma growth company. To do so, the company will need to continue to make progress on its significant clinical assets in nonalcoholic steatohepatitis, Crohn's disease, among others, and decide whether or not to hang onto its equity stake in Teva. Even so, this large cap biopharma does have a fairly strong balance, a respectable dividend yield of 1.23%, and high single-digit near-term growth prospects -- meaning that it might be worthwhile to grab some shares following this August swoon. 

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George Budwell owns shares of Allergan. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.