Thin Is In as Allergan Dodges Generics Bullet -- Heard on the Street

A series of acquisitions helped turn Allergan into a pharmaceuticals giant, but shareholders should be most grateful for what is no longer in its portfolio.

That is the clear takeaway from first-quarter results out Tuesday morning. Allergan reported revenue of $3.6 billion and adjusted earnings of $3.35 a share, narrowly topping expectations. Familiar products led the way with sales of workhorse drug Botox 12% higher than a year ago.

The star of the show, though, had exited stage left. Allergan's $40 billion sale of its generics unit to Teva Pharmaceutical Industries, which closed last summer, was exceptionally well timed for the seller. Allergan has used the proceeds to buy back stock, invest in new experimental drug candidates and pay down some debt.

The generics industry is currently struggling with falling prices of drugs as well as a wide-ranging collusion investigation by the Justice Department. Allergan, meanwhile, is up 13% over the past 12 months as most generics stocks have plummeted.

There are hurdles to be cleared if Allergan's stock is to keep rising. It carries nearly $23 billion in net debt on its balance sheet. That would sting if Botox sales lose steam. At 15 times this year's expected adjusted profit, new products like Kybella, a treatment for chin fat, and Coolsculpting, a noninvasive fat reduction device, will need to blossom to increase that valuation.

But those balance sheet worries would be far more severe if the generics unit hadn't been sold. And while Allergan's spending spree on new drug candidates isn't without risk, there is significant upside if things go well in the clinic.

Allergan shareholders have reason to keep their noticeably slimmer chins up.

Write to Charley Grant at charles.grant@wsj.com

(END) Dow Jones Newswires

May 09, 2017 11:37 ET (15:37 GMT)