2 Reasons Why Allergan Stock Plunged in 2017

What happened

Botox maker Allergan (NYSE: AGN) had a forgettable 2017. The branded pharma giant, after all, lost 22% of its value last year, according to data from S&P Global Market Intelligence.

What's behind Allergan's sinking share price? Two things:

  • The forthcoming entrance of generic competitors for the dry-eye medication Restasis. Restasis is Allergan's second best-selling medicine behind Botox.
  • As part of its generic drug sale to Teva Pharmaceutical Industries (NYSE: TEVA), Allergan gained a sizable stake (100.3 million shares) in the struggling drugmaker that it was forced to hold for a full year. Since this deal closed, however, Teva's value has dropped by more than 70%.

So what

In anticipation of generic Restasis hitting the market soon, Allergan decided to slash 1,000 jobs to kick off 2018. By doing so, the company hopes to cut costs by $300 million to $400 million this year in order to meet its 2018 earnings forecast.

Even with this drastic measure, though, Allergan may still miss its revenue target this year. Restasis, after all, generated a healthy $1.49 billion in sales in 2016, and generic rivals are likely to quickly gobble up market share.

Now what

On the bright side, Allergan's management is taking the steps necessary to address its two biggest problems. Last November, for instance, CEO Brent Saunders stated during the company's third-quarter earnings call that management is eyeing ways to reduce costs across the board, which ought to translate into even more job cuts and perhaps a pruning of its clinical pipeline later this year.

And not long afterwards, Allergan also announced that it pledged its nearly 10% stake in Teva to J.P. Morgan Chase Bank as part of a margin loan agreement.

Despite these definitive measures, however, this year promises to be a challenging one for Allergan -- implying that investors may want to take a cautious approach with this beaten-down pharma stock while this restructuring process plays out.

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