Allergan (NYSE: AGN) experienced a miserable third quarter -- even before any financial results from the quarter were known. The pharma stock fell nearly 16% during the quarter, after rising by the same amount thus far in 2017 up to that point. Allergan's woes continued in October.
The dismal stock performance stemmed in large part from concerns about eye drug Restasis. Sales for the drug slipped in the second quarter, but even worse, a federal district court ruled that Allergan's patents for Restasis were invalid.
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But while Allergan stock fared poorly during the third quarter, the company's business actually performed quite well. Allergan announced its third-quarter results prior to the market open on Wednesday. Here are the highlights.
By the numbers
Allergan reported third-quarter revenue of $4.03 billion. This reflected an increase of 11.4% over the prior-year period. It also met the consensus analysts' revenue estimate for the third quarter.
The company's bottom-line performance looked great or horrible, depending on which numbers you choose. Allergan reported a third-quarter GAAP loss of $4.02 billion. That was much worse than the $266.4 million net loss posted in the same period last year.
However, adjusting for special items made a huge difference. Allergan reported non-GAAP adjusted earnings per share of $4.15, up 25% year over year. This result also easily topped the average analysts' earnings estimate of $4.06 per share.
Behind the numbers
Allergan's solid revenue growth stemmed in large part from acquisitions. Regenerative medicines Alloderm and Strattice, picked up with Allergan's acquisition of LifeCell, added $113.7 million in sales during the third quarter. CoolSculpting, gained through the purchase earlier this year of Zeltiq Aesthetics, contributed another $83.4 million in revenue. These acquisitions accounted for nearly 73% of Allergan's total year-over-year revenue gains during the third quarter.
There were other bright spots driving revenue higher, though. Botox stands at the top of the list. Cosmetic sales for Botox increased 8.7% over the prior-year period to $189.7 million. Sales for therapeutic use of the drug grew to $352.1 million in the third quarter, a 15.2% year-over-year jump, helped by strong demand in the chronic migraine and adult spasticity indications.
But what about that big difference between Allergan's GAAP and non-GAAP bottom-line numbers? It resulted primarily from a whopping $3.2 billion impairment charge related to the federal court's invalidation of patents for Restasis. Allergan also recorded impairment charges for other assets, most notably a $646 million impairment for Aczone as a result of erosion in the acne market.
Another impairment hurt Allergan in the third quarter, but it wasn't just a one-time item that could be adjusted away. Allergan wrote down $1.3 billion due to the huge plunge in Teva Pharmaceutical's (NYSE: TEVA) share price. When Allergan solid its Actavis Generics business to Teva last year, part of the payment was in Teva stock. Allergan was required to hold on to the shares for at least one year, which has turned out to be a painful contract stipulation as Teva's share price has dropped more than 60% so far in 2017.
Allergan now expects 2017 will be a little better than originally thought. The company increased the low end of its full-year adjusted earnings guidance to $16.15 per share from $16.05 per share. Allergan kept the top end of its 2017 adjusted earnings guidance range at $16.45. It also narrowed its full-year revenue guidance to between $15.875 billion and $16.025 billion. Previously, Allergan projected full-year revenue of between $15.85 billion and $16.05 billion.
The huge question mark hanging over Allergan, though, relates to the patent invalidation for Restasis. Allergan's creative move to find a patent loophole by selling rights to the drug to the Saint Regis Mohawk Tribe is meaningless in the face of the court decision.
Allergan has appealed the decision and maintains it has a strong case. CEO Brett Saunders said, "If a generic product enters the market, Allergan is ready to mitigate that impact by growing our base business, reducing costs and deploying our balance sheet." Of course, the drugmaker would probably try to do all three things regardless of what happens.
Despite its challenges, I still think buying Allergan should pay off over the long run. Getting rid of its toxic Teva stock should jettison one anchor holding Allergan back. New product launches should also help. And if Allergan wins its appeal for Restasis, the stock could truly soar.
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