Company overview - Allergan plc is a specialty pharmaceutical company. The Company is engaged in the development, manufacturing, marketing and distribution of brand name pharmaceutical products, medical aesthetics, biosimilar and over-the-counter pharmaceutical products. The Company operates through three segments: US Specialized Therapeutics, US General Medicine and International. The US Specialized Therapeutics segment includes sales relating to branded products within the United States, including Medical Aesthetics, Medical Dermatology, Eye Care, Neurosciences and Urology therapeutic products. The US General Medicine segment includes sales relating to branded products within the United States that do not fall into the US Specialized Therapeutics business units, including Central Nervous System, Gastrointestinal, Women's Health, Anti-Infectives and Diversified Brands. The International segment includes sales relating to products sold outside the United States.

AGN Details

Strong execution in Second Quarter 2017:  Total net revenue grew by 9% yoy to $4.0 billion, driven by BOTOX, JUVEDERM Collection, the addition of ALLODERM and CoolSculpting, and new products including VRAYLAR, NAMZARIC and VIBERZI. However, the increase was partially offset by lower revenues from ASACOL HD and MINASTRIN due to the loss of patent exclusivity, the continuing decline in NAMENDA XR and lower revenues from RESTASIS, which was negatively impacted by trade buying patterns during the quarter. GAAP operating loss from continuing operations in the second quarter 2017 was $902.4 million, which includes the impact of amortization, in-process research and development (R&D) impairments, foreign exchange transactional losses and an increase in sales and marketing expenses. Non-GAAP adjusted operating income from continuing operations increased by 1.6% to $1.9 billion.  Although there was a 330bps decline in operating margin, it maintained a strong gross margin as negative impact from product mix offset by royalty buy-outs and a reimbursement of $15 million for costs previously expensed through cost of sales. Cash flow from operations increased 18.1% yoy to $1.63 billion excluding R&D asset acquisitions, restructuring charges and other one-time payments and receipts.


Q2FY17 Financial performance; (Source: Company reports)

The Company recorded restructuring charges of $65.6 million in the second quarter of 2017 primarily relating to the planned SG&A cost management initiatives due to changing industry dynamics and in advance of anticipated patent expirations. In addition, it includes planned optimization of R&D infrastructure and prioritization of the R&D portfolio to enable increased investment in the Company's highest potential projects. Revenue growth in the second quarter was led by significant year-over-year gains from many of top products, solid contribution from newly launched products and successful integrations of LifeCell and ZELTIQ. With strong first half performance and solid outlook for the remainder of the year, the Company has marginally upgraded its full-year guidance.
 

2017 guidance in millions, except for share data; (Source: Company reports)

U.S. Specialized Therapeutics led by recent acquisitions:  US Specialized Therapeutics revenues grew 15% driven by new acquisitions and growth in key brands offset by reductions in Restasis and Aczone. However, segment’s gross margin for the second quarter of 2017 declined to 92.5%, impacted by the 24% increase in selling and marketing expenses due to LifeCell and ZELTIQ acquisitions, as well as increased promotional spending for key products. General and administrative expenses at the segment level for the second quarter 2017 were $49.8 million, an increase of 8.3% versus prior year quarter mainly attributed to the LifeCell and ZELTIQ acquisitions. The segment contribution for the second quarter 2017 remained strong at $1.2 billion, an increase of 9.2% versus the prior year quarter, driven by increased revenues following recent acquisitions.


U.S. Specialized Therapeutics business segment results; (Source: Company reports)
 
Eye Care: Revenue from RESTASIS declined by 9.4% to $336.4 million in the second quarter of 2017 versus the prior year quarter, primarily driven by trade buying patterns, while volume demand remains stable. The Glaucoma franchise experienced a modest decline with ALPHAGAN/COMBIGAN net revenues in the second quarter of 2017 remaining stable at $96.4 million, while LUMIGAN net revenues declined 2% to $79.0 million versus prior year quarter, impacted primarily by generic competition. However, OZURDEX net revenues in the second quarter of 2017 increased 15.8% from the prior year quarter to $24.9 million, driven by continued strong demand from the diabetic macular edema indication.


Restasis market share; (Source: Company reports)

Medical Aesthetics:  The Facial Aesthetics franchise continues to deliver strong growth with revenues increasing 9.1% versus prior year quarter. BOTOX Cosmetic net revenues grew by 10.7% to $210.3 million in the second quarter of 2017 against prior year quarter, reflecting continued strong volume growth. JUVÉDERM Collection (defined as JUVÉDERM, VOLUMA and other fillers) net revenues grew 7.3% in the second quarter of 2017 versus prior year quarter, driven by continued strong demand and market share gains, while KYBELLA net revenues in the second quarter of 2017 were $12.7 million, unchanged from the prior year quarter.


Medical Aesthetics - Strong sustainable growth across 3 pillars; (Source: Company reports)

U.S. General Medicines impacted from generic competition:  Net revenues in the second quarter 2017 decline by 1.5% to $1.43 billion, impacted by lower revenues from generic competition to ASACOL, MINASTRIN and NAMENDA, offset by strong growth from VRAYLAR, VIBERZI, NAMZARIC, LINZESS and Lo LOESTRIN. However, gross margin for the second quarter increased to 85.8% due to the Company reacquiring rights to select licensed products in the segment, which had the impact of lowering royalty expense on these products.

Allergan CNS franchise net revenues increased by 9.2% to $346.6 million increased 9.2% versus the prior year quarter as a result of continued strong growth from VRAYLAR and NAMZARIC. Revenue from NAMENDA XR declined by 28.7% to $118.7 million, driven by lower demand as a result of a reduction in promotional support and continued conversion to NAMZARIC, as well as lower net pricing. NAMZARIC net revenues in the second quarter of 2017 increased to $33.4 million from $12.8 million in the prior year quarter driven by continued conversion and increased demand following an expanded label with new dosages for the product allowing patients to begin combination therapy on NAMZARIC. Further, VRAYLAR net revenues in the second quarter were strong at $66.3 million, reflecting its continued rapid acceptance in its second-year post-launch. From Gastrointestinal division, LINZESS net revenues increased 11.5% to $167.8 million, driven by strong demand and continued OTC conversion. VIBERZI net revenues increased to $41.3 million, driven by continued demand growth, while ASACOL/DELZICOL net revenues declined 61.9% to $45.6 million, impacted by generic entry for ASACOL HD and a decline in demand for DELZICOL. ZENPEP net revenues grew by 17.4% to $50.5 million versus the prior year quarter, driven by continued strong demand.


Q2 2017 performance by segment; (Source: Company reports)

International segment driven by Facial Aesthetics: Revenue grew by 16.2% to $858.5 million versus prior year quarter excluding foreign exchange impact, driven by growth in Facial Aesthetics, BOTOX Therapeutic and the addition of LifeCell and CoolSculpting in Medical Aesthetics. BOTOX Cosmetic revenues in the second quarter of 2017 were $148.2 million, an increase of 15.5% versus prior year quarter excluding foreign exchange impact, driven by continued strong growth across most regions. JUVÉDERM Collection revenues were $137.3 million, an increase of 30.2% versus prior year quarter excluding foreign exchange impact, reflecting continued strong performance across all regions, and Breast implant revenues grew by 4.4% to $41.1 million against the same quarter in 2016.


International business continues strong growth; (Source: Company reports)
 
Positive Recommendation from NICE:  National Institute of Health and Care Excellence (NICE) has published a Final Appraisal Determination, recommending that Truberzi (eluxadoline) be made available on the National Health Service for adults living with Irritable Bowel Syndrome with Diarrhoea (IBS-D). Truberzi is a first-in-class, twice daily, oral medication offering sustained relief from multiple symptoms of IBS-D, such as pain, diarrhoea, urgency and bloating. In two pivotal Phase III trials, Truberzi demonstrated a significant reduction in the two most bothersome symptoms of IBS-D, abdominal pain and diarrhoea, with fast and sustained relief for over six months. Treatment effect can be seen within 1 week, reaches maximal effect after 6 weeks and is sustained over 6 months. NICE expects to publish the final guidance at the end of August, assuming there is no appeal against the FAD.

Regulatory Milestones & Clinical Updates:  Allergan has initiated patient enrolment in a Phase 3 study of cenicriviroc (CVC), and the study is being conducted to confirm the efficacy and safety of CVC for the treatment of liver fibrosis in adult subjects with NASH. Further, Allergan and Amgen announced that the Oncologic Drugs Advisory Committee of the FDA review data supporting the Biologics License Application (BLA) for ABP 215, a biosimilar candidate to Avastin®. Following the review, the Advisory Committee unanimously recommended ABP 215 for FDA approval.


Development progress of 6-star programs; (Source: Company reports)

Stock performance: The shares of Allergan plc have declined 6.3% in the last one year, while it is up 13.3% on YTD basis as on August 10,2017. Notably, the company has a healthy product pipeline with increasing market share U.S. Specialized Therapeutics and international segments. Given the on-going R&D investments in specialty and complex segments, strong operating margins and stable outlook, we give a “Buy” recommendation on the stock at the current market price of $237.97


AGN Daily chart; (Source: Thomson Reuters)

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