Market Musings - March 10, 2018

We continue our blog series: Market Musings, Volume 2, Edition 13, giving our (hopefully not too random) thoughts on recent goings-on in the markets. Today, we present "Instant Analysis - Allergan 2017 Form 10-K Filing".

On February 16, 2018, Allergan Plc (AGN) filed with the SEC its 2017 Form 10-K filing. This blog will perform an instant analysis the risk factors section of the document (each excerpt is redlined against the respective text from Allergan's 2016 Form 10-K filing).

As an initial matter, it should be noted that AGN's total shares outstanding decreased from 335,224,713 as of February 17, 2017 to 330,320,420 as of February 13, 2018, or 1.5% lower year over year. AGN's stock price as of the former date was $247 and as of the latter date was $159, or 36% lower year over year. AGN's market capitalization thus declined from $82.8B to $52.5B, a total loss in value for shareholders of $30.3B. AGN's TTM stock chart is below:

EXCERPT 1

Instant Analysis: A new risk factor has been inserted into AGN's 10-K specifically referencing the potential loss of revenues due to "problems", such as losses of exclusivity (or LOEs) for drugs that individually produced more than $500MM in 2017 revenues for the company. AGN here calls out major revenue drivers such as Botox and Restasis and warns investors that the revenues derived from these drugs could be in jeopardy. Restasis, which produced $1.47B in 2017 revenues, may soon be subject to generic competition, for instance--typically drugs that go generic will see drastic (~80% or more) revenues declines.

EXCERPT 2

Instant Analysis: AGN here specifically calls out potential trade restrictions on their drug manufacturing capabilities. This is interesting in light of the Trump Administration's recent ratcheting up of tariffs on goods entering the United States. If a full-blown trade war were to erupt due to U.S. protectionism, AGN's ability to manufacture its drugs effectively could be negatively impacted.

EXCERPT 3

Instant Analysis: AGN adds a new risk factor specifically highlighting potential weaknesses in its R&D program. Over the past year AGN has had numerous pipeline setbacks, most recently having their PDUFA date for Esmya for uterine fybroids delayed by the FDA until August 2018 (see here). In addition, note the Refusal to File letter from the FDA regarding Vraylar in September 2017 (see here).

EXCERPT 4

Instant Analysis: AGN adds language to a risk factor specifying that it may suffer liability due to the explosion of opioid-related lawsuits that have been filed recently by state and local governments in the U.S. For example, in January 2018, New York City named AGN (along with seven other pharma companies) as a defendant in a $500MM opioid lawsuit (source here):

EXCERPT 5

Instant Analysis: AGN effects some word-smithing with respect to a risk factor regarding share repurchases. The key is not the changes made, but rather the fact that this risk factor has proven prescient in light of AGN blowing over $15B of available cash over the past couple years on repurchases of company shares at prices far higher than the current market price, generating little to no value for shareholders. For example, note the following regarding 2016-2017 repurchase programs, which were completed at levels in the $190 to $250 range (versus a current share price of $157); it clearly would have been a much wiser use of capital to instead reduce AGN's net debt, which currently is a massive $24,000,000,000 (source here):

EXCERPT 6

Instant Analysis: New language in a tax risk factor specifies that the Trump Tax Bill may "adversely impact [AGN's] effective tax rate or operating cash flows going forward" for various reasons. So much for the benefits of being a tax inverted company, one of AGN's previous talking points as to why their business model was superior to traditional U.S. pharma companies.

AGN Investors should also carefully review the section in the 10-K that discusses patent challenges to AGN's drug portfolio, which runs from pages F-87 to F-106 in the filing. While this is seriously dry reading, AGN investors would have saved a pretty penny if they had absorbed all of this information when it appeared in the 2017 10-K a year ago, as it would likely have warned them of the looming LOEs for Restasis and other major AGN revenue generators.

Given the drastic decline in AGN's share price over the past few years (shares are down over 50% since mid-2015), it will be interesting to see how much the senior executives at the company will receive in compensation for 2017. The 2018 proxy statement should be out in about two weeks. For the record, below is the Summary Compensation Table from the 2017 Proxy Statement (don't worry, these folks will not be going hungry anytime soon, although their shareholders might):