This Is What Hedge Funds Have To Say About Pharmaceutical Giant Allergan plc (AGN)

The New York-based investment firm also evoked that Allergan’s decision to sell its generics business to Israeli genetics giant Teva Pharmaceutical Industries Limited (NYSE:TEVA) was a financial “home run” considering that “they sold a structurally mature business for ~17x 2015 EBITDA while delevering the balance sheet from $40 billion in net debt to nearly zero”. On July 27, Allergan pocketed $33.75 billion in cash and $6.75 billion worth of Teva’s shares following the completion of the transaction. The letter to investors also noted that:

The strategic vision of the transaction is equally impressive. Despite the fact that generic drugs were Allergan’s original business, Bisaro and Saunders recognized that the legacy segment had become an anchor on valuation and that its divesture was the right course of action for Allergan shareholders. While shareholders applauded the decision, driving Allergan stock nearly 10% higher in the ensuing three days, we believe that there is still a meaningful valuation gap to close. Following the close of the TEVA transaction in Q1 2016, Allergan will be a pure-play growth pharmaceutical company with long duration branded assets in seven therapeutic areas, an underappreciated pipeline, an unlevered balance sheet and most importantly, a bold and forward thinking leadership team.

Meanwhile, Allergan plc (NYSE:AGN) posted phenomenal financial results for the second quarter, reporting net revenue of $5.76 billion, which was up by 116% year-over-year. By the same token, the company’s non-GAAP diluted earnings per share came in at $4.41, compared with $3.42 reported in the same quarter a year ago. Moving back to the fruitful letter, Daniel Loeb’s Third Point asserted its belief that the stock, which traded at $329 per share on July 31 or ~16.5x estimated pro forma earnings of $20 per share, was relatively undervalued at the time. However, the recent broader market pullback has pushed the stock below $300 per share, which makes it an even more attractive investment opportunity.

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