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Allergan Price Target Cut On Merger Delay, Weak Q1 Forecast

Drugmaker Allergan ( AGN ) got a price-target cut from Canaccord Genuity Thursday after the company hit a delay in its merger with Pfizer ( PFE ), among other issues. Analyst Corey Davis noted that on Wednesday, the Federal Trade Commission (FTC) had asked for additional information on the Pfizer-Allergan merger , which was first announced in November. The companies also have to wait until Allergan finishes divesting its generic-drug business to Teva Pharmaceutical Industries ( TEVA ), which itself hit a delay this month that caused Teva to push the expected closing date from Q1 to June. Pfizer and Allergan still expect to close their $160 billion merger in the second half of this year. “In the meanwhile, we are lowering our Q1 estimates (EPS drops from $3.43 to $2.89) as it’s always the weakest quarter for specialty pharma, and we feel the rest of the Street is also too high,” Davis wrote in his research note lowering his price target on Allergan stock to 320 from 340. “This has been a trend in the past several years and is partly because of the reset of Medicare Part D.” Davis added that the merger of Target ( TGT ) and CVS Health ( CVS ) should hit Allergan’s distribution business to the tune of $500 million a year, and the launch of bowel-disease drug Viberzi has increased spending. Davis wrote that he is nonetheless maintaining his buy rating due to the high likelihood that the deal will close. There has been some skepticism among investors over whether the Pfizer-Allergan deal is going to close this year — besides the signals from Allergan’s falling stock price, a buy-side survey by Evercore ISI analyst Mark Schoenebaum this month found that a fifth of respondents place the odds at less than 50%. Along with the FTC’s backlog, there’s concern that the incoming president and Congress might do something to limit tax-inversion deals like this one, as some candidates have threatened to do. Pfizer’s leadership and Wall Street analysts have been more confident, however. On March 8, Deutsche Bank analyst Gregg Gilbert wrote that the gap between Pfizer’s offer price and Allergan’s stock price — then $47 — presents a buying opportunity as it will likely narrow as the deal closing nears. Allergan stock was down a fraction in morning trading on the stock market today , near 274.

Medical Stocks Take Bloodbath; Valeant Creditors Demand New Terms

Disgraced drugmaker Valeant Pharmaceuticals ( VRX ) continued to sell off along with the rest of the medical sector Thursday as reports surfaced that creditors were demanding new terms as the company defaults on its massive debts. Reuters cited anonymous sources saying that in early talks, lenders were asking for higher interest payments and a pledge to pay a larger amount of the bank loans from the proceeds of any Valeant asset sales. Valeant has been in breach of its reporting covenant since Tuesday, when it missed its 10-K filing deadline, which it has 60 days to resolve. However, if it doesn’t file by March 30, it will also be in default with its bank creditors and will have only 30 days to resolve the default. Valeant is about $30 billion in debt after a years-long buying spree, culminating in a failed attempt to buy Allergan ( AGN ) last year. Allergan subsequently merged with Actavis and is now in the process of being bought by Pfizer ( PFE ). By late afternoon on the stock market today , Valeant stock lost 11.5% to 29.69. Medical groups tracked by IBD, even those unrelated to drugs, accounted for the seven worst performing groups out of IBD’s 197 industries. The generic drugs group led the slide with a 2.8% decline. The hardest-hit individual stocks were Valeant’s fellow specialty drugmakers, some of whom have consciously followed Valeant’s business model. Mallinckrodt ( MNK ) authorized a $350 million stock buyback but was down 4.1% to 53.42.   Endo International ( ENDP ), which is headed by former Valeant executive Rajiv De Silva, hit a three-year low of 27.62, trading down 11.4% to 30.03. Horizon Pharma ( HZNP ), which has been criticized for pricing policies much as Valeant has, was down 6.8% after selling off for the last three days. Among major drugmakers, Eli Lilly ( LLY ) tumbled 4.7%. Eli Lilly fell intraday to its lowest level since late 2014.

Allergan Q4 Earnings Beat, But M&A Dance Card Challenges Comps

Big Pharma player Allergan unveiled what it expects to be its final full year of operation as an independent drug maker before merging into Pfizer, reporting fourth-quarter 2015 earnings that beat expectations and revenue that barely topped Wall Street estimates. Before the market open, Allergan ( AGN ) said non-GAAP earnings rose 33% to $3.41 per share on a revenue gain of 74% to $4.2 billion. Both metrics exclude discontinuing operations, notably Allergan’s Global Generics business that it agreed to sell in July. The Global Generics unit carries the old Actavis name and generic drugs lines of business. Actavis had purchased specialty drug and Botox maker Allergan, a deal that closed in March, and renamed itself Allergan. Shares jumped 2.8% to 283.07  in early trading in the stock market today . Allergan had closed down 0.8% on Friday to 275.75, 18% off its all-time high of 340.34, touched July 29. Pfizer ( PFE ) was up  1.4% to 29.93  in early trading Monday, 17% below a nearly 12-year high set July 31 at 36.46. Analysts polled by Thomson Reuters expected Q4 EPS of $3.34 minus items, down 14.6% from $3.91 in 2014, on revenue of $4.192 billion, up 3.4% from Q4 2014’s $4.057 billion, although analyst numbers apparently were not uniformly adjusted for discontinuing operations. Allergan presented the pro forma year-earlier numbers as adjusted EPS of $2.57 and revenue of $2.4 billion. For the full year, Allergan said non-GAAP EPS from continuing operations increased 78% to $13.43 on revenue from continuing operations up 124% to $15.07 billion. With varying adjustments, for the full 2015 analysts expected $15.43 per share minus items, up 66% from $9.29 in 2014, on sales of $18.206 billion, up 117% from $8.380 billion in 2014. Allergan reported a Q4  GAAP loss from continuing operations of $2.13 per share, compared to a GAAP loss from continuing operations of $4.48 per share in the prior-year period. It said full GAAP results were impacted by amortization and acquisition expenses, license agreements, impairments, and severance related mainly to the acquisition of Allergan on March 17,  and Kythera on Oct. 1, as well as research and development expenses resulting from the purchase of R&D assets of Mimetogen. Allergan had declined to freshen its guidance upon issuing its Q3 performance Nov. 4, citing early merger discussions with Pfizer back then. But Monday it guided 2016 revenue to about $17 billion, with “no material changes to gross margins” from current levels and a non-GAAP tax rate “normalized” to about 14%. Management didn’t specify EPS for the year nor offer Q1 guidance other than suggesting Q1 performance would be the weakest of the year and fall below Q4 2015 results. Allergan’s 2015 results were an analyst’s challenge, influenced by its extraordinary M&A dance card. In Q3, it began discontinuing operations of the renamed Actavis generic lines, which it agreed to sell to Teva Pharmaceutical ( TEVA ) in July for $40 billion. By Nov. 23, Allergan’s board agreed to Pfizer’s offer of 11.3 Pfizer shares for each Allergan share, then valuing Allergan at $363.63 a share, or $160 billion for the entire deal, expected to take nine months to close. CEO Brent Saunders told analysts in a conference call following the Q4 earnings release that he still expects the Pfizer buyout to close in the second half of 2016. It would be the second-largest acquisition ever, after the sale of Vodafone AirTouch in 1999 to Mannesmann for $202 billion. Dell’s October offer to buy EMC ( EMC ) is valued at $67 billion. The Pfizer acquisition of Allergan is another in a thinning number of tax inversion deals that allow American companies to domicile in Ireland, Allergan’s home base, where the buyer may enjoy a lower tax base. The Obama administration has criticized the practice and thrown up speed bumps, if not road blocks. On Feb. 8,  Pfizer said it plans to reorganize its two broad lines of business into three  after the merger with Allergan is complete. Allergan CFO Tessa Hilado told analysts that debt stood at $42.7 billion on Dec. 31 and that $8 billion would be paid down after the close of the Teva sale. She put revenue from top-seller Botox at $656 million in Q4, with eye drug Restasis at $365 million, and Namenda XR at $190 million.  She said the CVS ( CVS ) purchase of Target ( TGT ) pharmacies “had an effect in Q4” on revenue, but that it didn’t and wouldn’t impact earnings.