Allergan Note: Post Pfizer Merger Kibosh

The shares of Ireland-based pharmaceuticals manufacturer, Allergan (AGN), are down more than 15% since the US Department of Treasury basically put the kibosh on its proposed merger with Pfizer (PFE) last week. We don’t currently own shares of Allergan, but we liked the stock before the merger was squashed, and we like it even more now. It’s a diversified, cash-rich, pharmaceuticals company with a huge advantage over the competition… it pays much lower taxes than its peers because it is headquartered in business-friendly, low-tax rate, Ireland. We’ve highlighted below the details of Allergan’s lower tax rate advantage, as well as a few other reasons why we believe it offers a highly attractive investment opportunity.

Tax Advantage: Allergan has built itself into a major pharmaceuticals player via tax-advantaged acquisitions, and the company will likely continue to grow via this strategy. Even though the combination of Allergan and Pfizer is now unlikely, Allergan will continue to look for other combination opportunities.  

Diversified Products: Allergan’s diversified, brand name, products portfolio is defensible and growing. For example, the company’s two largest products by revenues, Botox and Restasis, have strong brand recognition, and continued to grow in 2015. They still only make up ~27% of the company’s total branded product revenues. And company-wide branded product revenue grew 10% in 2015 (excluding divestitures), and is expected to continue to grow in the future (organically and through acquisitions).

Cash-Rich: Allergan is a cash-rich company, and this will enable more acquisitions in the future. Allergan does NOT currently pay a dividend because they believe their cash is better used for organic growth and acquisitions. The company had over a billion dollars in cash at year-end, plus $2.4 billion in accounts receivable, $1 billion in inventories, and $14 billion in assets held for sale. Additionally, Allergan plans to sell its generics unit (Actavis) to Teva for $40 billion this summer, which will provide more cash for Allergan to pursue its brand name acquisition strategy. Also, Allergan has the ability to issue equity to fund acquisitions, if necessary.