Intelligent Investing --- Private & Confidential --- 1 - - PowerPoint PPT Presentation

Intelligent Investing

• -- Private & Confidential ---

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www.qcmfunds.com

DISCLAIMER

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www.qcmfunds.com

QCM: EFFECTIVENESS AS ACTIVIST

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ALLERGAN: UNLOCKING VALUE THROUGH MANAGEMENT CHANGES

QCM May 2019 - Sohn Hong Kong Conference

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?

(QCM is long AGN)

www.qcmfunds.com

ALLERGAN IN A NUTSHELL

• Market Cap: $46b (NYSE)
• Industry: pharma
• Segments: esthetics,

general medicine

• Sales: $15.7b
• EBITDA: $7.1b
• Known for: Botox
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www.qcmfunds.com

CHALLENGING STOCK PERFORMANCE (-58% SINCE 2015)

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• 58%

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HISTORY

• Formerly Actavis.
• Redomiciled to Ireland (tax inversion)
• Generics division sale to Teva, deleveraging
• M&A spree
• Recent issues:
• Loss of exclusivity
• Serial write offs
• Looming botox competition
• Activist shareholders involved
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www.qcmfunds.com

PRODUCT PORTFOLIO

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www.qcmfunds.com

NOT EXACTLY A THRIVING BUSINESS AT FIRST SIGHT…

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• 8000.0
• 7000.0
• 6000.0
• 5000.0
• 4000.0
• 3000.0
• 2000.0
• 1000.0

0.0 Dec-31-2014 Dec-31-2015 Dec-31-2016 Dec-31-2017 Dec-31-2018 Mar-31-2019

Earnings from Cont. Ops.

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…BUT APPEARANCES CAN BE DECEPTIVE…

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0.0 1000.0 2000.0 3000.0 4000.0 5000.0 6000.0 7000.0 8000.0 9000.0 Dec-31-2015 Dec-31-2016 Dec-31-2017 Dec-31-2018 Mar-31-2019

Levered Free Cash Flow

Free cash flow

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AGN: INEXPENSIVE BY MOST MEASURES

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EV/EBITDA: 9.7 (VS 13.5 MEDIAN*)

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9.7 10 20 30 40 50 60

Horizon AstraZeneca Eli Lilly Novo Nordisk Perrigo Bristol-Myers Allergan Jazz Pharma

EV/EBITDA

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VALUATION: FWD P/E 8.4 (VS. 17.9 MEDIAN*)

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8.4 5 10 15 20 25

Eli Lilly AstraZeneca Novo Nordisk Horizon Perrigo Bristol-Myers Jazz Pharma Allergan

P/E (ntm)

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WHY SO CHEAP? PLENTY OF UNCERTAINTY

• Botox: fear of new competitors
• Write offs: poor management?
• Loss of Exclusivity
• High leverage (3.2x EBITDA)
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www.qcmfunds.com

LOSS OF EXCLUSIVITY: CAN BE MANAGED

• Restasis + other LOE
• Only 9% of sales affected
• Mitigated by core growth*

→ little/no impact on valuation

T

• tal

Sales, 15700 Restasis, - 1261 Other LOE, -187 Core Growth, 1136

• 4000
• 2000

2000 4000 6000 8000 10000 12000 14000 16000 18000

Sales (US$m)

Total Sales Restasis Other LOE Core Growth

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* QCM estimate

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WRITE OFFS: POOR MANAGEMENT?

• Questionable M&A
• Spectacular failures (e.g.

Rapastinel)

• No new champions
• $13.4bn of balance sheet

write-downs (in 4 years).

• Underperforming pipeline
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• 8000.0
• 7000.0
• 6000.0
• 5000.0
• 4000.0
• 3000.0
• 2000.0
• 1000.0

0.0 Dec-31- 2014 Dec-31- 2015 Dec-31- 2016 Dec-31- 2017 Dec-31- 2018 Mar-31- 2019

Earnings from Cont. Ops.

www.qcmfunds.com

BOTOX: GREAT FRANCHISE, BUT NEW COMPETITION LOOMING

• 24% of total AGN sales
• Fast (9%) growth rate
• Demographic tailwind
• High margin
• Limited regulatory risk

(cash-based)

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…STILL DOMINANT

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…BUT NEW COMPETITIVE THREATS: JEUVEAU

• Jeuveau (by Evolus)
• Seems clinically equivalent
• Marketed aggressively
• Discounts to doctors
• Branding
• Social media
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…BUT NEW COMPETITIVE THREATS: DAXI

• Daxi (by Revance)
• Might be approved in 2020

for frown lines.

• Seems to lasts significantly

longer than Botox*.

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DAXI CLINICAL STUDIES

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ASSESSING COMPETITIVE THREATS: BULL CASE

• Brand strength
• Some customer lock-in
• cosmetic portfolio synergies
• Resilience vis-à-vis old, stronger

competitors

• Competitors provide little/no new

benefits, no clinical history.

• Botox upcoming longer-lasting

product

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www.qcmfunds.com

ASSESSING COMPETITIVE THREATS: BEAR CASE

• Some Botox clients will switch, if

incentives are large enough.

• Product choice usually driven by doctor, not

patient.

• Competitors may provide discounts to

doctors.

• Safety profile not an issue (products

perceived as nearly equivalent).

• New products may be more

effective/longer lasting

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www.qcmfunds.com

BOTOX WORST-CASE-SCENARIO: NOT SO BAD

• Cosmetic Botox: only

10% of AGN’s revenue.

• Medical Botox less

threatened.

• Doctors store 2/3

products max. Botox must-have.

• Growing market (CAGR

7.6%) should accommodate new supply

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Others 77% Botox (cosmetic) 10% Botox (medical) 13%

Sales

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MANY WAYS TO WIN…

• Management shakeout
• T
• tal vs biz dev
• Stand still, deleverage &

buyback

• Botox fears proven

unfounded

• Split cosmetic/medical
• Sale
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www.qcmfunds.com

NOTABLE INVESTORS

David T epper (Appaloosa) Seth Klarman (Baupost)

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WHY WE BELIEVE MANAGEMENT HAS TO GO

ü Failed M&A policy ü Bad buyback timing ü Questionable

compensation

ü Lack of candor ü Main reason for depressed

stock price

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www.qcmfunds.com

CONCLUSION

• Strong core portfolio.
• Botox threats probably
• verblown
• Very strong FCF

generation

• Deleveraging & buyback

underway

• Price multiple depressed
• Activists safeguarding

questionable management

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www.qcmfunds.com

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