Allergan’s third-quarter numbers weren’t good. But neither was the way the company talked about them, one analyst says, and that’s even more worrisome.
On Wednesday, Allergan disclosed that revenue had come in 2% below consensus, thanks in large part to underperformance among older meds such as Namenda XR. But it also rebased its gross margin at 87.5% from 89%, and its SG&A costs--which were supposed to sink below 25%--at 27.5%. And to make matters worse, Bernstein analyst Ronny Gal points out, the company “did not communicate convincing answers around ‘how did that happen’ and ‘why did you not tell us.’”
The way he sees it, “the miss on revenue can be dismissed”--but the other two points “count against the company.”
Instead of explaining what, specifically, went awry, CEO Brent Saunders--after apologizing to investors on the Q3 call and taking responsibility for the performance--pointed to the “transformation of the company,” noting that “we did have a lot going on this year.” And Gal didn’t find that answer reassuring.
“The best explanation we have is that in a company with so much transition, a few balls were dropped,” he wrote to clients, adding, “They need to do better.”
Allergan’s transition recently has included a passing-of-the-torch from exec chairman Paul Bisaro to CEO Brent Saunders, as well as the long-delayed closing of Allergan’s $40 billion generics sale to Teva. On top of that, Saunders has been busy snapping up smaller buys--the kind he pledged to make after last year’s record-breaking Pfizer megamerger fell through.
Some may figure Allergan should be used to transformation by now, though, considering that it was largely a generics company--Actavis--when Saunders took the helm in 2014. One white-knight buy and name change later, it became Allergan, a brand-focused company that completed its knockoffs-to-brands journey with the close of the Teva transaction.
Amid all the chaos, though, the Dublin drugmaker did post impressive growth in aesthetics, eye drops and blockbuster Botox, which make up one-third of the company’s revenue and aren’t showing signs of slowing down anytime soon. New product launches--including IBS-D med Viberzi and chin-fat reducer Kybella--are “doing reasonably well” too, Gal wrote, and should reach around $400 million in revenue for the year.
And while he dubbed the quarter “a black eye,” he also praised Allergan management’s use of cash and argued that “investors should not lose faith.”
“This is still a good business, very focused on creating value for shareholders and management has made some smart strategic decisions,” he wrote.