Don't like Allergan's stock volatility? Blame hedge funds, analyst says

Large glass office building

On Monday, Allergan reported 9.3% organic growth, posted a 35% cash flow margin, pledged to stay away from large buyouts for now and reaffirmed its plans to return cash to investors. But its stock slipped by as much as 4% during the day.

Why? Bernstein’s Ronny Gal has a theory: hedge fund ownership.

As Gal pointed out in a note to clients this week, Big Pharma companies tend to have hedge fund ownership of 3% or lower. Allergan, on the other hand? An “overwhelming” 17.7%, he wrote. That’s up quite a bit since the pre-Actavis days, too; hedge fund ownership sat at 4.1% under former skipper David Pyott.

Unlike other investors, who may be taking more of a long-term view of a company’s prospects, hedge funds like near-term catalysts, Gal noted.  

“In short, we think the direct explanation for the volatility is that Allergan's investor base is heavily tilted toward ‘fast-money’, and those trade around near-term events,” he said. In other words, the 4% drop--and others like it--are "not indicative of a quarter being particularly bad.”

And he doesn’t expect that to change any time soon, as long as the composition of Allergan’s investor base resembles its current composition.

Allergan might want to do something to make sure it doesn’t, though. “It behooves Allergan to change the mix of its owners over time,” Gal wrote, and he thinks the company can do it. For one, it’s arguably as well positioned as it was during Pyott’s time, which means “the same mix can be achieved,” he figures. A dividend, which would make the stock more attractive to nonactive managers, might help, too.

One other suggestion? "Allergan should spend more time in Iowa," he wrote.

Related Articles:
Allergan CEO tamps down Biogen buyout rumors amid Q2 earnings slip
Is Biogen the latest big biotech M&A target? Allergan and Merck are circling, WSJ says
With Allergan deal sealed, Teva turns its attention to branded M&A
Allergan launches $10B buyback, focuses on tuck-in deals
Allergan's on the M&A hunt, but don't confuse it with Valeant: CEO

Read more on

Suggested Articles

At one point, Novartis even offered up $90 apiece for the inclisiran developer but would later say even $85 was too much, a securities filing shows.

Sanofi spent months hyping its Tuesday investor event, and new CEO Paul Hudson certainly laid out a different vision for the drugmaker at the confab.

After more than 10 years as partners, Sanofi and Regeneron are splitting up their deal to comarket PCSK9 med Praluent and immunology drug Kevzara.