North America Equity Research
`01 November 2005
`
`Allergan, Inc
`Overweight
`Allergan Puts Up Another Very Strong Quarter: Adj. Est. $95.23
`01 November 2005
`
`Specialty Pharmaceuticals
`Corey Davis, Ph.D.
`(1-212) 622-6434
`corey.davis@jpmorgan.com
`David B Shaw
`(1-212) 622-5246
`david.b.shaw@jpmorgan.com
`Edmund C Kim, Ph.D.
`(1-212) 622-6720
`edmund.c.kim@jpmorgan.com
`
`• Allergan beat 3Q top and bottom-line expectations by a wide
`margin: $40M more revenues and $0.04 higher EPS, even with
`higher than expected spending, which is a nice change from an
`earnings season that's been characterized by soft sales and
`earnings "hits" on lower spending within the speciality pharma
`sector (except for Sepracor).
`
`• Net sales were $606M, much higher than our $566M and the
`Street's $569M. EPS was $0.83, 4 cents higher than consensus of
`$0.79. As an added bonus, guidance was taken up by the amount
`of the beat. We adjust our ‘05 EPS to $3.27 (guidance $3.26-
`$3.27), and '06 to $3.69, down from $3.75 due to higher expenses.
`
`• The top-line strength was driven by outperformance of all the
`major product franchises. Relative to our estimates, Botox beat by
`$9M; Alphagan/P/Combigan beat by $10M; Lumigan beat by
`$4M; Restasis beat by $4M; and dermatology beat by $3M.
`Overall, the main drivers were strength in international markets,
`strong US performance, and a longer quarter in terms of selling
`days. Wholesaler inventory remains less than 8 weeks for all the
`major products. We sum it up as "operational excellence".
`
`• At $96, the stock trades at 26x our new ’06 EPS of $3.69. With
`leading fundamentals, a strong pipeline, and an eye towards
`execution, we find the valuation reasonable and stay at OW.
`
`Allergan, Inc (AGN;AGN US)
`
`2004A
`
`2005E
`(Old)
`
`EPS ($)
`0.59
` Q1 (Mar)
`0.63
` Q2 (Jun)
`0.67
` Q3 (Sep)
`0.86
` Q4 (Dec)
`2.75
` FY
`33.3
`P/E FY
`2,303A
`2,046
`Revenue FY ($ mn)
`Source: Company data, Reuters, JPMorgan estimates.
`
`0.76A
`0.78A
`0.79A
`0.90A
`3.23A
`
`2005E
`(New)
`
`0.76A
`0.78A
`0.83A
`0.89A
`3.27A
`29.2A
`2,303A
`
`2006E
`(Old)
`
`2006E
`(New)
`
`3.75
`
`2,437
`
`3.69
`25.9
`2,437
`
`Company Data
`Price ($)
`Date Of Price
`52-week Range
`Mkt Cap ($ mn)
`Fiscal Year End
`Shares O/S (mn)
`
`95.23
`01 November 05
`69.01 - 95.43
`12,028.71
`Dec
`135
`
`J.P. Morgan Securities Inc.
`See page 6 for analyst certification and important disclosures, including investment banking
`relationships. JPMorgan does and seeks to do business with companies covered in its research reports.
`As a result, investors should be aware that the firm may have a conflict of interest that could affect the
`objectivity of this report. Investors should consider this report as only a single factor in making their
`investment decision. Customers of JPMorgan in the United States can receive independent, third-party
`research on the company or companies covered in this report, at no cost to them, where such research
`is available. Customers can access this independent research at www.morganmarkets.com or can call
`1-800-477-0406 toll free to request a copy of this research.
`
`1
`
`ALL 2053
`MYLAN PHARMACEUTICALS V. ALLERGAN
`IPR2016-01128
`
`

`

`Corey Davis, Ph.D.
`(1-212) 622-6434
`corey.davis@jpmorgan.com
`
`North America Equity Research
`01 November 2005
`
`3Q Analysis
`Allergan beat 3Q top and bottom-line expectations by a wide margin: $40M more
`revenues and $0.04 higher EPS, even with higher than expected spending, which is a
`nice change from an earnings season that's been characterized by soft sales and
`earnings "hits" on lower spending within the speciality pharma sector (except for
`Sepracor). Net sales were $606M, much higher than our $566M and the Street's
`$569M. EPS was $0.83, higher than our and the Street's $0.79.
`
`The top-line strength was driven by outperformance of all the major product
`franchises. Relative to our estimates, Botox beat by $9M; Alphagan/P/Combigan
`beat by $10M; Lumigan beat by $4M; Restasis beat by $4M; and dermatology beat
`by $3M. International markets were apparently quite strong, complementing strength
`in the US. In addition, traditional script analyses that suggested a softish top-line
`were confounded by a larger number of actual selling days in 3Q. Wholesaler
`inventory remains less than 8 weeks for all the major products.
`
`On expenses, we’re encouraged by the GM at ~84%, up 270bp sequentially and
`320bp y/y reflecting the drag the AMO contract revenue business had on the margin.
`Excluding, AMO, the margin was flat to down, but newer, higher margin products
`are beginning to improve the mix and have seemingly stemmed further pharma-only
`GM deterioration. Allergan expects this level of GM to continue into 4Q, as implied
`by its upwardly revised GM expectation for the year of 83-84%.
`
` Our delta table showing the difference in line-items from our model is below (Table
`1).
`
`Table 1: 3Q05 Actuals vs. Estimates
`($M)
`
`Pharma sales
`Botox
`Alphagan
`Lumigan
`Restasis
`Total Derm
`Other sales (contract sales)
`Total Revenues
`Gross margin
`R&D
`SG&A
`Operating Margin
`Tax Rate
`Net Income
`EPS - adjusted
`Shares out
`Source: Company reports and JPMorgan estimates.
`
`Actual
`605.9
`214.8
`75.1
`72.8
`54.0
`33.0
`0.2
`606.1
`83.8%
`106.7
`250.5
`24.8%
`27.8%
`112.1
`$0.83
`134.7
`
`JPM Est.
`566.1
`206.0
`65.6
`69.0
`50.0
`30.4
`0.0
`566.1
`82.1%
`99.6
`218.0
`26.0%
`28.3%
`107.2
`$0.79
`135.6
`
`Variance
`39.8
`8.8
`9.5
`3.8
`4.0
`2.6
`0.2
`40.0
`1.7%
`7.1
`32.5
`(1.2%)
`(0.5%)
`4.9
`$0.04
`(0.9)
`
`Consensus
`
`
`
`
`
`
`
`569.2
`
`
`
`
`
`
`$0.79
`
`
`New Guidance
`Allergan raised a number of key guidance items for the full year ending Dec '05 and
`offered first-time 4Q05 guidance.
`
`For the year (December 2005 YE):
`
`• Net sales are now expected to be $2.24-$2.26B, about 30M higher than the
`mid-point of the previous $2.175-$2.225B. Drivers of this increase are
`raised expectations for Restasis and the Alphagan franchise.
`
`2
`
`2
`
`

`

`Corey Davis, Ph.D.
`(1-212) 622-6434
`corey.davis@jpmorgan.com
`
`North America Equity Research
`01 November 2005
`
`o Restasis is now expected to be $180-$200M (previously $165-
`$185) as that product continues to gain traction. The company
`reported strong patient satisfaction and compliance, which
`generated strong refill scripts. With the recently signed co-promo
`deal with NPS, the product will be detailed to rheumatologists,
`perhaps adding another aspect to the growth outlook of this
`product.
`
`o Alphagan franchise sales are now expected to be $255-$275M
`(previously $235-$255M). Emerging markets like Latin America
`and Asia/Pacific seem to be the drivers of continued growth with
`flattish US and EU sales. Allergan hasn't explicitly stated when it
`plans to launch Alphagan P 0.1% (fka Alphagan Z), but we
`continue to expect a 1H06 launch. The company appears to be
`trying to coordinate reimbursement and other franchise issues
`before putting the product in the market.
`
`• GM’s of 83-84%, up from 82.5-83%. Newer, higher margin products have
`stemmed GM pressure and Allergan has become more optimistic in its
`outlook.
`
`•
`
`SG&A as a % of pharma net sales of 40%, up from 38-39%. Allergan is
`confident it’s making the right investments in DTC on major products like
`Restasis, Botox cosmetic, and Botox hyperhydrosis, especially in the DTC-
`sensitive US market. It’s also expanding two key sales forces: Botox in EU;
`and a doubling of the Botox neuroscience presence in the US. We continue
`to believe the Allergan’s preparation by making personnel investments and
`gaining experience with Imitrex via the Glaxo deal are solid steps towards
`ensuring a strong launch of this indication upon approval.
`
`• R&D as a % of pharma net sales of 17.5%. This is no change, but a strong
`reminder how focused this company is on internal development compared to
`many specialty pharma “peers” and perhaps the biggest confounding aspect
`of comparables valuation. Even at these levels, it’s seemingly highly
`analytical of programs it does invest in as evidenced by it finally throwing
`in the towel on Tazoral in psoriasis.
`
`•
`
`•
`
`•
`
`Tax rate – unchanged at 29%.
`
`EPS guidance was raised to $3.26-$3.27 - effectively taking the top-end of
`the previous $3.20-3.23 range and adding this quarter's $0.04 beat. That
`both the top and bottom-lines are being taken-up by about the amount of
`today's beat is a good sign to us about Allergan's confidence in its outlook.
`
`Shares outstanding – unchanged at 133-134M.
`
`For 4Q05, Net sales is expected to be $565 - $580M and EPS is expected to be
`$0.88-0.89. We have only slightly trimmed our EPS to be at the top end of this
`range, being careful to note Allergan’s tendency as well as indicated expectation for
`the following quarter to reinvest any upside before throwing extra down to the
`bottom line.
`
`3
`
`3
`
`

`

`Corey Davis, Ph.D.
`(1-212) 622-6434
`corey.davis@jpmorgan.com
`
`North America Equity Research
`01 November 2005
`
`Valuation and Rating Analysis
`Our June upgrade was based on several catalysts, and as Allergan continues to hit on
`those catalysts, we still envision a 3-year investment time horizon with substantial
`and steady returns in each of those years, driven by consistent and possibly
`accelerating earnings growth, with low risk compared to peers. At $96, the current
`multiple has expanded up to nearly 26x, from the low 20’s earlier this year, and we
`still find it reasonable. Specialty pharma “peers” trade at about a 19x group average,
`however the level of R&D spend at Allergan is much more like that of a big pharma
`or biotech firm. Thus, we find broad group comparisons difficult, however, given
`the generally poor fundamentals of many members of the group and thus we find few
`true "peers."
`
`Risks to Our Rating
`We do not think there are any major fundamental risks in the near term like generic
`exposures that seem to plague many of the companies in this universe. New product
`launches are generally what drives specialty pharma stocks and Allergan has none in
`the near-term. With the recent run in the stock (up ~29% since May 2 compared to
`~6% for S&P), investors will now place more scrutiny on the longer-term pipeline
`that will be required to maintain the growth at the current rates. Hence, any pipeline
`setback, no matter how minor, may have more of a negative impact on the stock than
`it would have just a few months ago such as: delay in the start of the Botox Phase III
`migraine study, and in OAB, a hint that the Posurdex trials are not going well, and/or
`negative news on the potential for Combigan U.S. approval in 2006. Other specific
`risks would include a slowing Botox growth rate, which we have no visibility on due
`to lack of Rx data, and entry of Reloxin into the U.S. market sooner than 2008 with a
`deep discounting pricing strategy.
`
`4
`
`4
`
`

`

`Corey Davis, Ph.D.
`(1-212) 622-6434
`corey.davis@jpmorgan.com
`
`North America Equity Research
`01 November 2005
`
`Financial Snapshot
`
`Table 2: AGN Income Statement
`(In millions except per share amount)
`FY04
`FY: December
`705
`Botox
`25%
`Y/Y Growth
`269
`Alphagan Family
`-6%
`Y/Y Growth
`233
`Lumigan
`28%
`Y/Y Growth
`100
`Restasis
`160%
`Y/Y Growth
`101
`Total Derm
`-8%
`Y/Y Growth
`2,046
`Total Revenues
`17%
`Y/Y Growth
`81%
`Gross Margin
`781
`SG&A
`40%
`% of total revenues
`13%
`Y/Y Growth
`346
`R&D
`18%
`% of total revenues
`13%
`Y/Y Growth
`27%
`Operating Margin
`30%
`Tax Rate
`369
`Net Income
`18%
`Net Margin
`$2.75
`EPS
`19%
`Y/Y Growth
`134
`Shares Outstanding
`Source: Company reports and JPMorgan estimates.
`
`Q105
`176
`17%
`67
`-4%
`62
`16%
`37
`75%
`30
`21%
`527
`12%
`82%
`210
`42%
`15%
`82
`16%
`-5%
`28%
`29%
`101
`19%
`$0.76
`29%
`133
`
`Q205
`213
`20%
`64
`3%
`62
`7%
`46
`130%
`30
`25%
`591
`17%
`81%
`241
`42%
`22%
`91
`16%
`3%
`26%
`30%
`105
`18%
`$0.78
`23%
`135
`
`Q305
`215
`23%
`75
`3%
`73
`21%
`54
`124%
`33
`33%
`606
`19%
`84%
`251
`41%
`28%
`107
`18%
`29%
`25%
`28%
`112
`18%
`$0.83
`24%
`135
`
`Q405E
`231
`14%
`62
`-3%
`69
`11%
`53
`55%
`30
`9%
`579
`4%
`84%
`208
`36%
`1%
`115
`20%
`31%
`28%
`28%
`121
`21%
`$0.89
`3%
`135
`
`FY05E
`835
`18%
`268
`0%
`265
`14%
`191
`91%
`123
`22%
`2,303
`13%
`83%
`909
`40%
`16%
`394
`17%
`14%
`27%
`29%
`436
`19%
`$3.27
`19%
`134
`
`FY06E
`960
`15%
`264
`-1%
`298
`12%
`248
`30%
`129
`5%
`2,437
`6%
`83%
`946
`39%
`4%
`414
`17%
`5%
`28%
`28%
`500
`21%
`$3.69
`13%
`136
`
`5
`
`5
`
`

`

`Corey Davis, Ph.D.
`(1-212) 622-6434
`corey.davis@jpmorgan.com
`
`North America Equity Research
`01 November 2005
`
`Companies Recommended in This Report (as of COB 31 October 2005)
`Allergan, Inc (AGN/$89.30/Overweight)
`Analyst Certification
`The research analyst who is primarily responsible for this research and whose name is listed first on the front cover certifies
`(or in a case where multiple research analysts are primarily responsible for this research, the research analyst named first in
`each group on the front cover or named within the document individually certifies, with respect to each security or issuer
`that the research analyst covered in this research) that: (1) all of the views expressed in this research accurately reflect his or
`her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's
`compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the
`research analyst in this research.
`Important Disclosures:
`
`•
`
`•
`Liquidity Provider: JPMSI and/or one of its affiliates normally provides liquidity in the stock of Allergan, Inc.
`• Client of the Firm: Allergan, Inc is or was in the past 12 months a client of JPMSI; during the past 12 months,
`JPMSI provided to the company investment banking services and non-securities-related services.
`Investment Banking (past 12 months): JPMSI or its affiliates received in the past 12 months compensation for
`investment banking services from Allergan, Inc.
`Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation
`for investment banking services in the next three months from Allergan, Inc.
`• Non-Investment Banking Compensation: An affiliate of JPMSI has received compensation in the past 12 months
`for products or services other than investment banking from Allergan, Inc.
`
`•
`
`Allergan, Inc (AGN) Price Chart
`
`N
`
`OW $85
`
`N $85
`
`Price($)
`
`160
`
`140
`
`120
`
`100
`
`80
`
`60
`
`40
`
`20
`
`0
`
`Date
`
`17-Jun-03 N
`02-Jun-05 OW
`
`Rating Share Price
`($)
`80.82
`82.44
`
`Price Target
`($)
`-
`85.00
`
`Nov
`02
`
`Feb
`03
`
`May
`03
`
`Aug
`03
`
`Nov
`03
`
`Feb
`04
`
`May
`04
`
`Aug
`04
`
`Nov
`04
`
`Feb
`05
`
`May
`05
`
`Aug
`05
`
`Nov
`05
`
`Source: Reuters and JPMorgan; price data adjusted for stock splits and dividends.
`This chart shows JPMorgan's continuing coverage of this stock; the current analyst may or may not have covered it over
`the entire period. As of Aug. 30, 2002, the firm discontinued price targets in all markets where they were used. They
`were reinstated at JPMSI as of May 19th, 2003, for Focus List (FL) and selected Latin stocks. For non-JPMSI covered
`stocks, price targets are required for regional FL stocks and may be set for other stocks at analysts' discretion.
`JPMorgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
`
`Explanation of Ratings and Analyst(s) Coverage Universe: JPMorgan uses the following rating system: Overweight
`[Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the
`analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock
`will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.]
`Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the
`stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the
`sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s)
`coverage universe.
`
`6
`
`6
`
`

`

`Corey Davis, Ph.D.
`(1-212) 622-6434
`corey.davis@jpmorgan.com
`
`North America Equity Research
`01 November 2005
`
`Coverage Universe: Corey Davis, Ph.D.: Allergan, Inc (AGN), Andrx Corp (ADRX), Axcan (AXCA), Barr
`Pharmaceuticals (BRL), Barrier Therapeutics Inc (BTRX), Biovail (BVF), Cephalon, Inc. (CEPH), Durect (DRRX), Elan
`Corp (ELN), Emisphere (EMIS), Endo Pharmaceuticals (ENDP), First Horizon Pharmaceuticals Corp (FHRX), Forest
`Laboratories, Inc (FRX), Ivax Corp (IVX), King Pharmaceuticals, Inc (KG), Medicis Pharmaceutical Corp. (MRX), Mylan
`Laboratories (MYL), Neose Technologies, Inc (NTEC), NitroMed Inc (NTMD), Pharmion (PHRM), Sepracor (SEPR),
`Shire Pharmaceuticals (SHP.L), Teva Pharmaceuticals (TEVA), Watson Pharmaceuticals (WPI)
`
`JPMorgan Equity Research Ratings Distribution, as of September 30, 2005
`Overweight
`Neutral
`(buy)
`(hold)
`40%
`42%
`JPM Global Equity Research Coverage
`46%
`45%
` IB clients*
`34%
`49%
`JPMSI Equity Research Coverage
`65%
`55%
` IB clients*
`*Percentage of investment banking clients in each rating category.
`For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category, our Neutral rating falls into a hold
`rating category, and our Underweight rating falls into a sell rating category.
`
`Underweight
`(sell)
`18%
`39%
`17%
`45%
`
`Valuation and Risks: Company notes and reports include a discussion of valuation methods used, including methods used
`to determine a price target (if any), and a discussion of risks to the price target.
`
`Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation
`based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall
`firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.
`
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`
`7
`
`7
`
`

`

`Corey Davis, Ph.D.
`(1-212) 622-6434
`corey.davis@jpmorgan.com
`
`North America Equity Research
`01 November 2005
`
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`Corey Davis, Ph.D.
`(1-212) 622-6434
`corey.davis@jpmorgan.com
`
`North America Equity Research
`01 November 2005
`
`9
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