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Allergan (AGN) to Report Q3 Earnings: What's in the Cards?

Zacks Equity Research

Allergan plc AGN will report third-quarter 2017 earnings on Nov 1, before the market opens. Last quarter, the company delivered a positive earnings surprise of 1.77%.

Allergan’s share price has declined 14.1% this year so far, outperforming the 27.6% decline witnessed by the industry.

Allergan’s earnings performance has been mixed so far, with the company beating expectations in three of the past four quarters and missing on one occasion. The average negative earnings surprise over the last four quarters is 0.36%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

At the Q2 call, Allergan had said that third-quarter revenues are expected to be at similar levels to the second quarter. Second-quarter revenues rose 8.8% year over year. Third quarter revenues are likely to be driven by new products like Vraylar, Namzaric and Viberzi, international growth and growth from key established products like Botox and Linzess.

However, Namenda IR is facing generic competition, which will continue to hurt sales of the drug. Meanwhile, Namenda XR sales also declined in the previous quarters due to lower demand and shift of promotional efforts to Namzaric, a once-daily, fixed-dose combination of Namenda XR and Aricept. The company does not expect a generic version of Namenda XR to be launched until first quarter of 2018.

Investors will be interested to find out how Namzaric performed in the quarter. Last quarter, Allergan saw improved sales of Namzaric due to continued conversion from Namenda XR and higher demand following an expanded label with new dosages. The positive trend is expected to continue.

Meanwhile, the addition of Alloderm from LifeCell (Jan 2017) and CoolSculpting body contouring system from ZELTIQ (Apr 2017) acquisitions are likely to support the top line in the quarter.

However, loss of exclusivity of Asacol HD and Minastrin may remain an overhang on the top line.

Higher promotional expenses for key products, increased costs to support an advancing pipeline and the addition of lower margin LifeCell and ZELTIQ acquisitions can put pressure on Allergan’s margins. In fact, at the Q2 call, Allergan mentioned that SG&A and R&D expenses will be higher in the third quarter compared with the fourth quarter. Higher promotional activities, given the timing of new launches and continued strong promotion for key brands, are expected to lead to higher sales and marketing costs in the third quarter.

Investors will also be keen to know management’s plans to protect Restasis, its second best-selling drug, from generic competition. Earlier this month, a Texas federal district court invalidated four of the six patents covering Restasis, potentially opening doors for early generic competition. Restasis patents are scheduled to expire on Aug 27, 2024.

Allergan also came under fire recently for its agreement with the Saint Regis Mohawk Tribe. Lawmakers questioned the unconventional move adopted by the company to protect Restasis from generic competition. The deal with the Tribe has basically raised concerns that it will curb generic competition in the pharmaceutical industry and discourage generic drugmakers from making cheaper versions of expensive drugs.

Investors will also be interested to know the impact of new competition on Allergan’s key products – Restasis and Linzess. Shire’s SHPG dry eye disease drug Xiidra, launched last year, is posing strong competition for Restasis. Meanwhile, Synergy’s Trulance (plecanatide) was launched in the second quarter for CIC, which could pose competition to Linzess.

Earnings Whispers

Our proven model does not conclusively show that Allergan is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: The Most Accurate estimate stands at $4.03, while the Zacks Consensus Estimate is pegged higher at $4.06. This results in an Earnings ESP of -0.69%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Allergan has a Zacks Rank #4. We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Some stocks in the biotech/pharma sector that have a positive Earnings ESP and a favorable Zacks Rank are:

Acorda Therapeutics, Inc. ACOR, scheduled to release results on Oct 31, has an Earnings ESP of + 5.53% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Clovis Oncology, Inc. CLVS, scheduled to release results on Nov 1, has an Earnings ESP of +2.01% and a Zacks Rank #2 (Buy).

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