3 Reasons Big Hedge Funds Dropped Allergan Like a Hot Potato in Q3
November 29, 2016
By Mark Terry, BioSpace.com Breaking News Staff
Institutional money managers that have $100 million or more in assets they manage are required to make 13F filings with the U.S. Securities and Exchange Commission (SEC). The data in the 13Fs, which were made last week, are at least 45 days old, but can still give investors and analysts a peek into the inner workings of big investors that may provide a clue into shifts in the industry.
The recent filing indicated that investors were unloading stocks like Netflix (NFLX) and Intercontinental Exchange (ICE), but most relevant to this readership, they were getting out from under Allergan . Sean Williams, writing for The Motley Fool, takes a look at why.
There were 38 hedge funds that are closely followed, and 10 of them either dumped all or much of their shares of Allergan in the third quarter. Maverick Capital, Poinstate Capital and Viking Global Management bailed on Allergan. Adage Capital, Bluemountain Capital, Icahan Associates, Omega Advisors, Passport Capital, Paulson & Co., and Third Point all slashed their position. Williams cites three reasons.
1. The expectation of a Hillary Clinton presidency.
Although the Trump election came as quite a surprise to most people in the U.S., in the third quarter almost all polls and media sources expected Clinton to win. As Williams wrote earlier, “Clinton was expected to introduce considerably harsher legislation on drug pricing, which could have reduced their pricing power.”
Although President-elect Trump’s proposed policies regarding drug pricing aren’t all that clear, many investors apparently feel they are more friendly toward business. Whether his and the GOP’s intentions to “repeal and replace” the ACA will put downward pressure on drug pricing, or generate millions of people without health insurance, apparently was not a factor in their thinking.
2. The Teva-Actavis acquisition took too long.
This deal, which was a combination of cash and stock worth $40.5 billion, involved selling off some of its assets to avoid anti-trust issues. Williams wrote, it “ran into multiple regulatory roadblocks since it concentrated such a large share of generic-drug manufacturing in Teva ’s hands in select countries. Teva wound up appeasing regulators by selling certain assets, but the extra waiting and uncertainty surrounding the sale of Actavis clearly weighed on the debt-riddled Allergan.”
3. Allergan didn’t meet expectations.
Williams points out that in two of the past three quarters, Allergan didn’t meet Wall Street’s consensus profit expectations. Not all analysts are concerned, however. Jim Cramer and Jack Mohr, in an August Action Alerts PLUS, wrote “We view the shares as fundamentally undervalued and largely misunderstood. The misunderstanding is twofold: inaccurate consensus estimates and a lack of defined shareholder base. Future growth will be driven by several key new product launches and a broad late-stage pipeline. CEO Brent Saunders bases every decision on the context of maximizing shareholder value creation.”
It’s not totally clear if these investors made the right decision. On the downside, Allergan started the year with more than $42 billion in debt, which prevented the company from doing much until the Actavis sale was closed. And that took longer than expected.
On the positive side, Williams wrote, “Allergan’s eye-care products, medical aesthetics, and Botox therapeutics seem to be unstoppable beasts. Allergan possesses strong pricing power on these products, resulting in segment margin of 55.4 percent in Q3. Allergan is also expected to generate north of $21 in EPS by fiscal 2019. If investors can weather the expected turbulence, then Allergan could present as an intriguing value stock.”
However, in today’s post, noting those positives, Williams also says, “With some of Allergan’s mature products struggling, the cautious approach could wind up being the prudent one for the time being.”