An Undervalued, Wide-Moat Name in Healthcare

Michael Waterhouse: Specialty pharma company Allergan remains one of our more undervalued, wide-moat names in healthcare, as the company's stock price has suffered on some recent setbacks, such as mixed phase 2 data for a drug to treat the liver condition NASH.

The biggest issue has been likely earlier than expected generic competition on Restasis, the company's second largest product, following a recent trial judgment that invalidated the patents. We think generic competition on Restasis--which represents about 9% of sales and 15% of earnings--is a manageable issue for the company, and expense management should enable the firm to offset some of the earnings hit once the FDA approves a generic version.

Aside from Restasis, we think the market underappreciates the firm's innovative pipeline and particularly strong aesthetics business, led by Botox, that continues to post strong growth, has no reimbursement issues as a consumer business, and faces only limited competition--all key components for our wide-moat rating. Many of the company's key remaining products don't face patent expiration well into the next decade, while pipeline therapies for uterine fibroids and chronic migraine, among others, offer new growth opportunities down the road.

It's difficult to know when sentiment may change on the stock, but trading at about 11 times earnings makes us view the stock as undervalued and might be worth consideration for long-term oriented investors.