Should We Get Bullish on This Fast Growing Healthcare Company?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Allergan (NYSE: AGN) has been consistently increasing on the market since the market bottom, from nearly $32 per share in November 2008 to more than $116 per share in the middle of April 2013. However, Allergan has experienced a lot of recent volatilty, and now is near $105. The company is in the portfolio of several successful investors including Joel Greenblatt and Jim Simons. Should investors consider Allergan at its current trading price? Let’s find out.

Business snapshot

Founded in 1950, Allergan is considered to be the multi-specialty healthcare company, developing and commercializing different pharmaceutical products for medical dermatology, neurological, medical aesthetics and obesity intervention in more than 100 countries globally. The company operates in two main business segments: Specialty Pharmaceuticals and Medical Devices. 82.4% of its $4.78 billion revenue is generated by the Specialty Pharmaceuticals segment while the Medical Devices segment generated nearly $925 million in sales in 2012. The Specialty Pharmaceuticals and Medical Devices segment contributed nearly $2 billion and $279 million, respectively in operating income.

Growing performance with a strong balance sheet

Allergan has managed to consistently grow its revenue, from $4.4 billion in 2008 to $5.8 billion in 2012. Its net income also rose from $579 million to nearly $1.1 billion during the same period. The company only earned around $600,000 in profits in 2010. The extremely low net income in 2010 was due to a legal settlement of nearly $610 million and intangible asset impairment charges of $400 million. What I like about Allergan is its strong balance sheet with low leverage. As of December 2012, it had $5.84 billion in equity, $2.96 billion in cash and only $1.5 billion in long-term debt. Nevertheless, the company recorded as much as $3.47 billion in goodwill and intangible assets. Thus, its tangible book value stayed at $2.37 billion.

Johnson & Johnson: Bad news in India, good news in the U.S.

Allergan is trading at $105 per share with a total market cap of $31.2 billion. The market values Allergan quite expensive, at 16.8 times EV/EBITDA. Compared to its much bigger peers including Johnson & Johnson (NYSE: JNJ) and Novartis (NYSE: NVS), Allergan has the highest EV multiple among the three. Johnson & Johnson is trading at $86 per share, with a total market cap of $239.7 billion. It is valued at only 10.8 times EV/EBITDA. Recently, Johnson & Johnson has been facing a challenge in the Indian market. In India, Maharashtra FDA found out that the company has used ethylene oxide to kill bacteria in its baby powder. It seemed to be quite dangerous because ethylene oxide might cause lung damage and even cancer. Consequently, India has cancelled the company’s license to manufacture cosmetics at the Mulund plant.

However, in the U.S., Johnson & Johnson has received FDA approval on the company’s Sedasys device, which could sedate patients for some tests without an anesthesiologist. Johnson & Johnson CEO Alex Gorsky commented that its new device, which will be available next year, was “a great way to improve care and reduce costs.” Indeed, some glitches might happen with Johnson & Johnson in some parts of the world. However, with its global leading positions in the healthcare field and its ongoing R&D efforts, Johnson & Johnson could do well in a long run.

Novartis got sued

Novartis is also has a lower EV multiple than Allergan. The company is trading at $73.50 per share, with the total market cap of $180.6 billion. The company is valued at 11.4 times EV/EBITDA. According to the New York Times, at the end of April, Novartis was sued by the U.S. government, accusing the company of paying millions in kickback money to doctors in exchange for its drugs, including hypertension drugs Lotrel and Valturna, and the diabetes drug Starlis, being prescribed. In return, Novartis’ spokeswoman Julie Masow commented that Novartis would dispute the claims and defend itself.

Even after the legal issues, Novartis’ share price has consistently kept going up to nearly $73.50 per share. In February, it paid out more than $2.40 per share in dividends. Thus, the dividend yield stays at nearly 3.3%. Johnson & Johnson offers investors a bit lower dividend yield at 3.1% while the dividend yield for Allergan is very small, at only 0.2%.

My Foolish take

Investing in the pharmaceutical industry is not easy. The results of the potential future pipelines of each company are uncertain. If potential growth is factored in, Allergan seems to be the best pick with the lowest PEG at only 1.57% while the PEG ratios for Johnson & Johnson and Novartis are much higher, at 2.42% and 2.73%, respectively. However, investors might feel much safer with Johnson & Johnson and Novartis because of their huge sizes, market leading positions and decent dividend yields.

Is bigger really better?
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Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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