After suffering a series of setbacks, shares of Allergan PLC (AGN) are down by more than 50% from their all-time high in mid-2015, Barron's reports. The biggest concerns for investors have been competition for its lead product, wrinkle treatment Botox, and the pending expiration of patent exclusivity for dry-eye remedy Restasis, Barron's notes.

"The concerns are overdone," Barron's counters, indicating a "promising pipeline of new drugs" and adding, "The valuation is low enough that most of the bad news surrounding Allergan appear already priced in."

Valuing Allergan

Allergan closed at $163.70 on March 21. Over the past year, its shares have dropped by 30%. Allergan is one of the top 10 constituents by market weight of the S&P Pharmaceuticals Select Industry Index (SPSIPH), which was up by 4.5% for the year, per S&P Dow Jones Indices.

Using the consensus estimates for EPS as reported by Barron's for 2018 and 2019, $15.58 and $16.51, the forward P/Es based on the March 21 close would be 10.5 and 9.9, respectively. Barron's notes that competitors trade at 12 or 13 times earnings.

Valuing Allergan at 12 times 2019 earnings produces a price of $198.12, or 21% above the March 21 close. Portfolio manager Jason Benowitz at Roosevelt Investments tells Barron's that he uses a P/E of 13.5 on 2019 EPS to value the company, which generates a price of $222.89, or 36% above the March 21 close.

The Bad News

Roughly 19% of Allergan's revenue in 2017, $3 billion out of $15.9 billion, was produced by drugs that may lose patent exclusivity by 2020, Barron's notes. Of this figure, about half, or $1.5 billion, is from dry-eye remedy Restasis. A generic alternative may be on the market later this year. Other big sellers facing the same problem are blood pressure medication Bystolic and Alzheimer's treatment Namenda XR, Barron's adds.

Botox generated $3.2 billion of sales in 2017, or 20% of the company's total, per Barron's. Revance Therapeutics Inc. (RVNC) has been conducting promising clinical trials on a similar treatment currently called RT002, Barron's says, and has signed a licensing agreement with Mylan NV (MYL) to commercialize it.

'Moat Around Botox'

Treatment with RT002, however, lasts six months, rather than three or four months with Botox, and at much higher dosages, according to Michael Kon, a portfolio manager with Summitry, a longstanding investor in Allergan, in remarks to Barron's. Kon dismisses the competitive threat for these reasons and for an even more important one, the trust built up among patients and doctors around a proven product that is injected into the face. This, he indicates, represents a bigger "moat around Botox" than patents.

Additionally, Barron's indicates, citing research from Cowen Inc., Botox has a 70% market share and sales are growing at roughly double-digit rates despite the emergence of discount-priced competition. As for RT002, it is unlikely to reach the market until 2020 at the earliest, per Barron's.

Cross-Selling Advantages

Yet another plus for Allergan are what Barron's terms cross-selling and distribution advantages. For example, the company sells other dermatological preparations that can be sold to doctors in discounted bundles along with Botox. If that were not enough, Barron's observes that such aesthetic products are not covered by insurance, so prices are driven entirely by what consumers are willing to pay.

Product Pipeline

Barron's also cites a pipeline of 15 promising new drugs from Allergan that are in late stages of development or likely to hit the market in the next several years. The company has projected annual sales of $500 million for a migraine treatment scheduled to be released in 2020, and said its bipolar disorder drug Vraylar may grow into a blockbuster once approval is granted for other uses. Overall, the company has indicated that it has six products in development that collectively may generate over $4 billion in annual sales in the future, Barron's adds.

'Every Option to Create Value'

Allergan also plans to spend $1.5 billion this year on share repurchases and to reduce debt by $4 billion, while increasing growth through so-called bolt-on acquisitions, Barron's says. Among existing drug offerings, the company says, eight produced revenue growth of 10% to 20% in 2017, and they should produce 80% of the company's overall growth in 2018.

Lastly, Barron's quotes CEO Brent Saunders as saying, regarding a possible break-up of the company, "We're going to consider every option, and we're going to see if there are opportunities to create value, and we're going to do that with a sense of urgency." A scenario offered by Barron's would split Allergan into a high-growth company and a low-growth company. The former would include aesthetic and eye care products, among others.

Takeover Target Again?

Barron's notes that Pfizer Inc. (PFE) had offered to acquire Allergan for $363 a share in 2015. The deal involved Pfizer's becoming an Irish-domiciled company, like Allergan, but the Obama administration's moves to penalize such tax-motivated corporate inversions scuttled the acquisition. With the recent reduction of U.S. corporate tax rates, Allergan may be in play once again. At a market cap of $53.6 billion, per Barron's, potential suitors will have to be large, such as $216.1 billion Pfizer.