Is a Beat in the Cards for Allergan (AGN) in Q3 Earnings?

We expect Allergan plcAGN to beat expectations when it reports third-quarter 2018 results on Oct 30, before market open. In the last reported quarter, the company delivered a positive earnings surprise of 7.02%.

Allergan's share price has risen 14.8% this year so far against the industry 's decline of 1%.

Allergan's earnings performance has been strong, with the company beating expectations in each of the past four quarters. The average positive earnings surprise over the last four quarters is 5.72%.

Allergan plc Price and EPS Surprise

Allergan plc Price and EPS Surprise | Allergan plc Quote

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

Factors to Consider

On the second-quarter conference call, management guided third-quarter revenues between $3.75 billion and $3.90 billion and earnings per share in the range of $3.80 to $4.10.

Lower sales of Alzheimer's treatment Namenda XR and Estrace cream due to generic competition will hurt Allergan's revenues in the third quarter.

While a generic version of Namenda XR was launched by India-based company, Lupin in February that of Estrace cream was launched by Mylan MYL in January. A generic version of Delzicol is also expected to be launched soon. Allergan expected a generic version of Restasis, its second best-selling drug, to be launched between August and October of 2018. However, no generic version of Restasis has been launched yet.

Nonetheless, key products like Botox, Juvéderm collection of fillers, Vraylar, Linzess and Lo Loestrin are likely to support sales growth in the quarter. The Zacks Consensus Estimate for Botox is $858 million.

On the second quarter call, the company said that Amgen's newly launched CGRP antibody, Aimovig had no visible impact on Botox demand in the second quarter. However, the company did mention that it expects the growth rate for Botox Therapeutic to moderate in the second half due to competition from CGRPs, though it will remain near double digit level. At the same time, the company said that the introduction of the CGRPs should expand the migraine market and Botox and the CGRPs can coexist in the larger market. On the third quarter call, investors will be keen to know management's comments on this issue. Please note that both Teva and Lilly's CGRPs, were approved by the FDA in September.

Third-quarter revenues are also likely to benefit from higher revenues from Alloderm and CoolSculpting body contouring system added from 2017 acquisitions of LifeCell and Zeltiq, respectively.

Pipeline re-prioritization efforts should continue to result in lower R&D costs. Gross margins are expected to be hurt by loss of exclusivity of high-margin products - Restasis, Estrace and Delzicol - and unfavorable product mix.

We remind investors that on the second-quarter call, Allergan had mentioned that it was looking to sell its Women's Health and Infectious Disease to focus on four therapeutic areas, Medical Aesthetics, CNS, Eye Care and GI. On the call, the company mentioned that there were more buyers for the Infectious Disease franchise as investors await FDA decision on Esmya/ulipristal acetate (belongs to the Women's Health franchise). In August however, Allergan announced that the FDA has given a complete response letter (CRL) to the new drug application (NDA) for Esmya/ulipristal acetate on safety concerns. Esmya has been developed for the treatment of abnormal uterine bleeding in women with uterine fibroids. With the latest setback, investors will be keen to know the prospects of striking a profitable deal for the Women's Health franchise on the third-quarter conference call.

Earnings Whispers

Our proven model shows that Allergan is likely to beat estimates this quarter because it has the right combination of two key ingredients. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for a likely positive surprise.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate ($4.12 per share) and the Zacks Consensus Estimate ($4.01 per share), is +2.89%. 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 #3. The combination of Allergan's Zacks Rank #3 and positive ESP makes us confident of an earnings beat in the upcoming release.

Sell-rated stocks (Zacks Rank #4 or 5), on the other hand, should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some large biotech/drug stocks worth considering per our model. These have the right combination of elements to beat on earnings this time around:

Amgen, Inc. AMGN is slated to announce financial figures on Oct 30. The company has an Earnings ESP of +0.56% and is a Zacks #2 Ranked stock. You can see the complete list of today's Zacks #1 Rank stocks here .

Regeneron Pharmaceuticals, Inc. REGN has an Earnings ESP of +2.68% and a Zacks Rank of 3. The company is scheduled to report third-quarter earnings on Nov 6.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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