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Allergan and Elanco: Old and new pharma stocks have banner day

Written By | Sep 20, 2018
Allergan and Elanco

Elanco CEO discusses Thursday’s IPO on CNBC. (Screen capture, YouTube version of CNBC video)

 WASHINGTON. As we noted in an earlier article, Thursday was a banner day on Wall Street. Even our own somewhat beleaguered portfolios were irrationally exuberant today. Blasting to the upside were a pair of pharmaceutical stocks, one old — Allergan (trading symbol: AGN) — and one brand new — Elanco (ELAN), an IPO that debuted Thursday morning.

Both had the good fortune to be ready to roll on this remarkably bullish Thursday. Stocks in general got a lift due to a variety of factors. The most prominent of these was a diminished sense of concern by investors about the effects of the ever-escalating China trade battle. This allowed the essentially bullish implications of the most recent earnings season to combine with a sense of consumer optimism. That, in turn gave markets a big lift, after nearly a month of endless backing and filling with a downside bias.

With regard to our own holdings, let’s get down to the nuts and bolts on our odd-couple pharmaceutical companies.

Allergan reverses field

Our too-huge position in Allergan (AGN) regained and exceeded its surprisingly nasty setback earlier this week. That brings this holding close to our breakeven point. It’s quite an improvement, too, after the stock plummeted ever downward late last year. It bottomed for us, down a horrible -30 percent or thereabouts as the New Year’s trading action got underway in 2018.




Now we’re off less than 4 percent. We’d feel better if this were a positive 4 percent, but we’ll take what we can get here. Given the propensity of Allergan to give back at least half of each impressive upside move, we’ll probably have to wait a fair bit longer to cross breakeven.

What happens after a perfectly good stock gets way oversold

What’s likely happening with the shares of Allergan is normal and understandable. The many investors who were also casualties of the overdone selling in this stock have been bailing en masse when they hit their own breakeven points. That’s a very likely scenario. When people get unexpectedly clobbered by what seemed like a safe investment, they tend to head for the exits when they get their money back at breakeven.

The problem with Allergan, however, is that the original selling bout – largely attributable to the loss of a major patent case – grossly undervalued the rest of the company’s robust portfolio and active new-drug pipeline. We intend to hold on to our shares until we make a decent profit on the position.

Given that stock analysts are also upgrading the stock to a “Buy” or a “Strong Buy,” that’s likely to happen at some point. But we, and other Allergan holders, will have to remain patient if we’re to become profitable at last. These shares have been absolutely “snakebit” for well over a year.

Elanco scores a hit in its IPO trading debut

We experienced yet another feelgood moment today as we found ourselves the surprise owners of a very successful IPO Thursday morning. Namely, an old “new company” named Elanco Animal Health (ELAN).

We’ve had an unusually bad experience with IPOs this year. Nearly every one we’ve managed to land has turned out to be a money-losing dog. That’s partially because the really hot IPO shares we put in for tend to go to richer customers than us. That’s an old Wall Street brokerage house custom that continues to piss us off. We’ve tended lately to get stuck with shares of the also rans that don’t attract the interest of the Big Boys.

Somehow, however, we did get an allocation of ELAN shares this morning. The new shares priced at $24 per share.  That was up a buck from the top of their expected range. This is usually (but not always) a promising sign that a current IPO may pop when it opens for trading. Fortunately for us, Elanco proved to be that kind of winner.

Pet and animal health is a profitable business for this IPO

Reuters has a good description of this company’s interesting business.

“Elanco sells medicines for both pets and livestock, and its Rumensin cattle feed additive is responsible for some 10 percent of its roughly $2.9 billion in annual sales.

“Elanco sells medicines for both pets and livestock, and its Rumensin cattle feed additive is responsible for some 10 percent of its roughly $2.9 billion in annual sales.



“But rising demand for its pet healthcare products – including flea and tick elimination and heartworm prevention treatments – has driven much of Elanco’s business in recent years, propelling the company to No. 4 globally in the list of largest animal healthcare groups by revenue.”

Animal healthcare has been a growing and profitable niche in the stock market in recent years. Hence, the elevated  investor interest this new IPO. Elanco was oversubscribed. The shares opened for trading at around 11 a.m. and took off like a rocket due to pent up demand. At Thursday’s closing bell, the shares closed at $36, a whopping 50 percent gain on the day.

What’s next for the IPO shares of Elanco?

We feel good about this big and welcome pop in the stock. But our discount brokerage house more or less coerces us into holding IPO shares for 31 days. Which means we can’t flip them for a quick profit like the rich people do. In this case, we hope we can hold on to much of today’s gain until the holding period expires.

Why Elanco seems to be a good bet

Elanco was effectively founded in the 1950s under the Eli Lilly (LLY) pharmaceutical umbrella. As a result, unlike the endless parade of tech “unicorn” IPOs that lack a profit history, Elanco actually makes money. It has done so for decades.

Lilly simply made a business decision to spin off its animal pharmaceutical subsidiary. That’s because management no longer regards this sector as part of its core R&D and drug business.

Elanco will join Pfizer (PFE) spinoff Zoetis (ZTR) and a few other animal health / pharma companies in a drug and R&D niche that has grown exponentially in recent years. Most importantly, however, Elanco is already a viable business and this IPO already makes money. It even announced in its prospectus that it will immediately begin paying quarterly dividends. That’s a rarity in the IPO world.

So, we reasoned, why not give it a try? We’ll see how this works out. IPOs, even for a company like this one, are always an unknown when they hit the market. But some have better odds of success than others. This seems to be one of those, but we’ll have to wait and see.

Note:

Investors would be ill-advised to chase Elanco shares at this point. The opening-day pop will likely erode to some extent as flippers quickly dump their shares for an easy win.

—Headline image: Screen grab from a CNBC video via YouTube. Elanco CEO touts his company’s new IPO.

 

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Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17