WASHINGTON, November 2, 2017 – What a difference a day makes. Wednesday, we dared to wax mildly optimistic that the recent waterfall decline in the shares of pharmaceutical giant Allergan (symbol: AGN) had hit bottom as the company’s CEO reported terrific earnings for the company during its recent quarter.
Even better, even after it chose to take a hit against those earnings to account for the hit the company will take if generic versions of its blockbuster dry-eye treatment Restasis come online, Allergan vowed to continue share buybacks; dump its remaining holdings of shares in Israeli generic manufacturer Teva (TEVA); and impose tighter fiscal discipline in 2018 and beyond while ramping up when possible its new drug offerings near the end of the R&D pipeline.
As a result of the good news, the shares of both AGN and its convertible preferred “A” shares (AGN/PRA), which we hold, skyrocketed into the green zone for the first time in a long time, with the common closing at $184.58 and the preferred shares ending the day at $670 per share, both gains of + 5percent.
But as we noted above, what a difference a day makes. As of 1:30 p.m. ET Thursday, the preferred shares stand at $625 per share, down a harrowing $46.49 per share (-6.5 percent), while the common is down $10.46 per share (-5.7 percent) to stand at $174.12.
Simple. Another massive market overreaction to bad news that was already contained in yesterday’s otherwise optimistic earnings report and conference call.
The reason Allergan took its big write-off yesterday against otherwise spectacular earnings – leading to a paper loss (and concurrent tax write-offs, no doubt) – while announcing its sale of the Teva shares acquired as part of its generic portfolio sale to that company, was to get all its bad news off the investor analyst plate so it could start with a clean slate in its upcoming quarter without most of its current negative overhang.
The tactic worked, yesterday at least, as both flavors of Allergan stock caught a bid. But today, Teva itself reported horrible earnings, tanking its own stock, which, in turn, sent Allergan common and preferred shares back into a tailspin, given that Allergan will now get even lower prices for its sale of Teva stock.
What the barrage of computerized sell programs and short sellers are ignoring at least for now is that Allergan already built the Teva share tumble into its forward projections as of Wednesday’s quarterly report.
But that’s not the way computerized sell programs work. They read the headlines and not the facts and act swiftly and accordingly. What the machines read this morning was “The Sky is falling!” To which their algorithms responded, “Sell Sky!”
Hence, the resuming slaughter in Allergan shares.
At the beginning of the year, our Allergan preferred position was our biggest and most promising. As we move into the final two months of trading in 2017, the position now promises to be our biggest negative. We’re confident we’ll eventually get our money back from our Allergan commitment (the preferred shares convert to 2-3 shares of common in March of 2018). But until the current wave of punishment and computerized selling abates, we won’t be able to claim we’re seeing light at the end of the Allergan tunnel.
On the other hand, we avoided a fresh disaster last night by declining to take down our request for shares in the Funko, Inc. IPO (FNKO). To read all about this offering, which I can only regard as one big cluster**ck, check out our companion column.