By Lewis Krauskopf
NEW YORK (Reuters) - Four months after the collapse of its deal to be bought by Pfizer <PFE.N>, Allergan plc <AGN.N> has a $33 billion war chest, a pipeline of experimental drugs that some investors view as undervalued and optimistic shareholders scooping up its shares.
Whether the stock's recent rebound continues could rest on how wisely the drugmaker deploys that money. Wall Street could get a glimpse of Allergan's plans when it reports second-quarter results on Monday.
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"A lot of the strategic focus is going to be on what they do with this cash infusion," said Kevin Kedra, an analyst with Gabelli & Co.
One possibility is Allergan strikes a major purchase of its own. It was reported this week to be interested in buying Biogen <BIIB.O>, which has a market value around $70 billion.
While some analysts say the company does not need to strike such a sizable deal, they are bracing for some level of deal-making, along with share buybacks and the paydown of debt.
Allergan's newfound cash bounty stems from the sale of its generic drugs business to Teva Pharmaceutical Industries <TEVA.TA>.
Helped in part by the sale, which closed on Tuesday after some doubts it would win U.S. antitrust approval, Allergan shares have climbed 10 percent since the end of June, topping a 3.5 percent rise for the NYSE Arca Pharmaceutical index <.DRG> of large and specialty drugmakers. They have rebounded about 30 percent since sinking to a two-year low at the start of May and traded at midday on Thursday at $255.02, up $2.49, or 0.99 percent, on the New York Stock Exchange.
Even after bouncing back, the shares remain down almost 20 percent for 2016, hurt after the Pfizer deal fell apart in April over new U.S. tax rules.
Led by deal-making Chief Executive Officer Brent Saunders and armed with its top-selling Botox drug, known for smoothing wrinkles, Allergan's earnings per share are expected to rise 14 percent on average annually through 2019 on annual revenue growth of 8.7 percent, according to Thomson Reuters I/B/E/S.
With the recent rebound, the shares are trading at about 15.8 times earnings estimates for the next 12 months. That is slightly pricier than their three-year average of 15.3 times, but well below valuations for shares of other pharmaceutical companies with strong growth expectations, such as Bristol-Myers Squibb <BMY.N> and Eli Lilly <LLY.N>.
To merit a higher valuation, Allergan must improve its pipeline of experimental medicines, said Guggenheim Securities analyst Louise Chen, who rates the stock "neutral."
"They are going to need some sort of biotech assets or something that is going to be a bigger hook for people than what they currently have," Chen said.
Other analysts and investors tout the company's current pipeline and say it is not fully represented in the stock. Drugs for uterine fibroids, dry eye, major depressive disorder and migraines are among those "not getting the credit they deserve" for their potential, said Brian Turner, principal at Allergan shareholder Levin Capital Strategies.
"They already have an existing pipeline," Turner said. "The growth will be there. So they don’t need to do anything transformative."
(Reporting by Lewis Krauskopf; editing by Linda Stern and Dan Grebler)