Critical Comparison: Allergan plc (AGN) vs. The Medicines Company (MDCO)

Allergan plc (NYSE:AGN) shares are up more than 8.28% this year and recently increased 1.80% or $3.13 to settle at $177.12. The Medicines Company (NASDAQ:MDCO), on the other hand, is up 0.55% year to date as of 01/10/2018. It currently trades at $27.49 and has returned -3.14% during the past week.

Allergan plc (NYSE:AGN) and The Medicines Company (NASDAQ:MDCO) are the two most active stocks in the Drugs – Generic industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.


The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect AGN to grow earnings at a 7.81% annual rate over the next 5 years.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return. AGN’s ROI is 0.10% while MDCO has a ROI of -27.60%. The interpretation is that AGN’s business generates a higher return on investment than MDCO’s.

Cash Flow 

Cash is king when it comes to investing. AGN’s free cash flow (“FCF”) per share for the trailing twelve months was +3.21. Comparatively, MDCO’s free cash flow per share was -1.79. On a percent-of-sales basis, AGN’s free cash flow was 7.33% while MDCO converted -0.08% of its revenues into cash flow. This means that, for a given level of sales, AGN is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios are important because they reveal the financial health of a company. AGN has a current ratio of 1.20 compared to 2.30 for MDCO. This means that MDCO can more easily cover its most immediate liabilities over the next twelve months. AGN’s debt-to-equity ratio is 0.46 versus a D/E of 3.42 for MDCO. MDCO is therefore the more solvent of the two companies, and has lower financial risk.


AGN trades at a forward P/E of 11.21, a P/B of 0.89, and a P/S of 3.82, compared to a P/B of 10.57, and a P/S of 24.65 for MDCO. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. AGN is currently priced at a -21.2% to its one-year price target of 224.76. Comparatively, MDCO is -44.1% relative to its price target of 49.18. This suggests that MDCO is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.20 for AGN and 1.40 for MDCO, which implies that analysts are more bullish on the outlook for AGN.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. AGN has a beta of 1.16 and MDCO’s beta is 0.50. MDCO’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. AGN has a short ratio of 2.82 compared to a short interest of 17.46 for MDCO. This implies that the market is currently less bearish on the outlook for AGN.


Allergan plc (NYSE:AGN) beats The Medicines Company (NASDAQ:MDCO) on a total of 8 of the 14 factors compared between the two stocks. AGN is growing fastly, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, AGN is the cheaper of the two stocks on book value and sales basis, Finally, AGN has better sentiment signals based on short interest.

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