Thursday, February 26, 2009

Marcial: Allergan: A Lift from More Than Botox?

Marcial: Allergan: A Lift from More Than Botox?

Almost everybody knows specialty pharma outfit Allergan (AGN) because of its widely popular Botox product. Botox, originally approved for eye disorders, grew into a blockbuster product as a facial cosmetic agent designed to smooth away wrinkles. But there is more to Allergan, of course, and its efforts to expand its beauty and medical franchise are making its stock pretty attractive, too.

Allergan is an "economic value added (EVA) superstar," says Dan Natoli, president of investment research firm Matrix USA , which rates the stock a buy. EVA is one of the metrics that MatrixUSA uses to evaluate a stock. "Strong profitability coupled with impressive sales gains make for a positive and rapidly expanding EVA and a classic growth company,"" says Natoli.

The stock has kicked up from its 52-week low of 28 a share reached last November to 40.39 on Feb. 24, 2009. But that is still way below its 52-week high of 63.98 hit a year ago, and that's one reason why some bulls think the shares still have room on the upside.

Eyelash Enhancer Promising

A global health-care company, Allergan is a leading producer of ophthalmic, neuromuscular, and skin-care products. Its eye-care products accounted for some 46% of 2008 sales; Botox, about 30%; breast implants, 7.1%; devices for obesity treatment, 6.8%; and skin care, 2.6%. Foreign markets accounted for about 35% of total sales.

Two things could soon make Allergan's stock move higher: a new application of Botox to treat chronic daily headaches and a new product called Lumigan, a treatment for glaucoma. But it's one of the side effects of Lumigan that could deliver a bounty for Allergan: use of the compound results in longer and thicker eyelashes. As a result, Allergan developed a product called Latisse, which the Food & Drug Administration approved for eyelash enhancement last December. Latisse is applied on the upper eyelid while Lumigan, an eyedrop, is used in the eyes.

Latisse was launched in January, 2009, priced directly to physicians at $70 per application and $88 to wholesalers, notes analyst John Boris of Citigroup (C). (Citigroup has done banking for Allergan.) He estimates sales of $40 million in 2009 from Latisse. Although he rates Allergan a hold because of concern about the weak economy, Boris says the company has above-average earnings growth, an attractive product pipeline, and a proven management team.

Gregg Gilbert of Merrill Lynch (BAC) says in a report that based on Allergan's market research, roughly 9 million women in the U.S. could consult their physicians about a product like Latisse. (Merrill has done banking for Allergan.) "If we assume a cost of $75 a unit per month, the market could approximate $8 billion in the U.S. alone," says Gilbert, who rates the stock a buy with a 12-month price target of 48 a share. A penetration of 5% of the market would equate to $400 million, which he says could generate 75 a share in yearly earnings for Allergan. He forecasts Allergan will earn $2.68 a share in 2009, $3 in 2010, and $3.46 in 2011, up from 2008's $2.57.

Botox for Headaches

With regard to Allergan's new Botox treatment for chronic daily headache, the company is expected to file with the FDA a new-drug application in mid-2009, with approval expected in the first quarter of 2010, or earlier if it gets a priority review, says Citigroup's Boris.

How big is the market for headache treatment? Analyst Aaron Gal of investment firm Sanford C. Bernstein , who rates Allergan outperform with a price target of 74, sees the market for Botox for headache treatment at $1.5 billion. (Bernstein has done banking for Allergan.) He expects FDA approval, and sees the new use of the drug adding as much as 20% to Allergan's revenues. Chronic daily headache is generally recognized as an area of "high unmet need," says Gal, where current treatments offer only partial assistance to patients. (Bernstein has done business with Allergan).

"Botox is a safe, effective medication which has shown to provide superior efficacy/safety for suffering patients in a relatively large market," says Gal. But he is puzzled, he says, how slowly the market has picked up on Botox as a headache treatment. It is a central bull thesis on Allergan, says Gal, and on "why we are concerned a larger pharmaceutical company will attempt to scoop up the company in today's depressed prices."

Some of the biggest institutional investors are big players in the stock. Among them are T. Rowe Price (TROW), which holds a 6.9% stake, and Fidelity Management , with 6.8%. Wall Street remains somewhat bullish on the stock, with six of the 14 analysts who track it recommending a buy. None recommend selling. Eight others rate Allergan a hold.

With sturdy eye-care and Botox franchises and with promising new products, Allergan shares could provide a welcome lift for investors worried about the broader market.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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