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P/E ► 32.8 HIGH EV/EBITDA ► 18.0 AVG ROA ► 8.9% AVG ROE ► 12.9% AVG Debt to Equity ► 0.597 AVG Current Ratio ► 3.73 AVG Interest Coverage Ratio ► 11.5 AVG

 

 

 

 

 

 

Allergan (NYSE: AGN), maker of Botox, is a global specialty pharmaceutical company that researches, develops and manufactures prescription and over the counter specialty pharmaceuticals. The company's main areas of expertise, include dermatology, aesthetics (breast implants), ophthalmology, and neurological disorder (botox).

In 2005 Allergan acquired Inamed, which develops silicon breast implants and medical devices aimed at obesity prevention and treatment. In 2006 Allergan gained FDA approval for its silicon breast implants; silicon implants had been banned for the last 15 years. The addition of Inamed's obesity prevention products to Allergan's already strong portfolio of ophthalmology products leaves the company well positioned to benefit from both the continued aging of the US population and the ongoing obesity epidemic. A major threat to the company's future success is the expiration of its patents and the introduction of new competition. Another significant threat is the enduring global economic recession, during which consumers may be less likely to undergo luxury medical procedures like breast implants or botox.

Business Overview

History

Source: 2008 Allergan Annual Report^[1]

Allergan is a global specialty pharmaceutical company that researches, develops and markets innovative specialty pharmaceutical and medical device products for the ophthalmic, neurological, medical dermatology, medical aesthetics, breast aesthetics, obesity intervention and other specialty markets. In March 2006 Allergan completed the acquisition of Inamed Corporation for 3.3 billion and added its silicone-filled breast implants, obesity intervention Lab-band system and the Bib Bioentrics Intragastric balloon and Juvederm line of dermal fillers. In January of 2007 it acquired Groupe Corneal Laboratories in France for 220 million to add on its line of dermal fillers. Some of Allergan's notable products are included below.

Products

Ophthalmic (46% of FY 2008 Sales)^[2]

Ophthalmology is the study of eye care. Allergan develops, manufactures and markets a number of eye care products for dry eye, glaucoma and other external diseases affecting the eye. Ophthalmic products accounted for $2.0B in 2008, 46% of sales.

Dry Eye

• Restasis: (a prescription eye-drop) It is the only therapeutic option available that treats chronic dry eye disease by increasing the eye's tear production. It generated 270 million in 2006.

Glaucoma

Source: 2008 Allergan Annual Report^[3]

• Alphagan/Alphagan P, Ganfort and Lumigan: used to reduce intraocular pressure in patients with different types of glaucoma and ocular hypertension. Lumigan is the third-largest drug by value used to treat Glaucoma. (Alphagan franchise and Lumigan accounted for 598 million in sales in 2006.)

External Diseases (Ocular Infection, Inflammation and Allergy)

• Acular, Acular Ls, Alocril, Elestat/Relestat/Purivist, Ocuflox, Pred Forte, Zymer: used for the relief, prevention or treatment of symptoms associated with bacterial or allergic conjunctivitis (Pink Eye), corneal ulcers and surgeries.

Neurological disorder (30% of FY2008 Sales)^[4]

• Botox (Botulinum Toxin Type A) is the end-product of over 100 years of research on botulinum neurotoxins. Botox was approved by the FDA in the US for the therapeutic treatment of cervical dystonia (painful neck spasm), severe primary auxiliary hyperhidrosis (underarm sweating), blepharospasm (uncontrollable blinking) and strabismus (crossed eyes).

Among the many indications for Botox approved in countries outside of the US include: Adult post-stroke spasticity, Anal fissure, Back pain, Bruxism, Essential tremor, Headache, Hemifacial spasm, Hyperkinetic facial lines, Juvenile cerebral palsy, Multiple sclerosis Myoclonic disorders, Nasal labial lines and upper facial lines, Overactive bladder Spasmodic dysphonia and VII nerve disorder.

Allergan's Botox was recently out licensed to GlaxoSmithKline GSK, which added Japan and China to the list of consumers. Botox Cosmetic netted $1.3B in 2008 sales, 30% of company revenue.

Dermatology (3.1% of FY2008 Sales)^[5]

In 2006 Allergan gained $117 million (3% of net sales) from the sale of products indicated in the treatment of acne and psoriasis.

Products include:

• Avage (Tazarotene Cream) 0.1%: used to treat signs associated with overexposure to the sun, such as facial fine wrinkling, blotchy skin discoloration and flat patches of skin discoloration.

• MD Forte: a line of aesthetic skin care products helping to reduce the appearance of fine facial lines and wrinkles using alpha hydroxy acids.

• Prevage MD: containing a potent antioxidant, it is an anti-aging treatment used to revitalize the face.

• Tazorac Gel/ Zorac Gel: used in the treatment of psoriasis and acne.

Medical Aesthetics

The Inamed acquisition added silicone breast implants, dermal fillers, and the Lap-band and Bib Bioenteric's Intragastric devices to Allergan's Medical Aesthetics portfolio. Allergan is now the leading company in medical aesthetics.

Breast Aesthetics

Silicone-filled breast implants have been available to women for over 25 years in 60 countries worldwide not including the US (they were previously banned). In November 2006 the FDA approved Inamed's Silicone-Filled Breast implants, making it an addition to the saline-filled breast implants already in place.

The breast implants are used in breast augmentation, reconstruction and revision surgery. Silicon-filled breast implants are more costly to make but are expected to sell for twice the price of saline-filled breast implants (the company is charging a premium to allow for more profit), and are preferred to saline-filled breast implants by 90% of women in 60 countries worldwide. Allergan's share of the $600 million breast aesthetics worldwide market (growing at a rate of 4% annually) is 38%.

Facial Aesthetics

• Botox Cosmetic is given to adults 65 years and younger to temporarily remove the appearance of moderate to severe vertical "frown lines" between the brows. The neurotoxin works by paralyzing the muscles in that area. It has been approved for upper facial lines in Canada. When used for cosmetic enhancement, Botox is particularly vulnerable to consumer spending habits and the sluggish U.S. economy since it is considered as a luxury item. For example, sales in Q2 2009 come in 3.2% weaker than the year before, though the company cited exchange rates as a main reason. ^[6]

• Juvederm/ Hydrafill is a hyaluronic acid dermal filler product line to be launched in 2007. Juvederm products are used for volumizing and correction of facial wrinkles and folds.

• Allergan has won FDA approval in early 2009 for the use of bimatoprost ("Latisse") as a eyelash growth promoter. Bimatoprost is the active ingredient in the company's glaucoma drug Lumigan, and this potentially positive side-effect was noted in patients of Lumigan. Allergan is targeting the drug for the $3.7 billion mascara market, and has stated that the drug is more safe than many unregulated cosmetics. ^[7]

Obesity Intervention

• Bib Bioenterics Intragastric Balloon is a high-quality silicone balloon that is endoscopically placed in the stomach and then filled with saline solution. Taking up space in the stomach, patients using the balloon feel fuller, forcing them to reduce their food intake. The intragastric balloon is not yet available in the US.

• Lap-Band Adjustable Gastric Banding System is the only device of its kind to help treat obesity by placing an adjustable band around the upper part of the stomach to reduce its size. The lap-band is an alternate minimally invasive option to gastric bypass surgery in which permanent surgical reconstruction of the digestive tract occurs.

• The Easy band is a next-generation remote controlled gastric band (not currently available in the US) acquired with the acquisition of EndoArt Sa, a Swiss medical technology developer, in early 2007.

Research and Development

Responsible for already existing products, Allergan invests heavily in its Research and Development sector to ensure present and future growth of the company. R&D has been focusing on discovering more uses for the Botox neuromodulator and to meet unmet medical needs in other medically underserved specialty areas (see new markets). R&D expenditures for 2008 were $798 million up from $718 million in 2007.

The company hopes to have a new treatement of retinal edema by 2010-2012.

Sales/Marketing

Allergen gears its sales efforts and promotional activities towards the physicians and professionals that facilitate the sales of its products. It accomplishes its widespread marketing and sales strategies through a global marketing team and regional sales and marketing organizations. Training modules and seminars have been developed to update physicians on Allergan's line of changing products, and in 2006 Allergan began to target consumers directly.

Business Growth

Allergan's net earnings increased 23% for Q2 2009 to $176.1M from $143.4 in Q2 2008. Revenue, however, fell 4% to $1.13B from $1.17B, partially due to adverse currency movements. Cost cuts in overhead expenses and R&D were largely responsible for the improved bottom line. Botox, a largely luxury product, saw sales come in 3.2% weaker than the year before, with the company citing exchange rates as the reason. ^[8]

In Q3 of 2009, Allergan reported sales of $1.13 billion, a 4.2% increase over the same quarter of 2008. Sales growth was driven by a 7.8% growth in pharmaceutical sales, which includes eye-care pharmaceuticals, Botox, skin care products, and urologics. Sales growth was slightly offset by a 10.6% decrease in medical device sales, which includes breast implants, obesity intervention products, and facial aesthetics.^[9] Allergan reported earnings of $179 million, an increase of 8.5% over the previous year, beating analyst estimates. Allergan announced that it estimates full-year EPS of $2.75 to $2.77 per share off of sales of $4.35 to $4.4 billion.^[10]

Trends and Forces

Obesity

A growing worldwide epidemic, obesity affects an estimated 400 million of the adult population worldwide and an estimated 60 million in the US. The world health organization estimates that by 2015 the number of obese adults will reach 700 million. Currently 11.5 million people are candidates for gastric bypass surgery, which has a high morbidy rate of 1-2 out of every 100, and a limited 200,000 operations are performed each year. Allergan's Lap-Band system and intragastric balloon are safer, minimally-invasive alternatives that are expected be widely accepted by the public and drive greater revenues for the company in future years.

Aging Baby boomers

As the population of baby boomers is aging, their needs for Allergan's eye products increase as well as their desire to enhance their facial appearance with Botox and dermal fillers. The last group of the 70 million baby boomers will reach age 65 by 2011, giving Allergan a wider consumer base in the next few years.

Patent loss

Allergan owns or is licensed under a number of patents which protect its products. Patent expiration for Allergan's eye care products are as near as 2009 for Restasis, 2012 for Alphagan P (in the US) and 2009 in Europe, 2009 for Acular and 2010 for Zymar and 2015 for Lumigan. In addition, Botox is not patented and will face competition in the near future. Upon patent expiration/loss market share may be ceded to other companies who will then be able to manufacture lower-costing generic forms of Allergan's products.

Third Party Reimbursement

Allergan, like many health care providers, depends on third party payors (governmental payors such as Medicare, Medicaid and private insurance carriers) to reimburse the cost of its products. These payors typically do not cover purchases of breast aesthetics (breast augmentation) and facial aesthetics products, but represent 75% of reimbursement for other Allergan products. Lately, US Federal and State governments have been implementing ways to lower the costs of or limit coverage for pharmaceuticals, medical devices and procedures. This in turn increases out of pocket expenses for Allergan's consumers and is forcing Allergan to lower its prices (both of which will negatively impact Allergan's net sales).

New Markets

• The Botox neurotoxin is currently being studied for its potential to treat neurogenic overactive bladder (OAB) associated with spinal cord and nervous system disorders, Idiopathic OAB, which affects an estimated 13-33 million people in the US, and benign prostatic hyperplasia (BPH), a non-cancerous growth of the prostate that can interfere with urination – a common disease affecting men.

• Botox is also being studied for treatment of chronic migraine and palmar hyperhidrosis (excessive sweating of palms or hands)

• A class of Alpha arsenic agonists with the ability to treat naturopathic pain.

• Memantime Oral is the only drug of its kind to help in the fight against glaucoma by protecting against damage caused by increased pressure on the back of the eye.

• Posurdex involves intraocular injections of an extended-release drug delivery system used to treat eye diseases macular edema and retinal vein occlusion.

• A new Proton Pump Inhibitor to treat gastrointestinal disease, and new drug Pro-Omeprazole to treat GERD Erosive Esophagitis.

• Triamcinolone to treat Retinal Vein Occlusion and Diabetic Retinopathy.

• Androgen Tear to treat Ocular Surface Disease.

• Sirna 027 for age-related Macular degeneration and Diquafosol for dry eye.

• Inamed Style 410 Matrix uses a highly-cohesive silicone gel in order to make the breast implant look as close as possible to a real breast. It is the newest technology in breast implantations and is still under review in the US but sold in other areas of the world.

• The glaucoma drug bimatoprost was found in a study to make eyelashes longer, thicker, darker. In December 2008, Allergan received FDA approval of the use of the drug as a cosmetic. The drug, branded as Lamigen, has an annual sales potential of $500 million, according to the company. ^{[11] [12]}

Regulatory process

Extensive regulation by the FDA, US levels of government and sometimes foreign governments or health agencies exist at every point of the process of testing and then the marketing of a new product. In order to get FDA approval, Allergan will use the results of its product development, preclinical studies and the three phases of clinical trials to prove the safety and effectiveness of its product. Allergan faces many problems that may arise pre-marketing or post-marketing of the product as a result of any failure to comply with regulations in addition to the risk of non-approval of product or product failure.

Big Pharma Merger & Acquisition Strategy

With the high costs and high risk of successfully bringing new drugs to market, one healthcare fund suggests that acquisitions of small and mid-cap pharmaceutical companies with patented drugs and strong pipelines could be an effective way for big pharmaceutical companies to maintain and increase revenues as their own patents expire. Pfizer (PFE)'s acquisition of Wyeth and Merck (MRK)'s merger with Schering-Plough (SGP) are examples of this strategy playing out. While Allergan could certainly acquire smaller companies, as well, the same fund suggested that the company could also easily be a target for acquisition.^[13]

Competition

Allergan faces some competition from various companies across most of its specialty markets on both an international as well as a domestic level.

• Eye Care Pharmaceuticals such as Alcon Laboratories, Inc., Bausch & Lomb, Pfizer, Novartis AG Ophthalmics and Merck

• Generic Drugs manufacturers (both in the US and internationally) such as Falcon Pharmaceuticals, Ltd (affiliate of Alcon Laboratories). Falcon was going to launch a product similar to Allergan's profitable Alphagan P before it lost the ability to do so in a March 2006 settlement between Allergan and Alcon. (It may do so starting 2009.)

Apotex, Inc. was also stopped from launching a generic form of Acular pending patent expiration in 2009.

• Botox: Medicis Pharmaceutical corporation's Reloxin (for cosmetic indications) is expected to be launched in the US in late 2008/2009. Reloxin has a few undesirable qualities, however. Johnson & Johnson's acquisition of Mentor (MNT) gives it ownership of PurTox, another wrinkle remover set to compete with Botox.

• Skin Care: Competition in this specialty market stems from companies such as Johnson & Johnson, Novartis, Aventis, Medicis and Schering-Plough (which may be bigger in scale). The profitable Restasis now has a generic competitor.

• Breast Aesthetics: Allergan has one threatening competitor on a domestic level. Mentor (MNT), now part of Johnson & Johnson, received approval in November of 2006, like Allergan, for its silicone-filled breast implants. International competitors include Medicor Corp., Nagor, Mentor Corp. and Poly Implant Prostheses.

• Facial Aesthetics: In this specialty market Allergan competes with other hyaluronic acid products and other forms of treatments such as chemical peels, laser treatments, fat injections etc.

Allergan is currently competing in the US dermal filler market with Restylane, a Medicis product (since 2004), and with Radiesse, a filler from Bioform Medical (approved in 2006). Internationally, Allergan is competing with Q-Med A.B.'s Restylane, Restylane Fine Lines and Perlane.

• Obesity Intervention: The Lap-Band system is the only one of its kind in the US and only one company, Ethicon Endo-Surgery, Inc. ( a Johnson & Johnson company) has filed for FDA approval of its own gastric band product.

Internationally, Allergan's Lap-band system competes with Helioscopie's Swedish Adjustable Gastric Band and the Heliogast Band, and its Bib system with Helioscopie's own intragastric balloon.

Competition in the pharmaceutical industry lies mostly in specific drug markets. For example, a new diabetes drug is not going to have any effect on an existing cholesterol drug, no matter how successful it is. As a result, financial data on the pharmaceutical companies do not tell the whole story. Instead, it may be more appropriate to analyze Pfizer's competitors by each drug market (See section on Major Drugs and Industry Trends).

Note that Eli Lilly's net income is negative largely due to its acquisition of ImClone for $6.5 billion in October of 2008.^[14]

References

1. ↑ [1]
2. ↑ AGN 2008 10-K
3. ↑ [2]
4. ↑ AGN 2008 10-K
5. ↑ AGN 2008 10-K
6. ↑ The Wall Street Journal. "Allergan 2Q Net Up 23% On Cost Cuts; 3Q Earns View Weak." 31 July 2009.
7. ↑ [3]
8. ↑ The Wall Street Journal. "Allergan 2Q Net Up 23% On Cost Cuts; 3Q Earns View Weak." 31 July 2009.
9. ↑ Allergan Reports Third Quarter 2009 Operating Results
10. ↑ Allergan profit rises as Botox rebounds
11. ↑ [http://www.forbes.com/afxnewslimited/feeds/afx/2008/12/03/afx5775103.html| Thomson Financial News. "Allergan drug lengthens eyelashes -US FDA staff." 3 December 2008.
12. ↑ http://www.reuters.com/article/companyNews/idUKWBT01024720081208?symbol=AGN.N| Reuters. "Allergan eyelash drug wins US panel backing." 8 Dec 2008]
13. ↑ Reuters. "FUNDVIEW-Mid-cap pharma attractive as patent wells run dry." 13 Aug, 2009
14. ↑ Lilly to Acquire ImClone Systems in $6.5 Billion Transaction