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7/27/2010
Allergan's Botox Nears U.S. Approval To Treat Migraines
U.S. regulators are expected to soon approve Botox, the well-known cosmetic drug, for use in its first major medical application, boosting the fortunes of its maker, Allergan (AGN).
Allergan's Botox Nears U.S. Approval To Treat Migraines

U.S. regulators are expected to soon approve Botox, the well-known cosmetic drug, for use in its first major medical application, boosting the fortunes of its maker, Allergan (AGN).

Many people think of Allergan as the house that Botox built. And builds again. And again.

The great thing about Botox, from Allergan's point of view, is that the beneficial effects don't last. For Allergan, that means a continuing revenue stream from patients. They're mostly women getting Botox to smooth out wrinkles and crow's feet — women who'll get treated about every three months to ward off those signs of aging.

Also, the cost of cosmetic Botox injections is not vulnerable to insurer pressure, because it's not insured.

Botox pulled in $1.3 billion in sales for Allergan in 2009, nearly 30% of its total revenue. And Allergan could add what analysts estimate is $1 billion a year from the new medical use for Botox: prophylactic treatment for migraine headaches.

On July 9, British regulators gave Allergan a thumbs up for that purpose. A favorable U.S. Food and Drug Administration verdict is imminent, observers say.

It won't be the first approval for medicinal, rather than aesthetic, Botox. On March 10, the FDA OK'd Botox for treatment of muscle stiffness in the elbow, wrist and fingers in adults suffering from upper-limb spasticity. But this use has much less potential for Allergan.

And going back, the FDA in 1989 approved Botox for treating an eye disorder. It wasn't until 2002 that Botox got approval for cosmetic use. Botox is a prescription injectable containing small amounts of pure botulinum toxin protein. It's effective for three to six months.

Allergan does not hold a patent on the basic toxin, but its manufacturing process is secret. A few firms make similar products, but have only a small share of the market.

Allergan, slated to report earnings on Aug. 2, declined to speak with IBD for this story. In its last quarterly earnings conference call, the firm's CEO, David Pyott, said its Botox has 79% of a global aesthetic market that's growing 13% a year.

The company is "one of the possible suspects" in Sanofi-Aventis' (SNY) announced plan to make a major acquisition, says David Amsellem, an analyst with Piper Jaffray. He rates Allergan overweight, or buy.

With the Botox approval for migraine in the U.K. and the likely approval in the U.S., and with Sanofi's possible interest, Allergan is enjoying "a confluence of events," he said.

On Friday, reports surfaced that Sanofi was looking to buy biomed company Genzyme (GENZ), perhaps with an unsolicited offer, but the companies weren't talking.

If Sanofi doesn't want Allergan, the Botox company could attract a number of large pharmas, Amsellem says. Shares touched a more than two-year high above 66 on July 13 and closed Monday at 61.52.

The company has a wide pipeline, with Botox's the widest, Amsellem says. It has a long-term development program in next-generation products for treatment of pain.

"There's real science coming out of that," he said.

Diversification Strategy

Indeed, Allergan's story goes much deeper than Botox, says Jose Haresco, an analyst with JMP Securities. He likens the company's business model to that of diversified giant Johnson & Johnson (JNJ), offering a broad range of products across several health categories.

J&J does something in most areas of life sciences and medtech. Allergan has followed that model, says Haresco, who rates the stock a buy.

Its products range from dry-eye treatment to breast implants, from surgical products for weight reduction to acne treatments.

It makes the widely advertised eye drug Restasis, intended to improve tear production. Another is the Lap-Band, an adjustable restraint that compresses the stomach to reduce intake. It can be implanted with minimally invasive surgery.

Allergan has two units: medical devices and specialty pharmaceuticals. It might seem that the diversified range means that products are siloed. Not so, says Haresco.

Allergan has a strategy of cross-selling. Juvederm, an injectable wrinkle-reducer based on hyaluronic acid, can lead to sales of breast implants and vice-versa, he says.

The Allergan model "is not about synergies," Amsellem said. "It's to focus on medical specialties with high barriers to competition."

Botox remains its most important product. Allergan has been modifying the Botox marketing message, Haresco said: "They changed it from therapeutic to preventative."

Instead of aiming at women ages 50 and above, they've been targeting women 35 to 45, with the suggestion that they get Botox treatments earlier to ward off the effects of aging.

The recession hasn't put the kibosh on spending for appearance, Haresco said: "People will spend on appearance despite the economy. The stock did not fall of a cliff."

In the last 12 months, Allergan shares have risen 23%. Johnson & Johnson, by comparison, is down 4%. Abbott Labs (ABT), another diversified drug giant, is up 13%.

The consensus of analysts polled by Thomson Reuters is that Allergan will see per-share earnings rise 14% for 2010 and 2011. It's slated to report second-quarter results on Monday.

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