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Allergan Continues at Neutral

BMY AGN

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We continue to have a Neutral recommendation on Allergan Inc. (AGN - Analyst Report) following the release of second quarter 2011 financial results.

The company has a solid track record of meeting or beating its earnings guidance. Allergan second quarter earnings of 96 cents per share were above the company’s guidance range of 93 cents – 95 cents per share and a penny ahead of the Zacks Consensus Estimate. Strong sales helped boost earnings. While earnings increased 12.9% from the year-ago quarter, revenues increased 13.6% to $1,417.2 million. Revenues easily surpassed the Zacks Consensus Estimate of $1,339 million.

Allergan has been expanding into new therapeutic areas through acquisitions and collaboration agreements over the past few years. The company’s March 2006 acquisition of global healthcare company, Inamed Corporation, allowed it to expand its product portfolio significantly. Other acquisitions by Allergan include those of Groupe Corneal Laboratories, the company’s partner and licensor of Juvederm dermal fillers in the US, Canada, and Australia; the Swiss medical technology developer EndoArt SA (specializes in the development of remote-controlled implants used in the treatment of morbid obesity and other conditions); and the US-based pharmaceutical company Esprit Pharma. Further, in the first quarter of 2010, Allergan acquired a medical device company, Serica Technologies, Inc., and, in July 2011, Allergan announced the acquisition of dermatology company, Vicept Therapeutics.

Collaboration agreements include Allergan’s licensing agreement with Serenity Pharmaceuticals for the development and commercialization of a treatment for nocturia. The company also has an agreement with Bristol-Myers Squibb Co. (BMY - Analyst Report) for the development and commercialization of a drug for neuropathic pain. Additionally, in January 2011, Allergan entered into a collaboration agreement with MAP Pharmaceuticals Inc. for the US promotion of Levadex, which has completed late-stage trials for the treatment of acute migraine in adults, a self-administered, orally inhaled therapy. Moreover, in May 2011, Allergan entered into a licensing agreement with Molecular Partners AG and obtained global rights to MP0112, which is being investigated for the treatment of retinal diseases.

We note that Allergan’s lead drug, Botox, faces competition from Medicis Pharmaceutical Corp.’s Dysport. Botox sales have been impacted in the past due to weak consumer spending and negative news surrounding the product’s safety. Additional competition in the market could result in the company losing share to its competitors, thereby leading to a decline in Botox sales.

Additionally, several products in Allergan’s portfolio like Botox cosmetic, facial aesthetics, obesity intervention and breast implants have limited reimbursement or are not covered by government or other health care plans. Moreover, these products are not life-saving in nature. As such, demand for these products is dependent on discretionary spending by customers. Sales of such products are, therefore, likely to be affected by weakness in the economy as consumers postpone their requirements for these products. A decline in sales of these products was witnessed in 2009 and continuing weakness in the global economy could lead to an additional decline in consumer demand.

However, we believe that Allergan’s presence across different segments and geographies will help maintain growth going forward. The stock carries a Zacks #2 Rank (Buy rating) in the short run.

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