What the Botox Boom Means for Allergan (AGN)

Reader Question: My wife recently got her first Botox treatment. What's your take on Allergan?

We Reply: We don't officially cover Allergan (AGN), the company grabbing the lion's share of the aesthetic reconstruction market, but on a first look, we like what we see. Not only do 35% of revenues come from Botox procedures, last year they were prescient enough to foresee the surging demand in breast augmentation procedures by snapping up Inamed, a leader in obesity and breast shape enhancements. From a shareholder's viewpoint, the deal is a layup as there are myriad synergies the deal should capture.

We also like the "rinse + repeat" Botox business model: Botox, a neuromodulator, is immensely profitable because it forces the patient to come back in and re-inject. This means fat recurring revenue streams. High growth, high margin areas have translated into 19% sales growth over the last 5 years for Allergan, a trend we think will continue in the near term. The company has recently struggled with some merger issues, but we like the current pipeline and deep focus on R&D (17% of sales).

All that said, we'd be wary of a 6.2 x price to sales multiple, as well as a negative return-on-equity ratio, pitifully low insider ownership (<2% of shares outstanding), and competition from generics. This last threat could decelerate Allergan's sales growth and accelerate margin compression. In sum, don't chase the stock -- wait for a pullback under $100.

AGN 1-yr chart:

Comments

[NO DooDahs]

I'm in the bearish camp on AGN based on valuation and the technical top it seems to have made in March. I think you'll get your pullback and might even be able to make some money off of it. I see another return to the mid-90's as likely, but I don't see that as being necessarily a buying opportunity.

[FaisalLaljee]

I used to be bullish on AGN myself until earlier this year. While Botox is a growing market, this company has not exactly thrived.

[SeekingAlphaEditors]

The CrossProfit evaluation line posted in September 2005 explicitly predicted that AGN would peak in Q1 2006. Evaluation lines based on fundamental analysis guide the investor to recognize investment opportunities.

As seen in the chart we agree with Catablast Media that at present there is no investment opportunity. Our analysis pegs the Below/Above (buy below sell above) at 104. This means that if you are looking for a 12% return on investment over a 12 month period it would be prudent to wait until the stock is trading 12% below the EOL (end of line). A new 12 month forward looking evaluation line will be posted in September 2006. Until then the evaluation line portrays analysis that was completed in 9/2005.