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Allergan Sees Q4 Dip, Miss on Street’s Full-Year Expectation

Allergan Inc. followed its tradition of conservative forecasting last week—but the market didn’t shrug it off as usual.

The Irvine-based maker of Botox, other drugs and medical cosmetics raised some eyebrows when it forecast current-quarter profit and full-year sales below Wall Street’s expectations.

Allergan said it could see a profit of $300.5 million to $306.7 million in the fourth quarter.

Analysts had forecast a fourth-quarter profit of $312.9 million.

Allergan said it expects full-year net product sales, which are slightly lower than total sales, to come in at $5.37 billion. Wall Street had a full-year forecast of $5.42 billion.

· Headquarters: Irvine

· Business: drugs, other healthcare products

· Founded: 1948

· Ticker symbol: AGN (NYSE)

· Market value: about $25.7 billion

· Notable: forecast on sales, profits for current quarter, full-year below Wall Street’s projections

Shares Down

Allergan shares closed down some 4% to a market value of about $25.7 billion on Oct. 26, when it reported results.

“The stock had run up really strongly in the last week or so for reasons that weren’t apparent beyond people liking the reports coming up from the brokerage houses [and] some survey data about Botox,” Chief Executive David Pyott said.

Analysts took a similar view.

“Given heightened Street expectations and commentary heading into today’s results, we are not surprised to see (Allergan) consolidate some of its recent gains,” said Seamus Fernandez, an analyst with Boston-based investment bank Leerink Swann LLC.

“For a stock with high expectations, it’s not surprising it’s down a little bit, with their Q4 guidance coming in be-low consensus,” Corey Davis, a Jefferies & Co. analyst in New York, told Bloomberg Businessweek.

Allergan posted a profit of $285 million, excluding special items in the third quarter, beating Wall Street’s projections of $278.8 million.

Sales were up 10% to $1.31 billion, below analyst expectations of $1.33 billion.

“We were two cents over the top end of our guidance on the bottom line relative to Wall Street consensus,” Pyott said. “We missed the top line by about $30 million.”

Q3 Sales

Allergan said third-quarter sales in most of its product categories, including Botox, eye drugs, breast implants and skin fillers, were up. Sales of three key eye drugs—Lumigan and Alphagan P for glaucoma treatment and Restasis for dry eyes—missed some analyst projections, due in part to inventory changes.

Pyott said sales of those eye drugs were affected by rebates in response to the loss of patent protection and price cuts on Xalatan, a glaucoma treatment made by New York-based competitor Pfizer Inc.

“You basically pay to play,” Pyott said about Allergan’s efforts to have its drugs on the preferred lists, or formularies, of health insurers.

Botox sales in the third quarter were up 16% to $397 million.

Ad Campaign

Wall Street was “positively surprised” by the fact that the company is now running a television advertising campaign for the drug’s chronic migraine headache use, according to Pyott.

The ads do not specifically mention Botox, but refer viewers to a toll-free information line.

“I think the analysts, based on what I’d told them, had expected we’d start (the campaign) next year,” he said.

The earlier start came because Allergan is ahead on its training of doctors to use Botox for migraine and has succeeded in getting managed care coverage, according to Pyott.

Allergan also is working on getting managed-care coverage for Botox’s new clearance as a treatment for neuropathic overactive bladder usage. A sales push for the new use is set to begin in November.

Allergan saw another decline of sales for the Lap-Band weight-loss device, with third-quarter sales down 16% to $50 million.

“With Lap-Band, it’s all about both companies and their health insurers making access more difficult,” Pyott said.

The relatively high U.S. unemployment rate, which now hovers around 9%, also ap-pears to have played a role in the slowdown.

Health maintenance organizations generally do not cover the Lap-Band. Preferred provider organizations usually only pay part of the cost for the surgery, which can cost from $12,000 to $20,000 on average.

“Unfortunately, Lap-Band probably correlates as the only product in our line very strongly with unemployment rates,” Pyott said.

Out-of-pocket costs “could easily be $4,000 for the patient, and of course, if you’re already economically challenged or concerned about your job or all those issues, that’s a lot of money.”

Pyott said that recent reports of fatalities related to Lap-Band at clinics in Southern California had little or no impact on sales of the device.

The Lap-Band’s relatively small contribution to overall revenue has been affected by what Pyott refers to as the disappearance of the out-of-pocket, private-pay medical market.

“That market was a third of our procedures in 2008. With hindsight, we realized that it was paid often by credit card … let’s say the experience of the credit card companies was terrible and that market’s gone away completely.”

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