A strikingly conservative first-quarter forecast from Allergan Inc. had analysts reading tea leaves last week to discern what’s going on at the Irvine drug maker.
When all was said and done, they liked what they saw.
“This smells like the usual ‘under promise, over deliver’ game that Allergan management has mastered,” wrote Elliot Wilbur, an analyst with Oppenheimer & Co., in a client note.
Chief Executive David Pyott said as much last week in an interview at his freshly remodeled office at Allergan’s campus: “People like to pull you up to the sky and watch you fall. Our pattern is always the good old adage of under promise and over deliver.”
Pyott sent investors running for the exits for a short time last week after warning that analysts’ expectations for the current quarter were too high. He also revealed that a key glaucoma drug candidate was dead.
Allergan’s shares fell as much as 7% on the news before regaining ground and climbing later in the week, helped in part by word that a potential rival to blockbuster wrinkle smoother Botox had hit a regulatory snag.
The company had a market value of $20 billion last week, the most of any in Orange County.
Allergan makes eye and skin drugs as well as medical cosmetic products such as Botox, breast implants and a stomach banding system to fight obesity. Allergan’s $4 billion in yearly revenue is about evenly split between drugs and medical cosmetics.
Before the cautious outlook, investors had been fretting about Allergan’s medical cosmetics amid a slowing economy.
But Allergan said it lowered its outlook because it plans to spend more money in the quarter to launch products, including its Sanctura XR drug for overactive bladder. Allergan got Sanctura XR as part of its November deal for Esprit Pharma Inc., a New Jersey company.
Allergan said it expected to earn $155 million to $158.1 million in the quarter, versus the $174 million analysts had been expecting. It sees sales of $1.04 billion to $1.07 billion, above Wall Street’s expected $1.03 billion.
During Allergan’s conference call, analyst Marc Goodman of Credit Suisse First Boston pressed Pyott with questions about how the drug maker “can be so confident about Botox Cosmetic in a recessionary environment.”
The company hasn’t detected any impact of a consumer spending slowdown, Pyott said.
For the fourth quarter, Allergan reported a profit of $160.3 million, up 17.5%. Excluding an eye surgical business that was sold off last year, Allergan earned $186 million, beating Wall Street’s expectation of $180 million.
Wrinkle smoother Botox, other medical cosmetics and specialty drugs drove the gain.
New Products
Pyott also faced a question about what Natexis Bleichroeder analyst Corey Davis called a “lack of an obvious late stage product” that’s ready to come to market.
Allergan has several products on tap for possible Food and Drug Administration approval this year, Pyott said. Besides Sanctura XR, they include Lumigan X, a glaucoma drug that’s a second-generation version of Allergan’s original Lumigan, he said.
The company suffered a setback last week when it said its memantine glaucoma pill showed no significant benefits versus a placebo in a trial.
Allergan plans to do “a little bit of last work” on the memantine trial but does not believe FDA approval is likely.
“One pretty much should assume that this program will be stopped,” Pyott said.
Memantine has been “really very, very clearly the riskiest program we had in our pipeline,” he said.
Pyott compared its development to “drilling a 20,000-foot-deep hole in the seabed and discovering that there’s no oil there.”
“We have so many good things that have higher probabilities of success,” he said.
Assaf Guterman, an analyst with Lazard Capital Markets in New York, shook off the memantine news.
“While the disappointment over the lost revenue opportunity is understood and may weigh on the stock near term, the lost revenue impact on the company’s overall performance should be limited, and the product’s removal shouldn’t materially impact the company’s growth prospects.”
On the cosmetic side, Allergan is working with Clinique Laboratories, a unit of Estee Lauder Cos., to develop a line of skin products to be sold in doctors’ offices later this year.
Overseas, Allergan expects regulatory clearance for the original Lumigan glaucoma drug and Botox Cosmetic in Japan this year. The company also has regulatory filings for using Botox as a chronic daily headache treatment on tap, among other things.
This year, Allergan projects spending $763 million, or 17% of sales, on research and development, up from $646 million in 2007.
