Shares in Allergan Inc. have hit new highs this month as investors reward the Irvine-based drug maker for its strong financial performance and a pipeline of new products.
The stock, which was trading around 40 late last year, has more than doubled to its current price near 90. Shares in Allergan had been largely flat until early 1998, about the time Chief Executive David Pyott came on board.
“Since the end of 1997 we’ve increased gross margins by over 700 basis points, which is quite dramatic,” Pyott said. “We can use the gross margins as a source for reinvestments so we can push the money back into R & D; and also sales and marketing.”
Last month, Allergan reported third-quarter sales of $34.8 million, up 10% from the year before. Earnings grew 21% to 41 cents a share for the period, or $54.6 million.
“When the new management came in, we decided that the growth rate of the company would increase sharply from around 10% in earnings per share to 15%-plus,” said Glenn Weirick, president and co-founder of Los Angeles-based Westcap Investors and manager of Investors Research Fund. “As it’s turned out, they’ve grown at an even faster rate of 20%-plus.”
Weirick said he began buying Allergan shares when they were at about 15 to 20. The stock is one of the biggest holdings in his fund.
In the fourth quarter, Allergan plans to file for federal approval for a new use for its Botox drug, an injectable form of botulism toxin type A that helps relax muscles. The Food and Drug Administration already has approved Botox to treat eye-muscle spasms. Allergan is looking to market the drug for brow furrow, a condition also known as frown lines.
Allergan has its hands in many global businesses: neuromuscular drugs such as Botox, eye-care drugs, ophthalmic surgery products, contact lens care solutions and skin care products.
What’s helping fuel growth?
Drug makers need a constant flow of products. Sales of Botox rose 43% during the quarter, but Allergan’s got plenty of other products on the market, too. Alphagan, Betagan and Propine, all used to help treat glaucoma, are just a few of them.
Under Pyott’s lead, the company has doubled spending on research and development for new products. At the same time, he’s boosted profits: Allergan’s gross margin was more than 72% in the third quarter, much better than Merck & Co.’s 44% gross margin for the same period.
Allergan products still in the pipeline include a new glaucoma drug and a treatment for hyperhydrosis, a condition that brings on excessive sweating.
“There’s a lot of excitement about Allergan’s pipeline, namely a new drug for glaucoma called Lumigan, which could have a significant market potential,” said Hans von der Luft, an analyst with McDonald Investments.
Lumigan differs from other treatments in that it’s so far been shown as an effective once-a-day treatment with possibly fewer side effects.
Allergan shares have held up during the recent political turmoil. Wall Street always keeps a wary eye on drug stocks at election time. Because Democrats tend to be more active with healthcare and drug issues, it’s often thought that such stocks will do poorly under Democratic administrations.
Experts aren’t too worried this time around,whoever winds up in the White House. First, it’s mainly big drug makers such as Pfizer Inc. and Merck that are most at risk for price cuts, analysts said. Smaller specialty companies such as Allergan are likely to stay under the radar screen, they say.
“Sometimes, being small has its advantages as well,” Pyott said. “With the election kind of hanging on a thread, I think this is going to prevent any form of radical endeavor on both sides of the aisle.”
Von der Luft agreed: “There probably won’t be a whole lot of change in the near term regarding healthcare reform. It’s probably going to be business as usual.”
Still, Allergan faces big competition. It faces off with different companies in each of its business lines. In eye-care drugs, rivals include Alcon Laboratories Inc., Merck and Pharmacia Corp., while it goes toe-to-toe with Bausch & Lomb Inc. in the surgical products area.
And earlier this month, rival Elan Corp. got the nod from European regulators to sell NeuroBloc, a form of botulism neurotoxin type B, for neck and shoulder muscle spasms. It’s still waiting for U.S. approval.
But Allergan is diversified and should do fine as long as it’s coming up with new products, analysts said.
“We’re looking for companies (like Allergan) that have huge new products that are coming out to the marketplace where they have patent protection and can get premium prices for their products,” Weirick said. n
