Botox Approval for Spasticity Delayed, But Fundamentals Remain Strong

From a fundamental standpoint, we are enthusiastic about the future of Allergan, Inc. (AGN). Although the company is facing significant challenges in the form of slowing sales due to the global economic weakness, safety issues surrounding the use of Botox and foreign currency headwinds, we think Allergan will be able to face these challenges well and will be back on its historical mid-to-high teens earnings growth trajectory starting in 2011.

We consider Allergan to be one of the premier specialty pharmaceutical companies in the world. The company possesses a strong blockbuster product in Botox and a slew of innovative new products in the eye and skin care markets.

Allergan has also been pretty active on the acquisition front over the past few quarters. We believe these acquisitions will provide the company with the opportunity to drive growth in its existing business and to expand into new areas of business. Even in the face of slowing consumer spending, Allergan’s presence across different segments and geographies should help maintain decent growth going forward.

Allergan received disappointing news recently when the FDA issued a complete response letter (CLR) to the company’s supplemental BLA for the use of Botox for post-stroke upper-limb spasticity. According to the CLR, Allergan will have to get a risk evaluation and mitigation strategy (REMS) approved first.

Moreover, the company has been asked to submit a product safety update from clinical and non-clinical studies across indications. Allergan will also have to verify underlying patient source documentation at study sites relating to one of the pivotal clinical studies.

However, on a positive note, the agency has also proposed a revised indication which would expand the label so as to include the use of Botox for upper limb spasticity irrespective of the underlying cause (not just post-stroke).

Allergan will have to conduct a post-approval study for this indication in pediatric patients aged 2-17 years. While the company has already submitted its proposed REMS, it expects to submit an updated analysis of re-verified data in 2-3 months. Provided all goes well, approval for this indication should come later this year / early next year.

If approved, Botox sales should receive a boost for this indication from 2010 onwards. With about 850k people in the U.S. suffering from upper limb spasticity, the new indication, if approved, could bring in incremental sales in the range of $200 – $300 million. Botox is already approved in 55 countries around the world for this indication.

We have adjusted our model based on the first quarter results and 2009 guidance provided by the company. The company expects 2009 adjusted diluted EPS in the range of $2.69 – $2.75 on total product net sales of $4.1 – $4.3 billion.

Although we have cut our forward estimates significantly, we still see the company delivering decent top-and bottom-line growth (EPS CAGR of 12% through 2012). Based on our model, we see Allergan delivering EPS of $2.71 in 2009, up 5.5% y-o-y.

Beyond that, the company’s impressive pipeline should help drive growth in the next decade. We maintain our Hold rating with a $48 price target, which is based on 18x our 2009 EPS estimate of $2.71.

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