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Allergan wants to trim obesity treatment unit

by Michael D. Brown  |  Published February 8, 2013 at 3:11 PM
After digesting two acquisitions in the last six months, Allergan Inc. is going on a diet in the first half of 2013 and will try to purge its obesity treatment business in a move industry watchers believe better positions the company for growth.

The Irvine, Calif., pharmaceutical developer and producer of Botox announced last week it would explore a sale of its obesity treatment unit as sales continue to drop for its key product, the Lap-Band, which is an inflatable tube inserted around the stomach to control food consumption.

While total earnings increased 15% to $324.2 million for the quarter ended Dec. 31, sales in the obesity business fell 21% to $36.8 million for the same quarter. Allergan's $1.51 billion in fourth-quarter revenues came out slightly higher than Jefferies & Co.'s estimated projections of $1.49 billion, according to a Feb. 6 research note by Jefferies analyst Corey Davis.

Analysts overall were encouraged by the divestment and revenue news. Davis, in fact, subsequently raised his price target on Allergan to $100 per share from $95 per share, inflating Allergan's valuation to about $30 billion from $28.5 billion, based on the more than 300 million shares the company had traded on the New York Stock Exchange under the symbol AGN on Feb. 7.

Seamus Fernandez, an analyst at Leerink Swann LLC, held his valuation for Allergan's stock at $116 to $117, though he lowered his projected sales figures by $135 million to reflect the divestment of the obesity business. Fernandez held firm because of the promise for Allergan's two recent acquisitions -- the Jan. 23 purchase of migraine therapy specialist MAP Pharmaceuticals Inc. for $958 million and the Nov. 16 acquisition of the topical aesthetics skin care business of Carlsbad, Calif., cosmetic products company SkinMedica Inc. for $350 million.

The valuation is "reflecting our positive view of the bolt-on acquisitions of SkinMedica and MAP Pharmaceuticals as well as long-term prospects" for the company, Hernandez wrote in a Feb. 6 note.

Allergan, whose shares rose to a 52-week-high of $108.73 on Feb. 6, announced Oct. 30 that it would look to exit the business, which contributed just under 4% of total revenues, but it has yet to retain an adviser for the sale.

"The LAP-BAND business ... produced gross margins which are below the corporate average," explained Allergan CFO Jeffrey Edwards in an investor conference call. "So with the elimination or the sale of that business, we will be the beneficiary both this year and the following years."

Edwards said the company hopes to use the sale of the low-margin obesity business and its two new acquisitions to help keep margins up. In the fourth quarter, the company posted gross margins of 87.4%, up 50 basis points from the same quarter in 2011.

Allergan will also look to cash out of a field that has garnered a lot of attention recently, as obesity remains one of the America's most prevalent health issues. Two companies in particular, Arena Pharmaceuticals Inc. and Vivus Inc., won Food and Drug Administration approval of obesity drugs in 2012 -- the first FDA approval of obesity drugs since 1999, drawing even more attention to obesity treatments.

Vivus, in particular, is under pressure to explore a sale from a number of shareholders, including New York-based First Manhattan Co., to capitalize on the fact it got FDA approval.

Others are still investing in designing new obesity treatments. Princeton, N.J.-based healthcare investment firm Domain Associates LLC is backing Orexigen Therapeutics Inc., a San Diego-based biopharmaceutical company focused on the treatment of obesity. Orexigen is awaiting FDA approval for its lead drug Contrave, which is an appetite-curbing therapy that has already completed Phase 3 clinical trials. It expects to gain approval in late 2013 or early 2014.

On Feb. 5, Mexico's Wamex Private Equity invested $32 million in pharmaceutical company Medix SAPI de CV, a developer of obesity treatments. Cambridge, Mass.-based Zafgen Inc., which is also focused on obesity treatment, announced Dec. 4 that it had received $21 million in Series D equity financing from a group of venture capital firms, including San Francisco-based Alta Partners, Waltham, Mass.-based Atlas Ventures and Boston's Third Rock Ventures LLC.

While an Allergan spokeswoman declined comment, the company's CEO, David Pyott, said in a conference call that the company would continue to execute its long-term growth strategy of building high-margin businesses.

"Shedding LAP-BAND will boost overall growth," said Pyott on the call. "Evidenced by our recent acquisitions of SkinMedica and MAP Pharmaceuticals and our decision to declare our obesity intervention assets as a discontinued business, we are dynamically managing our portfolio to drive long-term sales growth."

Tags: AGN | Allergan Inc. | Arena Pharmaceuticals Inc. | Botox | David Pyott | Jeffrey Edwards | MAP Pharmaceuticals Inc. | obesity | SkinMedica Inc. | Vivus Inc.

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Michael D. Brown

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