We Reply: We don't officially cover Allergan (NYSE:AGN), the company grabbing the lion's share of the aesthetic reconstruction market, but on a first look, we like what we see. Not only do 35% of revenues come from Botox procedures, last year they were prescient enough to foresee the surging demand in breast augmentation procedures by snapping up Inamed, a leader in obesity and breast shape enhancements. From a shareholder's viewpoint, the deal is a layup as there are myriad synergies the deal should capture.
We also like the "rinse + repeat" Botox business model: Botox, a neuromodulator, is immensely profitable because it forces the patient to come back in and re-inject. This means fat recurring revenue streams. High growth, high margin areas have translated into 19% sales growth over the last 5 years for Allergan, a trend we think will continue in the near term. The company has recently struggled with some merger issues, but we like the current pipeline and deep focus on R&D (17% of sales).
All that said, we'd be wary of a 6.2 x price to sales multiple, as well as a negative return-on-equity ratio, pitifully low insider ownership (<2% of shares outstanding), and competition from generics. This last threat could decelerate Allergan's sales growth and accelerate margin compression. In sum, don't chase the stock -- wait for a pullback under $100.
AGN 1-yr chart: