Allergan Inc (AGN) received approval from the FDA on Tuesday for a Botox treatment of stiffness in elbows, wrists and fingers in adults, a condition known as spasticity. There is a significant market potential for this treatment as an estimated 1 million American adults are affected by the ailment. Many spasticity sufferers start to experience the stiffness as a complication of a stroke or a number of other serious conditions. Spasticity can be painful and potentially debilitating, and injections of Botox have been shown to be effective in blocking the nerve impulses that cause the stiffness and clinching, and it is the first neurotoxin to receive approval for such a use.
Clearly, this is a significant medical use for Botox, a product that has come to signify the modern standard for vanity. In fact, recently the ever boisterous Jim Cramer advocated buying Allergan, “as a play on consumer vanity, which is as good a driver for business as any other economic factor.” In addition to Botox, Allergan is also a leading producer of silicone breast implants, dermal fillers and eye care products. Producing specialty pharmaceuticals has thus far proved to be winning business model as Allergan has achieved steady growth for years, and was less affected by the recession than were many other businesses.
The market reacted to this possibly wider use of Botox positively after the market closed on Tuesday when the announcement was made, but AGN tapered off through the rest of the next trading day. The approval is further evidence that revenue growth should continue to be at least steady in the coming years. Coming into the week, we rated AGN as Fairly Valued as the stock is trading near its 52-week high. However, the stock has continued to improve both sales and cash earnings and may be in line for an upgrade in the coming weeks. For example, over the last ten years AGN has historically traded at a price-to-cash earnings multiple of 29.7x to 47.3x, but it currently stands at only 20.7x. Furthermore, a current price-to-sales per share metric of 3.96x is below the historically normal range of 4.09x to 6.43x.
For the stock to trade more closely in line with the market’s historical valuation, given current fundamentals, would suggest a price in excess of $80 per share. Of course, we are not saying that a stock will necessarily return to historical norms, but rather that a company that continues to strengthen fundamentally may begin to revert to somewhere at least closer to their historical range. Our methodology looks to find stocks that fall well below their historical valuation ranges as a margin of safety, especially when they continue to show growth.