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You might feel tempted to place a bet today on Allergan (NYSE:AGN), following news that its lap-band surgery can effect a cure for Type 2 diabetes. But resist that temptation.

Allergan funded the study in question, which covered just 150 patients who had uncontrolled diabetes. The study said 42% of those who got gastric surgery had a result, and that "many" of this group found that result obtained with surgery alone. The study is certain to gain wide publicity, given that it seems to hold a surgical answer to two of America's top health problems -- obesity and diabetes. Citigroup, in fact, has raised its price target on AGN to $110 and repeated its buy rating on the stock.

Allergan got into the gastric bypass market in 2006 after buying Inamed, which became the center of what's now its medical devices group. But it's not a one-trick pony. The company has drugs in the areas of eye care, neurosciences, medical dermatology and urologics.

Your downside gets protection from the fact that over 90% of shares are held by institutions. In Allergen's case, these include patient insurers and mutual fund companies like Vanguard, State Farm and Fidelity.

The problem here is that the company is currently priced to perfection. At almost $95/share it carries a PE of 31.44, which is very high for this group. (Pfizer PFE, by contrast, holds a PE of 20, and Amgen AMGN is short of 17.) The PE is high because the mean earnings estimate for this year held by analysts is $4.18/share (a forward PE under 25) and for next year is $4.90 (which if achieved would get you down to 20).

That kind of earnings momentum is certainly possible. But it may be speculative. If anything goes wrong in any of Allergen's units, you have trouble. AGN has been marching forward quite smartly since last summer when it was "on sale" for $72/share. It may not get down there again soon, but it will go down at some point. That's where I'd look for a buy point, at something closer to the industry's standard multiple.

AGN is not a bargain, but with so many conservative players already in it, the company could be a good investment.

Source: Allergan Lap Band News Already Priced In