Allergan Earnings In-Line, Outlook Disappoints

Allergan, Inc. (AGN) reported fourth quarter earnings of 78 cents per share, a cent above the Zacks Consensus Estimate. While earnings increased 2.6% from the year-ago quarter, revenues increased 15.9% to $1,224.3 million. Allergan also declared a fourth quarter dividend of 5 cents per share.

Earnings for the full year came in at $2.78 per share, a cent above the Zacks Consensus Estimate and 8.2% above the year-ago period. Full year revenues increased 2.3% to $4,503.6 million.

Segment Performance

Specialty pharmaceuticals sales increased 17.7% to $995 million in the fourth quarter with full year sales increasing 5.2% to $3,683.8 million. Eye care pharmaceutical sales increased 21.2% during the fourth quarter. Strong performance of the Alphagan and Combigan franchise and products like Lumigan and Restasis helped drive eye care sales. New product Latisse contributed $26 million to fourth quarter sales.

Importantly, we were pleased to see Botox sales increase both on a sequential as well as a year-over-year basis. Botox sales came in at $347.7 million, up 5.6%. Botox sales had been declining during the past few quarters mainly due to weak consumer spending, concerns regarding its safety record, and increased competition in the form of Medicis Pharma’s (MRX) Dysport. Botox sales for the full year declined marginally (0.1%) to $1,309.6 million with therapeutic indications accounting for 52% of total Botox sales (up 4% compared to 2008).

Going forward, Allergan is looking to grow Botox sales by gaining approval for additional indications. The company has filed for U.S. Food and Drug Administration (FDA) approval of Botox for the treatment of chronic migraine.

Meanwhile, Allergan’s medical devices segment also showed a recovery with fourth quarter sales increasing 8.3% to $211.4 million. We believe that increased direct to consumer (DTC) effort and consumer spending during the holiday season helped revive medical device sales in the fourth quarter. While breast aesthetics sales increased 9.7% to $77.8 million, facial fillers sales increased a whopping 18.3% to $66 million. However, obesity intervention is yet to recover with sales declining 1.3% to $67.6 million.

Full year sales for the medical devices segment came in at $763.8 million, down 8.8%. The performance of this segment was affected by weak consumer spending and stiff competition from companies like Johnson & Johnson (JNJ) and Medicis with all three divisions in this segment reporting a decline in sales in 2009. While breast aesthetics and facial aesthetics declined 7.3% and 5.7%, respectively, obesity intervention recorded the highest decline with 2009 sales coming in at $258.2 million, down 12.8%.

Earnings Outlook Disappoints

Allergan provided detailed guidance for 2010. The company expects earnings in the range of $3.09 - $3.15 per share on total product net sales in the range of $4,550 million - $4,750 million. Other revenues are expected in the range of $60 million. The earnings outlook was disappointing as the Zacks Consensus Estimate of $3.14 is already towards the higher end of the earnings guidance.

Total specialty pharmaceuticals net sales are expected in the range of $3,780 million - $3,930 million. Sales should be driven by Botox (guidance: $1,330 million - $1,370 million), Lumigan franchise (guidance: $520 million - $540 million), Restasis (guidance: $580 million - $600 million) and Latisse (guidance: approximately $140 million). However, Alphagan franchise sales are expected to decline in 2010 (guidance: $320 million - $340 million).

Medical devices net sales are expected in the range of $770 million and $820 million. Here, performance will be driven mainly by breast aesthetics (guidance: $290 million - $300 million) and facial aesthetics (guidance: $230 million - $250 million). The recent US approval of Juvederm XC, Allergan’s latest facial filler product, should help drive facial aesthetics sales. Obesity intervention sales are expected in the range of $250 million - $270 million.

Allergan also provided guidance for the first quarter of 2010 which was well below expectations. The company expects to earn 57 cents – 59 cents on total product net sales of $1,060 million - $1,100 million. The current Zacks Consensus Estimate for the first quarter is 69 cents. Allergan shares were down 1.88% in pre-market trading mainly due to the disappointing guidance.

Our Expectations

We currently have a Neutral recommendation on Allergan. 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 increased competition, 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 from 2011. Even in the face of slowing consumer spending, Allergan’s presence across different segments and geographies should help maintain decent growth going forward.