Allergan, Inc. (AGN) reported third quarter earnings of 78 cents per share, in-line with the Zacks Consensus Estimate and a penny above the higher end of the guidance issued by the company. While earnings increased 11.4% from the year-ago quarter, revenues increased 5.9% to $1,208.2 million.

Revenues easily surpassed the Zacks Consensus Estimate of $1,183 million. Allergan also declared a third quarter dividend of 5 cents per share.

Sales by Products

Specialty pharmaceuticals sales increased 5.2% to $989.3 million with eye care pharmaceutical sales increasing 6.3%. Strong performance of products like Lumigan and Restasis helped drive eye care sales. This was partially offset by weaker sales from the Alphagan and Combigan franchise which declined 4.9% to $99.8 million.

We believe sales were impacted by the entry of generic competition for Alphagan 0.15%. We expect Alphagan franchise sales to remain weak in 2010. In fact, the company expects sales to decline to $380 million – $390 million in 2010. Alphagan and Combigan franchise sales were $414.5 million in 2009.

Lumigan sales should receive a boost following the launch of the product across different countries in the EU, where it received approval earlier this year. New product Latisse contributed $21.7 million to third quarter sales. We note that Latisse sales declined both on a sequential and year-over-year basis. Allergan revised its guidance for Latisse and now expects sales of approximately $90 million (old guidance: $90 – $100 million).

Botox sales, which came in at $341.7 million, recorded an increase of 4.2% from the year-ago period. However, sales declined on a sequential basis. Botox sales had been affected in 2009 by weak consumer spending, concerns regarding its safety record, and increased competition in the form of Medicis Pharma’s (MRX) Dysport.

Going forward, Allergan is looking to grow Botox sales by gaining approval for additional indications. The company recently received approval for two additional indications. While the first label expansion allows the use of Botox for the treatment of increased muscle stiffness in the elbow, wrist and fingers in adults with upper limb spasticity, the second label expansion is for the treatment of chronic migraine.

Both label expansions should contribute nicely to sales. While the migraine control indication could be a multi-hundred million-dollar opportunity for Botox, the spasticity indication, which affects about 1 million Americans, especially after a stroke, could bring in incremental sales in the range of $200 – $300 million. Allergan is now seeking approval for the use of Botox for the treatment of urinary continence, which represents significant incremental opportunity.

For 2010, Allergan expects total specialty pharmaceuticals net sales in the range of $3,950 million – $3,970 million, up from the earlier guidance of $3,835 million – $3,930 million. Sales should be driven by Botox (guidance: $1,390 million – $1,400 million), Lumigan franchise (guidance: $520 million – $530 million), and Restasis (guidance: $600 million – $610 million).

Meanwhile, Allergan’s medical devices segment also delivered growth with sales increasing 8.3% to $202.7 million. While breast aesthetics sales increased 8.6% to $74.9 million, facial fillers sales increased a whopping 27.6% to $68.5 million. However, obesity intervention sales continued to disappoint with sales declining 8.1% to $59.3 million. The medical devices segment faces competition primarily from companies like Johnson & Johnson (JNJ) and Medicis.

Medical devices net sales are expected in the range of $800 million – $830 million in 2010 (earlier guidance: 785 million – $820 million). Here, performance will be driven mainly by breast aesthetics (guidance: $300 million – $310 million) and facial aesthetics (guidance: $270 million – $280 million). The US approval of Juvederm XC, Allergan’s latest facial filler product, should help drive facial aesthetics sales. Obesity intervention sales are now expected in the range of $230 million – $240 million, down from the earlier guidance of $235 million – $250 million.

Earnings Guidance Increased

Allergan increased its earnings guidance for 2010 and expects to deliver EPS in the range of $3.14 – $3.16, up from the earlier guidance of $3.11 – $3.15. The Zacks Consensus Estimate is already towards the upper end of the company’s guidance at $3.16. The company increased its product net sales guidance to $4,750 – $4,800 million (old guidance: $4,620 million – $4,750 million). Other revenues are expected in the range of $50 million.

Allergan also provided guidance for the fourth quarter of 2010. The company expects to earn 86 – 88 cents on total product net sales of $1,220 million – $1,270 million. The Zacks Consensus Estimate currently stands towards the higher end of the guidance range at 88 cents.

Neutral on Allergan

We currently have a Neutral recommendation on Allergan, which is supported by a Zacks #3 Rank (short-term Hold rating). Although the company is facing significant challenges in the form of slowing sales due to the global economic weakness, EU pricing pressure, 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.

 
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