Beauty Stock Shakeout

Growing appreciation for the long-term potential of the aesthetic market has lifted the fortunes of the three major players in this space, Allergan (AGN - commentary - Cramer's Take), Mentor (MNT - commentary - Cramer's Take) and Medicis Pharmaceutical (MRX - commentary - Cramer's Take).

The shares of all three have performed well with about 10% gains year to date. More recently, the performance of Allergan and Mentor has begun to improve with the FDA's long-awaited approval of silicone-gel breast implants in late November.

I expect these companies to show improved top- and bottom-line momentum in '07 as a result of this key product approval. I believe the diverse and improving growth platforms of Allergen and Mentor offer greater investment appeal and lower risk profiles compared with those of Medicis.

The table below shows that the forward valuations of the three stocks in this group have all moved well above the specialty pharma group average at about 40 times this year's and 30 times next year's earnings. The group's near-term growth outlook is stronger than the industry average, but the risks have risen at these valuation heights, particularly if trends start to slow. However, the prospect for accelerating growth at Mentor and Allergan should continue to support their hefty share valuations.

Conversely, I expect the valuation and earnings performance of Medicis to come under pressure in the face of upcoming marketing challenges for its key Restylane franchise and a shortage of additional growth drivers.

Primed for Growth

Medicis shares plummeted in June on news of the earlier-than-anticipated approval of Allergan's Juvederm. This product competes with Medicis' important Restalyne product line in the dermal-filer segment. Medicis shares have since recovered and are now about 40% above mid-summer levels, despite the coming full-scale launch of Allergan's Juvederm in January.

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At the time of publication, Michael Latwis held no positions in the stocks mentioned, although positions may change at any time.

Michael Latwis has directed health care content at TheStreet.com Professional Products. He also has worked at Barclays Wealth management division and was previously associated with Lazard Freres and Fiduciary Trust. Latwis covered companies in the pharmaceutical and specialty pharmaceutical sectors as well as biotech, medical technology, healthcare services, retail and media stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Latwis appreciates your feedback; click here to send him an email.