Cosmetic Surgery Stocks Keep Stiff Upper Lip

"Deceleration in [breast] augmentations continues, putting fiscal 2010 estimates at risk," says a new report by Jose Haresco, of Brean Murray Carret. He has a hold rating on the stock and doesn't own shares.

Although U.S. breast implant procedures rose steadily between 1997 and 2007, Haresco forecasts that the number will decline 3% this year and another 2% next year.

He sees a promising "long-term growth opportunity" for Mentor's implant business, but he warns that the "current financial and economic crisis will continue to exert pressure on the market."

Maxim Group analyst Anthony Vendetti predicts there could be a rebound in U.S. breast implants within the next 12 months even though the outlook right now is "bleak." Vendetti has a buy rating on Mentor and doesn't own shares.

Mentor and Allergan have a duopoly in the U.S. breast implant market, and both have benefitted from the Food and Drug Administration's ruling in 2006 that silicone breast implants, which are more expensive than saline, could be used for cosmetic purposes. Previously, the U.S. required cosmetic implants to use saline.

Both companies also sell their implants foreign markets, primarily Europe, where they compete with several companies. Eventually, Haresco believes the U.S. will look like other markets in which silicone implants account for 75% of breast augmentation procedures.

Mentor is trying to diversify. Its other revenue now comes from skin-care products and liposuction equipment, with more dermatology offerings, including a Botox-like drug. Allergan owns a healthy portion of the skin game thanks to Botox. For the first half of 2008, Botox produced $663 million in sales, up 15% from the year-ago period, and accounted for 30% of the total.