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Cosmetic Surgery Stocks Keep Stiff Upper Lip

Stocks in this article: AGN MNT MRX

Allergan's biggest business remains eye-care drugs, which represents 47% of first-half sales and were up 24% over the same period last year. Because Allergan is more reliant on products that receive insurance coverage, analysts say its stock shouldn't be as volatile as those of Mentor and Medicis. However, Allergan isn't free from worry or risk.

Gary Nachman of Leerink Swann recently trimmed his third-quarter sales and earnings forecasts because his research on cosmetic-treatment trends "were more disappointing than we expected" both in the U.S. and in Europe. Although he maintains an outperform rating, he reduced his price target from the high $60s to the mid- to high $50s.

"We remain confident that Allergan can absorb the potential weaknesses in the aesthetic products with solid diversification and financial flexibility," he says in a recent research report. He doesn't own shares.

The diversification includes the obesity-control device Lap-Band, an adjustable clamp that reduces the amount of food the stomach can hold. First-half 2008 sales of $148.5 million represented a 22% gain from last year.

Additionally, Allergan is testing Botox for new uses such as treating overactive bladder and headaches. Botox started as a drug for a rare condition of uncontrolled eye-blinking.

Meanwhile, investors in Medicis were no doubt blinking on Sept. 24 when the company said an accounting error would force a restatement of five years of financial results. The restatement is not expected to affect cash flows and cash balances, Medicis said. The company also withdrew its financial guidance for the rest of the year. The stock is down about 34% since the day before the restatement announcement.

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