By: Nicole Urken | 04/24/14 - 11:07 AM EDTTheStreet) - With biotech stocks--like Gilead (GILD), Biogen (BIIB), and Celgene (CELG)-- in the hot seat in recent months, selling off after big runs, high valuations, and debate over high cost drugs, Tuesday was filled with merger news in the healthcare center. Front and center is the proposed takeover of Allergan (AGN - Get Report) by Valeant (VRX - Get Report) and activist investor Bill Ackman. One of the reasons this is so significant is that Allergan, known most famously for its anti-wrinkle remedy botox, has been prized as a biotech has spent a high percentage of sales on research & development (R&D). In fact, the company has maintained 16-17% R&D over the past 10 years while growing EPS at 15% CAGR. The investment in drug development has been key to Allergan's growth story, something we've highlighted to viewers consistently on Mad Money that have continued to make money by banking on Allergan's CEO David Pyott. Basically, the company has executed a "pipeline in a product" strategy that has straddled both its aesthetic and therapeutic focus areas. For example, Latisse (which promotes eyelash growth and falls within the skin care segment with an aesthetic focus) grew fromLumigan, one of Allergan's glaucoma drugs. As patients were using Lumigan on their eyes, they noticed their eyelashes were growing and so Allergan worked on developing Latisse. The same underlying component is key for current research in baldness. While Valeant has been very successful in rolling up other companies--including other eye care companies like Bausch & Lomb, and aesthetic companies like Medicis--their strategy of cutting costs may hurt the upside for Allergan within that broader conglomerate. Yes, the sales force may sell more botox and eye care drugs near-term but in terms of long-term growth potential, Valeant could stagnate Allergan's growth engine. For example, last summer, Allergan's stock was weak on worries about the company's treatment for dry eye, called Restasis. Analysts were concerned about generics entering the market. However, the company has confronted this with successor compounds (read: effects of R&D efforts!) like Restasis X underway. As a note, Allergan's eye business growth is extremely important at 50% of its overall sales. Other skin care aesthetic products-- like the dermal filler Juverderm-- are also anticipating upside from newer permutations, including Juvederm Voluma XC. Of course, the botox franchise has also benefited from growth (that is the result of R&D) in therapeutic indications. Right now, botox revenues are broken down just about 50/50 between aesthetic indications and therapeutic indications. However, therapeutic is the big growth driver as the company's multiple shots on goal in terms of new indications could lead to doubling in the sales of the overall franchise by 2020. Again, R&D is key. What is botox used for now? Chronic migraine (US approval in 2010), neurogenic overactive bladder (US approval 2011), idiopathic overactive bladder (approved in Jan 2013). But many other indications underway, including BPH and osteoarthritis not to mention depression. And Allergan is looking at building out the migraine focus with Levadex (inhalation aerosol) which it acquired via MAP Pharma Yes, aging population will naturally help grow this name for both its aesthetic and therapeutic indications. And yes, there is more sell-through upside from more focus on the salesforce efforts. But the company relies on continued R&D investments for growth for longer-term opportunities. This brings me to the shift we are also seeing in the pharma space, where companies like Eli Lilly (LLY), Novartis (NVS - Get Report) and GlaxoSmithKline (GSK - Get Report) are focusing on their core competencies. This is something that Bristol Myers (BMY) led the way with, trimming down and pegging itself as more of a biotech company investing in growth and new treatments. In many ways, healthcare companies have become the "new tech" growth stories of the current era. This embrace of R&D is what we need to see... the sales rollouts and efforts will come later. Certainly acquisitions help fuel growth--look at what Pharmasset did for Gilead (GILD) and its Hepatitis C franchise. But when that growth is fostered and fueled. Valeant has been successful with cutting and slashing the past, but I question whether that will work for such an R&D-dependent company as Allergan. It's not just about the wrinkles. --Written by Nicole Urken in New York. Follow @nicoleurken >Contact by Email.
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