NEW YORK (TheStreet) - 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.
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.