February 12 2008: 4:10 AM EST
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A wrinkle in the Botox story

An FDA investigation may frighten some, but many Wall Street analysts say this is the time to buy shares of Botox manufacturer Allergan.

By John Simons, Fortune

(Fortune) -- The Food and Drug Administration may have caused pandemonium on Park Avenue and Rodeo Drive with its announcemenet late last week of a safety review of the famed cosmetic therapy, Botox. But on Wall Street at least a few financial analysts are advising investors to buy shares of Botox maker Allergan while they're cheap.

On Friday, the FDA said it had opened an inquiry into the safety of botulium toxin products, after receiving reports of breathing difficulties and deaths of patients using both Botox and competing product Myobloc, made by Solstice Neurosciences. A small number of these "adverse events" involved children with cerebral palsy who were being treated for muscle spasms associated with the disorder. The FDA has not approved use of either product for that use.

Botox is the second-most recognized prescription drug brand in the world, behind Pfizer's (PFE, Fortune 500) Viagra. And with the FDA announcement Allergan (AGN) shares fell 6% to $63 on Friday. It was the stock's biggest one-day dip in more than three years.

Although Allergan is known among jetsetters for its marquee Botox cosmetic therapy and its line of breast implants, the firm is about much more than aesthetic enhancements. The Irvine, Calif.-based company carries a broad portfolio of eye care products for glaucoma and retinal disease, obesity interventions (such as the Lap-Band implant) and skin care brands like Juvederm. In 2007, Botox sales were $1.2 billion, representing roughly one-third of the company's overall $3.9 billion in sales.

All of Allergan's products exist in high-growth markets. The company has posted double-digit sales growth in each of the last five years. Sales jumped nearly 30% in both 2006 and 2007.

Botox's most popular use, of course, is as a cosmetic therapy to temporarily erase wrinkles. Doctors inject patients' facial muscles with small doses of the drug, creating a smoothed look that lasts for three or four months. The drug works by blocking overactive nerve impulses and thereby decreasing muscle activity. Lesser known are Botox's other approved uses for treatment of crossed eyes, uncontrollable blinking, excessive underarm sweating, and a host of neuromuscular disorders. In the recent years, Allergan has begun testing the drug for expanded uses like treating migraines, post-stroke spasticity, and overactive bladder.

An Allergan spokesperson says it is important to note that the adverse events being investigated by FDA all occurred among patients using the drug as part of aggressive, high-dose neuromuscular treatments. More importantly, "the FDA's posting doesn't mean there's a causal relationship between Botox and the events that were reported," says Allergan spokesperson Caroline Van Hove.

Allergan CEO David Pyott points out that in all the years Botox has been used for cosmetic purposes, there have been no reported deaths linked to the drug. "We stand behind our 18-year safety record, with Botox being used around the world for more than 20 therapeutic conditions," Pyott told Fortune. He also points out that patients taking Botox for cerebral palsy-related muscle spasms were receiving as much as 700 units of the drug, a dose some 28 times larger than the amount injected into cosmetic Botox users. "Is that overdose?" asks Pyott. "Probably it is."

And despite the FDA's investigation, industry-watchers continue to sing Allergan's praises - seemingly from the same song sheet. "Though we recognize the possibility that the FDA could require revisions to [Botox and Myobloc's] labels that emphasize their adverse event risks in certain applications, we believe there will be minimal collateral damage to Allergan's Botox cosmetic business," says Peter Bye, an analyst with Jefferies & Company. "We advise using recent weakness in Allergan shares as a buying opportunity," Bye says.

Frank Pinkerton of Bank of America Securities is even more adamant about Allergan's growth prospects. Within hours of the FDA's announcement of its Botox safety review last Friday, Pinkerton called on investors to jump in and buy Allergan shares on the cheap. "We view the selloff as an opportunity to purchase this leading growth franchise," he advised. Pinkerton said that he does not plan to readjust his Botox sales forecasts for this year, since U.S. use of Botox for juvenile cerebral palsy is such a small portion of overall Botox sales.

Where does Pinkerton expect Allergan shares to go from here? His 12-month price target is $75, roughly 19% higher. Not to be outdone, Wachovia Capital Markets analyst Larry Biegelsen, in a note issued to investors yesterday, observed that the FDA has only seen one or two of these serious events in patients who have taken Botox for cosmetic reasons in all of the product's 18 years on the market. "We think the FDA safety review of Botox is unlikely to have a significant impact on the growth rate of Botox. In addition we think a modest impact would be manageable for Allergan." Like Bank of America's Pinkerton, Biegelsen maintains a year-end price target for Allergan at around $75.

And someone seems to be listening: Allergan shares gained 1.7% in Monday's trading.  To top of page