Does the Maker of Botox Need to Tighten Up Its Outlook?

Allergan (NYSE: AGN), best known for its muscle relaxant Botox and portfolio of plastic surgery products, reported its third-quarter earnings on Tuesday. The company's earnings, revenue, and growth across all major businesses rose by double digits.

Yet the market responded with an indifferent shrug, and shares closed slightly lower.

Allergan's troubles started back in May when it lowered its full-year earnings guidance. Then in June, concerns that its top-selling eye treatment, Restasis, could soon face generic competition sent shares tumbling even further.

Source: YCharts.

As a result, the stock has been flat over the past 12 months, woefully underperforming its industry peers and the market.

An impressive third quarter
During the third quarter, Allergan earned $1.23 per share, an 18.3% increase from the prior-year quarter. Revenue climbed 13.2% to $1.56 billion. Both earnings and revenue exceeded analyst estimates.

Allergan generates its revenue from two divisions -- specialty pharmaceuticals and medical devices, both of which posted double-digit growth during the quarter.

Source: Allergan earnings release.

The eye care business
In Allergan's specialty pharmaceuticals division, sales of eye-care treatments climbed 8.1% year over year to $717.1 million, accounting for 54% of the segment's sales. That growth was fueled by robust demand for the dry eye treatment Restasis, which reported 20.7% year-over-year growth.

Back in June, investors were concerned that Restasis could face generic competition earlier than expected, due to an FDA statement that human clinical trials would not be necessary if the generic versions were similar enough to Restasis. However, no generic versions have been approved yet.

In the eye-care business, Allergan's three primary competitors are Johnson & Johnson (JNJ -2.04%), Novartis (NVS -1.12%), and Valeant Pharmaceuticals (BHC -0.52%). All three companies' eye care operations are substantially larger than Allergan's eye-care segment.

Johnson & Johnson owns the Acuvue line of vision care products, a firm pillar of growth for its consumer care segment, which generated $3.6 billion in sales last quarter. Novartis' eye-care unit Alcon is its own business segment and generated $2.5 billion in revenue last quarter -- a 6% increase from the prior-year quarter.

To catch up to J&J and Novartis, Valeant completed its $8.7 billion acquisition of Bausch & Lomb in August. The deal is expected to generate $500 million in synergies in 2013.

The anti-aging business
Allergan's muscle relaxant Botox accounts for 36.5% of the pharmaceutical segment's revenue. Sales of Botox climbed 12.5% year over year to $485.7 million.

In September, Botox became the first treatment to ever be approved to treat crow's feet and laugh lines. In addition to its cosmetic indications, Botox is also approved to treat an overactive bladder, migraines, lazy eye, involuntary facial and neck movements, spasticity due to juvenile cerebral palsy, underarm perspiration, vocal disorders, and post-trauma muscle stiffness.

Botox is currently the market leader in facial muscle relaxants, but newer treatments such as Merz Pharma's Xeomin and Valeant Pharmaceuticals' Dysport are also gaining traction.

Valeant acquired Dysport through its $2.6 billion acquisition of Medicis Pharmaceutical in December 2012. Valeant has not reported sales figures for Dysport individually yet, but the company stated that it intends to put Medicis' dermatology portfolio to good use. That could also position Valeant as a competitor to Allergan's skin-care products, which generated the remainder of its specialty pharmaceutical segment's revenue.

To address the competition that Botox faces, Allergan has two new cosmetic treatments, which could soon generate meaningful revenue.

Allergan's Juvederm Voluma XC, a treatment that fills out the cheeks for a more youthful appearance, was recently approved by the FDA. Vistabel, another new treatment for crow's feet and laugh lines, received a positive opinion from France's National Security Agency of Medicines and Health Products, which is seen as a major step toward approval across the EU.

The plastic surgery business
Allergan's medical devices division offers two categories of products for plastic surgeons -- breast aesthetics and facial aesthetics products.

Sales of facial aesthetics, which rose 19.8% to $106.7 million, accounted for 54% of the segment's revenue. Sales of breast aesthetics, which climbed 6.7% to $91.9 million, comprised the remaining 44%.

Exiting the obesity business
Allergan recently sold its obesity business to privately held Apollo Endosurgery for an upfront payment of $75 million, another $15 million in minority equity interest, and $20 million in possible future milestone payments.

The highlights of this business were the Orbera obesity balloon, which was inflated after being swallowed by the patient to control the appetite, and a stomach restricting band called the Lap-Band.

The Foolish bottom line
Last year, 14.6 million plastic procedures were performed in the United States -- a 5% increase from 2011. Therefore, Allergan's sales could continue rising as demand for anti-aging procedures and plastic surgeries rise.

However, two problems could potentially trip up Allergan. Generic versions of Restasis, when they arrive, will take a bite out of sales -- even more so if J&J, Novartis, and Valeant create similar treatments. Second, an increased awareness of Botox alternatives like Xeomin and Dysport could eventually drag down sales of the world's favorite wrinkle remover.

In my opinion, investors should carefully consider those two issues before investing in Allergan, despite its lucrative double-digit top and bottom-line growth.