Fyi - Allergan Seeks A Buyer For Lap-Band

[Baba Wawa 543]

FYI, as reported in the NYT:

As Sales Fall, Allergan Seeks a Buyer for Lap-Band

By ANDREW POLLACK

Allergan said Tuesday that it was looking to divest itself of its Lap-Band, the once-popular weight-loss device that has experienced several years of falling sales, loss of market share and controversies about its safety and effectiveness.

The falling sales “do not fit the profile of a high-growth company like Allergan,” David E. I. Pyott, the company’s chief executive, told analysts Tuesday morning on a call announcing the company’s third-quarter financial results.

In an interview, Mr. Pyott said Allergan had already hired an investment banking firm, which he would not name, and was sending letters to other medical device companies and private equity firms seeking a buyer for its obesity business, which also includes a balloonlike device that is not approved in the United States but is used in some other countries.

The Lap-Band, a silicone ring that is wrapped around the stomach and can be inserted in an outpatient procedure, once appeared to have a bright future as a less drastic, if less effective, alternative to gastric bypass, which involves rerouting the digestive tract.

But Allergan’s obesity business sales have fallen from a peak of $296 million in 2008 to an expected $160 million this year. In the third quarter, the sales fell by 25 percent to $37.4 million from a year earlier.

The obesity business, while still profitable, represents less than 3 percent of total product sales for Allergan, which is known most for its Botox treatment for wrinkles, Migraine headaches and other conditions.

Although one-third of American adults are obese, the number of weight loss surgeries in the United States — about 160,000 a year — has stopped growing, largely because of the economy, Mr. Pyott said. Many patients pay out of pocket for weight loss surgery, and even when the procedure is covered by insurance, there can be a co-payment of thousands of dollars.

Mr. Pyott said Allergan had made progress in the last year in lowering barriers to insurance coverage, but it was not sufficient to reverse the decline in sales of the Lap-Band.

But gastric banding has also lost market share among weight loss surgeries, falling to about one-third from 44 percent a year ago, Mr. Pyott said. Lap-Band has most of the market among bands, although Johnson & Johnson also sells such a product.

Gaining in popularity has been sleeve gastrectomy, which involves cutting out part of the stomach. It is considered midway between banding and bypass in terms of both effectiveness and the degree of invasiveness of the surgery.

Dr. Marc Bessler, director of the center for metabolic and weight loss surgery at Columbia University, said that Lap-Band had lost some luster among bariatric surgeons because studies suggested it was not effective in the long run for one-third to two-thirds of patients.

“You had data coming out that 10-year outcomes are not what we were expecting,” Dr. Bessler said.

One study in Europe, for instance, published in The Archives of Surgery last year, reported that over 12 years, 60 percent of patients needed another operation, often to remove the band, because of complications or lack of weight loss. Allergan has said that techniques have improved since the patients in that study received their bands.

In 2011, Allergan succeeded in getting the food and Drug Administration to approve use of the Lap-Band for patients with lower weight than had been previously required. But that did not bolster sales, in part because of difficulty getting insurance to pay.

The company dropped efforts to get the Lap-Band approved for use in teenagers after controversy arose about the product’s safety.

There have been news reports about problems, including deaths, from the band.

Allergan said its overall product sales for the third quarter rose 6.1 percent from a year earlier to $1.39 billion. Earnings per share, after adjustments, rose to $1.06 from 92 cents.

[vmarlau 207]

Wow!

@_@

[Baba Wawa 543]

Wow!

@_@

Yes, sales fell from $240mm to $160mm, a huge decline! Sort of backs up what being said, AGBs are going the way of the dinosaurs, due primarily to high failure/complication rates + high follow up costs.

[wallflower 188]

If I could do it over, I would've gotten the sleeve.

[Alex Brecher 10,512]

Thanks for posting that article! I linked to a few articles discussing this monster announcement here.

I remember when Inamed health was purchased by Allergan in 2006. Many bandsters thought the sky was falling in on them and everything turned out ok.

The Lap-band and the Lap-band brand will continue. The question still remains, who will be taking over.

For more in depth info on this topic, please listen or read Allergan's latest 3rd quarter earnings call transcript.

To save you some time, I've copied and pasted the info pertaining to Lap-Band:

-------------------------------------------------------

David E. I. Pyott, Chairman, President & Chief Executive Officer:

In our press release, we commented that we are exploring strategic options for the obesity intervention business as the sales dynamics do not fit the profile of a high growth company like Allergan. Vigorous management of our portfolio of businesses has always been integral to our strategy.

Quote from Allergan press release:

"Allergan is exploring strategic options for maximizing the value of its obesity intervention business, including among other things, a potential sale of that business unit. To the extent Allergan elects to pursue such a strategic option, the company intends to offset any potential earnings dilution related to the transaction."

-------------------------------------------------------

Jeffrey L. Edwards, Chief Financial Officer & EVP-Business Development:

"One of our key drivers of Allergan’s long-term success has been the continuous evaluation of our portfolio of businesses to ensure that they are delivering high growth. During the past few years, the entire obesity intervention market has faced challenges as a result of economic conditions and reimbursement limitations. Earlier in the year, we committed to improving the reimbursement conditions for LAP-BAND. We have been able to reduce the wait time for surgery by reducing the time patients must undergo medically managed weight loss. Now 63% of commercial lives or 120 million patients have this benefit in their policies, an increase of 22 million lives just this year.

While we are confident in the long-term prospects of the business, we also must consider the best potential for future development and clinical advancement may exist outside of the company. Moreover, Allergan’s business model strategy emphasizes the importance of leverage and scalability. It’s clear to us today that Allergan will have the same ability to achieve the strategic business – it is not clear today that Allergan will have the same ability to achieve the strategic objective with this business. Therefore, we are exploring strategic options including among other things a potential sale of the business unit. "

-------------------------------------------------------

Operator: Our next question is from Steve Willoughby of Cleveland Research.

<Q – Steve Willoughby – Cleveland Research Co.>: Hi, thanks for taking my question. I was wondering if you could just provide a little bit more color regarding the LAP-BAND and your comment on the lack of leverage and scalability and what has changed in your thinking now versus the past couple of years?

<A – David Pyott – Allergan, Inc.>: Well if I cast the clock back a couple of years, we had lots of years of really good growth and this was in the timeframe 2006, 2007 and 2008. And at the time, if I restrict my comment to the US first of all, we didn’t realize that a lot of that was not only cash pay but actually it was credit card pay. And so of course, with hindsight that market, which at the peak was about a third of our US sales, has really shriveled down to a very negligible part. So I think the next part of the thinking then came and that was my commitment over a year ago to you on the sell side as well as the investment community on the buy side, that our job is to improve reimbursement conditions. And as you heard from Jeff’s remarks, we have made progress.

But then comes the real kind of what I call the tough call. Clearly you know as a company we are very committed to high growth and we have been able to do that. So a business like this, which is going the wrong direction, is a drag on that overall growth rate. Now I come to the point about leveragability and scalability. If you think of all of the business areas we are in, ophthalmology and medical aesthetics being very clear, we have a very broad range of products so we often have multiple sales forces presenting multiple products. And of course that gives you the benefits of scale.< /p>

If we look at the general surgery market, where we are present with LAP-BAND, it’s basically a one product entry, and as we have looked at alternatives, that would take us deeper into general surgery, which would be fine. But usually those products are associated with lower gross margin than the ones we have. So really ending the whole stream of thought, it may make better sense either for another company that one would call as strategic to add LAP-BAND and ORBERA overseas which is the intragastric balloon to their portfolio.

Or it could make sense for a private equity firm to acquire this business because of course it’s profitable. It is cash generative. It has a great brand name. It has very good intellectual property and finally of course, just to make it clear, we are assessing the sale because everything comes down to numbers at the end of the day. And so as you know we could always, if we don’t get the numbers we like, choose just to keep this business and run it in a different way.

-------------------------------------------------------

Operator: Our next question is from Chris Schott of JPMorgan.

<Q – Jessica Fye – JPMorgan Securities LLC>: Hey there, it’s Jessica Fye on for Chris Schott. I just wanted to follow up on some of the comments you made earlier about the obesity business. And I guess specifically, can you comment at all on the operating margins for that franchise just to give us a little bit of a sense of what the dilution might be? And then I know you talked about maybe offsetting that. Would that be more likely to come from share repo or more likely from an acquisition? Thanks.

<A – Jeffrey Edwards – Allergan, Inc.>: Well, we don’t comment specifically on the operating margins for any of our businesses, so we are not going to do so here. This is a profitable business and to the extent we do something that’s external in nature with this business, it’s our objective to try to address the dilution. And that’s a commitment we are going to do our level best with achieving. And that’s really all we can say at this juncture in time, because we continue with a very in-depth internal assessment process as to how we are going to address that business on a going forward basis.

-------------------------------------------------------

Operator: Our next question is from Louise Chen of Guggenheim Securities.

<Q – Louise Chen – Guggenheim Securities LLC>: Hi. My question is with respect to your capital allocation strategy, I was wondering if you could provide an update now especially given your large cash balance and also your decision to potentially divest your obesity franchise.

<A – David Pyott – Allergan, Inc.>: Well, I think as we’ve said over the years, first and foremost our goal is to add to the depth and breadth of our portfolio and whether that be through licensing, the Molecular Partners transactions were like that, although all that being said of course, in terms of use of capital, the up-fronts aren’t enormous relative to our cash flow generation. The second of course is we continually look at are there products we could buy or even companies that we could buy. And I think you as investors would prefer that we find good return assets like that versus the very modest levels of return we can get by investing in the capital markets where obviously right now the returns are very, very low, indeed. So we remain confident that we know the spaces in which we operate very, very well. We have seen over the years that technology owners tend to come to us. It’s not altruism because of course in theory we can afford to pay more than others because we have the best worldwide footprint in these businesses.