Allergan Considers Lap-Band Unit Sale as Demand Declines

Allergan Inc., the maker of the Botox wrinkle treatment, may sell its obesity business, including the Lap-Band weight loss device, as revenue declines and questions mount about the risk of the procedure.

Revenue for the obesity intervention unit will be about $160 million in 2012, the Irvine, California-based company said in a statement yesterday. Sales fell from $203.1 million last year and a peak of $296 million in 2008, the company reported.

Allergan’s goal is to generate about 15 percent earnings growth for the next three to five years, Chief Executive Officer David Pyott said yesterday in a conference call after the company released its third-quarter earnings. The obesity market, which once generated about a third of U.S. sales, has “shriveled down to a very negligible part,” he said.

“As a company we are very committed to high growth,” Pyott said. “A business like this, which is going the wrong direction, is a drag on that overall growth rate.”

Allergan fell 1.9 percent to $89.92 at 4:06 p.m. in New York. The shares have risen 2.5 percent this year.

The decision to pursue a sale makes sense, said Christopher Schott, an analyst at JPMorgan Chase & Co. in New York.

“Following several years of sales declines, Allergan is exploring options for its obesity franchise, including a divestiture of the business,” Schott wrote yesterday in a note to investors. He said he views a sale positively “given the growth challenges the company has experienced in this business.”

Durability Issues

Questions about the durability of weight loss with the Lap-Band device and the risks that accompany it may have hampered sales. Almost half of patients getting gastric banding had the device subsequently removed, often because of erosion, according to a Belgian study published in 2011. The company dropped its plans to market the Lap-Band for teenagers at the beginning of the year amid congressional criticism and lawsuits.

Allergan has struggled to find efficient ways to sell the Lap-Band, essentially its only product in the general surgery market. While the company considered going deeper into the surgical mix with new offerings, those have even lower gross margins, Pyott said on the conference call.

Ultimately, it may make better sense for another company to add the Lap-Band and company’s gastric balloon weight-loss technology to its product portfolio, he said. A private equity firm may also be interested, since the business is profitable and has a “great” brand name, he said.

Bottom Line

“We are assessing the sale because everything comes down to numbers at the end of the day,” Pyott said. “We could always, if we don’t get the number we like, choose to keep this business and run it in a different way.”

About one-third of 200,000 weight-loss surgeries in the U.S. annually use gastric banding, wrapping the small rubber devices around the upper stomach to limit capacity. It costs less than surgery that alters or staples parts of the stomach, and is adjustable and reversible.

Allergan plans to offset any potential earnings dilution that stems from losing the obesity business, perhaps in part with share repurchases, Pyott said.

The company, which has $2.9 billion in cash and may get more with the sales of the obesity business, is looking to add to the “depth and breadth” of its portfolio, Pyott said.

“We continually look at whether there are products we could buy or even companies that we could buy,” he said. “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, as you know, obviously right now the returns are very, very low indeed.”

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