Epipen Parent's Faceplant Is a Cautionary Tale for Botox Maker

(Bloomberg Opinion) -- Drugmakers Mylan NV and Allergan Inc. reported first-quarter earnings Tuesday, and their results had something in common:  they both got panned by investors.

Mylan’s sales missed Wall Street targets and the company offered no update on a strategic review that’s been in progress since August. Its shares plunged 19 percent to their lowest point since 2012. Allergan’s quarter was saved by its blockbuster Botox, which helped the company raise its full-year guidance. But otherwise, sluggish growth and questions about the company’s static strategy saw the firm’s shares fall 5 percent on top of a 23 percent decline over the last 7 months. 

While both companies disappointed shareholders, it wouldn’t fair to put Allergan in the same basket as Mylan; it isn’t in quite the same dire straits. That said, Mylan’s plight should be instructive for Allergan as it could end up in the same place.

Mylan’s drug sales in both Europe and North America fell in the first quarter amid a continued decline in generic-drug prices. The company’s long-gestating shift toward selling more complex and theoretically more profitable medicines has yet to prove itself as it bleeds revenue. A strategic update would have been a welcome distraction. It didn’t come, and it’s unclear whether Mylan could have announced anything that would give investors hope. Much of its business is performing poorly, parts of it are too small to compete independently, and the whole company is highly indebted. It’s not clear that a breakup or asset sales could create much value.

In the past, Mylan’s highly profitable EpiPen helped paper over other its issues. But competition arrived at exactly the wrong time, accompanied by investigations into the allergy treatment’s cost, manufacturing issues, and broader generic pressure, leaving the company where it is now. 

Botox plays a similar role for Allergan. The medicine, a toxin used to smooth wrinkles and treat medical conditions, generated sales growth of 6.7 percent in the quarter even as its market share among migraine patients faced challenges from a new category of drugs. But its traditional pharma business isn’t having the same success. The drugmaker recorded a goodwill impairment of $2.47 billion in the  first quarter related to the late-stage clinical-trial failure of a depression drug, which is far from its only pipeline fumble in recent years. Allergan faces pressure to restock its labs with more medicines as its lucrative eye drug Restasis faces generic competition, but it’s hard to be confident in management’s ability to pick winners.  

Botox and the company’s aesthetics business are less vulnerable to drug-pricing pressure in the U.S., and Allergan has generally proved pretty deft at growing the unit and bolstering it with good acquisitions. This is a case where there is a clear rationale for a split from the drug business, which has none of those qualities.  

Allergan CEO Brent Saunders said he was “open-minded” to a breakup if it created value. But the last time he said something similar, the firm concluded that the only needed change was the sale of a few businesses, and it only ended up selling one small unit. 

Mylan is a reminder that Allergan can’t twiddle its thumbs forever. Botox is keeping the wolves at bay and the company has options. But its choices and share price will shrink rapidly as newer entrants finally start to chip away at Botox’s dominant position. The time for action is sooner rather than later.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Max Nisen is a Bloomberg Opinion columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

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