Botox Makes Allergan Worth a Shot

The market has punished

We do expect the biosimilar Botox that Revance and

The current stock price likely implies Botox declines, but we think the franchise can maintain healthy growth as a result of expansion of the market and limited price competition.

Firms Likely to Have Difficulty Injecting Themselves Into Market The biosimilar threat from Mylan and Revance theoretically offers only one potential major advantage over other or upcoming neurotoxin compounds on the market: extrapolation across all currently approved indications for Botox. The requirement for clinical trial data for competitors to get a neurotoxin approved in each separate indication has always been a significant roadblock, particularly in the U.S. market.

Also, Botox is a biologic, which makes interchangeability highly unlikely. Manufactured from bacteria, Botox is a biologic molecule and approved through a biologics license application by the Food and Drug Administration in the U.S. It's a di-chain polypeptide derived from the bacterium Clostridium botulinum. The bacterium itself is commonly found in nature, but production of the toxin in anaerobic conditions (no oxygen), such as in food or even rarer sources like wounds, leads to botulism.

Botox is not as sophisticated a product as larger biologics (for example, Humira), but nonetheless, a company achieving interchangeability with a biosimilar remains an almost impossible task, in our view. We think this is the case for two primary reasons.

First, as with any biologic product, there are inherent differences in molecular makeup when manufacturing with proteins extracted from living organisms. Allergan's cell line and manufacturing process is unique and proprietary, and Botox has other complexing proteins present as well as albumin. Competitors to Botox--like Dysport and Xeomin--therefore have a different molecular fingerprint, including molecular weight, attached proteins, dilution factors, potency, immunogenicity, and so on. We speculate Mylan and Revance's product would therefore have unique molecular traits that keep it from attaining an interchangeable distinction from the FDA.

Second, due to the inherent formulation differences among neurotoxins, potency creates an additional product difference. The toxin's potency causes Allergan to produce only about a gram of the product for a full-year supply of Botox--enough for millions of injections. The amount of actual toxin in a unit of Botox is therefore remarkably small--a point management raises about its doubt that a competitor could even obtain enough material to accurately characterize the molecular makeup of the product. Botox contains only about 0.005% of the toxin necessary for a lethal dose by ingestion. Neurotoxin potency is evaluated in mouse units--the lethal dose for half a mouse population (LD50)--which requires extensive and expensive mouse studies on each batch. This process has been a trade secret for Allergan. In 2011, Allergan obtained FDA approval for an in vitro cell-based assay to determine potency on Botox, which was a multiyear, $65 million project for the company. Dysport and Xeomin do not list an assay for potency testing on their FDA labels.

We Expect Further Growth From Botox; CGRPs May Be a Headache We do slow our Botox growth projections versus the high growth the product has posted over the past few years, although we expect more ongoing robust growth for Botox internationally.

We continue to view the near-term potential launch of CGRPs for chronic migraine from

While we do consider Allergan to be undervalued because of exaggerated fears regarding its products and pipeline, we remain below consensus on Botox. Our base-case forecast assumes nearly $4 billion in total Botox sales by 2022. Our bull-case forecast roughly matches consensus, however, which we think is largely attributed to our potentially more bearish assumption on Botox's chronic migraine sales in the U.S. Because our overall Allergan forecast remains relatively close to consensus, we speculate that our probability-weighted pipeline assumptions make up most of the difference.