Research Digest
Marchcom
6, 2006
Research Associate: Praveen Nevatia,C.A.&M.Sc.
Editor: Nelson Bishop, CFA
Sr. Ed. : Ian Madsen, CFA : imadsen@zacks.com 1-800-767-3771,x417
www.zackspro.com
155 North Wacker Drive
Inamed Corporation
(IMDC-NSDQ)
Chicago, IL 60606
$90.22
Note: All new material since last report is highlighted.
Reason for Report: Pre Earnings Update
Previous Report: January 11, 2006
Overview
Inamed Corporation (IMDC), a global health care company, engages in the development, manufacture,
and marketing of health care products worldwide. It is a leading manufacturer and marketer of medical
products for aesthetics and lifestyle. IMDC’s divisions are breast aesthetics, facial aesthetics, and
obesity intervention.
It offers saline-filled and silicone gel-filled breast implants for aesthetic
augmentation and reconstructive surgery following a mastectomy and various tissue expanders for breast
reconstruction and as an alternative to skin grafting to cover burn scars and correct birth defects; various
dermal filler products to improve facial appearance by smoothing wrinkles and scars, and enhancing the
definition of facial structure. The company also produces the BioEnterics Lap-Band System, a long-term
treatment system for severe obesity, and BioEnterics Intragastric Balloon, a short-term therapy for
patients who need to reduce weight in preparation for surgery or for moderately obese patients. The
company also offers Contigen, a collagen product used for treatment of urinary incontinence due to
intrinsic sphincter deficiency. The company sells its products directly and through independent
distributors. Medicis (MRX) and Inamed Corporation jointly announced that they have entered into a
definitive merger agreement to create a global leader in breast and facial aesthetics products and
therapeutic dermatological medicine. The company is headquartered in Santa Barbara, California.
Additional information is available online at www.inamed.com.
Key Positive Arguments
IMDC’s diversified business continues to show strength
across the board.
As Lap-Band gains market acceptance and more
surgeons are trained in the procedure, IMDC should
enjoy a growth rate well above average.
IMDC has demonstrated its willingness to invest its
resources in new products and procedures related to
cosmetic and lifestyle healthcare.
IMDC has a strong balance sheet.
Key Negative Arguments
The stock is already fully valued relative to its direct
competitor Mentor and other medical device companies.
IMDC’s competitor Mentor Corp. (MNT) announced that
it has received approval decision from the FDA for its
silicone breast implant PMA.
IMDC’s fiscal year ends in December; all calendar references are to the fiscal year.
Sales
Total Revenue
Digest High
Digest low
Digest Average
Digest Y o Y Growth
Quarterly Growth
2004A
$384.3
$384.3
$384.3
$384.3
3Q05A
$105.2
$105.2
$105.2
$105.2
16.9%
-8.2%
4Q05E
$120.3↑
$125.0
$116.0
$120.3↑
15.8%
14.3%
© Copyright 2006, Zacks Investment Research. All Rights Reserved.
2005E
$445.0↑
$450.0
$441.0
$445.0↑
15.7%
2006E
$528.7↑
$565.0
$498.0
$528.7↑
18.8%
2007E
$646.1↑
$700.2
$582.9
$646.1↑
22.2%
In 3Q05, total sales were $105.2M; up 16.9% Y/Y. Management expects sales growth in the mid-double
digit. Analysts generally believe that IMDC’s sales growth rate will continue through 2005 and beyond as
it introduces new facial products to its customers, continues to work with the FDA on silicone-breast
implant approval, and achieves market acceptance of its obesity intervention product, Lap-Band. Annual
sales estimates of the analysts with published updated income statements are included in the
accompanying spreadsheet.
One analyst (Piper Jaffray) notes that the FDA approval of silicone appears imminent. This will remove
worry from investors and allow the firm to continue to build its revenues. One analyst (Lazard) also notes
that the firm may have significant upside to revenues in its silicone breast implant division (which
represents 83% of 2005 revenue). They also note that the IMDC product has an operational advantage
over its competitor MNT.
IMDC derives its revenue from four divisions/areas: Breast Aesthetics, Facial Aesthetics, Obesity
Intervention, and Other.
Breast Aesthetics:
IMDC manufactures a range of saline and silicone-filled breast implants used for both cosmetic and
reconstructive procedures. In 3Q05, breast aesthetic product sales increased 5.9% Y/Y to $52.2M.
Analysts note that the imminent approval of silicone will allow sales from this division to continue to grow.
Facial Aesthetics:
IMDC manufactures a full line of facial aesthetic products used in cosmetic procedures to correct facial
wrinkles and lip definition. Its products include Zyderm/Zyplast, Hylaform, and CosModerm/CosmoPlast.
Zyderm/Zyplast implants are injectable formulations of bovine collagen used to smooth wrinkles and
scars. The worldwide sales of the facial aesthetics division decreased 3.5% Y/Y to $16.5M. The
decrease was primarily due to lower sales of dermal filler products in the U.S. market.
On December 06, 2005, Inamed announced that it has submitted the fourth and final module of its
Premarket Approval Application (PMA) for three formulations of Juvederm(TM) [Juvederm(TM) 24 HV,
Juvederm(TM) 30 HV, and Juvederm(TM) 30] to the U.S. FDA. Juvederm(TM) is a non-animal based,
cross linked hyaluronic acid-based dermal filler which Inamed has exclusive rights to market in the United
States. The submission of the final module for Juvederm completes the company’s filing with the FDA
and represents another key milestone in the development of its facial aesthetic products. A late-stage
clinical trial has shown that its Juvederm dermal filler is superior to its Zyplast brand of injectable
collagen.
Obesity Intervention:
IMDC manufactures and markets the Lap-Band adjustable gastric banding system in Obesity
Intervention. This product is designed to treat severe obesity by tightening the top of the stomach and
slowing the passage of food. This minimally invasive procedure is provided as an alternative to full
gastric bypass surgery. Worldwide sales of this segment increased 59.9% Y/Y to $35.5M. The growth
was primarily driven by U.S. sales of the Lap-Band system. Analysts believe that Lap-Band gains are
slowing due to increasingly difficult year-over-year comparisons. Analysts feel Inamed's high-margin
gastric band, the only one currently cleared in the U.S., will continue to penetrate the obesity surgical
intervention market at the expense of gastric bypass procedures.
Other:
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IMDC’s other sales include sales of non-breast tissue expanders used as an alternative for skin grafting
to cover burn scars and birth defects.
Margins
2004A
74.6%
23.5%
19.1%
Gross
Operating
Net
3Q05A
72.2%
22.9%
16.6%
4Q05E
73.6%
24.8%
19.6%
2005E
73.2%
22.8%
18.0%
2006E
73.3%
25.5%
19.8%
2007E
71.2%
27.5%
21.0%
From January 1, 2005, IMDC has begun expensing royalties as part of cost of goods and is no longer
including these in SG&A expenses. In 3Q05, gross margin was 72.2%. This was relatively unchanged
from the previous quarter. Year over year, the increase in margins of 29.2% is due mainly to the
exclusion of royalties being included in cost of goods expense.
In 3Q05, SG&A was $42.4M. SG&A as a percentage of sales was 40.3% in 3Q05, which was up from
39.1% in 2Q05, and down from 43.1% in 2Q2004. R&D expense in 3Q05 was $9.1M, compared to
$7.2M in 3Q04, an increase of 26.4%. The increase was primarily due to the ongoing Reloxin and
Juvederm clinical programs in facial aesthetics as well as costs related to sustained activities in the
silicone breast implant regulatory programs.
Earnings Per Share
IMDC reported 3Q05 EPS of $0.53. Including merger-related expense, EPS on a GAAP basis was
$0.41. There were nominal changes in earnings estimates by analysts; none were material, and mainly
due to small adjustments. The firm also released an EPS guidance of $2.24 to $2.32 for FY2005.
Zacks Consensus
Digest High
Digest Low
Digest Avg.
Digest YoY growth
2004A
$2.04
$2.04
$2.04
$2.04
3Q05A
$0.53
$0.53
$0.53
$0.53
12.8%
4Q05E
$0.63
$0.66
$0.62
$0.64
23.1%
2005E
$2.25
$2.33
$2.24
$2.24↓
10.9%
2006E
$2.83↓
$2.94
$2.83
$2.89↑
27.5%
2007E
$3.66
$3.58
$3.63
25.8%
Target Price/Valuation
Target price for IMDC ranges from $93.60 (Zacks Investment Research) to $95 (Lazard). The Digest
average target price is $94.30. This is slightly higher than the previous target price of $93.30. Of the
analysts covering the stock, one has given a positive rating and four others have given a neutral rating.
Rating Distribution
Positive
25.0%
Neutral
75.0%
Negative
0.0%
Avg. Target Price
$94.3↑
Go to the Valuation tab of the IMDC earnings model spreadsheet for more details on the brokers’
valuation methodologies and individual price targets.
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Long-Term Growth
The long-term growth rates range from 15% (Piper Jaffray) to 26.9% (Lazard). The Digest average longterm growth rate is 21.0%.
Inamed participates in several high-growth markets, and the company appears to be well situated for
above-average growth rates as it serves the increasing demand for cosmetic and obesity procedures.
The company is unique with its development of its Lap-Band morbid obesity solution, and it expects a
high rate of future growth as the product benefits from increased consumer awareness, further physician
training, and insurance coverage. Analysts feel Inamed is well positioned to capture share in the silicone
breast implant market should the FDA approve the product. This could be a long-term growth driver for
the company.
Capital Structure/Solvency/Cash Flow/Governance/Other
On March 6, 2006, Allergan Inc., maker of the Botox wrinkle treatment, commented that it had extended
its offer for the shares of takeover target Inamed Corp. until March 10. Allergan further clarified that
around 17,779,617 shares or 48 percent of IMDC’s outstanding shares have already been tendered.
On September 21, 2005, IMDC received an approval letter from the FDA for its silicone breast implants.
IMDC must satisfy various conditions outlined in the letter before it receives FDA’s final approval. One
analyst (Adams Harkness) expects final approval by 1Q06. IMDC’s competitor Mentor Corp. (MNT)
announced that it has received an approval decision from the FDA for its silicone breast implant PMA.
Analysts have also noted that Allergan (AGN-SP) has proposed an $84 per share offer for Inamed.
Some analysts think FTC could potentially block the deal. This deal came after the FTC stated it was not
going to require that MRX license Juvederm to it.
On December 13, 2005, Inamed and MRX entered into a merger termination agreement (the plan of
merger was previously executed on March 20, 2005), which had entitled MRX to collect $90M as breakup fees and an additional $481,985 in expense reimbursement fees. Inamed paid these fees in full on
the same day. The termination was brought about by a more attractive offer from Allergan (AGN-SP).
On December 20, 2005, Inamed announced that it had entered into a definitive agreement and plan of
merger with Allergan. Pursuant to the definitive merger agreement and consistent with the exchange
offer previously commenced by Allergan, Allergan will exchange for each outstanding common share of
Inamed either $84 in cash or 0.8498 of a share of Allergan common stock.
On December 20, 2005, Inamed also entered into a termination agreement with Ipsen as a result of
which Ipsen will take back its rights on the botulinum toxin product Reloxin(R), and Inamed and Ipsen will
release each other of all obligations under the distribution agreement regarding Reloxin(R).
Individual Analyst Opinions
POSITIVE RATINGS
Lazard – Buy ($95): Report Date: December 14, 2005: The analyst believes the current offer still does
not cover the value of IMDC, and is unlikely to be accepted. They state that due to recent performance
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of the Lap-Brand, breast implant business, strong outlook from Juvederm and Reloxin, IMDC has
experienced a material increase in value not reflected. The analyst believes that the firm will receive an
offer that is higher than the current offer by AGN.
NEUTRAL RATINGS
Cathay Financial - Neutral: Report Date: November 17, 2005: With the new offer from AGN, the
analyst feels the potential upside is more balanced with the downside. The company has already filed for
HSR approval, and the analyst does not anticipate any antitrust issues. The offer also contains a higher
cash component ($1.45 billion vs. $1.1 billion) than the MRX offer, and has lower integration risk.
CIBC – Sector Perform: Report Date: December 07, 2005: The analyst notes the proposed takeover
bid by Allergen provides a significant upside to the stock price, even though it is possible that FTC would
block the deal.
NEGATIVE RATINGS
None
DROPPED COVERAGE
Piper Jaffray – Report Date: November 2, 2005
Canaccord – Market Perform: Report Date: February 24, 2006
Copy Editor: Pushpanjali B.
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