Botox-Maker Waves Its Wand and Losses Magically Turn Into Profits

Last Updated Nov 4, 2010 4:57 PM EDT

Allergan (AGN) CEO David Pyott waved a magic wand over his Q3 2010 earnings report and a loss of $668.7 million on the bottom line of his income statement magically transformed into a profit of $909.7 million.

That loss was caused mostly by a $600 million settlement Allergan paid to the Department of Justice to settle allegations it promoted Botox for the unapproved use of migraine treatment, plus a bunch of other one-off expenses. So Allergan produced a set of through-the-looking glass "non-GAAP" income statements in parallel to their actual income statements, in which all that unpleasantness with the feds was backed out. Abracadabra! Allergan turns a profit even when it loses money.

Allergan is also probably losing money on its high-profile Latisse eyelash lengthener, which you've seen Brooke Shields advertising on TV. Latisse made only $21.7 million last quarter, down 0.6 percent. The company said it expect to sell just $90 million of Latisse this year -- a sum so small that the marketing and selling costs are probably greater than its revenues.

The reason Wall Street ignored Pyott's fictional income statements and ran his stock up to a five-year high of $74.53 this morning is because the $600 million Botox fine and the paltry revenues on Latisse are mere loss-leaders that will be more than paid for by future sales of Botox as a headache medicine -- which the FDA just approved -- and Latisse as a baldness cure. The company began a Phase I clinical trial of Latisse for baldness in August and cosmetic doctors are already trying out it in off-label settings on their patients.

You don't have to spend too much time poking around hair-loss bulletin boards to realize that there's a huge untapped market for a baldness cure. The existing meds -- McNeil's Rogaine and Merck (MRK)'s Propecia -- basically don't work. (Ignore those claims about 85 percent of men regrowing hair -- if the stuff worked in any meaningful way you wouldn't be surrounded by bald men.)

Botox and Latisse both illustrate a lesson that all managers should remember: it's good to always keep multiple irons in the fire.

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Image by Flickr user jennratonmort, CC.