Allergan Inc. is considering selling its Lap-Band weight-loss unit amid rapidly declining sales and a swarm of negative publicity about patient deaths and a criminal investigation of one of its former customers.
Word of the potential sale came the same day Allergan disclosed that Lap-Band revenue fell for the fifth consecutive quarter. Sales from weight-loss products fell to $37.4 million during the third quarter, down 25% from last year and 53% from its peak four years ago.
It marks a major turnaround for a product that delivered annual sales of $296 million in 2008 for the Irvine company.
"We're exploring strategic options for the obesity intervention business, as the sales dynamics do not fit the profile of a high-growth company like Allergan," David E.I. Pyott, the company's chairman and chief executive, said Tuesday during a conference call with analysts. "Vigorous management of our portfolio businesses has always been integral to our strategy."
The Lap-Band is a silicone ring that is surgically implanted around the stomach to discourage patients from overeating and help them lose weight. Allergan, which also sells wrinkle-reducing Botox, eyelash lengthener Latisse and a host of ophthalmological pharmaceuticals, acquired the Lap-Band when it bought Santa Barbara-based Inamed in 2006.
The company said this year that it would no longer sell the device to a key customer, the surgery centers affiliated with the 1-800-GET-THIN ads that used to blanket Southern California freeway billboards, radio, television and the Internet.
That move came after the deaths of five patients after surgeries at the clinics and amid investigations by the Los Angeles Police Department and California's Department of Insurance. It also followed a warning by the Food and Drug Administration that the 1-800-GET-THIN ads were misleading because they failed to adequately disclose risks of the surgery.
The Times reported this month that the FBI and FDA were conducting a criminal investigation of the businesses affiliated with 1-800-GET-THIN and the brothers who lawsuits say own the company, Michael and Julian Omidi. An attorney for the Omidis said he did not expect the investigation would lead to criminal charges.
The big plunge in Lap-Band sales is among the reasons behind Allergan's decision to sell the unit, said Tim Lugo, an analyst who covers Allergan for William Blair & Co.
"I guess maybe we shouldn't be surprised, given the issues they've had," Lugo said. "It's a drag on growth. Any time you can sell off a unit that's a drag on growth, I think that would be a great idea."
Lap-Band sales have declined for several reasons, among them competing weight-loss surgical procedures. One surgery called sleeve gastrectomy has been growing in popularity, even though it is more invasive than the Lap-Band, requiring the stomach to be cut open and stapled so it holds less food. The procedure cannot be reversed, as the Lap-Band can.
Allergan said this month that it had withdrawn its application for approval to market the Lap-Band for overweight teens.
The company had sought permission from the FDA to promote Lap-Band surgeries for adolescents as young as 14, and it has been conducting clinical trials on teenage patients. A spokesman for Allergan said it pulled that government application this year as part of a routine evaluation of its business priorities.
Allergan released a statement Tuesday that said it was confident about the long-term prospects of its weight-loss business but believed "the best potential for future development and clinical advancement may exist outside the company."
In addition to Lap-Band, the company markets Orbera, a balloon that is inserted into the stomach and inflated to make patients feel full sooner and eat less.
Difficulties with the Lap-Band business come amid otherwise promising results for Allergan. The company said Tuesday that its total third-quarter revenue increased 6% to $1.4 billion. Botox sales were up 9% year over year to $432 million.
Analysts remain upbeat about Allergan, noting that the Lap-Band amounts to a fraction of the company's total sales. Botox sales continue to grow as the drug has proved to be an effective treatment for migraine headaches as well as wrinkles.
"I would definitely say it's one of the highest quality companies," Lugo said. "They have very good management. They're also not facing a lot of generic risk, which a lot of other companies are. Allergan, with Botox being their main driver of growth, is relatively immune to that right now."
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