Monday, December 11, 2006

With Silicone Back, Breast Implants Will Enlarge Bottom Line

INVESTOR'S BUSINESS DAILY

Posted 12/8/2006

Now that silicone breast implants are back on the U.S. market, the two remaining makers are expected to start raking in the profit.

On Nov. 17, nearly 15 years after the Food and Drug Administration asked companies to "voluntarily" stop marketing silicone implants, the agency again approved them for general use.

During the moratorium, only women needing reconstruction had access to silicone, while everyone else could get only saline implants. Now any woman over 22 can have silicone.

Many of the original firms that sold silicone implants are out of business. They lost billions in class-action lawsuits that alleged autoimmune diseases and cancer. The lawsuits also forced Dow Corning into bankruptcy.

All that survive are Mentor (MNT) of Santa Barbara, Calif., and Inamed, a unit of Botox maker Allergan (AGN) of Irvine, Calif. Both stand to enjoy strong profit in the next several years.

"Silicone implants should be more profitable with expected gross margins in the high 70% to low 80% ranges," said analyst Jayson Bedford, who follows Mentor for Raymond James. "That's better than the low 70% for saline."

Mentor and Inamed have had mild price wars in the past, but under former management teams. Industry watchers don't expect that again in the near term.

"Competition is at least a few years away in the silicone market," Bedford said. "Ultimately margins could come down, but with (increased) volume you'll see price stability."

Ronny Gal, who follows Allergan for Sanford C. Bernstein, says a pair of silicone implants will sell to doctors for about $1,750. That's about double the price of their saline counterparts. Women usually pay $6,000 to $10,000 for the surgery.

As part of the approval, the FDA is making the companies fund studies to monitor up to 40,000 women with the silicone implants for 10 years.

"These are not trivial costs," Gal said.

In Europe, where silicone implants stayed on the market, 90% of all implants are silicone.

"I don't see as complete a switch to silicone in the U.S., but I do think (silicone) will grow to about 65% of the market," Gal said. "It's due to residual concerns about the safety of silicone implants."

More risk-averse women have chosen saline because if it leaks into the body, it's just salt water. Saline, however, can harden or look wrinkly if underfilled.

Silicone is thought to look and feel more natural.

"Silicone also had shaping advantages, allowing you to better shape the breast the way you want it," said Dr. Anthony Griffin, who has practiced for 16 years and is board-certified in cosmetic and reconstructive surgery.

Fears Linger On

At his Beverly Hills, Calif., practice, he often hears women mention residual fears of silicone implants, he says.

"I see that every day when I consult with patients," Griffin said. "Since (silicone implants) were banned for so long, people still have a negative association with them — even though the studies show there's no risk of cancer or autoimmune diseases."

Griffin sees this changing with time and education. Most of his patients today are women in their 30s who've had children.

"Usually it's 'I breastfed and now they're all out of shape and I want them fixed and lifted,' " he said.

Consumer groups such as Ralph Nader's Public Citizen Health Research Group have objected to silicone implants since the 1980s, saying there isn't enough safety data.

But in June 1999, the Institute of Medicine, an independent federal research group, published a 400-page report that found no link between silicone implants and any major diseases. The study did cite risks of localized problems, such as leaking, hardening or developing scar tissue capsules.

An FDA report shortly afterward also pointed to leakage as a possible problem.

Mentor and Inamed make implants with thicker outer shells and barriers filled with thicker silicone gels. This, they say, will reduce ruptures. The FDA also is reviewing the companies' newer implants that use even thicker silicone gels.

Most analysts say the rivals' products are similar. "Largely interchangeable," Gal said.

Allergan and Mentor each control half the market. Last year, Allergan had breast implant sales of $231 million and Mentor had $217 million. Gal sees each of the companies bringing in about $240 million this year, about $370 million next year, and $500 million in 2008.

His estimates show the market more than doubling by 2008. Historically, the market has grown 8% to 10% a year.

"We'll see very little growth this year," Gal said. "Women held back from getting procedures, expecting silicone to become available. Now that (implants) are here, they'll likely get the procedures done. So 2007 will be a 'catch-up' year with 10% to 15% growth because of that."

He sees growth slowing to 12% in 2008 and 10% in 2009.

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