Cosmetic surgery market stands firm

NEW YORK (CNNMoney.com) -- The current economic downturn could give a nip and tuck to the $10 billion cosmetic surgery market, but simple consumer vanity may outweigh recession fears.

"If [consumers] aren't feeling good about the finance and the economy, they'll want to feel good about how they look," said Anthony Vendetti, analyst for Maxim Group, who believes baby boomers will continue to spend big bucks searching for the ever-elusive Fountain of Youth.

If financial sacrifices have to made, he said, many luxury consumers will eschew that new fur coat or leather jacket in favor of breast implants or laser surgery. At the very least, they'll keep up their Botox and Restylane shots, he said.

Analysts believe the facial aesthetics market, which is dominated by Allergan Inc., (AGN) Medicis Pharmaceutical Corp. (MRX) and Artes Medical (ARTE), is the best-positioned to succeed in the face of a market downturn. Patients will continue getting regular shots of Botox and Restylane and the various dermal fillers because they won't want to go back to the way they looked before.

"You get used to the way you look, and that's a big deal for the demographic," said Jose Haresco, analyst for Merriman Curhan Ford. "It's an incredibly effective dynamic."

Haresco called Allergan "one of the best-run companies out there," armed with an effective franchise combining Botox and Juvederm. Allergan's products compete directly against Medicis' Restylane and Artes' ArteFill. Juvederm, Restylane and ArteFill are dermal fillers, while Botox is an injectable toxins that smooth wrinkles by temporarily paralyzing facial muscles.

Botox hit a bump on Feb. 8, when the Food and Drug Administration linked the product to side effects that caused deaths in some children being treated for cerebral palsy. In these cases, Botox, and a similar product from Solstice Neurosciences were being injected into the legs of children to calm spasticity. But the use is not FDA-approved and represents a small part of overall sales.

An Allergan spokeswoman said the children were receiving much larger doses of Botox than the adults who inject it into their faces for cosmetic purposes. Allergan and Solstice also said their products had not been proven to cause the side effects.

Allergan's stock has fallen 5% since the FDA announcement. But Aaron Gal, analyst for Sanford C. Bernstein, said the problems with the off-label usage are unlikely to have any lasting affect, unless the FDA decides to take further action.

The outlook isn't as firm for the breast implant market, owing to relatively high product costs and a crowded field.

Breast implant sales have surged dramatically since November, 2006, when the FDA lifted its 14-year ban on silicone. The material is generally considered more consistent and able to maintain a more normal-looking shape than saline, but it was outlawed in the U.S. because of rupturing concerns. The FDA later determined silicone was safe enough.

The implant market is dominated by Allergan and Mentor Corp. (MNT) Julie Schumacher Hoggatt, analyst for Noble Financial Group, said she rates Mentor's stock a "hold" because its breast implant procedure costs $7,000, which is prohibitive to many consumers, compared with cosmetic procedures that cost hundreds of dollars, she said.

Haresco of Merriman Curhan Ford recently downgraded his rating on Mentor's stock to "neutral" because of Allergan's dominance.

"While Mentor may ultimately benefit from a turnaround in the economy somewhere down the line, sequential quarterly losses in market share have convinced us that it will be difficult to out-muscle Allergan's marketing capabilities in the near-term," he wrote in a Feb. 1 note to investors.

Allergan's chief executive David Pyott expects implant sales for his company to grow up to $350 million in 2008, compared to $300 million in 2007, which was up 68% from the year before.

But sales are driven by the cost of the more expensive silicone implants, rather than volume, which has been decreasing year over year, said Haresco. But the higher prices should continue to drive sales through 2008, he said.

For consumers faced with a recession, the up-front cost is measured in thousands of dollars instead of hundreds, as with Botox. "I think that implant sales will continue to go up, and they are showing growth, but I believe that growth will be tempered by the economy and consumer confidence," said Vendetti of Maxim Group.

Laser surgery, which is dominated by companies such as Palomar Medical Technologies (PMTI), Cutera Inc., (CUTR) Syneron Medical (ELOS), Candela Lazer Corp., (CLZR) and Cynosure Inc. (CYNO), faces a tough challenge in the vanity industry because of the high price of the machines, which range from $40,000 to $200,000. Doctors often lease the machines instead of buying them. But the current credit crunch could make it more difficult for doctors with shaky finances to lease them.

Consumers will continue to spend money on laser treatments, said Vendetti of Maxim Group, though their spending habits will change. A recession might actually boost the popularity for low-cost procedures, he said, such as $150 for a hair removal, but consumers would less enthusiastic about spending $5,000 on a full-body cellulite treatment.

Many analysts are projecting that the recession could be over by 2009. Cosmetics companies had better hope they're right.

"If we go into a protracted recession, all bets are off, and even the low-cost laser procedures could get crimped," said Vendetti.