A Meltdown For Mentor Corp.

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After Mentor Corp. (MNT) warned of disappointing sales in the coming years, investors dumped the MemoryGel breast implant maker's stock on Apr. 20. Market players worried that the Santa Barbara company has lost ground to its rival Allergan's (AGN) Inamed implants, as the two companies battle for customers in a market whose dynamics have recently changed.



Women who want the silicone-filled products for cosmetic reasons no longer face the same regulatory hurdles to get them. But Mentor said Apr. 19 that its fiscal 2007 sales will range from $300 million to $302 million. Fiscal 2008 sales will then range between $340 million and $355 million. Analysts surveyed by Thomson Financial had estimated revenue of $309.3 million during fiscal 2007 and $371.88 million during fiscal 2008.



The optimism came after news of a sea change involving Mentor's main product. For years, silicone-filled breast implants could only be sold overseas or to women seeking breast reconstruction and revision surgery through clinical studies. But then in November, news hit that the Food and Drug Administration would allow women to get such breast implants for cosmetic reasons. Unlike earlier breast implant devices, today's implants have a thicker shell and a barrier layer designed to withstand more than 25 times the force of a normal mammogram without failure.



Silicone implants, which look and feel more realistic than their saline alternative, are used in most procedures outside the U.S., according to Morningstar. The investment research firm estimates that if silicone implants start replacing saline ones, the U.S. breast implant market could quickly double in value.



But the FDA also required in November that Mentor and Allergan take steps such as providing physician training and conducting a post-approval study for 10 years.



"During the fourth quarter, we saw sales growth slow in our breast aesthetics business as we began market roll-out of our MemoryGel post-approval study, which was initiated officially on February 15th 2007," Mentor CEO Joshua H. Levine said in a press release Apr. 19. "We believe this impact on our sales growth is temporary and future growth will be consistent with overall market rates in the next fiscal year."



Investors responded with pessimism. After the news Mentor's stock plunged 16.3% to $40.39 per share in afternoon trading on the New York Stock Exchange Apr. 20.



"Mentor appears to have lost market share to its chief breast implant rival, Allergan, due to their different strategies in filling post-approval studies required by the Food and Drug Administration," Morningstar analyst Julie Stralow said. She points out problems such as Mentor's requiring every patient receiving silicone implants to enroll in its study, while Allergan took a voluntary approach.



Raymond James analyst Jason Bedford downgraded Mentor's stock to market perform from outperform, explaining that the company's fiscal year is shaping up to be a second consecutive "transition year." The analyst feels the stock is fairly valued in the low to mid $40s.



In the meantime Mentor is pushing ahead with efforts to find other products to sell. Its research and development expenses will range between $34 million and $35 million in fiscal year 2007 and then between $47.6 million and $56.8 million during fiscal 2008. The company plans to increase its investment in programs including one in advanced trial stages that involves botulinum toxin, the same protein used in the widely known cosmetic treatment Botox. Mentor is also working on a program with the pharmaceutical company Genzyme to develop hyaluronic acid dermal fillers, which keep the skin on the face smooth and supple.



Stacy Trombino contributed to this report