Allergan: Listening to Customers has Led to Success

From humble beginnings to a global presence.

BY JERRY HELZNER, SENIOR EDITOR

ALLERGAN CEO AND CHAIRMAN DAVID E.I. PYOTT

The year was 1950 and entrepreneurial Los Angeles pharmacist Gavin Herbert Sr. had to decide which of two business ideas he would pursue. One idea was a remedy for thumb-sucking that a pediatrician friend was developing. The other was a new type of anti-allergy nose drop that was brought to him by another friend, chemist Stanley Bly. Herbert assessed the potential of each product and put his money behind the nose drop.

The two entrepreneurs named the formulation "Allergan," a combination of the words "allergy" and "neoantergan," a principal ingredient of the new product. Late in 1950, the pair introduced Allergan to the local market.

That might have been the beginning of a minor business success story, but as would be repeated time and again over the decades to come, the then-fledgling company was responsive to the suggestions of its customers. In this instance, an ophthalmologist who knew Herbert and Bly suggested reformulating the product as an eye drop for allergic conjunctivitis, which at that time was a common and difficult-to-treat ocular condition.

The Early Years

Though Allergan Pharmaceuticals’ 1950 sales totaled only slightly more than $4,000, Herbert’s business acumen and Bly’s ability to develop new products proved to be a successful combination. By 1953, the company had launched two more products, Cortefrin, the first cortisone eye drop, and Prednefrin, an ophthalmic steroid decongestant that was effective in treating inflammation.

At about the same time another door opened for the young company when the FDA decreed that ophthalmic preparations had to be sterile. This ruling ended the market for drugstore formulations and created an opportunity for companies that could invest in the more sophisticated equipment required to produce sterile ophthalmic products on a large scale. As this article will describe, Allergan was one of only a few companies with the vision to grasp that early opportunity and grow to have a global presence in ophthalmic pharmaceuticals.

Though Allergan’s product line has evolved over the years, most notably into medical aesthetics, the company�s commitment to its roots as a developer, manufacturer and marketer of high-quality ophthalmic formulations has always remained constant. This longstanding commitment is reflected today through such established ophthalmic products as the glaucoma medications Lumigan (bimatoprost 0.03%) and Alphagan P (brimonidine tartrate 0.1% and 0.15%), the anti-infective Zymar (gatifloxacin 0.3%), the NSAIDs Acular (ketorolac tromethamine 0.5%) and Acular LS (ketorolac tromethamine 0.4%), the dry eye treatment Restasis (cyclosporine 0.05%), the anti-allergens Alocril (nedocromil sodium 2%) and Elestat (epinastine HCI 0.05% co-promoted in the United States with Inspire Pharmaceuticals), and the multiproduct Refresh brand line of artificial tears.

The Path to Success

Allergan became modestly profitable in only its second year of operation but it was not until Gavin Herbert Sr. turned over the reins of the company to his 27-year-old son, Gavin Herbert Jr., in the late 1950s that a real blueprint for success was created. Recognizing that Allergan had limited resources compared to the pharmaceutical giants, the younger Herbert focused exclusively on ophthalmic drugs. He established lasting relationships with ophthalmologists, determined their most critical needs, and put all company research dollars into those key treatment areas. The stunning success in the early 1960s of Blephamide (sulfacetamide prednisolone), Allergan’s new treatment for blepharitis, won the confidence of ophthalmologists around the country and earned the company a national reputation for delivering innovative ophthalmic products.

Gavin Herbert Jr.’s long stewardship of Allergan, which continued into the 1990s, was always marked by an extensive outreach program to key customers.

"I think he knows every ophthalmologist in the country," a member of the Allergan board of directors once remarked in amazement.

As the decades passed, Allergan continued on a growth path by gradually expanding its sales force, research capabilities and international presence. In 1969, Allergan made its first move to diversify, using its experience with topical steroids to develop products that dermatologists could prescribe for skin conditions. Allergan also established itself with the optometric community by becoming a major marketer of contact lens care products.

Allergan is Acquired

By 1980, Allergan had approximately $100 million in annual sales, a listing on the New York Stock Exchange and occupied such an attractive niche that SmithKline acquired the company for $260 million. SmithKline wisely allowed Allergan to operate as a nearly autonomous subsidiary, with the parent company providing ample financial resources that helped Allergan to continue to grow strongly throughout the 1980s.

However, despite eventually recording approximately $750 million in annual sales and contributing excellent profits to its parent, Allergan remained a niche company that simply could not deliver the blockbuster drugs that SmithKline was seeking. SmithKline made Allergan independent again in 1989 by spinning it off. The Allergan management team, which had largely stayed in place during the SmithKline years, barely missed a beat. By the time Gavin Herbert Jr. retired as chairman of the board in 1994, Allergan was on the verge of hitting $1 billion in annual sales.

A New Focus

Thanks in large measure to the appointment of David E. I. Pyott, as president and CEO in 1998, the pace of evolutionary change has speeded up considerably at Allergan in recent years.

Pyott, a European-educated native of Scotland, had previously served as the head of the Novartis Nutrition Division and a member of the Novartis executive committee. He brought a wealth of marketing and consumer product knowledge to Allergan. However, he had no experience in ophthalmic pharmaceuticals. He jokes that when he first came to Allergan he "couldn’t even spell ophthalmology." That did not stop him from immediately shaking up a company that he felt had become complacent.

"One of the things I wanted to set up here was a company that would act swiftly and decisively, re-creating a fast, small-company culture with a crystal-clear strategy," says Pyott, who is now 53.

Pyott’s vision of the "New Allergan" meant going back to the company’s entrepreneurial roots while breaking down some of the corporate bureaucracy that had been built up over the years. By the year 2000, Pyott had brought a new focus to Allergan, delivered sales approaching $1.5 billion and saw the company’s stock price triple.

In the new millennium, Pyott has continued to move decisively. In 2002, Allergan spun off Advanced Medical Optics, its ophthalmic surgical business that it had acquired during the 1980s. This move allowed the company to allot additional resources to the growth of Botox (botulinum toxin type A), the single most successful product in Allergan’s history.

Approved by the FDA in 1989 as a therapeutic for the treatment of strabismus and blepharospasm, Botox has also proved effective for other neuromuscular conditions and, most notably, as a cosmetic enhancement treatment for the removal of frown lines, an indication for which Botox was approved in 1992. Botox for the first time surpassed the $1 billion mark in annual sales in 2006.

More Growth Expected

The company continued to build its presence in cosmetic enhancement and facial aesthetics in 2006 with the $3 billion acquisition of Inamed, a maker of breast implants and dermal fillers. Later in the year, Allergan reached an agreement to purchase Groupe Corneal Laboratoires, a manufacturer of dermal fillers — a deal that was finalized in early 2007. The current range of businesses is working well for Allergan. Overall, the company had sales of just over $3 billion in 2006 and fully diluted earnings of $3.66 per share, up from $2.3 billion in sales and $3.38 a share in profits in the previous year.

With Wall Street analysts expecting another record year for Allergan in 2007, estimating sales of approximately $3.5 billion and profits in the neighborhood of $4.30 per share Ophthalmology Management thought it a good time to get together with Allergan CEO and Chairman Pyott to get his take on the company’s business philosophy, strategy and outlook for future progress.

Lumigan is a leading glaucoma medication.

Q. How have the qualities, values and expertise that guided Allergan’s founders been continued in the company down to the present day? How are these attributes important to the continued success and progress of the company?

A. Allergan has more than a half-century of commitment to improving people’s lives through science-based, innovative solutions that satisfy unmet medical needs, developing and commercializing products in the areas of ophthalmology, neurosciences, medical dermatology, medical aesthetics, obesity intervention and other specialty markets.

Our company’s founders listened to physicians and developed products that addressed their needs, a theme that has repeated itself time and time again over Allergan’s history. To this day, Gavin Herbert Jr. maintains strong relationships with physicians. We have much to learn from the physicians on the front line with patients and value the time we spend in their company.

Allergan has demonstrated innovation and leadership in ophthalmic therapeutics with a long list of "firsts" starting in the 1950s with Prednefrin (prednisolone acetate), the first ophthalmic steroid decongestant. We have continued to produce outstanding results by addressing unmet medical needs — and in several instances, creating major new markets — such as Botox Cosmetic, the first approved botulinum toxin for cosmetic use in the world, now approved in more than 75 countries for 20 different indications, Restasis, the first prescription dry eye therapeutic product in the world, and Lumigan, the first prostamide approved for IOP reduction in patients with open-angle glaucoma.

We are carrying our history of innovation and achievement forward by developing our pipeline of new therapeutics and technologies in the areas of retinal disease, glaucoma, neuropathic pain, urology and gastroenterology, as well as through current partnerships and in medical aesthetics through our recent acquisition of Inamed Corporation.

Restasis represented a breakthrough in the treatment of dry eye.

Q. What is Allergan’s stated Mission and Vision?

A. Quite simply, our vision is to dive deeper and reach further in all that we do.

Allergan is a technology-driven healthcare company with a portfolio representing a unique blend of specialty businesses comprised of pharmaceutical and medical device offerings. We have a vision for a better way of doing business and an unwavering commitment to helping improve quality of life.

We have achieved leadership by developing deep scientific and medical expertise in select specialties and have adopted an innovative approach to discovering and developing new medicines and technologies that address unmet medical needs. We follow our research and development (R&D) into specialty markets and work closely with the physicians who advise us to help the patients they serve. We listen, and we offer advice and counsel every step of the way.

Q. How and why has the focus of the company changed in recent years and what events were key in making this transition? How much has the advent of Botox impacted the resources allocated to the eye care business?

A. Allergan is maintaining its unwavering commitment to ophthalmology and our core specialty pharmaceutical platforms while following our pipeline into other specialties.

We significantly expanded our medical aesthetics franchise with the recent acquisition of Inamed. With the acquisition and the success of all of our products, Allergan is able to invest incrementally in R&D, which of course includes our major R&D programs in ophthalmology. In 2006, Allergan’s expenditures on R&D, adjusted for certain items, principally a large in-process R&D charge for the Inamed acquisition, increased by 24% to $476 million, representing 16% of sales.

These increases in R&D investments in ophthalmology have led Allergan to having more branded glaucoma products than any other company in the global market and also an extensive research and development programs for retinal therapeutics than any other company.

Q. Specifically, why was AMO spun off? Was it a question of allocating resources, being more focused on specialty pharmaceuticals or a combination of reasons? How has the AMO spinoff affected the progress of Allergan?

A. AMO was created in 2002 with the firm belief that Allergan and AMO, as industry leaders in their respective fields of specialty pharmaceuticals and optical medical devices, would stimulate innovation and growth in each of their fields. The divestiture meant that AMO businesses would no longer compete for financial resources and would enjoy new freedom to expand through greater investments in new technologies and in sales and marketing.

AMO has executed several significant transactions that would not have been possible under Allergan’s ownership: the acquisition of the Pharmacia ophthalmic surgical businesses, the merger with Visx and most recently the acquisition of IntraLase.

In the years since the AMO divestiture, Allergan has continued to experience strong growth by maintaining our strategic focus on high-growth segments of the ophthalmology market where unmet needs are significant and has in fact been the fastest growing global eye care company for the last 5 years.¹ In the fourth quarter of 2006, we achieved record U.S. market share.

Q. Please provide a brief description of Allergan’s key eyecare products that are used or recommended by ophthalmologists? How are these products faring in an increasingly competitive marketplace?

A. Allergan’s offers eyecare products in a number of areas. Treatments for glaucoma include Lumigan ophthalmic solution, the Alphagan P franchise and, outside of the United States, Ganfort, a fixed combination of Lumigan and timolol, and Combigan (brimonidine/timolol).

In 2006, sales of Lumigan increased by 22% to $328 million, establishing its position as the third largest glaucoma drug in the world by value.¹ The Alphagan P franchise, which includes Alphagan P and Alphagan P 0.1%, is the number one branded single-agent adjunct to a lipid², with products indicated for the lowering of IOP in patients with open-angle glaucoma or ocular hypertension.

Treatments for dry eye, where Allergan is by far the market share leader in the world as well as the United States, include Restasis ophthalmic emulsion and non-prescription artificial tear brands such as the Refresh Brand and Optive Lubricant Eye Drops. Restasis remains the first and only treatment available in the world for chronic dry eye disease, and has become a pivotal therapy in the management of this serious condition. Sales of Restasis increased by 42% to $270 million in 2006. Recently, Allergan launched Optive, a next-generation artificial tear that leverages new technology to create a dual-action formulation to provide both lubrication and osmoprotection and thus long-lasting relief from dry eye symptoms.

Recently launched Optive is a next-generation artificial tear.

Treatments for infection and pain management include Zymar ophthalmic solution and Acular/Acular LS. Zymar, the first FDA-approved fourth-generation ophthalmic fluoroquinolone indicated for the treatment of bacterial conjunctivitis, is the number one prescribed fluoroquinolone by U.S. ophthalmologists.³ In a market that has seen the entry of two competitors, the Acular franchise, including Acular LS, remains the number one prescribed NSAID among U.S. ophthalmologists.⁴

Q. Looking ahead, can you discuss the eyecare products now in the pipeline that hold potential for the future. When might some of these products be commercially available?

A. The long-term vibrancy of our business will be driven by the discovery, development and approval of innovative new medicines, new devices and new procedures, with a focus on the needs of physicians and their patients. Therefore, a major focus of senior management is to continue to advance and build out Allergan’s R&D pipeline. Allergan has a rich and promising early stage pipeline of new drugs and innovative new technologies including novel treatments for retinal diseases, drugs for glaucoma and dry eye disease, and the sustained-release drug-delivery technology acquired from Oculex.

Our sustained-release drug-delivery technology is a bioerodable implant that has enormous potential for helping to deliver medications to the targeted disease site at the back of the eye. Phase 3 clinical studies were initiated in 2004 with Posurdex, a proprietary formulation of dexamethasone delivered by this system, for diabetic macular edema and non-diabetic macular edema as well as for retinal vein occlusion. We expect this device to be used to deliver a number of compounds such as tyrosine kinase inhibitors as well as RNAi. We are also in collaboration with Sirna Therapeutics to use RNAi-based technology to investigate other targets as new treatments in age-related macular degeneration (AMD).

In addition, Allergan is currently supporting the world’s longest phase 3 clinical trial for the treatment of glaucoma with an oral compound called memantine, approved in the United States for Alzheimer’s disease and marketed as Namenda. If proven to work, memantine, in conjunction with topical agents, would be the first and only oral medication that directly protects the optic nerve in the treatment of glaucoma and thus transform glaucoma treatment.

Allergan also has Combigan, a brimonidine/timolol combination therapy, under review in the United States. We have already received approvals to market Combigan in Europe, Canada, Brazil and Australia and are very committed to pursuing an approval of Combigan in the United States. In late December, we received an approvable letter from the FDA and are working with the agency to address any remaining issues.

Q. Given the aging of the baby boomers and other favorable demographics, what do you see as the growth potential for your ophthalmic pharmaceutical business? What has been the recent annual growth rate for this business?

A. Allergan is excited about the future of the ophthalmic segment of our business and we are making significant investments in eyecare research and development projects with high market potential. In the last few years, Allergan has been growing sales every year around the mid teens, which is about twice the growth rate of the global market.

A major strategic focus for us right now is on back-of-the-eye diseases such as macular edema, diabetic retinopathy and AMD. Enormous progress will be made in treating these diseases over the next decade, and Allergan will be in the forefront of these advances.

Meanwhile, the market for ophthalmics (both eyecare pharmaceuticals and over-the-counter eye care products) is approximately $9 billion and is growing at a rate of approximately 7% annually, according to IMS data. Our market share is approximately 16%. In 2006, we achieved more than $1.5 billion in sales of eyecare pharmaceuticals.

Q. Is the Allergan ophthalmic pharmaceutical portfolio generally the same around the world or does the portfolio vary from country to country?

A. Our extensive ophthalmic portfolio is worldwide in scope, such that 2006 was our fifth straight year as the fastest growing global ophthalmic pharmaceutical company, growing sales by 16% in a market expanding by 7%. Our global market share gains are being driven by Restasis, Lumigan, Combigan, Zymar, Elestat for ocular allergy and the artificial tear lines. Regional differences are that Combigan and Ganfort are not available in the United States, and that Restasis is not available in Europe, Canada or Australia.

Allergan at a Glance

History: Founded in 1950 by entrepreneurial pharmacist Gavin Herbert Sr. and chemist Stanley Bly, Allergan’s initial success came from an anti-allergy eye drop. By the mid 1950s, the company had developed the capability to produce sterile ophthalmic formulations on a large scale. Later, Allergan evolved into a broad-based provider of ophthalmic pharmaceuticals, skin care products and surgical devices. In 2002, the company spun off American Medical Optics (ophthalmic surgical) and focused its attention on ophthalmic pharmaceuticals, medical dermatology and Botox, which has both therapeutic and aesthetic indications. Primary businesses: Ophthalmology (eyecare pharmaceuticals); neurosciences (Botox); medical dermatology; obesity intervention and medical aesthetics (breast implants, dermal fillers, Botox cosmetic and physician-dispensed skin care treatments). Key U.S. ophthalmic products: Alphagan, Alphagan P and Lumigan for glaucoma, Restasis for dry eye, Acular and Acular LS NSAIDs, Alocril and Elestat (co-promoted) anti-allergy medications, Zymar fourth-generation fluoroquinolone, Refresh brand and Optive artificial tears. Sales: Wall Street analysts are estimating 2007 sales at approximately $3.5 billion, up from $3.01 billion in 2006. In 2006, ophthalmic pharmaceuticals accounted for just over half of total company revenues, with ophthalmic sales showing a year-over-year growth rate of almost 16%. Headquarters: Irvine, Calif. Employees: More than 6,500 CEO: David E. I. Pyott (since 1998) Stock listed: New York Stock Exchange (symbol AGN) Recent stock price range: $105-$123

Q. What percentage of Allergan eyecare revenues comes from the United States and what percentage is international?

A. Allergan does not report regional sales by business, but as a corporation 33% of our 2006 sales were outside the United States.

Q. Internationally, which geographic areas offer the greatest opportunities for growth in Allergan’s eyecare products?

A. Many of our current and development-stage eyecare products are used for diseases of the elderly. Therefore, the aging population offers a global opportunity. Especially interesting are the emerging countries where life expectancy will be significantly improving over time and creating a greater need for treatments for these conditions.

Q. In what ways does Allergan stay in touch with ophthalmologists and the needs of the ophthalmology community?

A. Allergan’s commitment to eye care means we are continually looking to the future. We regularly meet with leading ophthalmologists for feedback on products and programs. In 2006, our company hosted several consultant meetings with leading ophthalmologists and fellows for their input and perspectives.

In addition to these programs, we provide industry-leading continuing medical education programs and public awareness efforts. We employ the industry’s largest ophthalmic sales force worldwide outside of Japan, where we have out-licensed our ophthalmic products to local Japanese companies, which enables us to implement operational strategies that provide the greatest value for physicians and their patients.

Lastly, to keep our R&D employees connected with the most-up-to-date and cutting-edge data and research available, we sponsor the Irving H. Leopold Lecture Series. The lecture series brings accomplished thought leaders and Allergan employees together for presentations and discussion.

Q. Allergan is recognized as a major contributor to the advancement of eye care around the world. In what ways does the company advance the profession and provide assistance in providing eye care where it is needed?

A. Allergan is committed to supporting eye disease research, medical education and public awareness efforts in partnership with research institutions, professional and patient organizations to enhance the care of patients with eye disease.

In 2006 Allergan established the Horizon Grant Program to advance the practice of ophthalmology by supporting academic medical institution fellowship programs and recognizing the important contributions of fellows in ophthalmology research and development. Over the next two years, the Allergan Horizon Grant Program will provide approximately 20 fellowship awards totaling $1 million to academic medical institutions to support fellows seeking careers in academic medicine. These awards will fund fellowship programs that conduct clinical research in the diagnosis or pharmacological treatment of glaucoma, corneal and retinal diseases.

In 2006, Allergan actively supported the American Academy of Ophthalmology and through the Allergan Foundation supported the Pan-American Ophthalmology Foundation and funded the International Council of Ophthalmology’s Resident Program Directors Course in Cairo, Egypt. The goals of the Allergan Foundation are, furthermore, to support the communities in which we operate offices and plants, making charitable contributions to the Arts, Community, Education and Health.

Our educational efforts extend beyond the physician community. In 2006, through the Allergan Foundation, support was provided to groups like the Glaucoma Foundation, Prevent Blindness America and the Glaucoma Research Foundation for educational endeavors and patient outreach.

Q. Given that many companies, including biotech firms, are entering the eyecare arena, how does Allergan intend to maintain and strengthen its competitive position?

A. Allergan will continue to strengthen our competitive position by heavily investing in R&D in disease areas where unmet needs are significant. This includes work in retinal diseases, where we have a broad product pipeline, with programs such as Posurdex for retinal vein occlusion and diabetic macular edema. We are currently working on putting other compounds in this drug-delivery device, such as tyrosine kinase inhibitors, anti-VEGF compounds and an RNAi program, in collaboration with Sirna that also may be useful in AMD. In addition, we have many innovative programs in our historical areas of strength in glaucoma and dry eye therapeutics. As ophthalmology is Allergan’s largest and most important business, it always receives particular attention and focus. More competition gives us the motivation to be creative and work harder.

Beyond this, we are a unique company in this industry, in ways that give us some significant advantages. We combine the lean operating models and high-growth characteristics of the specialty model, the diversified product portfolio and global integrated R&D capabilities of much larger pharmaceutical companies, and the strong pipeline characteristics of biotech. In short, we are large enough to command sufficient resources, but small enough for nimble execution. This is all a great advantage in an industry that is rapidly evolving and changing.

Q. Will the eyecare business grow primarily organically or is Allergan interested in acquiring or partnering with companies that could provide complementary expertise/products?

A. First and foremost, our progress has been due to the success of Allergan’s internal discovery and development capabilities. We are, however, pleased to supplement this internal technology with external acquisitions as well as technology licenses. Historically, Allergan has been selective about acquisitions. We consider opportunities when they offer high-market growth, potential and innovation — in line with our strategic business standards — and will continue to seek technology partnerships that support and expand our leadership position in ophthalmology.

Q. Where do you envision Allergan’s eyecare business 5 years from now, in terms of revenues, product line and future initiatives?

A. We are excited about the future of the ophthalmic segment of our business and are making significant investments in eyecare research and development projects with high market potential. A major strategic focus currently is on back-of-the-eye diseases. We have the broadest product pipeline of any company now working in the retinal area and intend to build on our position as the second largest ophthalmic pharmaceutical company in the world.

Q. Allergan has expressed an interest in developing a therapy for wet AMD, an area where a great deal of development activity is currently going on. What is the company’s strategy?

A. As I noted, we have made a significant investment in our new drug-delivery technology, which has enormous potential for helping deliver medications to the targeted disease site at the back of the eye to treat such disabling diseases as AMD. This approach is much different than current therapy, which requires oftentimes painful, frequent injections to the back of the eye. We expect our sustained-release drug-delivery platform to be used to deliver a number of retina compounds, including the tyrosine kinase inhibitors that can inhibit the development and growth of abnormal blood vessels in the eye — the leading cause of severe vision loss in AMD.

Q. Would you like to mention any other areas of the business that our ophthalmologist readers may find interesting?

A. In addition to our company’s long-term commitment to scientific innovation and clinical development in ophthalmology, we are equally committed to growing our other core specialty areas, including medical aesthetics — an area that interests a growing number of ophthalmologists seeking to expand their practice through facial aesthetics. OM

References

1. Intercontinental Medical Statistics (IMS): (from 48 countries), Q3 2006, in constant exchange, for the trailing 12 months, as of September 2006

2. Verispan LLC. Physician Drug and Diagnosis Audit. Yardley, Pa: Verispan LLC; 2006.

3. Verispan (from the United States only), in U.S. dollars, for the trailing 12 months, as of November 2006.

4. Verispan (from the United States only), in U.S. dollars, for the trailing 12 months, as of April 2006.