Allergan Chief Has Injected New Energy Into Once-Lagging Firm
Allergan Inc. was suffering a midlife crisis three years ago. Sales and earnings were flat. Morale was poor. The Irvine-based specialty pharmaceutical company seemed like a good candidate for Botox, its anti-wrinkle and neuromuscular drug.
But in the last 2 1/2 years under Chief Executive David Pyott, the 50-year-old firm has been rejuvenated. Allergan’s stock, trading in the mid-$80 range, has jumped fivefold, far ahead of the blue-chip Standard & Poor’s 500 index and the drug industry overall. Operating profit increased by double-digit percentages both in 1998 and 1999, as have sales, which reached nearly $1.5 billion last year.
“Allergan has gone from being a minor, insignificant company to a player of growing stature,” said Steven Gerber, an analyst with CIBC World Markets in Los Angeles.
Allergan’s future is by no means secure. The mid-size pharmaceutical company is squaring off against industry giants that can pour billions of dollars into developing and marketing the next miracle treatment. Indeed, the company almost succumbed to a takeover bid four years ago.
But Pyott has taken a number of steps aimed at securing a niche for Allergan in the intensively competitive drug industry.
Shortly after taking the reins in January 1998, the 46-year-old Pyott, known to some as the “velvet hammer,” eliminated scores of administrative jobs and shuttered four factories. Allergan estimates the cuts will save the company more than $75 million through 2001.
He also stepped up spending for research and development and marketing, adding about 200 scientists and more than 300 people to the sales force. The company now has 6,165 workers, 1% more than when he began the job cuts. Those investments have helped boost sales of Botox and glaucoma drug Alphagan.
Like other biotech companies, Allergan is constantly in search of the next wonder drug. To enhance its pipeline of products, Pyott has formed alliances with a growing number of firms.
But Pyott and industry observers believe Allergan’s own star drug, Botox, and another potential blockbuster, glaucoma drug Lumigan, are keys to sustaining the company’s growth.
Botox comes from an unlikely source: botulinum, a lethal toxin generally associated with food poisoning. The substance can be used in biological warfare.
Allergan’s drug is a highly purified form of botulinum that has been approved for treating such neuromuscular disorders as crossed eyes and uncontrollable blinking.
But Botox’s ability to relax tense muscles throughout the body gives it great potential. For years, doctors have used Botox for migraines, to iron out wrinkles and for other treatments not yet approved by the Food and Drug Administration. Movie stars and corporate titans are even using it to stop excessive sweating.
Despite the limited approved uses, Botox sales surged 43.5% last year to $175.8 million, accounting for about 12% of the company’s total sales. In the first six months this year, sales climbed an additional 44%, and Allergan believes Botox could become its biggest seller once regulators approve more uses.
Pyott, a marketing guru and former head of the nutrition division at Novartis, thinks the drug might be able to treat up to 93 conditions, ranging from lower-back pain to cerebral palsy. He has tripled the amount budgeted for testing of the drug.
Botox is undergoing U.S. clinical trials for movement disorder, limb spasticity, migraines, cosmetic uses and excessive sweating, among other conditions. The drug cannot be marketed for specific treatments without FDA approval.
Industry observers also believe Botox is a hot prospect.
“There are certain drugs like penicillin that become legends,” said Dr. Mitchell Brin, director of movement disorders at the Mount Sinai School of Medicine in New York. “Botox is going to become a legend.”
Marc Goodman, a health-care analyst at Morgan Stanley Dean Witter in New York, believes Botox will be a windfall for Allergan for years to come. He predicts sales will jump from $240 million this year to $650 million in 2005, even though a competitor, Elan Corp., is hoping to obtain FDA approval soon for its own neurotoxin drug.
Although Lumigan has yet to appear on pharmacy shelves, it is drawing similar raves.
Lumigan, which drains fluid from the eye, appears to work as well as other glaucoma drugs on the market but with fewer side effects. Whereas Lumigan may irritate eyes in a small percentage of patients, other medications can induce shortness of breath and irregular heartbeat and, in rare instances, change patients’ eye color, said Dr. Harvey DuBiner, an Atlanta ophthalmologist who has conducted clinical studies on the drug.
“It has home-run potential,” DuBiner said.
Tim Coan, specialty pharmaceutical analyst with ING Barings in New York, expects the drug to generate sales of $380 million in 2004.
Allergan hopes to submit Lumigan for FDA approval this month. The agency usually issues final decisions in about a year.
To reduce the risks of drug development--only one in five drugs that begin clinical trials receives FDA approval--Pyott also has formed alliances with about 20 companies that are developing new products.
In March, Allergan invested $10 million in Ista Pharmaceuticals Inc. in Irvine, which is developing Vitrase, a treatment for bleeding in the eye and for diabetic retinopathy, the nation’s leading cause of adult blindness. Allergan has agreed to sell, market and distribute Vitrase worldwide, except in Mexico and Japan. Allergan would pay Ista a royalty on Vitrase sales abroad and split profit from U.S. sales.
Allergan has entered several co-marketing arrangements to boost sales of existing products. In July, for example, it forged an alliance with Johnson & Johnson’s Vistakon division, in which the companies would jointly market Johnson & Johnson’s Acuvue soft contact lenses and Allergan’s Complete, which cleans, disinfects and lubricates lenses.
“Because of our size as a small-to-mid-size pharmaceutical company, we have to look to partners to help us succeed,” Allergan’s Corporate Vice President George Lasezkay said. “We can’t do it all on our own.”
Strategically, Allergan is focusing on niche markets that might be too small to attract heavyweights, said Goodman, the Morgan Stanley analyst.
Pyott concurs. “We live in Lilliput,” he said. “In our rather shrunken-down world, the markets are rather small and we are huge and have the resources to have the most innovative pipeline.”
The company’s most fruitful union might be its marriage to Pyott, who draws praise from analysts. His soothing Scottish brogue and boyish charm notwithstanding, Pyott admits he isn’t afraid to wield a cudgel from time to time to get things done.
“I’m fairly relaxed and soft-spoken, but if I have to ask for something three times--whack!” he said. “It comes very softly, but you’ve known you’ve been hit.”
Allergan’s lack of girth has made it a tempting takeover target. In 1996, for instance, Pharmacia & Upjohn Inc. nearly acquired Allergan before the deal unraveled.
To discourage potential suitors, Pyott has made it a priority to boost the company’s stock, including instituting an incentive program that rewards executives when shares go up.
So far, the strategy seems to be paying off.
Allergan’s shares surged to a record $88 on Friday on the New York Stock Exchange before closing at $86.47, up $1.28. The stock has gained nearly 74% so far this year.
And the company appears to be safe for now from the clutches of deep-pocketed rivals, said Kenneth Abramowitz, an analyst with Sanford C. Bernstein in New York.
Pyott also has benefited handsomely from the incentive plan. Last year, his compensation package--salary, bonus, stock options and benefits--nearly doubled to more than $8.1 million.
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Healthy Stock
Allergan Inc. shares have increased five-fold since David Pyott became chief executive of the Irvine specialty pharmaceuticals company at the beginning of 1998.
SOURCE: Bloomberg News
Allergan Inc.:
Business: Eye care and specialty pharmaceutical products
Headquarters: Irvine
Employees: 6,165 ; OC employees: 1,800
Major products: Alphagan (glaucoma), Botox (muscular problems such as eye spasms, crossed eyes), Complete (contact lens cleaner and disinfectant)
Founded: 1950
Leadership: Chief Executive David Pyott
Operating Profit (millions)
95: $121.3
96: $180.0
97: $149.0
98: $217.6
99: $252.5
Sales (billions)
95: $1.07
96: $1.15
97: $1.15
98: $1.30
99: $1.45
Comparison with Industry Leaders
*--*
Company 1999 revenue (billions) 1. Merck & Co. $32.7 2. Pfizer Inc 27.5 3. Johnson & Johnson 27.5 4. Glaxo SmithKline 26.3 5. Aventis SA 21.8 * Allergan 1.5
*--*
SOURCES: Allergan Inc., Med Ad News, Bloomberg News
