Allergan plc Ordinary Shares(NYSE:AGN)

Stories of Companies and People Behind – AGN

If I ask you about the company of Allergan, Inc., you might say “no, I don’t know this company”; if I ask you about the facial aesthetic product Botox, you would most likely say “of course I do, this blockbuster has swept over the market, gathered windfall with few competitors”. Botox was launched in 2002 and has been promoted with tremendous success by Allergan, Inc., which is focused on ophthalmology, and is ranked No.2 in the global arena.

You might be surprised that an ophthalmological company became the winner in the aesthetic industry. Well, there are things that have been happened, and there are things that are going to happen in this world, it doesn’t matter how bizarre they may seem to you, the key is that smart people know why and how.

The key player is David Pyott, the current CEO of Allergan, Inc.. However, I will not talk about him right away. Let’s look back into the glorious history of this company.

In 1948, a small drugstore owner Gavin S. Herbert, Sr. had an idea of starting an ophthalmologic business, he convinced his friend Stanley Bly, who only had a Bachelor’s Degree in Chemistry to help him invent eye drops, and so did Stanley. The first product is an antihistamine eye drop, which was named Allergan. The owner’s son, Gavin S. Herbert, Jr. was the only salesperson in the company. Government regulation was far less restrictive at that time, if you had ambition in the Healthcare industry, it was a really good time to enter the field.

Gavin S. Herbert, Jr. is a great business man. He led this company forward, reaching a sales revenue of $100,000 in 1957, then $1 million in 1962, $10million in 1970, $100 million in 1980 and $1 billion in 1995.  By that time, the company had gone public, and had two main segments: specialty pharmaceuticals and medical devices. Its main business line was selling eye care pharmaceuticals, skin care and Botox (which was used to treat a rare eye muscular disorder at that time), Allergan also had ophthalmic surgical and contact lens care under medical devices segment, which contributed a little bit more than half of its revenue in 1995.

Between 1995 and 1997, the company was stagnant. The growing momentum of its revenue had stalled for 3 years. The impact on contact lens was significant, and the management acted controversially in dealing with this situation. In 1992, Allergan sold the North and South American division. The following year, Allergan sold its contact lens business outside of the Americas. However, in 1994, Allergan acquired the Ioptex Research worldwide intraocular lens product line. In the annual report for the fiscal year of 1997, the company claimed that the Contact Lens Care business continued to be impacted by trends in the contact lens and lens care marketplace, such trends included technological and medical advances of surgical techniques used to correct vision impairment. One-bottle chemical disinfection systems have gained popularity among soft contact lens wearers instead of peroxide-based lens care products which have historically been Allergan’s strongest family of lens care products.

Huge problems threatened Allergan, and its leader Gavin S. Herbert, Jr. was getting old. He wanted to find a stellar CEO who could help him, overcome the company’s setbacks.

David Pyott stepped up to the plate. Over the next 13 years, he would prove his extraordinary leadership. By 2010, he had increased revenue to $4.5 billion, with a 21% compound revenue growth and the product Botox became legend. However, back at 1997, he needed to convince the key decision maker Gavin S. Herbert, Jr. to pick him as CEO. He humbly described leadership as not “a call to self-importance”, but the “opportunity to serve”, however, it is always the “opportunity to serve” that is hardest.

David is another example of a CEO with a lawyer’s education. He holds a Diploma in German and European Law from the Europa Institute at the University of Amsterdam, a Master of Arts degree from the University of Edinburgh, and a Master of Business Administration degree from the London Business School. He had worked in various roles in Malaysia, Singapore, Austria, Spain, the United States and Switzerland. When Gavin Herbert, Jr. was asked what impressed him to appoint David as CEO, he mentioned two merits: diversified experience and outstanding communication skill.

Of course David’s skills are more than just diversification and communication. His long term vision, fundamental strategy, market oriented tactics and his influential power make him a great leader. His capability to demonstrate himself by first-rate communication skill to get the opportunity to be CEO is a very good case study for those who have the potential and willingness to be CEOs.

Probably quite a lot of people would say that he or she could be a good CEO if given the “opportunity to serve”, however hardly anybody would confidently say that he or she can be a good surgeon or lawyer if given the “opportunity to serve” in those careers. Sounds funny. However, if you think deeply, you can identify the difference, and you know the most difficult thing in the world seems to be the simplest, and vice versa. Qualifications of surgeon or lawyer can be tested by board exams, while qualification of CEO is very hard to be tested just by several exams.

So David Pyott successfully took the CEO role in 1998. The situation he was faced with was tough and at that time, pretty complicated. It’s like turning a piece of granite into fine sculpture. The artist has the audacity and confidence to make the cuts. In a company, the cut means expenditure of huge resources, and even means laying off employees. Just as an artist knows the final image of his work, an effective CEO knows the outcome of his operation.  What did David do?

David focused on two things. First, he increased the company’s sales force by 100 people per year and trained them to be the most knowledgeable advisors to physicians; second, he enhanced R&D to stock its pipeline with plenty of new potential products for FDA submission. These are the exact same ends that Jonah, CEO of Medicis sought. In the very beginning period, David also completed the spin-off of Allergan’s contact lens business line. Although this new division brought in 50% of the company’s revenue at that time, David deemed it was not a good fit for Allergan any more. How did he make such an accurate judgment then? He put in this way, “my only advice is that if you are small like we are, then specialize fiercely where you have a focused area of technology and where you feel, over time, you can be world class,” once the unique know-how of “peroxide lenses” became outdated, David cut it ruthlessly.

David has said, “specialize fiercely where you have a focused area of technology”, and its ophthalmology has always been Allergan’s manifestation of that belief. He has never been stingy in this area, and makes sure Allergan has plenty of eye care products, as well as launching new drugs to the market each year.

The legendary story of Botox is applicable to the second part of his business philosophy, “specialize fiercely where you feel, over time, you can be world class”.  It’s simple words, just like these, that separate the big players from the amateurs.  When these great people made things happen, the results would become so common that people cannot sense how difficult the it was to put these simple ideas into practice and products.  Think about Steve Job’s simple idea on transferring technology for human use, his dream changed the world.

So did David with his world class pursuit of “applying and marketing Botox into aesthetic use”. Let’s talk about the interesting story of Botox.

Botox is a poison, technically called botulinum toxin, which is secreted by a bacteria that commonly exists in canned sausage. It’s so toxic that four kilograms of Botox can kill the whole world population. Allergan acquired the manufacturing technology, as well as FDA approval of Botox for treating strabismus and blepharospasm early in 1989. The original purpose of Botox was to treat the eyes because strabismus is a muscular disorder of the eyes. An injection of botulinum into patient’s eyelids helped relieve their symptoms. Now you know why this aesthetic product was born in an ophthalmologic company.

Researchers had already noticed that while botulinum relaxed eye muscles, there was an interesting side effect – any wrinkles on the eyelid disappeared. Several studies were conducted and published in the early 1980s. Nobody in Allergan paid any attention to the potential value of this side effect, because the management was busy developing other medical applications of Botox.

Things changed after David assumed the role of CEO in Jan 1998.  He looked beyond the focus of ophthalmologic market to the much broader aesthetic market. He felt that over time, “wrinkle treatment” would be his “world class” opportunity.

But, wait a minute, was he insane? Botox is so so toxic! How could anyone think of applying it to the general population? In addition, the sales force was trained to pursue ophthalmologists, how could it excel out in the aesthetic marketing?

There was no doubt for this intrepid entrepreneur! His determination was never swayed by “toxic” concerns because his company had already accumulated 10 years of experience and the confidence that it could toxin safely. Marketing, which has always been his strength, had been the key to success in the ophthalmological arena and also would be applied to aesthetic industry.

In 2000, phase 3 clinical trial went smoothly, in Apr 2002, Botox was approved by the FDA for cosmetic use. A well-planned advertising campaign started immediately afterwards. Revenue from Botox grew at an average of 20% until 2008. Before then, the total annual revenue had already hit $1 billion. Botox became so popular that people often forgot that it’s a poison. There aren’t many blockbusters in the world, Botox is one of them.

More recently, David caught another big opportunity – Restasis (Cyclosporine), a drug originally designed to treat glaucoma. Patients realized it was lengthening their eyelashes. David Pyott sensed it could be another Botox potentially, even bigger due to the possibility to prevent and treat “baldness”. It goes without saying that such a product would be huge.  Performance of Restasis in recent years has also shown a better growth pattern than that of Botox. In 2005, revenue was $191 million; in 2010 it had more than tripled to $620.5 million. When considering its strength, keep in mind that these great profits have been made without having been introduced to the market of “baldness” yet.

In 2006, David made a bold decision to acquire rival company named Inamed in a $3.2 billion cash-stock deal. This happened even though Inamed had already signed a merger agreement with Medicis Pharmaceutical (NYSE: MRX), another competitor in the aesthetic market. Evidently, it was a big strategic movement. However, reflecting on his own words of “focus and world class probability”, was he thinking that Allergan could be a world class provider of breast aesthetic, dermal filler, and lap band just because he had obtained these products from Inamed? The performance of its medical device segment has not been so satisfying, $837.4 million in 2008, $763.8 million in 2009 and $846.2 million in 2010.

Allergan is also being challenged by the Street because the patents of its big sellers are going to expire. David sought to discredit this notion by claiming that even though generic formulation are approved by the FDA, those generic makers will know how to adjust fine PH or buffer composition to realize the efficacy of brand name drug, which is the competitive advantage this long-lived ophthalmologic firm has.

In Apr 2011, David was successfully reappointed as CEO of Allergan, possibly because the board members are betting on him to recreate past glories on “Restasis”?

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