David Pyott of Allergan: Eyes on the Prize

Botox smooths wrinkles and rakes in profits for its manufacturer. But Allergan’s chief wants more new drugs in his pipeline.

When he was named CEO of Allergan two years ago, David Pyott thought it odd that he was only the third chief executive in the company’s 50-year history. No doubt, management stability can be a good thing, but Pyott quickly discovered that it was not the cause of the long tenures. Quite simply, the manufacturer of eye care and specialty pharmaceuticals was losing its competitive edge.

To be sure, the Irvine, California-based company had begun to enjoy the extraordinary bounty that comes from Botox. Originally used to treat cross-eyed patients, the drug took on a new life in the mid-1990s when a Canadian doctor, using Botox on the eyebrows of patients with a blinking disorder, found that the treatment also smoothed wrinkles. The drug now accounts for nearly 60 percent of Allergan’s sales and delivers gross margins of 80 percent.

In spite of that good fortune, however, Allergan’s operations were a mess when Pyott arrived on the scene. The company’s cost structure needed an overhaul, and its management team, while talented, lacked focus. The stock traded in the low teens immediately following Allergan’s 1989 initial public offering and had climbed by only a few dollars by 1998.

Pyott, the former head of Novartis’s nutrition division, moved fast to cut overhead and cultivate a new pipeline of drugs. He closed five plants and slashed 550 jobs, about 9 percent of the total workforce. At the same time, he boosted spending on sales and research and development.He recruited managers from consumer goods firms like Johnson & Johnson and Colgate-Palmolive and assigned 16 scientists to concentrate solely on developing new applications for Botox. New versions of the drug are expected shortly to combat everything from lower back pain to migraines and cerebral palsy.

Analysts estimate that the company is on track to grow earnings by 20 percent per year for the foreseeable future. Allergan’s shares have more than tripled during Pyott’s tenure.

Now the new CEO looks to gain market share from his company’s chief rival, Alcon Laboratories. He also has to fend off competition in the hotly contested specialty pharmaceuticals market, where mergers and new partnerships can alter the balance of power in the blink of an eye. He recently discussed these and other challenges with Institutional Investor Staff Writer Justin Schack.


Why did you need to restructure the company two years ago?

Pyott: From about 1993 to 1997, Allergan had been going sideways. People close to the industry viewed the company as a takeover target. It was clear to me that things had to change, or we’d become somebody’s breakfast. When I came, I knew from reading to 10-Ks and 10-Qs that we had an overhead problem. But we also lacked focus. I would ask nine of my top officers about the future of the company and get four different answers. Many people thought, “Okay, this is the guy who’s got to find some money to prop up the share price and stay alive.” When you’re brought into a situation like that, it’s like you’re a Marine jumping out of a helicopter, knowing that if you don’t dig a foxhole real quick you’re going to get your brains blown out.

How did you keep from getting your brains blown out?

We started moving the chips on the board, focusing on places where we were going to win, and started turning off a few things where it was clear we were just wasting our time. We also started saving to spend. We expanded our field sales force by 28 percent and R&D by 26 percent. So despite having laid off 9 percent of the workforce, I’m pretty happy to say we actually employ more people today than we did when I walked through the door. Now that process is largely complete, and we’re focusing 90 percent of our energy on how we’re going to grow.

How are you going to grow?

There’s room to grow in ophthalmology, which is a $6 billion market. We think in the next three years or so we can dislodge Alcon from being No. 1 in ophthalmic pharmaceuticals at least. It’s great to become No. 1, but then you start thumping your head because the only growth you get is from growing the market. So we look at other areas. In dermatology we’re No. 6. I’m sure you can guess that’s not good enough. We have some technology, but I doubt whether we can get to No. 2 or No. 3 without acquiring something. Another area that ranks even higher is neurology. Look at Botox. People keep on asking when that business will slow down. We keep on surprising analysts with our growth. Part of that is due to investment in research. It’s also due to massive sales force expansion. Now we have all those relationships, we have the sales force, and so we’re looking to add more products.

What about buying other companies?

We’re saying to Wall Street now that for the next five years we can grow the top line about 15 percent or more in local currency and yield 20 percent earningsper-share growth, all organically. Look at ophthalmology. When I arrived I assumed that Allergan was weak and I’d probably have to make an ophthalmology acquisition. Now that I know more about our capabilities and our pipeline and think about all the big names in eye care, I don’t think I’d buy any of them, even if they were available. I think our technology is either as good or better in most of the product cases. And many of them are growing slower than we are. We have such a high P/E ratio because we’re a growth stock. I’m asked all the time by analysts about acquisitions. And I say to them, “Let me ask you a question: If I announced an acquisition and said after the acquisition that our growth rate is now 10 percent, would you be throwing me a bouquet of flowers or a pile of stones?” And they smile. And I say, “You’ve got the answer.”

Who are your main competitors?

If you look at eye care—including ophthalmic pharmaceuticals, ophthalmic surgical and lens care solutions—the biggest competitor is Alcon, which is relatively unknown on Wall Street. We’re the second-largest. Then you have Bausch & Lomb, Merck in ophthalmic pharmaceuticals, a Japanese company called Santen and Pharmacia.

What trends will affect your business during the next few years?

Inevitably, when someone’s doing well it attracts other fish. I’d say certainly over the last two years I can feel the markets getting more competitive. Five years ago the model in this industry was to partner with big, systemic houses and convert their compounds into ophthalmic solutions. In our own house an example is Ocuflox, the No. 1 anti-infectant prescribed by ophthalmologists in the U.S. That came from a licensing agreement with Daiichi & Santen in the early 1990s. Alcon’s anti-infectant, Ciloxan, comes from Bayer. That’s changing, in that we are now about to launch a glaucoma compound called Lumigan, which is self-discovered. And Alcon, too, is about to launch its first self-discovered compound. This is a reflection of the huge ramp-up in R&D expenditures in this industry. In the past four years alone, we doubled our R&D expenditure, to $250 million, which is quite a lot for a company with our revenue base. That means you’re going to see a lot more product coming out.

How is the Internet going to affect your business?

We’ve thought a lot about that, and we recently hired a VP for e-commerce. It became apparent to me that we wouldn’t get anything done with various people working on this on a part-time basis. Obviously, there are the mechanical things, like the purchasing side, automation of the supply chain. What is much more difficult is how you use the Internet for marketing. We’re looking at a venture where we might get involved in e-commerce services for physicians, to help them help themselves in terms of marketing their practices, re imbursement and billing services. Of course, it’s not all pure altruism. We’ll want to maintain content on all those Web sites. If there’s a reference to glaucoma, for example, there’d be a reference to Allergan and what distinguishes our product’s benefits from others. I spent a day earlier this year in Silicon Valley, and it was really eye-popping. There’s so much going on in health care, and it’s moving very, very quickly. That’s why I think you’ve got to dive in, because if you don’t get there first, there’s a danger you may not get there at all.