More Than Just a Pretty Face

Before Botox became a popular beauty treatment, Allergan was just a small ophthalmic business that made prescription eye therapies and contact lens care products. But during a decade of off-label use-mostly in Hollywood as a quick fix for frown lines-Botox's (botulinum toxin type A) sales grew and slowly transformed the company's focus and future. Last year, FDA approved the product for cosmetic purposes, opening the door to consumer advertising, and its sales jumped 39 percent from the first quarter 2002 to the first quarter 2003.

David Pyott

But CEO David Pyott is quick to point out that Allergan is much more than a one-product cosmetic company. "Sixty percent of the Botox business is, in fact, therapeutic," he says. "And last year, Botox was only a third of our total sales." With a projected annual growth rate of about 23 percent during the next five years, a full pipeline, and a streamlined new focus, Allergan's "future's so bright, you gotta wear shades," as the Timbuk3 song says. (See "Analysts' View," page 34.)

Eye Care Evolution

The company's best strategic move-licensing botulinum toxin type A in the late 1980s-was reluctantly made. Alan Scott, an ophthalmologist, had discovered that diluted doses of botulinum toxin were effective in treating eye spasms and founded a small company called Oculinum. Scott obtained an FDA investigational new drug approval for the neuromodulator but needed a partner to gain marketing approval. So he asked Allergan to take on its development. Company leaders had minimal interest in the project, but two of its scientists saw possibilities and convinced them to run clinical trials. Allergan earned approval to treat blepharospasm (uncontrollable blinking) and strabismus (crossed eyes) and took the toxin to market in 1989 under the name Oculinum.

At a Glance

Around the same time, according to folklore, a Canadian ophthalmologist mentioned to her husband, a dermatologist, that her patients' forehead wrinkles faded away after she injected the product around their eyes. Excited by the possibilities, together they experimented on a nurse in their joint practice. The results were impressive. The couple then shared their discovery with other doctors, some of whom were located in Hollywood, and the off-label cosmetic use mushroomed.

Meanwhile, Allergan bought Scott's company, renamed the product Botox, and gained approval in 11 countries by 1992. But the company didn't start clinical trials for the cosmetic indication until 1997. Its leaders knew they needed to proceed carefully with FDA, and they wanted to use data from independent studies to support their application. In 2002, Botox Cosmetic was approved in the United States to treat glabellar lines, commonly known as frown lines. It is now marketed in 20 other countries for that use, including France, which okayed it this year with the brand name Vistabel. France will act as the member reference state for the European Union, and more approvals are likely to follow.

Over the years, the company gained global approval for the product for various conditions-eye muscle disorders, cervical dystonia, and hyperhidrosis-and now sells Botox in more than 70 countries. In 2002, the product's sales hit $440 million, a 40 percent increase from 2001. (See "Botox Bounty." ) But that's just the beginning. Pyott says, "It's no longer if, but when Botox will be more than $1 billion."

David Pyott,Up Close

But when he joined Allergan in January 1998 after a long career at Novartis, the Botox clinical trials had just begun, and the company had been through a rough few years of losing patent protection on several ophthalmic products. He says, "The big assumption of the late '80s, was that generics would never come to ophthalmic pharmaceuticals because the category was too small. Bad, bad assumption." So the board of directors brought in Pyott to make some changes. He was only the third person to lead the company, which at that time had been around for nearly 50 years.

And he'd been hired to cut expenses, so employees were uneasy, especially when he started closing manufacturing plants. "I had worked in six countries in the last 20 years and whether I was talking to Spaniards or Germans or Americans, I'd say, 'Sorry guys, I'm Scottish, and we all know what that means.' So when I talked about saving money, it was taken pretty seriously."

But more important issues arose first. "When I came in, there was absolutely no clarity around the strategy at all," he says. "When I asked my senior group, 'Where are we going?' I got four different answers. So then I reversed the order of what we were going to do. Strategy came first, then we went after the overhead second."

Device Division

One of the main concerns to emerge from those strategy sessions was the disparity between the company's business and its device unit. "The pharma business was growing about 20 percent a year," Pyott explains. "And the device end of the business was growing somewhere between zero and one percent. So it was like having a catamaran with two outboards-one churning out 20 knots and one doing only one."

On closer examination, the executive team came to realize that everything about the two businesses was different. That included:

• gross margins-80 percent of sales for pharma, devices only 60 percent

• R&D-much more intense and expensive for pharma

• product lifecycle-seven to ten years for pharma; two to three for devices only

• product size-much larger for Rx sales.

So they decided to spin off the device business into an independent company that they have no stake in. "What I learned here and at Novartis is that a well run pharma company will kill everything else in sight, " Pyott says. (See "David Pyott, Up Close.")

In reality, the spin-off set the smaller business free. Since its birth in 2002, Advanced Medical Optics' growth has gone from zero to about 4 percent. "We were constraining those businesses quite badly, and I had to say, "Hey guys,

I need 20 percent earnings per share growth out of you. Otherwise, I'm starving the pharma business to feed a lower opportunity business on your side.' Now that they are independent, they can work some deals that I couldn't have dared to look at, because they are focused on their industry with their set of operating metrics."

The transition, which he says was executed with "military" precision, went smoothly for both employees and customers. Pyott says the few staff members who lost their jobs later thanked him and that "the customers really perceive the benefits of being serviced by two dedicated suppliers."

Bottomless Botox

Free to focus on pharmaceutical R&D, Allergan has a pipeline stuffed with projects. (See "The Next Wave," page 36.) Many of them involve new indications for the Botox neuromodulator, which seems to have virtually unlimited possibilities, especially for relaxing spastic muscles. Pyott says, "I saw an article in Scrip magazine a couple of years ago that said there were more than 90 potential applications for Botox. It's a temporary relaxing of the muscle, and the body is full of muscle."

Transformation

The company's lead project is an indication for hyperhidrosis, a condition commonly known as excessive sweating that affects between 500,000 and two million people in the United States alone. Approved in Europe and Canada for that indication last year and already used off-label elsewhere, Allergan hopes to file an NDA (new drug application) for it in the United States this year.

In this case, the toxin goes from the muscles into the nerve endings, where it stops neurotransmitters from activating sweat glands. To be effective, the treatment requires 20 or more site-specific injections, typically in the palms, feet, or armpits. Pyott admits injections in those areas can be more painful than cosmetic injections in the face, but the hyperhidrosis treatment also can last for up to 12 months compared with four months for other conditions.

Botox Bounty

Another major indication sought by the company is for migraines-a market estimated at around $2 billion-for which it currently has more than 1,000 patients enrolled in Phase II trials. The project's evolution sprang from the Beverly Hills crowd as well. Pyott says, "Patients kept coming back and saying, 'You know, doc, not only did you make my wrinkles go away, you made my migraines go away, too. What are you doing?'" The question remains unanswered. He admits, "How Botox works to treat an acute episodic migraine…We still don't know for certain."

What Allergan researchers do claim to know for sure is that the product is safe. According to Pyott, regulatory agencies' first reaction is often, "'My God, it's a toxin." But he says, "We have more than 14 years of safety history here. The worse thing that can happen is excessive weakening of a muscle. But it comes back." That's the nature of Botox; it's a temporary treatment that lasts three to four months. Therefore, side effects that may occur are only temporary. The product is also local to the point of injection, so there are no systemic reactions.

But excessive sweating and headaches are just the tip of the treatment iceberg. According to an article in the New York Times, independent researchers are using and testing the neuromodulator for a host of other ailments, including stroke paralysis, stuttering, lower back pain, incontinence, writer's cramp, carpel tunnel syndrome, and tennis elbow. Botox is also under study to treat morbid obesity by relaxing the muscle that lets food out of the stomach and to prevent ulcers by relaxing the muscles that let gastric acid into the esophagus.

One of its most impressive uses has been to treat babies with club foot. Instead of surgically reconstructing several tendons-often with poor results-doctors inject the babies' feet with Botox, stretch the relaxed muscle, then put casts on to keep them stretched. By age two or three, they are walking normally. Many of those markets may be small and some may remain off-label, but together they add up to a product with a seemingly endless lifecycle.

And so far, Botox's only competition in the United States is Elan's Myobloc (botulinum), which has an indication for cervical dystonia (head and neck muscle contractions) and earned about $20 million in sales last year. Another product, Ipsen's Dysport (botulinum) is approved in Europe, but together, the two products have only 10 percent of the market. Analyst Marc Goodman of Morgan Stanley says Dysport will come to the United States in about five years, but that by then the market will have expanded enough that it won't hurt Botox sales.

Analysts' View

Pipeline Push

Neuromodulators are only one of Allergan's three franchises. Much of its R&D is focused on ophthalmology and dermatology. The company has a full line of products to treat eye conditions such as glaucoma, ocular infection, inflammation, and dry eyes and a small but growing group of therapies for skin conditions such as acne and psoriasis. (See "Eyes, Skin, and Muscles," page 36.)

Ophthalmology. In 2002, Allergan added to its ophthalmology line with the approval of Restasis (topical cyclosporine), a first-in-class product that treats the underlying inflammation causing dry eye and increases tear production rather than just alleviating the dryness. The approval "came as our Christmas present on December 23rd," Pyott recalls. With one million US patients, analysts estimate the market could grow to $400 million during the next four years. Another 2002 approval for Refresh Endura added an emulsion formulation to Allergan's line of Refresh products for dry eyes.

The year 2003 is shaping up to be even better-with a potential of five new approvals including three in ophthalmology. One of the first is a new indication for Acular LS (ketorolac) to treat ocular pain following corneal surgery. Acular is already marketed for inflammation, photophobia, and ocular itch. Also approved this year by FDA was Zymar (gatifloxacin), a fourth generation fluoroquinolone ocular anti-infective; under FDA review is epinastine, an ocular antihistamine.

The Next Wave and Eyes, Skin, and Muscles

Dermatology. Although this franchise makes up only 15 percent of its revenue, Allergan expects it to grow, partly because it complements Botox Cosmetic. "In fact," Pyott says, "Allergan was the fastest growing company in skin care in the United States last year in our areas of interest: acne and psoriasis." The company hopes to accelerate that growth with an oral version of tazarotene -the molecule used in its topical products for psoriasis and acne (Avage and Tazorac)-for severe acne and psoriasis indications. Phase III studies will wrap up this summer, and the company will file with FDA for the treatment of psoriasis soon after.

"The data is really looking good, not just for psoriasis but also for acne," says Pyott. "It seems as if we have very similar efficacy as Accutane [isotretinoin] but a much better side-effect profile. For use in acne, we are having to run FDA-mandated head-to-head trials against Accutane, not just against placebo. So it's going to take a few years to get all that done. But I say there's a strong chance that we have the next new and improved Accutane. For a company of our size, that will be a huge event, and we're enormously excited about the possibility."

At its peak, Accutane's sales reached nearly a billion, but its potential has been limited by a black box warning for pregnant woman and speculation that it causes a small percentage of adolescents to commit suicide. Tazarotene will also be counter-indicated for pregnant women. Nevertheless, Pyott says, "There will be some of the same challenges as Accutane but with a much shorter half life. That will be really important for female patients. Our half life is hours, with Accutane it's days."

Beauty is Big Business

It's the Science

To come up with such molecules, Allergan has been investing 17 percent of its sales in R&D. That was one of Pyott's primary goals in reducing the company's overhead-to boost research. To loosen up that cash, he closed five of ten manufacturing plants between 1999 and 2001. But he increased the R&D staff 43 percent during the last five years. Currently, 50 percent of the company's sales are based on products discovered in house. Most of the rest were in-licensed, then developed in house. The company does very little outsourcing either in development, sales, or manufacturing. Pyott puts it succinctly: "Everything of importance we make ourselves."

Some of those new scientists are working on Phase II products with great potential. Memantine, approved in Germany for Parkinsons and Alzheimers, is one example. Allergan licensed the molecule from Merz and is developing it for glaucoma, which is also a neurodegenerative disease. The project is a gamble with a potentially big payoff. Pyott says, "This is the most expensive trial in the history of ophthalmology, because we may have to test the patients for up to four years." But considering the prevalence of glaucoma and the aging population, he also says, "This is a billion-dollar market, a billion-dollar drug. If it works."

And some of those scientists are working on early-stage projects in new therapeutic areas for the company. "As a teaser," he says, "at the beginning of next year, we hope to be able to talk about something we have for gastroenterology." But he doesn't believe Allergan will stray too far from its core areas of expertise. "Over time, we're also going to become a neurology company: a) because of the confluence between glaucoma and neurology, and b) who is the biggest future user group of Botox? Neurologists."

Not Just Another Product

Botox is not one of those drugs a sales rep can introduce to a doctor by dropping off a few samples with a two-minute detail. The product's use-by injection into selected muscles-requires some training. Allergan's "Botox development managers" call on dermatologists, plastic surgeons, and other "aesthetic" physicians. But they do more than teach them how to properly inject the toxin. They also teach the physician's entire staff how to talk about-and thus sell-the product. The training is optional, but only experienced, aesthetically oriented doctors are listed in the company's "Physician Network." A separate sales force calls on ophthalmologists and neurologists, who require somewhat different training.

Senior vice-president of specialty pharmaceuticals Steve Pal says, "We provide a whole range of programs to those offices to ensure they are saying and doing the right things so their patients learn about the product and get the best results they can." That training also includes teaching doctors, nurses, and receptionists how to "close the sell" and to follow up with patients to ensure repeat business. The company is currently trying to measure the success of those programs by comparing the sales volumes of trained offices versus untrained offices. Company executives think they're seeing great results, but the final numbers aren't in yet.

Allergan also promotes Botox Cosmetic directly to consumers. It works with Grey Advertising on those communications, but much of its other material is developed in house. "Our product managers ensure that we have programs at all levels," Pal says. "We do consumer advertising and physician programs. We have a consumer website and a mall tour program, which is another vehicle we use to communicate the benefits of Botox Cosmetic to the public." The mall tour features representatives and physicians providing product information from kiosks at malls across the United States, and the website contains product information, customer testimonials, and a feature that lets visitors type in their zipcode and find a trained "injector" in their neighborhood.

Twice in its first year of promoting the cosmetic indication, Allergan received FDA warning letters for its DTC material. The agency's phrasing in the letter is rather emphatic-it references "significant public health concerns"-but the company says that type of language is typical of FDA's standard warning letter and that the points raised are relatively minor.

"FDA raised three basic issues, and we feel we can address them through small changes to our ad copy," says Christine Cassiano, Allergan's senior manager of public relations. "The first was the use of the phrase 'cosmetic treatment.' FDA requested we market under the name Botox Cosmetic, so using 'cosmetic' is something we need to do when talking about our product. But overall, we agree with FDA that we don't want consumers to think it's an over-the-counter treatment. One of our recommendations will be to include the phrase 'physician administered.'

The second thing FDA brought up is the use of the term 'frown lines.' The specific FDA indication is for 'glabellar lines.' Knowing that most consumers don't know what a glabellar line is and wanting to make sure they understood, we referred to them as frown lines between the brows in the first paragraph of our ad copy. We do shorten it later in the ad, and we believe adding the phrase 'between the brow' to additional references may provide the necessary clarification. Last, there was a question about the phrase 'The side effects, if any occur, may include.' We believe that removing or modifying the phrase 'if any occur' would provide the necessary clarification."

Sound Strategy

Allergan's relationship with FDA overall, though, is healthy. It had two products-Alphagan P (brimonidine) and Lumigan (bimatoprost) both for treating glaucoma symptoms-approved on the same day, March 16, 2001. And in June 2003, the agency approved Acular LS for post-operative corneal surgery based on electronic data collected directly from patients-the first such move for an FDA filing.

"We work with FDA in various phases of development to make sure we design trials that meet the right end points and collect data in the proper way," Pal says. "Using electronic diaries is becoming more of an efficient system, which the FDA welcomes. I believe our headache trials also involve a very sophisticated electronic system to monitor what patients are experiencing over a long period of time."

That's one advantage of being a small company-Allergan ranked 40 on PE's 2003 Top 50 Pharma list-the ability to stay on the cutting edge of changing technology and industry trends. But Pyott doesn't think of Allergan as a small company. "We're just like Big Pharma, only we're big in a small space," he says. He also thinks that "space" will grow. "SmithKline, before Tagamet, was a tiny company. Glaxo was a tiny company before Zantac. Maybe ten years from now, if I really dream-because we've got some great science-Allergan could become a big pharma. Who knows?"