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Pyott’s Voyage in Lilliput

Shortly after David E. I. Pyott became chief executive of Allergan in January 1998, he asked his direct reports to …

Shortly after David E. I. Pyott became chief executive of Allergan in January 1998, he asked his direct reports to outline their views of the future for the ailing Irvine, CA-based provider of eye care and specialty pharmaceutical products. He got several different answers.

The varied responses disturbed Pyott. Allergan had been in poor financial health for several years. Flat sales and margins and high manufacturing costs had weakened the bottom line, and the company’s stock languished. If the company were to thrive, Pyott realized, employees would need to hear a clear, hopeful vision and, importantly, the freedom to act on it.

Such vision, Pyott knew, could only come from the top. A three-stage strategic plan was mapped and circulated, giving Pyott a mandate for a broad corporate restructuring aimed at cutting bureaucracy and decentralizing operations. “Leadership is from the front, by example,” says Pyott, 47, who spent most of his career in line operations jobs at European pharmaceutical giants Sandoz and Novartis. A military history buff, he sees some similarities between doing business and doing battle. “I’m always very careful to take care of the customer and make sure that the troops are fed,” Pyott explains. “A happy army is well-fed and well-trained.”

Pyott, only the third CEO in Allergan’s 50-year history, turned out to be just what the doctor ordered. Under ” his direction, Allergan’s margins and revenues have soared-as has its stock. For the nine months ended in September 2000, net sales climbed 13 percent to $1.16 billion, while earnings rose 16 percent to $150 million. And new revenue streams are on the horizon, including a possible acquisition or two, and one particularly promising drug with huge sales potential.

The first phase of Pyott’s restructuring involved big cuts in overhead; the CEO felt that Allergan’s return on equity in 1998 was dangerously close to its cost of capital. So he closed half the company’s manufacturing plants and reinvested savings into sales, marketing, and research and development. Both field sales and R&D have grown their staffs nearly 30 percent in the past two years.

To boost revenue, Pyott is orchestrating a major shift in the company’s product mix. Stage two of this transformation solidifies Allergan’s core ophthalmic business and positions the company as a niche provider of specialty pharmaceuticals with myriad applications. Drugs to treat glaucoma, eye infection, and inflammation accounted for roughly 45 percent of gross sales, while neurotoxins used to control muscle contraction and spasms-the company’s fastest-growing unit-represented about 15 percent of sales. Allergan is also making a concerted effort to expand sales of skin care medications for acne and psoriasis, which currently contribute about 5 percent of sales. Apart from pharmaceuticals, the company also is involved with ophthalmic devices for cataract and refractive surgery and has a large but slower-growing presence in consumer contact lens care solutions.

Add to the mix high-margin prescription and over-the-counter medications, which now generate nearly two-thirds of revenue, up from 55 percent in 1998. Gross margins are roughly 73 percent of net sales vs. 65 percent when Pyott came aboard. A key driver of that growth is the drug Botox-short for botulinium toxin-that treats dozens of involuntary movement and muscular disorders. Botox also could be useful for alleviating migraine headaches and lower back pain, and for cosmetic uses, such as brow furrow and crow’s feet.

The company has the lion’s share-nearly 90 percent-of the worldwide market, with annual sales growth at roughly 45 percent. Pyott says that Botox could become a $1 billion product-roughly five times its current size-for which Allergan expects only a couple of significant competitors. So while its market share would likely slip, Pyott explains, “we’d rather have 70 percent of a $1 billion market in five years than 90 percent of a $200 million market.”

In addition to Botox, sales of Allergan’s glaucoma treatment Alphagan are increasing at better than 40 percent annually. Morgan Stanley Dean Witter analyst Marc Goodman points out that Alphagan won’t face generic competition until mid-2003, but adds that Allergan is developing two value-added products to extend Alphagan’s life cycle.

Pyott is a strong advocate of spending capital on R&D. As a percentage of Allergan’s total sales, R&D has doubled under Pyott to about 12 percent. But a closer look shows that fully 28 percent of pharmaceutical sales is earmarked for R&D. “We look like a late-stage biotech company,” Pyott says. Indeed, its deep product pipeline is poised to make a significant bottom line contribution over the next several years.

Allergan’s blockbuster in the making is Lumigan, a next generation glaucoma drug, which currently is in Phase III clinical trials and could receive Food & Drug Administration approval during the second quarter of this year. Lumigan sales could reach $350 million globally in 2005, Goodman forecasts in a recent research report. Adds Pyott, “Lumigan has the potential for being a best-in-class drug.”

Lumigan, Alphagan, and other eye care drugs could help propel Allergan to become the world’s top ophthalmology company by 2003, Pyott ventures. His goal is for each business line to be first or second in its own market. Allergan could achieve this milestone quicker through acquisitions, though Pyott is more inclined towards collaboration with big pharmaceutical companies like Johnson & Johnson and biotech firms Acadia Pharmaceuticals and Cambridge Neuroscience.

As stage three of his game plan unfolds, however, Pyott is considering acquiring products or companies that can fit with Allergan’s existing drugs and enhance its customer relationships. Oncology is one possible new channel. And a dermatology product ancillary to Botox could work well in the mix, Pyott speculates. In this way, Allergan could leverage Botox’s power to help grow its relatively small skin care business.

Pyott likes things simple-outline an action plan, double revenue in five years, and make shareholders happy. The big .1 league and its layers of bureaucracy is not Pyott’s aim; he’s been there before. “You don’t need to be big for the sake of being big,” he insists. In fact, Pyott views Allergan’s small size as a competitive advantage-the agility to grasp opportunity immediately. “Life in Lilliput is great,” says Pyott, drawing analogy to the miniature land where Gulliver found himself on one of his travels. “I’d rather be the giant in Lilliput than some minnow in the broad seas. To be big in the second tier, you’re in an enviable position.”

Vital statistics

David E.I. Pyott CEO, Allergan

“I’d rather be the giant in Lilliput than some minnow in the broad seas.”

Birthplace: London

Age: 47

Family: Married, four children

Education: M.A., University of Edinburgh; M.B.A., London Business School; diploma, German and European Law, University of Amsterdam

Language Spoken at Home: German

Hobbies: Mountaineering; alpine skiing; military history.

Most Influential Military Leader: Winston Churchill. 

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