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After the strong 29 percent sales growth we enjoyed in 2007, 2008 was a challenging year financially given the worldwide economic downturn. However, 2008 also represented a time for reflection and assessment of our short- and long-term opportunities, enabling us to emerge from 2008 stronger and better prepared for the challenges ahead. Even in a difficult economic climate with various external, uncontrollable factors impacting our businesses, Allergan draws stability, strength and value from its Growth Equation — a business model that balances diverse specialties with a focused approach and a leadership presence in markets around the globe.
The net sales growth of 12 percent we achieved in 2008 was quite different from our expectations at the start of the year, particularly with regard to continued strong expansion of the medical aesthetics business that includes BOTOX® Cosmetic, dermal fillers and breast aesthetics. Late in the first quarter, we began to experience the impact of cutbacks in U.S. consumer spending on these elective cash pay businesses. From mid-year onward, we increasingly experienced the effects of a global recession, especially in Europe. Beyond medical aesthetics, the economic currents also challenged our growth expectations for our obesity intervention portfolio, specifically the LAP-BAND® Adjustable Gastric Banding System. For the LAP-BAND® System, about a quarter of our business is currently cash pay and when reimbursed the typical co-payment is in the range of $2,000 to $4,000. So, in tough economic times when consumers are reducing their personal expenses, growth for a product like the LAP-BAND® System, a well-established treatment for morbid obesity, is also negatively impacted.
Even with these challenges, first half 2008 net sales growth was still strong at 21 percent over the corresponding period of 2007, while second half net sales growth was moderate at three percent with weak consumer demand being amplified by the strength of the U.S. Dollar versus foreign currencies. Thanks to our reliable forecasting systems we initiated strong expense controls from mid-year onward which permitted us to deliver adjusted Diluted Earnings per Share (EPS) growth of 18 percent for the full year. [A reconciliation between Generally Accepted Accounting Principles (GAAP) Diluted EPS and adjusted Diluted EPS results is on pages 4-5.] Allergan’s pharmaceutical businesses (including BOTOX® sales) increased 13 percent over 2007 on a constant currency basis, compared with a worldwide pharmaceutical industry growth rate of 4 percent.1 Given the high investments we made in prior years in sales force expansions and substantial Direct to Consumer (DTC) advertising budgets for our consumer-oriented brands, we possess the strategic flexibility to leverage these cost areas, reducing many optional programs while protecting our long-term investments in Research and Development (R&D).
Diversified Business Model
While much investor attention is paid to our consumer-oriented, elective cash pay businesses — such as BOTOX®, which today is likely one of the most famous pharmaceutical brands in America;2 JUVÉDERM®, our leading dermal filler; our Natrelle™ Collection of breast implants; and the LAP-BAND® System, the world’s No. 1 gastric band3 — in reality the cash pay portion of our overall sales in 2008 was only about 30 percent of our worldwide revenues. The real strength of our diversified business model was demon- strated by a constant currency growth of 13 percent in our worldwide pharmaceutical businesses, which accounted for the remaining 70 percent of our revenues. Eye care pharmaceuticals, representing 46 percent of our global sales mix, increased 13 percent in Dollars over 2007. For the seventh consecutive year Allergan has been the fastest growing global eye care pharmaceutical company thanks to RESTASIS®, our artificial tear brands led by REFRESH® and OPTIVE™ and our glaucoma franchise.4 RESTASIS® ophthalmic emulsion, the only prescription therapeutic dry eye product, is now the second largest eye care pharmaceutical brand in the United States5 with 2008 worldwide sales of $444 million.
Operating cash flow in 2008 was a strong $682 million, and post-capital expenditure a net of $492 million. We utilized our potent cash generation to undertake strategic transactions enhancing our specialty product lines and strengthening our diversity. Notably, we acquired the North American rights to ACZONE® gel 5% for approximately $150 million. ACZONE® contains the first new FDA-approved chemical entity for acne treatment since our TAZORAC® (tazarotene) gel was approved in 1997. We also established a collaboration with Spectrum Pharmaceuticals to co-develop and commercialize worldwide (outside Asia) the antineoplastic agent apaziquone, currently being investigated for the treatment of non-muscle invasive bladder cancer and a perfect fit with Allergan’s emerging strategic focus in urology. As part of the collaboration with Spectrum Pharmaceuticals, we paid $42 million upfront in the fourth quarter of 2008. Only a limited sum of $230 million was expended for stock repurchases as part of our long-term strategy of offsetting employees’ exercise of stock options. Given the distressed state of the global credit markets since the latter half of 2008, we are fortunate to have approximately $1.1 billion of cash on the balance sheet and no material expiries of our existing financing arrangements until 2011. Therefore, as we enter 2009, we have multiple levers for strategic acquisitions and licensing transactions or for rearrangement of our debt structure.
Steady Investment in R&D and Scientific Innovation
While 2007 marked the strongest sales growth in Dollars in Allergan’s history, 2008 marked our strongest R&D performance ever — reflecting not only the competence of our scientists, but also our steadily increasing investment in the R&D component of our Growth Equation. In 2008, adjusted R&D expenditures were $729 million or 16.8 percent of sales — a near doubling of adjusted R&D spend within a short three-year time span. [A reconciliation between GAAP R&D expenditures and adjusted R&D expenditures is on page 17.] R&D is the center of the enterprise and the long-term driver of product innovation that should be a key focus for any CEO and Board of Directors to ensure productivity and operational efficiencies. To that point, 2008 was a pivotal year for us with several product approvals by government agencies worldwide.
To begin, we secured approval from the U.S. Food and Drug Administration (FDA) for LATISSE™ (bimatoprost ophthalmic solution) 0.03%, a unique and first-ever prescription product for the treatment of hypotrichosis (inadequate or not enough eyelashes). In addition, we received FDA approval for TRIVARIS™ injectable suspension, a specially formulated triamcinolone product, marking Allergan’s first product to treat retinal disease. Around the world, our combination glaucoma therapy drugs, COMBIGAN® (brimonidine tartrate/timolol maleate ophthalmic solution) 0.2%/0.5% and GANFORT™ (bimatoprost/timolol ophthalmic solution) 0.03%/0.5% were approved in many second-tier markets. Regarding BOTOX® neurotoxin, we received regulatory approvals in Korea for post-stroke spasticity, aesthetic use and severe primary axillary hyperhidrosis. In Australia, we received regulatory approval of BOTOX® for upper limb juvenile cerebral palsy. And, in early 2009, through our partnership with GlaxoSmithKline (GSK), we received Japanese approval of BOTOX® for aesthetic use, which will be marketed under the trade name BOTOX VISTA®, as well as for the treatment of juvenile cerebral palsy. Additionally, following an earlier regulatory approval in Mexico, BOTOX® received approval for overactive bladder (OAB) in Brazil in 2009. In terms of our dermal filler line, the JUVÉDERM® Ultra and Ultra Plus brands formulated with lidocaine anesthetic were launched in Europe, Canada, and Australia in early 2009. Additionally, VOLUMA™, a next generation volumizing filler, was approved in Europe, Canada and Australia.
The only significant regulatory disappointment in 2008 was the termination of our long-term program to secure FDA approval for oral memantine, which we believed had the potential to be the first oral treatment worldwide to hinder the progression of glaucoma through the direct protection of the optic nerve rather than by reducing intraocular pressure (IOP). Unfortunately, the trial failed to reach its clinical endpoints. From the outset, we had fully appreciated that this was a pioneering program, and therefore one that entailed the highest risk of any clinical endeavor at Allergan.
In addition to many important product approvals worldwide, R&D productivity in 2008 was significant, as proven by the large number of regulatory filings and subsequent approvals. Looking ahead, several important submissions are awaiting action from regulatory agencies in 2009. [An overview of Allergan’s 2008-2009 granted product approvals and 2009 pending approvals is on page 8.]
Despite the current economic climate, we maintained a sharp focus on our longer-term R&D pipeline by moving internally developed compounds and programs to the next stage, as well as by externally enhancing our portfolio through in-licenses. For example, the Phase II programs for BOTOX® for idiopathic OAB were completed. Additionally, PG analog and other compounds for the lowering of IOP and RESTASIS® X, a new formulation of our highly successful, unique dry eye therapy product, began testing in 2008 and are continuing clinical development in 2009.
In light of the significant product approvals we secured in 2008, it is important to note that the process for obtaining regulatory approval of pharmaceuticals and medical devices by agencies around the world has become increasingly complex. Allergan, however, benefits from having drugs and delivery systems that are primarily topical and targeted in effect, versus systemic, and have optimal safety profiles. This is one reason why Allergan has historically enjoyed a much higher than industry average success rate in the number of drugs entering the clinic relative to the number of final approvals. The other key reason is our organizational focus on select specialty therapeutic areas where we have long-established scientific experience and commercial leadership, enabling us to rapidly progress products through the development pipeline.
Despite current economic challenges, we are determined to continue to build a strong pipeline. This is evidenced not only by the strong progress made with our internally developed compounds and technologies, but also by our recent business development activities with Spectrum Pharmaceuticals (urology), BAROnova (obesity intervention), Asterand (eye care) and Polyphor (eye care).