Call Allergan Inc. the biggest publicly traded company in Orange County.
Just don’t call it “Big Pharma.”
That’s the word from David Pyott, the longtime chief executive of the Irvine-based maker of Botox and other drugs, which checks in at the top of this week’s list of OC-based public companies, with a recent market value of about $37 billion (see related stories throughout issue, list on page 10).
“I do not like the label of ‘Big Pharma’ at all,” Pyott said last week. “Specialty pharma does describe us better—that is the right label.”
Big Pharma is a sector of the healthcare industry that includes big names such as Merck & Co., Johnson & Johnson, Pfizer Inc., Eli Lilly and Co. and GlaxoSmithKline PLC.
Allergan has seen annual sales grow from the equivalent of $700 million when Pyott arrived in the corner office in 1998 to $6.3 billion last year, when it spent more than $1 billion on research and development.
Pyott’s point gets some support when it comes to market value. Allergan is far and away the leader on market cap in OC. It’s only about 60% of Eli Lilly’s total, though, and a smaller fraction of most of the other familiar names of Big Pharma.
Another distinction that keeps Allergan from a natural fit in the Big Pharma mold: It gets a good deal of its revenue from cash-pay products, such as Botox Cosmetic, dermal fillers and breast implants. The typical member of Big Pharma relies more on drugs that are covered by private insurance and government programs such as Medicare and Medicaid.
Allergan prefers being called a specialty drug maker because of its concentration on what Pyott calls “five pillars” of distribution. Allergan’s main product lines cover opthalmology, dermatology, neurology, urology and aesthetic products.
“We have a limited number of areas,” he said.
Pyott points to J&J, “which does 10 to 20 verticals,” as an example of the broader spread that goes with Big Pharma.
His reticence to take on Big Pharma trappings also relates to the corporate culture he’s nurtured during his time at Allergan. Pyott said he gives his unit heads freedom to do things that would normally involve levels of bureaucracy at larger drug makers, such as creating advertising campaigns.
That helps keep the decision-making process free of bottlenecks, something he saw in some of his earlier career stops, including a tenure as head of the nutrition division at Switzerland-based Novartis AG. He often meets with key Allergan executives at breakfast.
“Our biggest challenge is ourselves,” he said. “There will be mistakes made. It is OK to make mistakes … as long as they don’t recur.”
The Big Pharma label is nonetheless creeping into the vocabulary of some Allergan watchers, a trend fueled mainly by the company’s strong growth in sales and profits as well as market value.
Allergan’s revenue rose 12% to $6.3 billion last year with $985 million in profit, which reflected one-time charges related to the sale of its lagging Lap-Band weight-loss business. Wall Street expects the company to post a $1.7 billion profit on nearly $6.9 billion of revenue this year.
Stephen Simpson, a former equity analyst with Piper Jaffray and Northland Securities and freelance financial writer, used the label in an article published last month on the Motley Fool investor website.
“In the world of Big Pharma, growth is a precious commodity these days,” Simpson wrote. “Allergan is a noteworthy exception, though, as the company continues to see strong demand for cornerstone products like Botox and Restasis as well as its facial aesthetics.”
Seamus Fernandez of Boston-based Leerink Swann LLC classified Allergan as a “major pharmaceutical” company in a late February report summarizing the firm’s global healthcare conference.
“With key overhangs removed and credible views of a narrowed and weaker competitive landscape, top and bottom-line growth prospects look compelling,” Fernandez said in his report.
Pyott and Allergan Chief Financial Officer Jeffrey Edwards met with Fernandez several times in February to talk up their various efforts.
“Extending leadership in core areas like aesthetics, medical dermatology, ophthalmology, neurology and urology remains [Allergan’s] core emphasis,” Fernandez said.
Whether such efforts continue to push perceptions of Allergan toward Big Pharma remains to be seen.
The upward push on market value looks set to continue in any case.
Citigroup analyst Liav Abraham last week raised his price target for Allergan shares to $140—they were around $125 last week—on what he called “potential upside to consensus revenue estimates,” as well as having confidence in the drug maker’s key franchises.
