another year of strong results
It is gratifying to report that Allergan’s 2005 operating results were among the very best since I joined the Company as Chief Executive Officer in 1998. Pharmaceutical sales increased by 17 percent to $2.3 billion and all of our businesses and operating regions produced double-digit sales growth. Including the effect of a one-time Internal Revenue Service (IRS) tax settlement reached in February 2006, diluted earnings per share (EPS) increased by 23 percent, adjusted for restructuring in Europe and Japan, and for the termination of our contract manufacturing agreement with Advanced Medical Optics (AMO), a company spun off in 2002, as well as for certain other transaction gains and losses(1). Had Allergan not achieved this IRS tax settlement, adjusted EPS would still have grown a robust 20 percent. Our high adjusted EPS growth was achieved while continuing to invest fully in the long-term future of our company.
Within the attractive, high-growth specialty markets we serve, we were able to steadily strengthen our positions in several key areas. For the third consecutive year, Allergan has been the fastest-growing global ophthalmology company in the world when one excludes retinal therapeutics(2), a segment in which Allergan’s research and development (R&D) candidates have not yet been commercialized. Further market share gains were recorded in our U.S. dermatology unit. Finally, the estimated global share of our BOTOX® franchise increased from 85 percent to 86 percent(3), even in the face of increasing competition.
The strong 2005 results were a clear reflection of increased and improved management focus on the greatest opportunities within our portfolio. In mid-2004 we experienced a disappointing, but thankfully for Allergan, a rare set-back when we received a non-approvable letter from the U.S. Food & Drug Administration (FDA) for TAZORAL™, our innovative oral medication for psoriasis. Denied this sales growth driver for 2005, we were forced to re-examine our other prospects. Rebounding from this challenge, we focused our commercial efforts on our key opportunities for growth and dedicated our attention and funds to BOTOX® Cosmetic/VISTABEL®/VISTABEX™, BOTOX® therapeutic, RESTASIS® and LUMIGAN®.
For each of these leading products, we were able to achieve significant results and in several instances have created major new markets as we addressed unmet medical needs and harnessed the power of direct-to-consumer advertising to inform our patients. BOTOX® Cosmetic is, for the fourth consecutive year, the No. 1 cosmetic procedure administered in the offices of U.S. dermatologists and plastic surgeons(4). Also, in terms of positive brand media awareness, BOTOX® ranks, amongst all pharmaceuticals, second only to VIAGRA® worldwide.
In Europe we made significant investments in introducing VISTABEL®/VISTABEX™, the European trade names for BOTOX® Cosmetic, to many major markets and we received marketing approvals in the important countries of Germany and the United Kingdom in January 2006. Within the BOTOX® therapeutic franchise, we have continued to educate physicians and their patients about the use of BOTOX® as an innovative alternative in treating hyperhidrosis, or excessive sweating. BOTOX® continued its strong trajectory of growth, increasing global sales by 18 percent from 2004 to $831 million. Presently, BOTOX® is approved for 20 indications in more than 75 countries, with an estimated 57 percent of sales relating to therapeutic uses and 43 percent to aesthetic use.
RESTASIS® is the only therapeutic agent approved in the United States to treat dry eye disease, in contrast to traditional artificial tears which are designed to alleviate the symptoms. In 2005 we were able to increase global RESTASIS® sales by 91 percent to $191 million. Early in the year, we bought out our patent royalty obligations relating to RESTASIS® from Novartis, which permitted us to invest in heavy direct-to-consumer advertising. LUMIGAN® consolidated its position, increasing global sales by 15 percent to $268 million and establishing its position as the 4th largest glaucoma drug in the world by value (2).
Expenditures on R&D, adjusted for non-GAAP items, increased by 12 percent to $387 million(5), or 17 percent of pharmaceutical-only sales. Within Allergan’s rapidly growing R&D organization, our goals are to support the benefits of increasing scale by creating dedicated leadership within each therapeutic area. We are increasing our focus on the top tier clinical development programs. In addition, we are setting clear objectives for the discovery group in terms of new compounds that will transition from the laboratory to human clinical use.
During 2005, we received approval for COMBIGAN™, a fixed combination of brimonidine and timolol, in all member states of the European Union, Australia, Mexico and Argentina. We expect this powerful new combination therapy to be an important driver for Allergan’s glaucoma franchise in 2006. We also received approval for the newest line extension of ALPHAGAN® from the FDA — ALPHAGAN® P 0.1% — which we launched in the United States in early 2006. Thanks to the innovative formulation of this product, we are able to reduce drug exposure and achieve equivalent efficacy to the original ALPHAGAN®.
Allergan’s financial performance for the year was also robust, generating $425 million of operating cash flow, return on equity of 29 percent and return on capital of 20 percent, both adjusted for non-GAAP items(6). This places Allergan in the top quartile of the pharmaceutical industry and provides us with flexibility for strategic transactions in the future.
change and continuing evolution of allergan’s business model
The long-term vibrancy of our business will continue to be driven by the discovery, development and approval of innovative new medicines, new devices and new procedures as well as our focus on the needs of physicians and their patients. In addition, we are constantly searching for ways to increase operational efficiencies. In 2005, we made several significant structural changes to our business, including:
- Restructuring of our European commercial and R&D operations; and
- Out-licensing of BOTOX® in Japan and China to GlaxoSmithKline (GSK); and co-promotion of GSK’s IMITREX STATdose System® and AMERGE®, which are indicated for migraine treatment in the United States.
As a consequence of these two projects we will close our R&D centers in France and Japan, concentrating all our clinical development for Europe in the United Kingdom and increasing benefits of scale in our Irvine, California facility. This transitions us from a 4-center to a 2-center R&D network. At the end of 2005, California Governor Arnold Schwarzenegger opened our new R&D facility, the Herbert Research Center, named in honor of our founder and Chairman Emeritus, Gavin Herbert, at Allergan’s headquarters in Irvine.
| (1) | Adjustments to GAAP diluted earnings per share used to calculate diluted earnings per share growth, adjusted for non-GAAP items, include the aggregate non-GAAP adjustments, net of tax, detailed in the Consolidated Statements in this Annual Report. Diluted earnings per share growth using GAAP net earnings was 6.7 percent for 2005. |
| (2) | Intercontinental Medical Statistics (IMS): (from ~48 countries), Q3 2005, in constant exchange, for the trailing 12 months, as of September 2005. |
| (3) | Allergan market estimates. |
| (4) | The American Society for Aesthetic Plastic Surgery (ASAPS) 2005 Cosmetic Surgery National Data Bank. |
| (5) | Adjustments to GAAP research and development expense used to calculate research and development expenditures, adjusted for non-GAAP items, include $1.5 million of transition/duplicate operating expenses and a $3.0 million buy-out of a license agreement in 2005. GAAP research and development expense was $391 million in 2005, a 13 percent increase from 2004. |
| (6) | Adjustments to GAAP net earnings used to calculate return on equity, adjusted for non-GAAP items, and return on capital, adjusted for non-GAAP items, include the aggregate non-GAAP adjustments, net of tax, detailed in the Consolidated Statements in this Annual Report. Return on equity using GAAP net earnings was 26 percent in 2005. Return on capital using GAAP net earnings was 17 percent in 2005. |
| (7) | World Health Organization Web site. Magnitude and Causes of Visual Impairment. Available at: http://www.who.int/mediacentre/factsheets/fs282/en/. Accessed March 1, 2006. |