ALLERGAN 2004 ANNUAL REPORT
`
`UNI UELY
`
`F O C U S E D
`
`APOTEX 1050, pg. 1
`
`

`

`COMPANY PROFILE
`
`Allergan, Inc., with headquarters in Irvine, California, is a global specialty
`
`pharmaceutical company that develops and commercializes innovative
`
`products for the ophthalmology, neuromodulator, dermatology and other
`
`specialty markets. In addition to its discovery-to-development research
`
`programs, Allergan has global marketing and sales capabilities in over 100
`
`countries that deliver value to our customers, satisfy unmet medical needs and
`
`improve patients’ lives. Driven by technology and innovation, Allergan addresses
`
`the needs of patients around the world with approximately 5,000 employees,
`
`a global research and development infrastructure and three state-of-the-art
`
`manufacturing plants.
`
`APOTEX 1050, pg. 2
`
`

`

`OUR VISION/OUR MISSION
`
`To continue as an innovative, technology driven, global health care company
`
`focused on pharmaceuticals in specialty markets that deliver value to
`
`customers, satisfy unmet medical needs and improve patients’ lives.
`
`To become the partner of choice for ever better health care through the
`
`value of our technological innovation, industry leadership, partnering skills
`
`and relationships, worldwide infrastructure, research and manufacturing
`
`capabilities. To develop a level of understanding of our customers in order to
`
`implement operational strategies that provide the greatest value for our
`
`customers and stockholders.
`
`APOTEX 1050, pg. 3
`
`

`

`FINANCIAL OVERVIEW
`
`In millions, except per share data
`
`STATEMENT OF OPERATIONS HIGHLIGHTS
`(As reported under U.S. GAAP)
`
`Product net sales
`Gross profit
`Research and development
`Earnings (loss) from continuing operations
`Earnings from discontinued operations
`Net earnings (loss)
`
`Basic earnings (loss) per share:
`Continuing operations
`Discontinued operations
`Diluted earnings (loss) per share:
`Continuing operations
`Discontinued operations
`
`Dividends per share
`
`ADJUSTED AMOUNTS (a)
`Adjusted earnings from continuing operations
`Adjusted basic earnings per share:
`Continuing operations
`Adjusted diluted earnings per share:
`Continuing operations
`
`NET SALES BY PRODUCT LINE
`Specialty Pharmaceuticals:
`Eye Care Pharmaceuticals
`BOTOX/Neuromodulators
`Skin Care
`
`Total Pharmaceutical Sales
`Other (primarily contract sales)
`Total Net Sales
`
`PRODUCTS SOLD BY LOCATION
`Domestic
`International
`
`2004
`
`2003
`
`Year Ended December 31,
`2002
`
`2001
`
`$2,045.6
`1,658.9
`345.6
`377.1
`–
`377.1
`
`2.87
`–
`
`2.82
`–
`
`0.36
`
`368.8
`
`2.81
`
`2.75
`
`$1,137.1
`705.1
`103.4
`
`1,945.6
`100.0
`$2,045.6
`
`$1,755.4
`1,435.1
`763.5
`(52.5)
`–
`(52.5)
`
`$1,385.0
`1,163.3
`233.1
`64.0
`11.2
`75.2
`
`$1,142.1
`944.0
`227.5
`171.2
`54.9
`224.9
`
`(0.40)
`–
`
`(0.40)
`–
`
`0.36
`
`305.2
`
`2.34
`
`2.30
`
`0.49
`0.09
`
`0.49
`0.08
`
`0.36
`
`252.3
`
`1.95
`
`1.92
`
`1.30
`0.42
`
`1.29
`0.40
`
`0.36
`
`207.7
`
`1.58
`
`1.55
`
`$ 999.5
`563.9
`109.3
`
`1,672.7
`82.7
`$1,755.4
`
`$ 827.3
`439.7
`90.2
`
`1,357.2
`27.8
`$1,385.0
`
`$ 753.7
`309.5
`78.9
`
`1,142.1
`–
`$1,142.1
`
`69.1%
`30.9%
`
`70.4%
`29.6%
`
`70.6%
`29.4%
`
`67.0%
`33.0%
`
`2000
`
`$992.1
`794.4
`165.7
`165.9
`49.2
`215.1
`
`1.27
`0.38
`
`1.24
`0.37
`
`0.32
`
`166.6
`
`1.27
`
`1.25
`
`$683.9
`239.5
`68.7
`
`992.1
`–
`$992.1
`
`63.4%
`36.6%
`
`(a)
`
`The adjusted amounts in 2004 exclude the favorable recovery of $6.5 million of previously paid state
`income taxes and the after-tax effects of the following: 1) income of $2.4 million from a patent infringement
`settlement, 2) $7.0 million restructuring charge primarily related to the scheduled termination of
`the Company’s manufacturing and supply agreement with Advanced Medical Optics, 3) $0.4 million
`unrealized loss on derivative instruments, 4) income of $5.0 million from a technology transfer fee, and
`5) $6.5 million of income from a revised Vitrase collaboration agreement with ISTA Pharmaceuticals.
`
`The adjusted amounts in 2003 exclude the after-tax effects of the following: 1) $179.2 million charge
`for in-process research and development related to the purchase of Oculex Pharmaceuticals, Inc.,
`2) $278.8 million charge for in-process research and development related to the purchase of Bardeen
`
`Sciences Company, LLC, 3) $0.4 million reversal of restructuring charge and asset write-offs, net related
`to the 2002 spin-off of the Company’s ophthalmic surgical and contact lens care businesses, 4) $0.3
`million unrealized loss on derivative instruments, and 5) $0.9 million charge for the early extinguishment
`of convertible debt.
`
`The adjusted amounts in 2002 exclude the after-tax effects of the following: 1) $118.7 million in
`litigation settlement costs, 2) net costs of $100.3 million associated with the 2002 spin-off of the
`Company’s ophthalmic surgical and contact lens care businesses to Advanced Medical Optics which
`consist of restructuring charge and asset write-offs of $63.5 million, duplicate operating expenses of
`$42.5 million and gain of $5.7 million on sale of a facility, 3) $30.2 million loss on the other than
`
`APOTEX 1050, pg. 4
`
`

`

`CASH FLOW FROM OPERATIONS* (IN MILLIONS OF DOLLARS)
`* As reported, including discontinued operations
`
`CASH, NET OF DEBT* (IN MILLIONS OF DOLLARS)
`* As reported, including discontinued operations
`
`00
`
`01
`
`02
`
`03
`
`04
`
`$350.8
`
`$348.3
`
`$219.6
`
`$435.3
`
`$548.5
`
`$130.0
`
`$167.2
`
`$157.9
`
`00
`
`01
`
`02
`
`03
`
`04
`
`($90.1)
`
`RETURN ON EQUITY (ADJUSTED FOR NON-GAAP ITEMS)**
`
`RETURN ON CAPITAL (ADJUSTED FOR NON-GAAP ITEMS)**
`
`00
`
`01
`
`02
`
`03
`
`04
`
`25%
`
`27%
`
`33%
`
`33%
`
`42%
`
`00
`
`01
`
`02
`
`03
`
`04
`
`14%
`
`16%
`
`18%
`
`** Adjustments to GAAP net earnings (loss) 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 on the next two pages of this annual report. Return on equity using GAAP net earnings (loss) was 34%, (7)%, 9%, 23% and 25% for 2004,
`2003, 2002, 2001 and 2000, respectively. Return on capital using GAAP net earnings (loss) was 22%, (4)%, 5%, 14% and 14% for 2004, 2003, 2002, 2001 and 2000, respectively.
`
`$311.6
`
`23%
`
`22%
`
`temporary impairment of equity investments, 4) $1.7 million unrealized loss on derivative instruments,
`5) net gain of $1.0 million from partnering agreements, and 6) $11.7 million charge for the early extin-
`guishment of convertible debt.
`
`The adjusted amounts in 2001 exclude the $40.0 million charge for in-process research and development
`related to the purchase of Allergan Specialty Therapeutics, Inc. and the after-tax effects of the
`following: 1) $6.2 million restructuring charge and asset write-off reversal consisting of $1.7 million
`restructuring charge reversal and a $4.5 million gain on sale of a facility reducing the write-offs recorded
`in 1998, 2) income of $1.5 million from a partnering agreement, 3) $4.5 million loss on the permanent
`impairment of equity investments, 4) $2.0 million gain on the sale of divested pharmaceutical products
`
`in Brazil, 5) $4.2 million unrealized gain on derivative instruments, and 6) $4.4 million associated with the
`2002 spin-off of the Company’s ophthalmic surgical and contact lens care businesses.
`
`The adjusted amounts in 2000 exclude the after-tax effects of the following: 1) a $0.2 million
`restructuring charge, 2) $1.3 million gain on the sale of investments, and 3) $2.0 million in expenses from
`partnering agreements.
`The foregoing presentation contains certain non-GAAP financial measures and non-GAAP
`adjustments. For a reconciliation of these non-GAAP financial measures to GAAP financial meas-
`ures, please refer to the next two pages of this annual report.
`
`APOTEX 1050, pg. 5
`
`

`

`CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
`AND RECONCILIATION OF NON-GAAP ADJUSTMENTS
`
`Year Ended December 31, 2004
`Non-GAAP
`Adjustments
`
`Adjusted
`
`GAAP
`
`Year Ended December 31, 2003
`Non-GAAP
`Adjustments
`
`Adjusted
`
`GAAP
`
`$
`
`$1,945.6
`100.0
`2,045.6
`301.6
`85.1
`1,658.9
`–
`778.9
`345.6
`–
`–
`7.0
`527.4
`14.1
`(18.1)
`0.3
`(0.4)
`8.8
`4.7
`
`532.1
`154.0
`1.0
`$ 377.1
`
`(a)
`
`$ –
`–
`–
`–
`–
`–
`–
`2.4
`–
`–
`–
`(7.0)
`4.6
`–
`–
`–
`0.4
`(c)
`(11.5)
`(11.1)
`
`(b)
`
`$1,945.6
`100.0
`2,045.6
`301.6
`85.1
`1,658.9
`–
`781.3
`345.6
`–
`–
`–
`532.0
`14.1
`(18.1)
`0.3
`–
`(2.7)
`(6.4)
`
`(d)
`
`(6.5)
`1.8
`–
`$ (8.3)
`
`525.6
`155.8
`1.0
`$ 368.8
`
`$1,672.7
`82.7
`1,755.4
`242.5
`77.8
`1,435.1
`1.5
`697.2
`763.5
`–
`–
`(0.4)
`(23.7)
`13.0
`(15.6)
`–
`(0.3)
`(2.9)
`(5.8)
`
`(29.5)
`22.2
`0.8
`$ (52.5)
`
`–
`–
`–
`–
`–
`–
`–
`–
`(458.0)
`–
`–
`0.4
`457.6
`–
`–
`–
`0.3
`0.9
`1.2
`
`(e)
`
`(f)
`
`(c)
`
`(g)
`
`$1,672.7
`82.7
`1,755.4
`242.5
`77.8
`1,435.1
`1.5
`697.2
`305.5
`–
`–
`–
`433.9
`13.0
`(15.6)
`–
`–
`(2.0)
`(4.6)
`
`(h)
`
`458.8
`101.1
`–
`$ 357.7
`
`429.3
`123.3
`0.8
`$ 305.2
`
`In millions, except per share amounts
`
`PRODUCT SALES
`Net sales – pharmaceutical only
`Non-pharmaceutical sales (primarily contract sales)
`Total
`Cost of sales – pharmaceutical only
`Cost of sales – non pharmaceutical
`Product gross margin
`Research services margin
`Selling, general and administrative
`Research & development
`Legal settlement
`Technology fees from related party
`Restructuring charge (reversal) and asset write-offs
`Operating income (loss)
`Interest income
`Interest expense
`Gain (loss) on investments
`Unrealized gain (loss) on derivative instruments, net
`Other, net
`
`Earnings (loss) from continuing operations before
`income taxes and minority interest
`Provision for income taxes
`Minority interest
`Earnings from continuing operations
`
`Basic earnings (loss) per share:
`Continuing operations
`
`Diluted earnings (loss) per share:
`Continuing operations
`
`Total Net Sales
`
`$
`
`2.87
`
`$(0.06)
`
`$
`
`2.81
`
`$ (0.40)
`
`$ 2.74
`
`$ 2.34
`
`2.82
`$
`$2,045.6
`
`$(0.07)
`$(41.9)
`
`(v)
`
`$ 2.75
`$2,003.7
`
`(0.40)
`$
`$1,755.4
`
`$ 2.70
`$ (45.9)
`
`(v)
`
`$ 2.30
`$1,709.5
`
`“GAAP” refers to financial information presented in accordance with generally accepted accounting
`principles in the United States.
`
`In this annual report, Allergan included historical non-GAAP financial measures, as defined in
`Regulation G promulgated by the Securities and Exchange Commission, with respect to the year
`ended December 31, 2004, as well as the corresponding periods for 2003 through 2000. Allergan
`believes that its presentation of historical non-GAAP financial measures provides useful supplemen-
`tary information to investors. The presentation of historical non-GAAP financial measures is not meant
`to be considered in isolation from or as substitute for results prepared in accordance with accounting
`principles generally accepted in the United States.
`
`In this annual report, Allergan reported the non-GAAP financial measure of “adjusted earnings”
`and related “adjusted earnings per share.” Allergan uses adjusted earnings to enhance the investor’s
`overall understanding of the financial performance and prospects for the future of Allergan’s core
`business activities. Specifically, Allergan believes that a report of adjusted earnings provides consis-
`
`tency between its current, past and future periods. Adjusted earnings is one of the primary indicators
`management uses for planning and forecasting in future periods. Allergan also uses adjusted earnings
`for evaluating management performance for compensation purposes.
`
`In this annual report, Allergan reported the non-GAAP financial measures of return on equity, adjusted
`for non-GAAP items, and return on capital, adjusted for non-GAAP items. Allergan uses return on equity,
`adjusted for non-GAAP items, and return on capital, adjusted for non-GAAP items, to enhance the
`investor’s overall understanding of the financial returns on equity and capital for Allergan’s core busi-
`ness activities.
`
`In this annual report, Allergan also reported sales performance using the non-GAAP financial
`measure of constant currency sales. Constant currency sales represent current period reported sales
`adjusted for the translation effect of changes in average foreign currency exchange rates between the
`current period and the corresponding period in the prior year. Allergan calculates the currency effect by
`comparing adjusted current period reported amounts, calculated using the monthly average foreign
`
`APOTEX 1050, pg. 6
`
`

`

`Year Ended December 31, 2002
`Non-GAAP
`Adjustments
`
`GAAP
`
`Adjusted
`
`Year Ended December 31, 2001
`Non-GAAP
`Adjustments
`
`GAAP
`
`Adjusted
`
`Year Ended December 31, 2000
`Non-GAAP
`Adjustments
`
`Adjusted
`
`GAAP
`
`$1,357.2
`27.8
`1,385.0
`191.4
`30.3
`1,163.3
`3.7
`623.8
`233.1
`118.7
`–
`62.4
`129.0
`15.8
`(17.4)
`(30.2)
`(1.7)
`(5.7)
`(39.2)
`
`$
`
`–
`–
`–
`(3.7)
`(i)
`–
`3.7
`–
`(39.2)
`(j)
`(4.7)
`(k)
`(118.7)
`(l)
`–
`(62.4)
`(f)
`228.7
`–
`–
`30.2
`1.7
`1.0
`32.9
`
`(q)
`
`(c)
`
`(m)
`
`$1,357.2
`27.8
`1,385.0
`187.7
`30.3
`1,167.0
`3.7
`584.6
`228.4
`–
`–
`–
`357.7
`15.8
`(17.4)
`–
`–
`(4.7)
`(6.3)
`
`89.8
`25.1
`0.7
`64.0
`
`(h)
`
`261.6
`73.3
`–
`$ 188.3
`
`351.4
`98.4
`0.7
`$ 252.3
`
`$
`
`$
`
`$1,142.1
`–
`1,142.1
`198.1
`–
`944.0
`4.2
`481.0
`227.5
`–
`(0.7)
`(1.7)
`242.1
`30.6
`(18.1)
`(4.5)
`4.2
`6.0
`18.2
`
`260.3
`88.5
`0.6
`$ 171.2
`
`$
`
`–
`–
`–
`–
`–
`–
`–
`(2.9)
`(40.0)
`–
`–
`1.7
`41.2
`–
`–
`4.5
`(q)
`(4.2)
`(6.5)
`(6.2)
`
`(n)
`
`(o)
`
`(p)
`
`(c)
`
`(r)
`
`$1,142.1
`–
`1,142.1
`198.1
`–
`944.0
`4.2
`478.1
`187.5
`–
`(0.7)
`–
`283.3
`30.6
`(18.1)
`–
`–
`(0.5)
`12.0
`
`(h)
`
`35.0
`(1.5)
`–
`$ 36.5
`
`295.3
`87.0
`0.6
`$ 207.7
`
`$992.1
`–
`992.1
`197.7
`–
`794.4
`3.5
`410.3
`165.7
`–
`(3.1)
`0.2
`224.8
`23.9
`(16.2)
`0.8
`–
`2.3
`10.8
`
`235.6
`69.1
`0.6
`$165.9
`
`$
`
`–
`–
`–
`–
`–
`–
`–
`1.3
`(s)
`(2.0)
`(t)
`–
`–
`(0.2)
`0.9
`–
`–
`–
`–
`–
`–
`
`(u)
`
`$ 992.1
`–
`992.1
`197.7
`–
`794.4
`3.5
`411.6
`163.7
`–
`(3.1)
`–
`225.7
`23.9
`(16.2)
`0.8
`–
`2.3
`10.8
`
`(h)
`
`0.9
`0.2
`–
`$ 0.7
`
`236.5
`69.3
`0.6
`$ 166.6
`
`0.49
`
`$ 1.46
`
`$
`
`1.95
`
`$ 1.30
`
`$ 0.28
`
`$
`
`1.58
`
`$ 1.27
`
`$
`
`–
`
`$
`
`1.27
`
`0.49
`$
`$ 1,385.0
`
`$ 1.43
`$
`6.5
`
`(v)
`
`$ 1.92
`$ 1,391.5
`
`$ 1.29
`$1,142.1
`
`$ 0.26
`$ 28.8
`
`(v)
`
`$ 1.55
`$1,170.9
`
`$ 1.24
`$992.1
`
`$0.01
`$24.1
`
`(v)
`
`1.25
`$
`$1,016.2
`
`exchange rates for the corresponding period in the prior year, to the actual current period reported
`amounts. Management refers to growth rates in constant currency so that sales results can be viewed
`without the impact of changing foreign currency exchange rates, thereby facilitating period to period
`comparisons of Allergan’s sales. Generally, when the dollar either strengthens or weakens against other
`currencies, the growth at constant currency rates will be higher or lower, respectively, than growth
`reported at actual exchange rates.
`
`(a) Income from a patent infringement settlement. (b) Restructuring charge related primarily to the
`scheduled termination of the Company’s manufacturing and supply agreement with Advanced Medical
`Optics. (c) Unrealized loss on the mark-to-market adjustment to derivative instruments.
`(d) Favorable recovery of previously paid state income taxes and the tax effect for non-GAAP adjust-
`ments. (e) In-process research and development charges related to the acquisition of Bardeen
`Sciences Company, LLC and Oculex Pharmaceuticals, Inc. (f) Restructuring charge (reversal) and
`asset write-offs, net related to the spin-off of Advanced Medical Optics. (g) Loss on early extinguish-
`
`ment of debt. (h) Tax effect for non-GAAP adjustments. (i) Duplicate operating expenses of $2.6 mil-
`lion and restructuring charge and asset write-offs of $1.1 million related the spin-off of Advanced
`Medical Optics. (j) Duplicate operating expenses incurred related to the spin-off of Advanced Medical
`Optics. (k) Duplicate operating expenses of $0.7 million and partnering collaboration expense of $4.0
`million. (l) Legal settlement regarding LUMIGAN. (m) Partnering deal settlement of $5.0 million, gain on
`sale of facility (spin-related) of $5.7 million and loss on early extinguishment of debt of $11.7 million.
`(n) Duplicate operating expenses of $4.4 million related to the spin-off of Advanced Medical Optics, net
`of income of $1.5 million from a partnering agreement. (o) In-process research and development charge
`related to the acquisition of Allergan Specialty Therapeutics, Inc. (p) Restructuring charge reversal relat-
`ed to the 1998 restructuring charge. (q) Mark-to-market loss on investments and related third party
`collaborations. (r) Gain on sale of facility (1998 restructuring-related) of $4.5 million and $2.0 million
`gain on the sale of divested pharmaceutical products in Brazil. (s) Gain on sale of investments.
`(t) Partnering agreement expenses. (u) Final restructuring charge adjustment related to the 1996
`restructuring charge. (v) The adjustment to measure sales using constant currency.
`
`APOTEX 1050, pg. 7
`
`

`

`ALLERGAN
`
`A UNIQUE SPECIALTY PHARMACEUTICAL COMPANY FOCUSED ON GROWTH & INNOVATION
`
`Results. I am pleased to report on another successful year of delivering
`innovations to meet the needs of our patients around the world. Total
`sales for the first time crossed the $2 billion dollar threshold in 2004,
`with revenues from our pharmaceuticals line increasing 16% in an
`industry challenged by slowing growth rates and a more difficult oper-
`ating environment. Diluted earnings per share, adjusted for certain
`transaction gains and losses and final restructuring associated with the
`2002 spin-off of our medical device businesses to Advanced Medical
`Optics (AMO), increased by 20%, again placing us in the top quartile of
`performers in the pharmaceutical and biotechnology industries.
`
`A year of many achievements. Our robust sales growth was driven by
`a wide range of products – BOTOX®, BOTOX® Cosmetic, RESTASIS®,
`LUMIGAN®, ZYMAR®, ELESTAT™ and ACULAR® – an unusual strength
`amongst companies of our size category in the pharmaceutical
`industry. We are also proud that we were once again able to gain
`market share in each of our product market categories.
`
`Growth was again led by BOTOX®, which continues to demonstrate
`its enormous versatility based on its multiple indications, over 15 year
`history of safe and effective use by physicians in millions of patients,
`and approved sale in approximately 75 countries around the globe.
`Overall sales of BOTOX® achieved $705 million, increasing by approx-
`imately 25% over 2003. Sales of BOTOX® Cosmetic, also marketed
`under the VISTABEL® brand in Europe, increased by approximately
`30% over 2003 as part of a global mega trend of the “Baby Boomer”
`generation’s desire to not only feel good but look good. Whilst
`BOTOX® enjoys fame as being the wrinkle treatment and is one of
`the best known pharmaceutical brands in the world, the cosmetic
`indication, in fact, only accounts for 42% of worldwide sales. Strong
`growth of BOTOX® in therapeutic indications was registered at
`approximately 20% as BOTOX® continues to enjoy expanding use in
`many indications around the world.
`
`In ophthalmology, Allergan was again the fastest growing global
`company in the world, increasing in-market sales by approximately
`
`12% in the first 9 months of 2004 in a market expanding by 7%,
`according to IMS Health global data. Particularly good progress was
`made in the United States, with the value of prescriptions written by
`ophthalmologists for Allergan products being about 50% higher than
`that of the nearest branded competitor. As the original therapeutic
`dry eye product in the world, RESTASIS® ophthalmic emulsion was
`established as a key new therapeutic option for practitioners to sup-
`plement the use of artificial tears and reached $100 million in sales
`in its first full year on the market. LUMIGAN® ophthalmic solution, the
`most effective agent in lowering intra-ocular pressure (IOP), achieved
`$233 million in 2004 sales, increasing by approximately 28% in a
`global glaucoma market that grew 8%.
`
`Our dermatology business suffered a disappointment in 2004.
`Allergan’s R&D has one of the best track records in the industry for
`success measured in terms of the number of compounds entering the
`clinic relative to the number of market approvals, and has not experi-
`enced a non-approvable letter for a decade. We were disappointed by
`the FDA’s decision to accord “non-approvable” status to our application
`for tazarotene oral although the FDA Dermatologic and Ophthalmic
`Drugs Advisory Committee and the Drug Safety and Risk Primary
`Management Committee had in fact found that the compound
`achieved its primary efficacy endpoints in the treatment of moderate
`to severe psoriasis. We remain committed to seeking a resolution of
`this matter by working with the FDA to secure an approval, and even-
`tually providing tazarotene oral as a new alternative to topical and
`biological treatments for physicians and their patients. Market
`research clearly indicates that psoriasis is a disease that represents
`an area of major unmet needs in terms of improved efficacy and
`reduced side effects.
`
`Ex-factory sales of our in-line dermatology products were also disap-
`pointing, declining by approximately 5%. This was primarily due to an
`excess of in-channel inventory of TAZORAC® cream and gel at the
`retail pharmacy level at the beginning of the year, which is difficult to
`detect from all sources of available market data. In terms of in-market
`
`APOTEX 1050, pg. 8
`
`

`

`
`
`APOTEX 1050, pg. 9
`
`

`

`sales, however, TAZORAC® grew 12% which made it the fastest grow-
`ing topical retinoid in the market to treat acne in the United States. As
`an organization, we enjoyed a very strong position in the dermatology
`and plastic surgery specialist markets in 2004, being one of the top
`three companies, based on sales of BOTOX® Cosmetic, TAZORAC®
`cream and gel, and our other dermatology products.
`
`Unfortunately, setbacks such as tazarotene oral occur in the high
`risk, high reward pharmaceutical industry. In developing corporate
`strategy and managing a business for long-term success, it is a
`question of how an organization deals with reversals. Our reaction
`has been to galvanize management and employees to focus on the
`products and tools at our disposal to continue to produce great
`results and great success. We believe that we are already seeing the
`benefits of this focus, just as we saw the benefits for the BOTOX®
`brand after the 2002 spin-off of AMO. We also take great pleasure
`in observing the success of the AMO team in their single-minded
`focus on what is their core medical device business.
`
`Focus on Innovation. As the only driver of long-term success, our
`foremost efforts and attention are directed to creating innovation
`and value for our physicians and patients. During 2004 we invested
`almost $350 million in R&D, an increase of approximately 13% versus
`2003, excluding in-process R&D acquisition costs, and a sector lead-
`ing 18% of pharmaceutical sales. We also invested 40% of sales in
`Selling, General & Administrative Expenses (SG&A), which places
`Allergan at the top of the pharmaceutical industry in terms of our
`resources dedicated to selling and marketing. Administrative expens-
`es as a component of SG&A were comfortably below 8% of sales.
`Thanks to these continued strong investments, we achieved some
`notable successes in 2004.
`
`The approval in the United States for BOTOX® for hyperhidrosis, a
`disease afflicting some 1.3 million Americans, marked a breakthrough
`new treatment option. We are working to build this market – making
`patients aware of this treatment, training physicians and securing reim-
`bursement. In the area of BOTOX® Cosmetic we are training physicians
`in all the continents of the world where this indication is approved to
`improve their treatment techniques and to organize their practices for
`delivering customer satisfaction. In early 2005 we secured for VISTABEL®
`positive opinions – the precursor to commercialization licenses – in an
`additional 12 European Union countries. At year end, we secured
`
`agreement with the FDA on the protocols for studying BOTOX® in
`the treatment of migraine in large Phase III clinical trials.
`
`As a world first in the treatment of dry eye disease, we harnessed the
`power of consumer advertising in the United States to make patients
`aware of the availability of RESTASIS® as a powerful medication to
`treat dry eye. LUMIGAN® solidified its position as the most efficacious
`agent in the world for lowering IOP to treat glaucoma and achieved
`the status of being a first-line treatment option in the European Union.
`In our attempts to address more than just IOP, we continue to invest
`heavily in our pioneering clinical studies in memantine, which if proven
`effective, would be the first approved agent to directly protect the
`optic nerve from glaucomatous damage. We are also continuing our
`studies in humans on the neuroprotective properties of ALPHAGAN®
`ophthalmic solution, our other world leading glaucoma product. In
`order to provide greater convenience and compliance to our patients,
`we started successfully marketing COMBIGAN®, a fixed combination
`of ALPHAGAN® and timolol, in Canada and Brazil. Moreover, in early
`2005 we secured approval for COMBIGAN® in Switzerland as the first
`European market, and are awaiting action by other key agencies in
`the United States and the European Union. ZYMAR®, a new potent
`fourth generation fluoroquinolone for treating ocular infections, was
`established as the No. 1 choice of American ophthalmologists and
`was launched in several key Latin American markets. ELESTAT™ was
`launched in Europe and was established as a leading allergy product
`in the United States by our partner, Inspire Pharmaceuticals.
`Addressing the area of retinal diseases, which are currently the lead-
`ing cause of blindness in the developed world, we made great strides
`in progressing our programs for macular edema with POSURDEX®,
`which utilizes the unique technology from Oculex Pharmaceuticals
`which we acquired in 2003, our bioerodable delivery system and
`triamcinolone, a collaboration with the National Eye Institute.
`
`Moving our earlier stage innovative technology to the next decisive
`phase, we filed Investigational New Drug (IND) applications with
`the FDA in 2004, both for our proton pump inhibitor pro-drug for
`the treatment of gastrointestinal heartburn, as well as for an alpha
`adrenergic agonist for neuropathic pain.
`
`Focus on Efficiency & Effectiveness. Focus on innovation is no
`longer the only means to secure long-term success in an industry
`where ever greater cost pressures are building up in the healthcare
`
`APOTEX 1050, pg. 10
`
`

`

`2004: A year of many achievements.
`
`systems around the world. For this reason, we at Allergan also place
`great emphasis on driving efficiency and effectiveness in all of our
`functions. Since 1997 we have substantially expanded productivity,
`having increased sales per capita by more than threefold. Unusual in
`our industry, one in two Allergan personnel today work in either R&D or
`in our salesforces – the two drivers of growth. These massive produc-
`tivity gains were possible as we consolidated our manufacturing into
`only three plants, where we continue to invest heavily, and streamlined
`our overhead structures. This process continues as we announced fur-
`ther streamlining of our European business in early 2005, which will
`lead to greater concentration of our R&D into the United States and the
`United Kingdom and leaner back-office functions. New clinical devel-
`opment processes and metrics are in place not only to maintain
`Allergan’s status as one of the fastest in the industry but also to lower
`the costs of our clinical studies. In 2005, these measures are expected
`to help us save about $15 million in clinical development costs where
`the savings will be reinvested back into additional quantities of new
`studies. In manufacturing, we utilize Six Sigma and lean manufacturing
`techniques in our three plants. Constant training of our top-rated sales-
`forces is designed not only to improve customer satisfaction but also to
`increase the number of calls per day and per year, harnessing state-of-
`the-art information technology.
`
`Efficiency and effectiveness are evident in our financial metrics.
`Return on equity at year end, adjusted for non-GAAP items, was 33%
`versus an industry benchmark of 20% and return on capital, adjusted
`for non-GAAP items, moved up to 22% from 14% in 2000 and versus
`an industry average of 15%. We ended the year with a record low for
`days of sales outstanding (DSO) of 40 days and low inventories of
`79 days on hand (DOH). At year end, Allergan held an aggregate
`cash position of about $900 million, and just over $300 million in
`terms of cash net of debt, an increase of roughly $400 million in one
`year. This should provide us flexibility for future strategic transactions.
`
`Focusing on our Future. By combining the best elements of biotech-
`nology and specialty pharmaceutical industry models, Allergan is well
`equipped to face and address the challenges of our industry. Our
`discovery research capabilities, as evidenced by our platform tech-
`nologies in the areas of neurotoxins, alpha agonists for the treatment of
`pain, tyrosine kinase inhibitors for age-related macular degeneration
`and sodium channel blockers for neurologic disorders, are a reflec-
`tion of the entrepreneurial and innovative culture at Allergan, and
`
`make us a unique specialty pharmaceutical company more akin to
`the best of the profitable biotechnology companies. Given the
`escalating prices to acquire or license early stage products in the
`market, driven by the demand from “Big Pharma” and “Big Biotechs”
`for new products, these technologies are key assets of value in
`Allergan’s portfolio.
`
`As we embark on 2005, our clinical development staff is focusing on
`those key projects that are anticipated to deliver new product
`approvals in the next two to three years and our commercial teams are
`focusing their financial and human resources on the key product
`growth drivers. The mid-year appointment of Dr. Scott Whitcup, an oph-
`thalmologist, retina specialist, internist, and former Clinical Director at
`the National Eye Institute, to lead Allergan’s R&D function, has already
`brought new approaches, building on the best practices of prior years,
`to accelerating certain clinical programs and to focusing efforts in
`discovery research to rapidly bring compounds into the clinic.
`
`I wish to thank the many hard working and talented Allergan employ-
`ees around the globe that contributed to making 2004 another
`successful year. In a pharmaceutical industry facing unprecedented
`change, I wish to acknowledge the support and counsel of our
`exceptional Board of Directors. I thank, in particular, Dr. Lester
`Kaplan who retired from Allergan’s management and Board in 2004
`after having built our R&D organization over a 20 year career with the
`Company; and Prof. Ronald Cresswell, formerly Chief Scientific
`Officer of Warner Lambert, who retired from the Board for health
`reasons. The recent additions to our Board have further strength-
`ened our global pharmaceutical industry experience and perspective:
`Prof. Trevor Jones, who served as the Director General of the British
`Pharmaceutical Industry Association and hitherto main board director
`responsible for R&D at Wellcome; and Robert Ingram, Vice Chairman
`Pharmaceuticals of GlaxoSmithKline, who has spent his entire
`career in the industry. Finally, I wish to thank our shareholders for
`their continuing loyalty and support.
`
`David E. I. Pyott
`Chairman of the Board, President and Chief Executive Officer
`
`APOTEX 1050, pg. 11
`
`

`

`Pictured from left: Handel E. Evans, Trevor M. Jones, Michael R. Gallagher, Leonard D. Schaeffer, Gavin S. Herbert and Karen R. Osar
`
`BOARD OF DIRECTORS
`
`HERBERT W. BOYER, Ph.D., 68 – Vice Chairman of the Board since 2001,
`served as Chairman from 1998 to 2001; Board member since 1994. Dr. Boyer
`is a founder of Genentech, Inc. and a Director since 1976. A former Professor
`of Biochemistry at the University of California at San Francisco, Dr. Boyer is a
`recipient of the National Medal of Science from President George H. W. Bush,
`the National Medal of Technology, and the Albert Lasker Basic Medical
`Research Award. He is an elected Member of the National Academy of
`Sciences and a Fellow in the American Academy of Arts and Sciences. Dr.
`Boyer serves on the Board of the Scripps Research Institute.
`
`HAN DE L E. EVANS, 70 – Elected to the Board in 1989. Former Chairman
`of Equity Growth Research Ltd., a company providing financial services in
`Europe that was acquired by Libertas Capital in 2004. Mr. Evans has over 40
`years of experience in the pharmaceutical industry and was the founder and
`former Executive Chairman of Pharmaceutical Marketing Service Inc., Source
`Informatics Ltd. and Walsh International Inc., companies providing marketing
`services to the pharmaceutical industry. Mr. Evans was also a co-founder of
`IMS International Inc., the leading pharmaceutical information supplier. Mr.
`Evans is a Director of Cambridge Laboratories Ltd. and Chairman of the
`Trustees of British Urological Foundation. Mr. Evans was previously a Director
`of Smithkline Beecham Plc. and IMS International Inc.
`
`M ICHAE L R. GALLAG H E R, 59 – Elected to the Board in 1998. In 2004,
`Mr. Gallagher retired as Chief Executive Officer and as a Director of Playtex
`Products, Inc. Prior to joining Playtex in 1995, Mr. Gallagher was Chief Executive
`Officer/North America for Reckitt & Colman PLC; President and Chief
`Executive Officer of Eastman Kodak’s subsidi