S BARNEY
`
`See last pages for Important Elisclosures
`2H l'Ji'éL‘§.aé1'3“ """
`
`Angela Larsen
`212-313-3923
`
`Sanjay S. Ualvani
`212-313-1323
`
`Terry-Ann Burrell
`212-313-9922
`
`
`
`UnitedStates
`
`LARGE-cAP
` $8-Obit
`UNITED STATES
`
`Specialty Pharmaceuticals
`
`— I February 12. zoos
`
`Allergan Pharmaceuticals
`
`-
`
`_
`(AGN $6035)
`
`Awaits
`
`)1» After a spin-off of AIIergan's non-pharmaceutical
`
`businesses in 2002, the spotlight is focused on
`
`product growth opportunities in 2003 and beyond.
`
`1» Interestingly, in 2003 we believe Allergan faces
`
`generic risk in two products (Alphagan and
`
`Acular) and the U.S. launch of three products
`
`(Restasis, Acular new formulation, Gatafloxacin).
`
`I» We believe the financial model oflers flexibility
`
`but risks cloud this opportunity in the near term.
`
`1» we rate AGN In-line (2H), and our target of $57
`
`represents a 40% PIE premium to the industry.
`
`I» We have a Marketweight rating on the specialty
`
`pharmaceutical industry.
`
`FY December
`Revenues (mi|.}
`Current EPS
`
`Previous EPS
`PIE
`
`1313531103
`Price Perlnnnance
`Absolute
`Relative
`
`2002191
`51,4233
`$1.88
`
`2003E
`31333.1
`$2.31
`
`2I)lJ4E
`31,1159
`$2.86
`
`52-Week Range
`Dividendfiield
`Shares Oulimil.)
`
`—
`32.411
`
`NA
`2001
`-22.5%
`-9.4%
`
`NC
`234x
`
`NA
`2002
`-23.2%
`«-0.1%
`
`NC
`2131:
`
`NA
`YTD
`+3.9%
`+19%
`
`Floatlmii.)
`Est. 5-YearEPS Growth
`
`L-T nebucapnal
`ROE [2003E)
`Current Book Value
`Priceffloek
`
`ss.1=-sou: 333
`
`$70-$50
`Nil
`131.2
`
`123.3
`22%
`
`35.9%
`NA
`NA
`NA
`
`1
`
`ALL 2049
`MYLAN PHARMACEUTICALS v. ALLERGAN
`|PR2016-01128
`
`A memberof c1t1qroup'J‘
`
`1
`
`ALL 2049
`MYLAN PHARMACEUTICALS V. ALLERGAN
`IPR2016-01128
`
`

`

`Allergan Pharmaceuticals — February 12. 2003
`
`Allergan Pharmaceuticals
`(nen-nvsr-:)
`
`Angeia Larson
`212-316-6923
`
`Ratinq:
`
`Price (02i10i2003}:
`
`Price Tarqel:
`
`52-Week Rarltlez
`
`2H (tn—Iine, High Risk}
`
`$50.95
`
`$5? .00
`
`$70-$50
`
`'
`
`Nil
`
`COMPANY DESCRIPTION
`Aiiergan, inc. is a giobai speciaity pharrnaceuticais
`company that currently has three core therapeutic focuses.-
`ophthaimoiogy (6? % of 2002 sates). movement disorders
`(32% of 2002 sates), and dermatoiogy (7% of 2002 sates).
`on Juiy I. 2002. the company announced a spin-offoi its
`non-pharrnaceuticai franchises to become a pure-piay
`pharrnaceuticai company, Aiiergan seiis products in more
`than 100 countries and receives approirirnaie.-‘y 30% of
`corporate revenues from outside the United States.
`in
`2002, Aiiergan reported pharmaceuticai revenues of $1.421
`9500”: HP 79%)/93f Oliefiteaf»
`
`' .§.i.'c';E§_?‘§,{$E"2'§f,?s".,f,°RATE° ‘AGM
`smw
`
`6 =
`..n.cL‘C°,§‘;,‘*""‘9., “’§,?,,S,.5
`41-Weeks
`-1.02
`‘'“'°'”‘
`‘W 1.1133
`OTB
`-1.08
`DIE
`YTD
`4.00
`9.?6
`2DD2
`-23.22
`D.‘|-I1
`20131
`-22.48
`-9.44
`2000
`94.60
`104.151.
`1999
`53.6?
`34.14 House Estimate
`FYE Dec 2|JD2 EFS 1.9?
`PE Ratio
`
`F.;f’2Z.. 9:19“
`“'°*'”E5""’”‘”
`
`$333
`2*”.
`
`-
`‘
`
`.
`
`‘
`
`iii;
`iflfifl
`.§'.°§.‘ .§§£
`2.91]
`3.]"E|
`2.30
`3.51
`‘ID
`3
`2
`1
`1
`1
`
`-
`
`2°°‘.‘,,,u,2§$,,,,”,°°"‘
`5.7.‘i?.“t"3§.i§“{'§i..,
`Shares Out (MI)
`Daily Volume {Thou}
`Ddiy Vnlume [$11.51)
`Diuiderfl Eslimale
`Payout! Ralio
`Retention Rate
`Dividend fie|d
`
`KEY RATIOS (96)
`Tax
`
`Net
`
`Margin
`NA
`NA
`NA
`
`Rate
`NA
`NA
`NA
`NA
`NA
`
`SALES AND EARNINGS {$ in millions, except per-share data)
`Net
`Shares
`
`Revs.
`FY ends:
`NA
`12i05iEi
`51,7750
`12i04(E}
`$1 .5331
`12i03{E}
`$1,432.1
`12tU2{A]
`$1.5B8.1
`12i01(A]
`5-Year Growth Rates:
`
`03-0‘i(El
`98—02(A}
`
`NA
`NA
`
`EBITDA
`NA
`$578.8
`$431 .'i
`$380.3
`$353.3
`
`NA
`NA
`
`Income
`NA
`$315.4
`$305.5
`$243.90
`$191.84
`
`NA
`NA
`
`{miI.]
`NA
`132.0
`132.0
`131.4
`134.0
`
`NA
`NA
`
`EPS
`NA
`$2.80
`2.31
`1.35
`1.48
`
`.
`'
`NA
`$0.48
`$0.36
`$0.36
`$0.36
`
`NA
`NA
`
`QUARTERLY EPS
`20
`an
`NA E
`NA E
`NA E
`NA E
`
`10
`NA E
`NA E
`
`$0.54 E
`$0.43 A
`
`$0.58 E
`$0.43 A
`
`$0.59 E
`$0.48 A
`
`PIE 12i04[E)
`PIE 12i03[E]
`Rel PiE 2003{E]
`Pricetreus 12i03[Ei
`
`VALUATION
`
`21 .3):
`26.4):
`1.6%
`NA
`
`PricetB‘v
`TE1.-'tEBlTDA
`Beta
`Technical rating
`
`RATING CHANGES
`Date
`01 t1 6:02
`
`BALANCE SHEET SUMMARY [$ in millions. as of 122001)
`Current assets
`$1.325.3
`Current liabilities
`Fixed assets
`338.?
`Lono-term debt
`Other assets
`332.2
`Oiherliahilifies
`
`Total assets
`
`2,045.2
`
`Eguitg
`Total liabilities & equity
`L-T dehticapital
`
`$490.0
`520.6
`58 2
`
`977.4
`2,046.2
`34.8%
`
`SHARE DATA
`
`Market cap {miI.]
`Primary shares (mil)
`Float [mi|.]
`Avg. daily volume [rnil.]
`
`$1995.54
`131.2
`NA
`1.3
`
`Convertible shares
`Institutional ownership
`Insider ovirnershio
`Weight in 5&9 500
`
`‘
`
`RECENT PUBLICAHONS
`
`Date
`
`.
`.
`
`'
`
`.
`
`2
`
`SALOMON SMITHBIAHNEY
`
`

`

`Allergan Pharmaceuticals — February ‘E2. 2003
`
`
`
`luetuumsengnoexg
`
`Allergan has a history of consistent revenue and eamings growth
`
`and in 2002 because a “pure—play” pharmaceutical company. We
`
`believe growth can continue in 2004 with the launch of three new
`
`products in the U.S.: Re-stasis for dry eye, gatafloxacin for ocular
`
`infections, and a new formulation ofAcular for ocular
`
`inflammation. However, Allergan’s 2003 risk (in our view) to
`
`Alphagan generic, Acular generics, the Botox lawsuit, and the
`
`stock’s current premium valuation weigh against our growth
`
`outlook.
`
`Allergan beat our fourth quarter EPS estimate by $0.01.
`
`Allergan reported fourth quarter 2002 EPS of $0.54, vs. our estimate and
`
`consensus of $0.53. Total sales were slightly light, by 2% vs. our forecast, and we
`
`thus do not view the EPS upside as significant.
`
`2003 appears to be an interesting year for Allergan"s pipeline.
`
`In 2003, Allergan expects to launch three products (Restasis for dry eye,
`
`Epinastine for allergies, Gatafloxacin for eye infections); to file potentially
`
`three more (Botox for movement disorders, Tazorac oral for psoriasis, and
`
`combination Lumigan+Timolol for glaucoma); and to gain greater clarity on
`
`the generic risk for two products (Alphagan for glaucoma and Acular for
`inflammation).
`
`Allergan is not riskless.
`
`We believe risks for AGN are related to the patent challenges to Alphagan, the
`
`growth forecast for Botox (use of which we are concemed may prove to be a
`
`fad), and the continued development of the R&D pipeline. Allergan is one of
`
`our globally diversified covered companies, with 30% of sales from outside the
`
`United States, which implies foreign exchange Concerns and lack of third-party
`
`data for product demand outside the United States.
`
`AGN outperformed the specialty pharma sector in 2002.
`
`For calendar 2002, the specialty pharmaceuticals sector was down 39%, the
`
`market (S&P 500) was down 13%, and AGN shares were down 20%. Year to
`
`date 2003, AGN is up 4% vs. the specialty phannaceutical sector, which is up
`9%, and the market, which is down 6%.
`
`We rate Allergan 2H (In-line, High Risk), with a $51 target.
`
`A|lergan’s $57 price target reflects a 40% WE premium on estimated calendar
`
`2003 EPS relative to its peer group of specialty pharmaceutical companies (25x
`
`our estimated calendar 2003 EPS of $2.31).
`
`We rate the specialty pharmaceuticals industry Illlarketweight.
`
`We believe the news flow and pipeline potential may support the specialty
`
`pharmaceutical industry's valuation. We continue to remain selective in our
`
`individual company recommendations and focused on new product
`
`deveiopmentllaunches to drive growth.
`
`SALOMUNSMTIHBARNEY
`
`

`

`Allergan Pharmaceuticals — February 12. 2003
`
`Table of contents
`
`Executive Summary ............................................................................................................... 3
`Sector Valuation .................................................................................................................... 5
`A Few Valuation Comments .................................................................................................. .. 5
`
`Growth Now, and Growth Beyond ....................................................................................... 9
`Company Description ............................................................................................................ .. 9
`We Are Here .......................................................................................................................... .. 9
`
`Products for Today .............................................................................................................. .. 11
`Expected 2003 Pipeline Products ........................................................................................ .. 15
`Other Pipeline Products — Beyond 2003 ............................................................................ .. 16
`Model Review ...................................................................................................................... .. 17
`
`Don’t Borget Bardeen .......................................................................................................... .. 18
`Model Sensitivity Analysis .................................................................................................. .. 19
`Valuation ............................................................................................................................. .. 20
`
`Investment Summary ........................................................................................................... .. 22
`Risks .................................................................................................................................... .. 22
`
`Appendix ............................................................................................................................. .. 23
`
`Calendar of Events — By Calendar Quarter .................................................................. .. 24
`Events .................................................................................................................................. .. 24
`
`Recent Publications ............................................................................................................. 25
`
`Year-to-Date Recent Research Notes/Reports ..................................................................... .. 25
`
`Product Summary Chart..................................................................................................... 26
`Recent News Flow .............................................................................................................. .. 28
`
`January 2003 ........................................................................................................................ .. 28
`December 2002 .................................................................................................................... .. 28
`November 2002 ................................................................................................................... .. 28
`October 2002 ....................................................................................................................... .. 29
`
`September 2002 ................................................................................................................... .. 29
`August 2002 ......................................................................................................................... .. 29
`July 2002 .............................................................................................................................. .. 29
`
`Allergan Board Review ....................................................................................................... 30
`Director Biographies ............................................................................................................ .. 31
`
`Allergen Financial Model .................................................................................................... 34
`
`Allergan Prescription Model............................................................................................. .. 38
`
`Allergan Rx Model — Forecasts......................................................................................... 39
`Rx Data ................................................................................................................................ .. 39
`
`Allergy — Eyeclrop Market ................................................................................................. .. 41
`Glaucoma Market ................................................................................................................ .. 43
`
`Table of Figures ................................................................................................................. .. 46
`
`4
`
`SALDMONSMTTHBARNEY
`
`

`

`Allergan Pharmaceuticals — February ‘I2. 2003
`
`Sector Valuation
`
`)- The specialty pharmaceutical sector is currently trading at a 17.0):
`multiple based on forward 2003 earnings estimates. The current
`
`multiple is significantly lower than the five-year average multiple of
`
`29.9): and the ten-year average multiple of 31.21:. We believe this is
`
`more due to general market fears and war concerns than anything
`
`more industry-specific as the sector remains at a premium to the
`
`market (currently at 12% premium vs. the last-ten-year average of a
`
`57% premium).
`
`AGN is currently trading at a 26.4): multiple based on forward 2003
`
`earnings estimates. The current multiple is lower than the five-year
`
`average multiple for Allergan of 32.8x and is slightly higher than the
`
`ten-year average multiple of 24.71:.
`
`AGN is trading at a 53% premium to the sector although the five-
`
`year historical average is a 10°/o premium to the group.
`
`AGN's year-to-date performance has not matched that of the sector,
`
`up 4% versus up 9%, respectively (the S&P 500 is down 6%).
`
`We believe the specialty pharmaceutical stocks that have
`
`outperformed the sector have been driven by new product launches
`
`and pipeline news flow supporting revenuelearnings growth.
`
`We have a Marketweight rating on the specialty pharmaceutical
`
`industry.
`
`As brand companies
`have defined their
`business models, the
`range of multiples has
`contracted.
`
`In Few Valuation Comments
`The brand—focused specialty phannaceuticals sector has experienced quite a bit of
`
`volatility in its absolute forward PIE multiples in the past ten years. ranging from
`
`17x to 52x. The range contracts only slightly, to 18x to 42x, if we reduce our
`
`analysis to just the past five years. We believe this consistently wide range is due to
`
`a variety of conditionsfopportunities that have Caused the companies in our
`
`composite to behave very independently of one another. These factors include the
`
`following:
`
`>- various business models in the sector, ranging from ones with a therapeutic
`
`focus supported by R&D activity to ones that without a therapeutic focus and
`
`with minimal R&D capabilities;
`
`)- difierent maturity levels ofbusiness strategies. including self-marketing of
`
`products (which offers greater self—eontroI of the longer—term corporate destiny);
`
`>-
`
`a wide variety of representation of selfimarketcd products in total revenues in
`
`comparison with historical sources (i.e., generics. drug delivery, and non-
`
`phannaeeuticals);
`
`SALOMON SMITH BARNEY
`
`

`

`Allergan Pharmaceuticals — February 12, 2003
`
`Hlstorlcally, Allergen has
`been a high-P/E stoclr ln
`the sector.
`
`3- high, but not necessarily consistent, revenue!earnings growth due to young
`
`product portfolios;
`
`Y
`
`Y
`
`Y
`
`wide-ranging R&D commitments and pipeline visibility;
`
`varying exposure to negative industry concerns (such as generic risks); and
`
`diverse management backgroundsftrack records (including entrepreneurs,
`
`scientists, professional managers, and seasoned pharmaceutical veterans).
`
`Figure 1. Specialty Pharmaceutical Brands — Absolute Forward PE
`
`6030
`
`5000 .
`
`S ecial -Brands Absolute Forward PIE
`
`10 year average = 3‘L2x
`Syear average = 29.91
`1/ Current
`= 13.91
`
`40.00
`
`30.00 '
`
`('1Q
`
`:1
`1-
`
`("1Q
`
`:1
`l‘-
`
`3e.
`
`:
`1-
`
`3e.
`
`:
`l‘-
`
`la‘)E
`
`:
`1-
`
`la‘)92
`
`:
`l‘-
`
`(59‘;
`
`:
`1-
`
`(DE
`
`E
`l‘-
`
`h-Q
`
`:
`1-
`
`l--E
`
`1:
`l‘-
`
`03Q
`
`1:
`1-
`
`CDE
`
`L:
`l'-
`
`0)E:
`
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`1-
`
`0)Q
`
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`
`DQ
`
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`1-
`
`C)9.
`
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`
`-E
`
`:
`1-
`
`1-E
`
`:
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`
`NE
`
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`1-
`
`NE
`
`:
`l‘-
`
`P’)E
`
`:
`-
`
`0 S&P 500
`- Spec rharnna Gsne.ri.9s.
`
`—Spec Pharma Brands
`- fill? _M.ai9r Pha.r"3a_
`
`Note: Sper:ialtyPham1aceuiicals Brand composite oampaniesr Allergan, Elan Corp, Forest. King Pharma. Medicis, and Shire Pharmaceuticals.
`Source: Stockilal
`
`Figure 2. Specialty Pharmaceuticals Brand — Relative Forward PlE
`
` En£&
`10 year average = 169%
`5 year average = 123%
`cumm:
`= 112%
`
`'
`
`.2‘/5}'earrange
`
`=-103%- 151%
`
`_
`
`400%
`359% '
`300% -
`
`250%
`
`200%’
`
`150%
`
`
`
`1m%-Wwwgwwwm
`50%-
`
`E3853.§'é$$E$i$$’«2i§Z§§§33$$$§§§§15.§%E5‘.§$
`SEESEESE§E%§EE§E%a'§EE§E%§EE§EEEE
`
`.
`
`..
`
`.
`
`1Spec Pharrna Brands
`
`-- Spec Pharma Generics
`
`-'><-- S3.P Major Pharrna
`
`Note: Specialty Phamraceuticals Brand Composite companies; Allergan, Elan (‘.orp., Forest, King Pharma, Medicis, and Shire Pharmaceuticals.
`Source: Stockila!
`
`SALOMON SMITH BARNEY
`
`

`

`Allergan Pharmaceuticals — February 12. 2003
`
`We continue to believe the specialty pharmaceuticals sector can hold its premium to
`
`the market (and even the large-cap pharmaceuticals sector) due to our forecast for
`
`higher comparative rcvenuefeamings growth. In addition, we believe revenues and
`
`earnings are now of greater quality than in the past due to the increasing reliance on
`
`self-marketing and selfldevelopment efforts. The group is rather diverse in many
`
`aspects. We continue to prefer companies with the following attributes:
`
`P earnings growth driven by new productfrevenue growth;
`
`D»
`
`a diversified but consistent revenue base (i.e., more than one product but with
`
`tight end-market focus);
`
`YYYY
`
`late—stage R&D capabilities (phase 3 development capabilities);
`
`medium-stage R&D visibility (early phase 3 and phase 2 programs identified);
`
`buying opportunities for shares at a reasonable valuation; and
`
`a strong, experienced management team.
`
`Our coverage universe and ratings are shown in Figure 3.
`
`Figure 3. Specialty Pharmaceutical Coverage universe
`
`company
`
`(211 012003) Price
`
`Rating
`
`Price Target
`
`Alcon Pharmaceuticals
`Allergan Pharmaceuticals
`Barr Labs
`
`Biovail Corp
`
`Elan Corp
`Endo Pharmaceuticals
`Forest Labs
`
`King Pharmaceuticals
`Medicis
`Mylan Labs
`Watson Pharmaceuticals
`Source: Salomon Smith Barney
`
`$37.57
`$60.05
`$74.25
`
`$31.56
`
`$3.84
`$9.87
`$50.10
`
`$15.50
`$47.05
`$27.11
`$29.00
`
`2H (In-Line, High Risk)
`2H (In-Line, High Risk)
`1H (Outperform, High Risk)
`
`1H (Outperform, High Risk)
`
`33 (Underperform. Speculative)
`15 (Outperform. Speculative)
`2H (In-Line, High Risk)
`
`2H (In-Line. High Risk)
`2H (In-Line, High Risk)
`3H (Underperform, High Risk)
`3H (Underperform, High Risk)
`
`$40.00
`$57.00
`$92.00
`
`$42.00
`
`$2.90
`$12.00
`$53.00
`
`$20.00
`$45.00
`$24.00
`$29.00
`
`SALOMON SMITI-IBARNEY
`
`7
`
`

`

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`

`

`Allergan Pharmaceuticals — February 12. 2003
`
`Growth Now, and Growth Beyond
`
`On January 29, 2003, Allergan reported fourth quarter 2002 EPS of
`
`$0.54 (excluding one-time items), $0.01 above our estimate. Total
`
`sales reported were slightly light (by 2%) versus our forecast, and
`
`we thus do not view the EPS upside as significant.
`
`Ailergarfs EPS excluding
`one-time items beat our
`
`estimate by $0.01.
`
`Allergan management outlined its guidance for 2003. While our
`
`sales forecast was in line with guidance, SG&A and gross margins
`
`were guided to lower-than-expected levels, and such revisions
`
`generally drive our estimate changes.
`
`We believe 2003 looks to be an interesting year for Allergan, with
`
`the potential of four U.S. launches (three brand new products), two
`
`European launches, the filing of potentially three more, and generic
`
`risk for two products likely to become reality.
`
`We rate AGN shares 2H (In-line, High Risk) and our price target
`
`remains $57. We have a Marketweight rating on the Specialty
`Pharmaceutical sector.
`
`We believe Allergen
`became a pure-play
`specialty
`phannaceuticais
`company in 2002.
`
`Icompany Description
`Allergan, Inc. is a global specialty pharmaceuticals company that currently has three
`
`core therapeutic focuses: ophthalmology (61 % of 2002 sales), movement disorders
`
`(32% of 2002 sales), and dermatology (7% of 2002 sales). On July 1, 2002, the
`
`company announced a spin—off of its non—pharrr1accutical franchises and became a
`
`purc—play pharmaceutical company. Allergan sells products in more than 100
`countries and receives approximately 30% of corporate revenues from outside the
`
`United States.
`
`In 2002, Allergan reported pharmaceutical revenues of $1 .42]
`
`billion, up 19% year over year.
`
`Iwe Are Here
`Allergan reported fourth quarter EPS of$0.S4 excluding one-time charges, above
`
`our and consensus estimates of $0.53.
`
`It also reported full year results. We tend to
`
`view product sales as the key indicator to a company’s growth strength as
`
`nonoperating one-time items seldom affect product growth. On this front, Allergan
`
`reported total sales just slightly (2%) below our forecast ($328 million versus $383
`
`million). Accordingly, we view the quarter reported as solid, although we are not
`
`overly impressed with the $0.01 of EPS upside.
`
`SALOMONSMHHBARNEY
`
`

`

`Allergan Pharmaceuticals — February 12, 2003
`
`_
`The company's guidance
`is for earnings growth in
`the 22V-25"/6 range.
`
`Figure 5. Fourth Quarter Historical EPS Comparison
`
`[our best estimate of stand-alone phanna historicals)
`
`50-50
`$0.50
`
`50-40
`$030
`
`$0.20
`
`$0.10
`
`$0.00
`
`$0.35, up 22%
`
`
`
`Q4a'00A
`
`Source: Company reports and Salomon Smith Barney
`
`$0.43, up 23%
`
`
`
`Q41‘01 A
`
`$0.54, up 25%
`
`QIUOZA
`
`Allergan has an extended history of meeting or beating consensus expectations, but
`
`recently results have been clouded by the reporting comparison post the spin-off of
`
`American Medical Optics (AMO), or non—pharmaceutical business. Because the
`
`spin-off has created a highengrowth, more nimble company, we expect upside
`
`surprises to continue, but Allergan’s strong history of financial discipline makes us
`
`believe the upside surprises are likely to be a penny or two.
`
`Figure 6. Allergan Historical Earnings Surprises
`
`First Call Announcement Surprise in $
`ALLERGAN INCORPORATED (AGN)
`
`stockvaia
`
`EPS Surprise in $
`
`xpec
`e
`e:
`E Es“’:';“:‘ $333’
`
`Recent upside earnings
`surprises have not
`always been rewarded by
`immediate stock moves.
`
`Relative Price Impact v. SP5
`1-5.7%
`+4.2‘!-3 r
`
`+4.1%
`
`Source: Slocktfai
`
`10
`
`
`
`

`

`Allergan Pharmaceuticals — February 12. 2003
`
`IProducts for Today
`Allergan reported total fourth quarter sales of $3'r'8 million, which was 2% below
`
`our forecast of $383 million. Growth in sales were reported by all three distinct
`
`franchises: ophthalmology, which made up 58% of sales; movement disorders,
`
`which consists of Botox and accounted for 38% of total sales; and dermatological
`
`products, which represented 6% of sales.
`
`Botox (neurotoxin for movement disorders)
`
`Sales of Botox were reported at $128.2 million, above our forecast of$l 20 million
`
`for the quarter. While we expect continued growth due to the launch of cosmetic
`
`approval in the U.S., the company also highlighted the potential growth from the
`
`cosmetic approvals outside North America. Specifically, Allergan continues to
`
`expect cosmetic approval in first quarter 2003 in France — which is to serve as the
`
`reference country for the EU approval} launch process. Botox is to have a separate
`
`brand name and price structure from the currently marketed Botox brand in Europe
`
`for therapeutic purposes. Botox has an interesting historical quarterly growth
`
`pattern: first quarter sales typically approximate fourth quarter sales, and second
`
`quarter sales typically exceed the first quarter’s by about $10-$15 million. While
`
`this pattern has held consistent for the last few years, Allergan’s Botox sales mix and
`
`promotional expenditures have not been consistent. For example, in early 2002,
`
`Botox received cosmetic approval in the U.S. but the free publicity as well as
`
`company efforts did not break sales trends. Allergan estimates 40% of Botox sales
`are now for cosmetic uses.
`
`Looking forward to 2003, there are two possible diverging issuesiopportunities:
`
`P Continued internationai launches to support growth — With Evistabel rolling
`
`out in Europe, we believe new users are likely to join the existing therapeutic
`users.
`
`P A lawsuit in the US. could bring adverse publicity — In February, Allergan
`
`announced a lawsuit had been filed by a patient claiming chronic adverse
`
`reaction to use. Given the profile of the product, we believe Allergan‘s claim
`
`that the suit is frivolous. However, we worry the suit filer could seek public
`
`attention that may affect U.S. cosmetic trends.
`
`We view Botox as a critical growth driver of the Allergan model. The company
`
`offered product sales guidance for 2003 of $540-$580 million. We estimate the $40
`
`million variance could represent a $0.19 swing in 2003 EPS (see modeling
`
`sensitivity analysis to follow). We raised our 2003 sales forecast for Botox to $560
`
`million from $520 million, still following historical quarterly growth trends.
`
`SAL.0MONSMTI'HBARNEY
`
`1 1
`
`

`

`Allergan Pharmaceuticals — February 12. 2003
`
`Figure 7. Beta: Quarterly Sales
`(5 in millions)
`
`Botox f0!’ C0S'fl'.l9fl7C U59
`was approved on April
`15, 2002.
`
`$150
`
`$140
`5120
`$100
`$80
`$60
`
`$20
`$0 .
`
`.
`
`.
`
`.
`
`.
`
`.
`
`.
`
`.
`
`.
`
`.
`
`Q1!01A
`
`Q2i0‘|A
`
`Q3i0‘lA
`
`Q4I0‘|A
`
`Q1f02A
`
`Q2!02A
`
`Q3i02A
`
`Q4i'02A
`
`1(JOSE
`
`2Q03E
`
`3Q03E
`
`40035
`
`Source: Company reports and Salomon Smith Barney
`
`Lumigan (glaucoma)
`
`Lumigan has iaunchedin
`'"*”‘°‘5 W°”dW"°‘°"
`
`Sales of Lumigan were reported at approximately $35 million, relatively in line with
`our forecast of $38 million. Although it is not a significant revision, we lowered our
`
`2003 outlook for the franchise to $175 million from $179 million. Still, we plan to
`
`watch trends carefully for potential upside opportunity, including promotional
`
`activity, as Allergan shifts throughout the year due to the many new product
`
`launches. We continue to view Lumigon as on important product in ourfinanciol
`
`modes’ and or criticaifocror in our corporate outlook, for our product .raies_forec-as!
`
`off 3} 75 million in 2003 is about 12% of rotors’ safes.
`
`Figure 8. Lumigan Weekly New Prescriptions
`(Hints in thousands}
`
`Figure 9. Lumigan weekly New Prescription Market
`(NRxs in thousands)
`
`«me!
`4011'!)
`
`F F F F F F F F F F F F ~ u ~ u ~ ~ u ~ ~ u ~ mm
`
`10.030
`
`-
`
`Source:
`
`IMS America
`
`Source:
`
`IMS America
`
`we no ,0,,,ge,. View
`Aiphagan as a driver for
`‘“"9’93"-
`
`Alphagan Line (glaucoma)
`Sales of Alphagan franchise (Alphagan and Aiphagan P) were reported at
`approximately $65 million, relatively in line with our forecast of $62 million.
`However, we are significantiy lowering our 2003 outlook for the franchise, to $206
`
`million from $248 million (1 7''% drop), for a few reasons.
`
`>- Year-over-year growth trends for the franchise in the U.S. have slowed, coming
`
`in at down 1% in fourth quarter 2002 versus up 4% in third quarter 2002. We
`
`believe this is partially due to Allergan’s strong marketing support of its various
`
`prostaglandin products, which are viewed as a first- line therapy in treating
`
`glaucoma, leaving Alphagan in more of a second-line position.
`
`12
`
`
`
`

`

`Allergan Pharmaceuticals — February 12. 2003
`
`D» Allergan intends to shift its marketing resources away from the Alphagan line to
`
`the various new 2003 launches (Restasis, gatifloxacin, Aculat), and this is very
`
`likely to hurt Alphagan’s growth.
`
`)- Finally, we recognize the risk that generic Alphagan emerges in the U.S. in the
`
`course of the next year, as we await a federal Circuit Court of Appeals ruling on
`this issue expected to come in the next few weeks.
`
`We no ionger view the Aiphaganfiranehise as a significant growth driverfor
`
`Ailergan. but at $206 miiiion in 2003 revenues. or I4"o oftoral sales, rhefiranchises’
`
`trends. be they steaabz or supported by new products. are still.’ a criticalfactor in our
`
`corporate outlook.
`
`Figure 1D. Alphagan New Prescription Glaucoma Market Share
`(% market share)
`35% -
`
`We expect Aiiergarfs
`glaucoma market shares
`to remain relatively
`stable.
`
` .0‘ .-O
`
`-0-
`-H-
`-0-
`—a—
`
`Pl-IA
`Xalatan
`Alphagan P AGN
`Travatan ACL
`Cosopt
`MRK
`
`Source:
`
`IMS America
`
`AI'DLL
`Rescula Novartis
`-I-
`1 Total Alphagan AGN
`—-—
`Trusopt
`MRK
`
`Alphagan AGN
`-$-
`Lumigan AGN
`-0-
`: Total Timoptic MRK
`
`What is most fascinating to us in 2003 for Al|ergan’s eye care franchise is the
`
`inflection point in segment importance. While we forecast continued growth in total
`
`franchise supported by new product launches as well as strong demographic trends,
`
`the sales contribution from glaucoma, whose revenues grew for several years to
`
`make this area an important one for the company, has probably flattened, in our
`
`view. While we look for the drug eye franchise to become a more significant
`
`growth driver going forward, we are cautious as we may be underestimating the
`
`anti-infective and allergy segment growth in the face of new product launches in
`
`2002. Suddenly, it appears that the Street‘s myopic focus on the glaucoma franchise
`
`for eye care sales growth may need to change.
`
`SALOMUNSMTIHBARNEY
`
`13
`
`

`

`Allergan Pharmaceuticals — February 12, 2003
`
`Figure 11. Allergan Segment Shifts
`1% of total sales)
`100%
`
`We believe Dry Eye is
`becoming the new
`growth driver.
`
`7533
`
`50%
`
`25%
`
`0% .
`
`1999A
`
`.
`
`2000A
`
`.
`
`.
`
`2001A
`
`.
`
`2002E
`
`20D3E
`
`.
`
`2004E
`
`.
`
`2005E
`
`2006E
`
`.
`
`El Dry Eye
`
`I Anti—infective
`
`
`
`El Allergy
`
`I Other
`
`El Glaucoma
`Franchise
`
`Source: Company reports anti Salomon Smith Barney
`
`Tazorac (acne, psoriasis)
`
`Sales of Tazorac were reported at $15 million, significantly below our forecast of
`
`$22 million for the quarter. This is partially due to the launch of Avage in first
`
`quarter 2003 rather than fourth quarter 2002, but we are lowering our 2003 outlook
`significantly for the combined Tazorac and Avage products significantly (by 21%),
`to $88 million from $1 1 1 million, for a few reasons:
`
`)~ Slowing prescription trends for Tazorac in the U.S., which while up 31% year
`
`over year in fourth quarter 2002, slowed from up 42% in third quarter 2002. We
`
`believe this is partially due to the typically expected product launch’growth
`
`pattern, but may also reflect the economic sensitivity of the market and the
`
`continued strong competition overall.
`
`Iv Avage to treat facial fine wrinkling, mottled hypo- and hyperpigmentation
`
`(blotchy skin discoloration), and benign facial lentigines (flat patches of skin
`
`discoloration) was approved in October 2002. Some stocking began in early
`
`2002, but the sales force promotion has yet to occur.
`
`We view the Tazorac and Avage products as growth opportunities for Aiiergon, with
`
`aforecast of$88 miiiior: in 2003, which represents 6% of rotor! product sales — in
`
`our View not quite yet a criricaifactor to our modeiirig.
`
`Figre 12. Tazorac Total Prescrigions
`Units in thousands}
`90
`B0
`70
`60
`50
`40
`30
`20
`10
`