Allergan (NYSE:AGN) CEO David Pyott has described himself as a "mountaineer," a "born marketer," and a bit of a masochist, but there’s 1 thing the man undoubtedly is: A pioneer of the medical technology world.
After taking the reins of the Irvine, Calif.-based medical aesthetics giant in 1998, Pyott quickly set about transforming an eyecare company into a global juggernaut that pulls in north of $5 billion a year with a diverse line of specialty pharmaceuticals and medical devices. Pyott did so not by doubling down on conventional wisdom, but by changing the playbook. Much to the chagrin of some company executives at the time, he cut costs by 33%, shed Allergan’s contact lens solution business and concentrated significant resources on a little-known product in the company’s pipeline called Botox.
Today no one needs any introduction to Botox, which is as much a cultural phenomenon as it is a medical product. But the lessons of the drug and Allergan’s medical aesthetics business, which makes up 40% of its sales (all paid for directly by consumers) could hold some significant lessons for the broader medical device world.
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We sat down with Pyott recently to discuss how medical aesthetics could change the way medical devices are sold and marketed to patients. It’s a subject we’ll be going even more in-depth with the CEO on Dec. 11 at our next MassDevice Big 100 West meeting in Orange County, Calif.
MassDevice: I’m hoping today we can drill down into medical aesthetics and how it relates to consumer-centric medicine. When Allergan bought InaMed in 2006,you said, "Now Allergan is the global leader in medical aesthetics." I’m hoping you can define what the term "medical aesthetics" means to you and how it fits within your overall approach to the Allergan business.
David Pyott: I think I can be speaking accurately if I can say really I invented that term. I was literally sitting there, because I’m a recovering marketer, thinking "What on earth does 1 call the genre of Botox and its competitors?" Latisse was still a twinkle in my eye at that stage. Clearly it had something to do with improvement of appearance and so I liked the word aesthetics. But I wanted to make it very clear. This is aesthetics delivered through a physician, hence why I chose the word medical. Breast implants were long way away from any form of cosmetics that you’d buy at the Macy’s counter. But the further you got to that direction, such as physician-dispensed Cellulite Creams and lotions, that’s probably the closest point to where the world of retail is just around the corner.
MassDevice: When you coined the term, how were these classifications of drugs and devices generally referred to in the medical community? Was it sort of ambiguous?
DP: I would say the markets were very small and I’m not sure that anybody had thought of the overarching market in such a holistic way. People were very much drilled in on the individual product segments. So clearly by 2006 Botox had grown enormously, because we got the approval in 2001. By that stage it was probably roughly half a billion in sales. And dermal fillers, in my view, hadn’t really happened in the United States.
At that point the European market, particularly Central Europe, was probably 2½ times the consumption per capita of broader North America. And when we brought Juvéderm into the Canadian and U.S. market, it probably took us 3 years to get up to European consumption levels. So you can see that there is kind of a whole history in the background here of creating markets where really nothing had existed before.
MassDevice: Was there a-ha moment for you in the medical aesthetics field, or is it directly tied to Botox? When you took over Allergan, it certainly wouldn’t have been referred to as medical aesthetics company – it was more eyecare.
DP: I’m pretty sanguine about these things, because people often claim instant brilliance and I’m not sure I would ever subscribe to that theory. I think there are moments that are similar to hiking in the Sierras, a pass in the mountains as you get higher and higher.
The way I would see it is if I look at that journey, when I came to Allergan, Botox was literally an orphan drug. And I think it was probably an orphan drug in the minds of a lot of the senior management as well. And this was before the heyday of orphan drugs.
I realized, listening to both people internally and then customers, that there was a huge opportunity for Botox, not only cosmetics but therapeutic, which is a different topic. That led to having investments and getting cosmetics through the FDA. So that really started in early 1998 and we got the approval 3 years later. And that was the beginning of the journey.
MassDevice: When we look at that segment, most of those products are discretionally-spent consumer-paid models.
DP: To be fair, you could say if you wanted to be very accurate within breast implants, roughly 15% of the segment is reconstruction as opposed to mastectomy.
MassDevice: And so those businesses comprise about 40% of Allergan’s total sales, the direct-to-consumer?
David: That’s right, and 1 of the reasons, just so I don’t mislead you, probably the topics we’ve been talking about are just over 30%, probably 32% to 33%. But then the other 7% is because I realized that, when you think about India, or Brazil, or China – well, that’s like eyedrops for glaucoma – actually aren’t paid by the government, or rarely. It’s out-of-pocket, because there’s no health insurance.
MassDevice: Within the medical aesthetics market, in terms of long-term growth, do you see yourself trying to expand that 40% consumer-paid model to be a greater portion of your business?
DP: Well, interestingly, I always kind of say we will just kind of get on the train to wherever it goes, because we actually have, in the next couple of years, huge growth drivers on the reimbursed side. The biggest single – well 3 maybe – the big 3 are: Botox for migraine and Botox for bladder, and then the drugs for retinal disease. So that kind of takes us in a different direction than our area of interest here in this discussion.
But clearly when one looks at this medical aesthetics field, I predict that it will grow for quite a long time around about the 10% mark worldwide. Then you see kind of small variations around that core – the number – it goes up and down depending what’s going on, i.e. consumer spending, introduction of new products which boosts sales, but I think roughly I predict for the next X number of years, this market globally will grow about 10%.
MassDevice: And it’s been growing in the last few years even with the economic downturn, which is interesting. In 1 of your recent earnings calls you discussed the resiliency of the dermal filler and the Botox markets, the breast implants in markets like Southern Europe, which you seemed a little bit tickled by. Is there a broader lesson here?
DP: When we look back, the great recession year for us was 2009. When we entered 2009, of course, none of us knew how bad it was going to be. So we were pretty cautious and the first half of that year, the whole company declined about 10%.
But what was really interesting was that the recession, particularly in the U.S., around the world, some places you could argue maybe it never happened. Like China, Brazil, they felt they had a recession, but it was like hitting a little pothole, a very small 1 and just bounced right through it. In the U.S., our market stopped declining 5 months after it started, and then it re-accelerated. So when we got to 2010 – in fact all of our product markets globally were already bigger than in 2008. Which, of course, I would never have dared to predict in early 2009. I was thinking, "Oh man, this is going to take years until we get back to the high-water mark."
Partly it was because of the segments of society that we probably addressed at that time, in terms of our penetration. So typically, this is kind of middle-top for income. It’s not only women, probably 10% of the consumption’s male – but women’s repertoire of how they want to keep themselves looking a bit younger than their driver’s license or passport, or birth certificate would say. Of course, the idea of going back to being the way you were before is not really a great option for most people.
During that phase, I literally heard about people postponing or canceling vacations or crimping on fine dining, basically to save up for Botox and Juvéderm. We used to hear lots of that.
MassDevice: Well that’s interesting too, because in the orthopedics business, we’ve heard tons of stories about people postponing all acute surgeries, and all other medical markets seemed to contract a bit there.
DP: I think we saw a bit of that with breast augmentation surgery. That was the 1 that was the most heavily hit, because of course there’s somewhere a good correlation to what is the out-of-pocket spend. So if I can keep it in real simple terms, the purchasing act for Botox, let’s call it $400, and for dermal filler treatment $800, and breast augmentation surgery we’d call it $5,000.
And if one goes to Botox and Juvéderm, although Botox lasts for 4 months. People in practice, they maybe use it 2.6 times per year. Then dermal fillers last for a year, but people don’t really think of it that way. Because they just sort of say, "How much money goes through the credit card?" as they leave. That is the way the human psyche works.
I think another comment you made which I’d like to address was, "Why is Europe doing so well?" Well, my experience has been that, basically, innovation can trump a lot of economic headwinds. We have syndicated market research, so we have the very fix on the European market and of course we know our sales even better. We’re growing somewhere between – depends on the country – 2 and 3 times the speed of the market in Europe.
That’s really due to a new product called Voluma, which is a volumizing filler. This basically can be used on nasolibial folds, but is particularly for cheeks. These days I have to know these things professionally, and you kind of look at photographs. Because I sit in conferences along with the docs just looking at what they’re discussing. What we don’t really realize as males, is the shape of a woman’s cheek and fullness actually is a signal of – I don’t want to be crude here – but it’s sexual productivity. Because basically once you start reaching menopause, unfortunately you start losing the volume.
So you can imagine then, from a very medical point of view, there is a connection between attractiveness, which is linked to fullness of cheeks. Hope I explained myself well. It sounds crazy but the more you look at these photographs, you go, "They hit it right on the button."
MassDevice: So if we extrapolate some of the lessons that you’re covering here in medical aesthetics, and we look at the broader medical device industry, can you bring those over to your reimbursable medical device products? And do you think that there’s a lesson for the big medical device companies to look at what you’re doing here, and just try and figure out their own method of trying to replicate that?
DP: The way I’d answer the question is with maybe a fractionally different angle, where as we got into all of these things, as you very aptly pointed out, it spans everything from the most complicated biopharmaceutical – i.e. Botox, which still today requires less on the ground to supply the world with all 25 license indications, to a small molecule which is Latisse, which is really the same product. Its essences are Lumigan glaucoma drops, and then all the way through to device.
There is, if you like, the technical approach, but I think the next approach is the interesting one, which is basically, we’ve applied consumer marketing right across the top. Everything from classical, direct-to-consumer advertising, public relations, massive consumer database, where if you go across each of the product categories, we now have over 2 million people that have opted in to receiving information from us. That’s kind of cool. If we have anything new, we kind of have to do it at the weekend so we don’t burn out the routers. You know, talk about highly targeted marketing.
I think if there was maybe, and it depends what the business is of course, if there’s an ability to harness how you talk to the consumer, as well as talking to your surgeon, your physician, through whom you’re delivering the service. So that’s the way I’d answer that.
I think there’s also another element here which we haven’t really talked about. When we go to market, now not to the consumer but to the physician, what we’ve done over the years is basically not only teach them how to use the products, which is classical medical device. Right?
I sometimes point out, Botox, although it’s regulated as a pharmaceutical actually, the way we sell it is much more like a medical device. Because it’s not just the case of picking out the bottle and get your pad out and write a prescription. You have to know how to prepare it, mix it, how to inject it, how much and what not to do. It sounds like many of the things in the companies that you cover every day.
Then the next part of it is, we basically taught them how to become better business people, – how do they attract patients to come into your office versus the guy across town? Then once you got them in the office, how do you in a tasteful manner bring to their attention these other offerings as well? So if you start with Botox, well at what point might you go on Juvéderm or Latisse or something else? Or you might purchase some cosmeceuticals on the way out from the office assistant.
Then of course there’s the issue of how do you also make sure they don’t forget to come back. Which is also – if we work for whoever, Nordstrom, Macy’s, it’s the same issue: "How do I get Mrs. Jones back into my store?"
We’ve used a certain number of things there, that one would see in those worlds. In terms surrounding consumer promotions, but very much linked and delivered through the doctor. Because we don’t ever want to give them the sense that we’re trying to go around them. Because it is a partnership with the physician, and there I’m right back to the beginning, it is medical aesthetics versus cosmetics.
MassDevice: You’re a born marketer, I mean, when you’re looking at these indications, and these products that you’re going to place into there, when you look at the specialties, do you pick 1 that fit within that specialties where you can communicate directly to the patient? I saw some of the direct consumer advertisings you had for Botox for migraines, so you’re going directly to the patient there and addressing their pain point.
DP: I think really where we start is where is the technology? Where do we have a solution that in some manner improves patient care? That’s always the starting point and maybe because we’ve looked carefully and found, time and time again we found these solutions. If I cross over, to say, Botox for a chronic migraine, 1 of the reasons that we chose to go down that road was because so many migraine patients have just given up. They’ve tried treatment after treatment, on to doctor after doctor and they’re basically at home miserable. We know from consumer research we’ve done that these people, when they’re not in sort of maximum pain, because they’re probably to some degree forced to be inward-looking. Because they don’t go out so often because they’re in terrible pain, so they’re on the Internet a lot.
MassDevice So as someone with such a robust marketing background, do you scoff at medical device executives in other markets who say it’s too difficult to market directly to the patient?
DP: When I’m at the Edwards Lifesciences (NYSE:EW) board meetings, where they probably have 1 of the most interesting device breakthroughs, in my view probably in the last decade, with the percutaneous heart valves. Of course, we’re still going through the gears, we meaning Edwards, because we’ve got a massive training effort ahead of us and constant improvements of generation after generation of both valve systems.
Of course down the road, you could ask the question, "Do people who are applicable for this almost revolutionary heart surgery really know about it?" That’s not my job, I’m not the CEO, I can only just ask the questions and it’s for [Edwards CEO Michael] Mussallem and his team to process the comments, right?
But at some point you can say, well maybe there’s a very appropriate public relations campaign or even an appropriate advertising campaign to be done. I think it’s a couple of years away, but a moment could be reached, right?
MassDevice: When we spoke to Align Technology (NSDQ:ALGN) CEO Tom Prescott, he said that the medical device industry used to look down on the private pay model. Do you think there’s still that attitude?
David: I don’t think so. I mean if you look at the pressures that are facing our industry, whether it’s device or pharma, I think there arehuge huge pressures. I think a lot of both; well, industry executives realize that private pay could be an escape valve. How do you get out of some of these pressures? And we’ve seen that in Europe in a different field, another example of how we go to and fro between cash pay and reimbursed.
In this country artificial tears are paid for out-of-pocket. You just go down to Walgreens and you can find it on the shelf. Now you probably as a consumer have in the back of your head that the optometrist or the ophthalmologist recommended you brand A or B, hopefully ours. We happen to be the world’s number 1 producer of artificial tears. But then in Europe, it’s very interesting. There there’s a bifurcated model where historically the government has paid for tears.
But more recently certain governments have either completely de-reimbursed tears or made it possible in parallel to introduce, I’ll call it non-price regulated tears, I mean you still have the approval right? But then you have the ability to price-relate. There’s another example of where you can kind of go down 2 streets.
It shows there are ways to segment markets and of course you’ve got to do it within the regulatory process of that individual country.
You can see there are many different angles to this question about how medical aesthetics can translate. You can come in through, "What is the regulatory framework?" You can come in through, "How do you drive the consumer element?" if you like delivering consumer or consumerized medicine. Then I suppose this is just the whole backdrop of how do you innovate, right?
MassDevice: I like the idea of how you pioneer delivery to a consumer market because there’s a great desire in all the companies that we cover for growth. And it feels like they are just throwing products against the wall, seeing if they can keep the same model or expand to a different country.
DP: Yeah, well, I mean to end on a high note, I would say, hard times often are great times to get creative, right? Because you sit there and go, "This isn’t enough, we’ve got to find something new."