Allen Chao’s Business Strategy

Watson Pharmaceuticals Inc. develops, manufactures, and sells

proprietary (brand) and off-patent, or generic, pharmaceutical products. The
company offers more than 140 generic products as well as 30 branded products
marketed through three divisions: general products, nephrology, and women's
health. Watson was formed in 1985 and grew significantly during the 1990s by
making key acquisitions. During 2002, more than 178 million prescriptions were
filled with a Watson product--the company reported that 11 times every second
of every 12-hour business day, a company product was dispensed by a U.S.
pharmacist.

Chao's motivation to start his own enterprise came partly from his parents:
"You know, you'll never win the Nobel Prize," Chao's mother told him after he
went to work with Searle, according to Forbes. In fact, Chao's parents had
originally hoped that their son would return to Taiwan to run the family
pharmaceuticals manufacturing business. When Chao's father realized that his
son was going to begin a career in the United States, he sold the business and
he and his wife moved to California to retire. Throughout his career at Searle,
Chao's mother prodded him to start his own company. She got her wish in 1983,
when Chao left G.D. Searle and launched the venture that would become
Watson Pharmaceuticals.

Watson was able to profit, though, because it was often the only company
competing in its selected niches. The big drugs, in contrast, were often copied
by as many as ten or more generics manufacturers that competed fiercely on
price. In addition to pursuing smaller market niches, Watson focused on
developing drugs that were difficult to duplicate. That tactic allowed the
company to utilize its advanced research and development arm to generate
relatively high profit margins, even in the generics industry. To find those high-
margin, small-market drugs, Watson's researchers regularly plied public records,
searching for little-known drug prospects with big potential.

To take advantage of rising sales, Chao and fellow executives pursued an

aggressive plan to expand Watson's manufacturing operations. To that end, they
had taken Watson public in February of 1993 with a stock sale that raised $25
million. A subsequent offering brought a total of more than $100 million to
Watson's war chest. The cash was used to add manufacturing capabilities. For
instance, Watson purchased the patent on an injection-molding technology that
would let Watson make suppository products that were less waxy and messy.
 The money also was used to fund research and development of new
generics and delivery systems. Of importance, Watson's cash surplus allowed
Chao to move closer to his initial goal of making the company a fully integrated
pharmaceutical firm.

Despite the challenges presented by such rapid growth, Chao remained

focused on his goal of making Watson a fully integrated, global pharmaceutical
company. To that end, Watson entered two joint ventures with Chinese
companies that would allow the company to begin manufacturing and
marketing its products to Chao's native region. The company also was working
to develop its own patented drugs through joint ventures and partnerships with
other drug makers. The firm's strategy, which centered on internal product
development and making both strategic alliances and acquisitions, remained at
the forefront of company operations.

While the company had pursued an aggressive acquisition strategy during

the late 1990s and into 2000, it also had been active in the product development
arena. In 2002, the company set plans in motion to launch Oxytrol, the first
Watson product developed internally from start to finish. The branded drug was
the first transdermal, or skin, patch designed to treat overactive bladder. The
company faced a major setback, however, when the FDA declined its approval
in March 2002. Determined to see the drug reach fruition, Watson went back to
the drawing board and resubmitted the product after additional testing.

By now, it was evident that founder Chao's strategy had indeed paid off.
In 2003, Watson was operating as the fifth largest pharmaceutical company in
the United States, based on prescriptions dispensed, and the third largest
generic drug company in the nation. Sales reached $1.2 billion in 2002 and were
expected to continue their upward climb. With a strong focus on both its generic
and branded businesses, Watson Pharmaceuticals appeared to be well
positioned for continued growth in the years to come.