Jim Hindman - Senior Vice President, Treasury, and Investor Relations
David Pyott - Chairman of the Board and Chief Executive Officer
Jeff Edwards - Executive Vice President and Chief Financial Officer
Scott Whitcup - Executive Vice President, Research and Development
Jim Barlow - Senior Vice President and Corporate Controller
Ronny Gal - Bernstein Research
Larry Biegelsen - Wachovia
Gregg Gilbert - Merrill Lynch
David Buck - Buckingham Research
Peter Bye - Jefferies & Company
Gary Nachman - Leerink Swann
[Mark Gipson] - [Credit Suisse]
Allergan Inc. (AGN) F3Q08 Earnings Call October 29, 2008 11:00 AM ET
Hello and welcome to the Allergan Third Quarter 2008 Earnings Call. Following today's presentation there will be a formal question-and-answer session. Today's conference call is scheduled to conclude at 9:00 a.m. Pacific Time. (Operator Instructions). At the request of the company today's conference is being recorded. If anyone has any objections you may disconnect at this time.
I would like to introduce today's conference host Mr. Jim Hindman, Senior Vice President, Treasury, and Investor Relations. Sir you may begin.
Jim Hindman - Senior Vice President, Treasury, and Investor Relations
Thank you, Marian. Good morning. With me for today's conference call is David Pyott, Chairman of the Board and Chief Executive Officer, Jeff Edwards, Executive Vice President of Finance and Business Development, Chief Financial Officer, Dr. Scott Whitcup, Executive Vice President, Research and Development and Jim Barlow, Senior Vice President and Corporate Controller.
Before we move ahead, I'd like to remind you that certain statements that we will make in this presentation are forward-looking statements. These forward-looking statements reflect Allergan's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting Allergan's business.
Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding the forward-looking statements that is included in our third quarter 2008 earnings release, which was furnished to the SEC today on Form 8-K, as well as our filings with the SEC referenced in that disclaimer.
We will follow up the question-and-answer session of this call with a short listen-only segment where we will provide additional miscellaneous information that relates to our business. Under Regulation FD, in order to be able to discuss this information freely during the quarter, we must be sure that this is in the public domain.
This conference call and accompanying webcast are being simultaneously broadcast over the Internet with replays available for one week. You can access this information on our website at www.allergan.com.
At this point, I'd like to turn the call over to David Pyott.
David Pyott - Chairman of the Board and Chief Executive Officer
Sure. Thank you, Jim. Good morning, ladies and gentlemen. In spite of the impact of the downturn in Europe and United States in the third quarter in our cash pay business, Allergan has still managed to increase sales by 8.6% in local currencies with stronger performance of the reimbursed pharmaceutical businesses. With our application discipline we attention to detail execution we reduced adjusted diluted earnings per share of $0.65 coming end of the top range of our guidance and generating 12% adjusted diluted EPS growth by the third quarter of 2007, grossly increase adjusted R&D expend by 10%. We also become to leverage our historical declined levels of SG&A expenditures. The full reconciliation of GAAP adjusted numbers is laid out in our press release.
Looking forward to the fourth quarter our guidance for adjusted diluted EPS is in the range of $0.72 to $0.76 marketing increase of 20 to 27%. Boosted by the passage of the US federal R&D tax credit in the fourth quarter.
Sales guidance for the fourth quarter growth and local currencies within the range of minus 1% to plus 4% with the Australian time to the US dollar expecting to reduce growth by 700 basis points or 7% industry is outing in the dollar growth in the range of minus 3 to minus 8%. Finally, looking at full year guidance of 253 to 257 for adjusted to diluted EPS these calculates to 16 to 18% increased versus 2007 investor line with our historical aspiration of mid-to high teens EPS growth.
As we look forward into 2009, planning has become quite difficult given all the economic dislocations in fact due to sever contribute in demand and the sudden and dramatic strengthening of the US dollar versus major currencies and also interest rates.
Giving all the uncertainty we felt it’s prudent to give you a broad preliminary estimate of 2009 adjusted diluted EPS in the range of 5% to 12% over the final diluted adjusted EPS number for 2008 based on currently prevailing foreign exchange rates.
At the time of announcing of our Q4 results in early February of 2009 and in keeping our past practice we will establish more precise guidance. In our 2009 plan it is our intent to continue to increase our investment into long term value creation driver our R&D deleverage our substantial investment and sales forces made over the recent years and also our investments into direct to consumer advertising. In this tough environment we are monitoring all expenses very tightly and have a tight time over hiring including replacements. As the world economy recovers we intend to reestablish our historical aspiration that met to high teens adjusted EPS growth.
On R&D, we are further adding to the depth and value of our R&D product line enhancing other guidance internal programs as evidenced last three months activities and then supplemented from the outside with recent equity investments in last time single collaboration deals with bio nova, and today spectrum pharmaceuticals.
Our total relevant in co-promotion equipment was Spectrum announced today gives us to Spectrums apaziquone program for the world excluding Asia and this product is already in phase three and is the perfect fit with our specialist urology business. This product is expected to be approved from the 2013, 2014 timeframe with worldwide peak sales in our territory of around $500 million. I think projection should last through 2022.
Given the current subdued outlook over the short term for growth provide of our base cash pay businesses we're fortunate that we have many, many new growth drivers in the offing some of which should be substantial products.
Many products have been filed or about to be filed with the US FDA. The FDA receives Regulatory approval between now and the end of 2009.
Let me give you the list. LUMIGAN X, the multi plus for eyelash growth. South pole attempts Silica investment implants. JUVEDERM is lied cane. BOTOX with specificity indication actular X and positive X for macular the Dee ma associated with retinal vein occlusion. Further more, we're expecting approvals from the Japanese MHI values for BOTOX for the cosmetic indication, BOTOX for juvenile cerebral palsy and LUMIGAN. Further more we expect an approval to BOTOX cosmetic in China. And we anticipate filing BOTOX for chronic migraine with the US FDA by mid-2009.
And finally, we're in the process of launching several newly approved products such as Axon and anemic medical just now in the US. Dermal filler in Europe and will be launched in early 2009 in the US. Given concerns raised by our major competitor Alcon regarding the US opthalmic pharmaceutical market I will start with comments in eye care. We are pleased to be continuing strong performance of eye care with third quarter growth year-over year of 11.5% in dollars and 9.1%in local currency included those are the worldwide numbers as we met both our internals goals as well as expectations established by no sales sight analysts. Year to date September Allergan has grown exactly 5.5% in local currency compared to the market growing AIMS global at 9% in the first half of the year versus the first half of 2007.
For the first half IMS reports Allergan in market growth at 12% and shows that as the fastest growing by a wide margin. Although we do not yet have the benefit of product launches in Japan where we collaborate with St. Jude and St. Vaunt.
Outside Japan we're the fastest growing company in each geographic region. If one excludes the new retina market in which we do not yet compete. And the other kind of hitting record shares in many markets in the US, in Europe, Latin America and Asia outside Japan. As a mark of the health of our eye care businesses, we have increased fourth quarter sales guidance on a performance basis versus the projections given in our previous guidance supplied in the last earnings call including here you'll see the impact of currency when you do the numbers.
Now coming to the US ophthalmic market in particular we used very strong as our data provider whereas Allergan uses clearer path. For us we already have September data from base band and they show a buoyant September market with that position dollar growth at 18% year-over-year and growth for the third quarter at 12.3%. Year-to-date growth in the market was 9.8% for the first nine months of 2007. Year-to-date Allergan increased sales and acquisition dollars by 12.8% whereas outcome increased by 8.3%.
We believe that the numbers from baseline in IMS accurately reflect end market demand. Maybe stepping back for a moment, Allergan and Alcon have very different portfolios and product in China. Allergan has virtually no ophthalmic generics spread outs invest no exposure in the ophthalmic generics market which is declining in value. Likewise we have no exposure to the general practitioner and pediatrician channels which are flat being dominated by allergy products which are also flat in value.
At Allergan we're fortunate that we have the greatest exposure to the highest value growth segments of therapeutic glaucoma and survival antinflammatories. In market we steps in September is maintaining its growth rate of 30% in line with year to date growth of 39%. We steadily increasing units filled for prescription. COMBIGAN has been added to the ALPHAGAN franchise and was picking up steadily given the convenience of the cut out tolerability. Best Oxygan is still growing in trailing prescriptions. COMBIGAN has reached 35% to new prescription share of Cosalt. The Cosalt based and growing genetic in the US and our strong formulary positions for COMBIGAN we expect further sales gains.
Within the cost development category LUMIGAN has marginally lost share given the success that time see. However, with the expected approval of LUMIGAN expect to reserve LUMIGAN to a market share growth trajectory.
Outside the US our growth across the world is being driven primarily by glaucoma and dry eye franchises. Growing sales in glaucoma and the ALPHAGAN franchise including COMBIGAN and then LUMIGAN, by GANFORT, and then dry eyes from OPTIVE and the refresh line of tears. We continue to round out the availability of our products worldwide with third quarter approvals of LUMIGAN and GANFORT to Romania. COMBIGAN in Hong Kong and Malaysia, the new unit dose product Optive Sensitive was launched in the US and OPTIVE was launched in the UK, Austria, Portugal, South Africa, and Chile in the quarter.
My math shows Allergan's Artificial Tears growing at 12% at constant currency in the first half of 2008 versus prior year. So in conclusion, I can state our eye care business is in a robust position and we're now poised to enter the rapidly growing retina market in 2009 with an eye care. So I gave all of my thoughts about the challenges of our cash pay businesses which were affected by the US economy and then a slowdown in Europe from the early summer onwards reflecting general economic problems in several European countries.
The BOTOX franchise grew 7% in dollars and six in local currency in the quarter. Globally, we estimate a modest 2% market share in the first half of 2008 versus the same period in 2007 to new entrants such as Zyramin, Meditox from Korea and China Toxin. Nevertheless we continue to enjoy about 84 to 85% market share on a global basis.
In some secondary markets, we have seeded share as we've chosen not to reduce prices to much competition in some government tenders for therapeutic uses in places such as Scandinavia, Brazil, and Mexico. On a positive note, BOTOX is still gaining share in the top five markets of Europe in both the therapeutic and cosmetic segments despite the of Zyramin which now suffers from stagnant market share in its German home market, with Zyramin's historical gains coming at the expense of export.
Across this we generally see low price competition fighting amongst themselves. BOTOX continues to grow rapidly in Asia and parts of Latin America. Planning ahead for 2009 it is clear that we will have to manage through a challenging market for aesthetics as we deal with competition in the US. However, we are encouraged on the therapeutic side that the FDA has granted us toxicity file, a priority review with action expected by the end of Q1.
Also with positive results from our Phase III chronic migraine trial, we hope to file for FDA approval in 2009, and if approved, we believe the chronic migraine should be another growth driver in 2010. Regarding profitability of the BOTOX franchise, we should enjoy at least from GSK's approvals in Japan and China.
Moving on to dermal fillers, sales remain strong with third quarter growth year-over-year of 18% in dollars and 16% in local currency. In market for Q2 we estimate that the global filler market continued to grow rapidly with growth year-over-year at 19% even up a little from the 17% in market growth in Q1.
Now looking at Q3 it seemed that the US market continued to grow slowly with JUVEDERM picking up share to be at parity with the Restylane franchise. In Canada, market conditions remained strong with JUVEDERM achieving approximate parity with the Restylane franchise. We are pleased that we launched our JUVEDERM plus Lidocaine products in September in Canada, which should lead to more market share gains as well as further stimulation of the market.
In Europe, Q-Med report 42% growth in their Q3 sales points to a strong market. In Europe Perlane was just formally launched as a key element in our whole phase offering. In the late summer we commenced an innovative TB and print campaign for JUVEDERM Ultra and Ultra Plus. Those are the products incorporating Lidocaine in France and the UK and are pleased with the consumer response. The addition of multiplus eye growth -- eyelash growth and the JUVEDERM first aid products will be useful enhancements to the Allergan facial aesthetics portfolio in the United States if approved in 2009. Regarding breast aesthetics, sales in the third quarter increased 3.4% in dollars and 1.6% in local currency. The dropoff in growth from Q2 to Q3 occurred overseas. Particularly in Europe where we had been growing in double digits until Q2 and then sales in Q3 accelerated especially in southern Europe. In Asia and Latin America where we integrated the operations and added breast aesthetics to our product range, we need to go strongly above at a lesser rate than earlier in the year.
In the United States we see declines in the volume of procedures pretty much at the same rate as Q3 as Q2. With the volume decline being offset by the pickup in value as the market converts from saline to silicone. We probably maintain discipline and maintaining price levels as we opt to compete in product quality, range of offering and service.
Regarding our internal efficiencies, we're pleased with the progress of transitioning our manufacturing from Ireland to Costa Rica and also recent we benefited from the consolidation of our US logistics into a Fed ex-hub in mentors. In global basis we estimate with the market in Q2 grew 10% year-over-year coming down from the end market global growth of 15% in Q1.
For intervention we report the sales increase of 7% in dollars and six in local currency in the US we've experienced a significant discretion market growth in the end fact of portion cough patient cough base with the range of 2to $4000 even for reimbursed procedures. Cash pay part of the market has declined considerably given approximately $15,000 for out of pocket costs. Also we feel in competitive intrusion about taken on bound we're pleased that the market share gains have slowed considerably in recent months.
Europe experienced poor sales in Q3 given negative reimbursement changes in several major continental markets. In Australia sales in that already well developed market continued on a strong growth trajectory. Great progress is been made in United Kingdom and march headway has been made in net sales market in Latin America. For skin care, sales declined 905%. In market as our Acquisition dollars increased 2.7% with factory sales declined year-over-year due to a minor increase of trade inventory a year ago in Q3 of 2007.
In addition sales of the older physician dispensed products VIVITE declined as we focused our efforts on the newer VIVITE line and now launch all the medical product range. Finally y in the urology areas sales in Q3 of $70 million increased sequentially from sales of $11 million in Q2. SANCTURA's X unique profile is the only ending in the category. And the favorable based on dry mark gives the product good acceptance in the urology specialty. Analyzing prescription trajectory in terms of prescription for months since launch SANCTURA X on continues to exceed the performance and is only slightly behind that of advice care.
Regarding Tier II care, we're encouraged that we're added to certain fee form layers at the beginning of October. With the spectrum collaboration we continue to build depth in the urology specialty. Offset this specialty urology and OBGYN Primary care, it is clear that we should avoid defocusing efforts and therefore our continuing discussions with several big companies as well as contract sales organizations in terms of collaboration.
I'd now like to pass over to Jeff Edwards who will comment with financials.
Jeff Edwards - Executive Vice President and Chief Financial Officer
Thanks David and good morning to all of those on the call. Allergan continue to demonstrate during the third quarter its ability to generate consist performance results despite the impact of difficult economic conditions. As mention on previous earnings call, Allergan diversionification business across of cash pay and reimbursed products and between domestic and international operations continues to be a strategic benefit to the company. Turning to the third quarter our diversify face of business and ability to carefully control business expenditures allowed the company to deliver the top end of our earnings per share guidance for the quarter. For the third quarter as a result of the continued difficult economic conditions, gains sales results for slightly below the guidance range provided to you on the second quarter call.
Well we cannot control the overall health of the economy we can continue to calculate monitor our markets and manage business expenses as necessary through appropriate leverage with the goal of delivering our bottom line EPS guidance. Consistent with our strategy to support the future health of the company, Allergan will continue to make meaningful investments within research and development to support our long term growth as evidenced by the various license and agreements announced in the earnings release.
Continuing to make these strategic R&D investments in the future of the company is important. And while we plan to continue to carefully monitor our broader base expenses through these challenging tough economic times, we'll be very thoughtful in our evaluation to ensure we are leveraging in these expense base in the appropriate areas. We will carefully control these areas of spending, focusing on the new products and indications that we expect to launch in 2009.
From the third quarter we continue to make targeted investments in the components of our business where the likely financial returns are significant while leveraging areas that were deemed to generate less favorable financial returns. This focused approach enabled to the company to deliver adjusted EPS results at the top end of our guidance range. Adjusted diluted earnings per share for the third quarter was $0.65 marking 12.1% increase over 2007 results for the same quarter.
The reconciliation of all the adjustments to GAAP earnings is set out in our earnings release. Adjusted selling general and administrative expenses were 40.1% of product net sales for quarter totals $434 million. This percentage and amount of SG&A's spend represents our lowest level in four quarters. Reflecting our commitment to leverage our expense base. As mentioned previously, we constantly undertake thoughtful evaluations of these investments to ensure the date continue to generate favorable financial returns to maintain certain level of financial flexibility which can be adjusted as necessary in response to changing business factors. Excluding the effects of non-GAAP adjustments and amortization of the tangibles.
Allergan's Q3, 2008 gross margin is 82.4% increased 10 basis points when compared to prior year. While the Q3 medical device gross profit percent increased versus the same quarter last year. There was a slight reduction in the Q3 former gross profit percentage as a result of the change in sales mix between quarters. With respect to spending in the R&D area, the company remained very focused on invested in many mini foot projects in both our former and medical device pipelines resulting in adjusted R&D investor ratio of 16.7% for the quarter.
Allergan's adjusted R&D spend for the quarter totaled $180 million a $16 million increase over the third quarter of 2007. As outlined by David, a few moments ago it's clear that our choice of investments within the R&D area is producing a stream of filings and major progress in clinical development.
With respect Allergan's consolidated net worth increased to approximately 3.99 billion at the end of September 2008 from approximately 3.74 billion at the end of 2007. Consolidated Allergan's sales outstanding was 39 days while consolidated Allergan's inventory days on hand was 126 days.
At the end of the third quarter, Allergan's cash and cash net of debt positions totaled approximately 1.01 billion or 85 million respectively when you look at cash net of debt. 2008 operating cash flow after CapEx was approximately $178 million for the quarter. During the quarter, Allergan utilized approximately $75.3 million to acquire 1.37 million shares through its open market share repurchase program.
Allergan's did not acquire any shares through this program during the same period in 2007. For the fourth quarter of 2008 Allergan estimates product net sales in the range of 990 million to 1.04 billion at current exchange rates. This estimate has been negatively impacted by approximately $70 million of currency versus our prior guidance assumptions. The midpoint of this guidance represents growth of approximately 2% on a constant currency performance basis and a decline of approximately 5% in dollars versus the prior year. The ongoing dramatic and rapid strengthening of the US dollar against other currency has created challenging hurdle when comparing total dollar growth to the prior year. In addition to sales these currency movements will have a negative impact on EPS growth for the quarter however the effect will be somewhat offset by the natural expense hedge as a result of our operations outside of the United States, including the large majority of our manufacturing facilities that supply product to the US and the benefit of our option hedging strategy.
It should be noted that effective September of this year, we executed a series of foreign exchange options transactions focused on the 2009 year to attempt to get ahead of the negative affects of the strengthening US dollar. Allergan is certainly focused on hedging approximately 50% of our net foreign currency exposure within our major currencies by the use of an options based strategy.
Q4 EPS will be positively impacted by approximately $0.04 due to the renewal of the US R&D tax credit as the full year benefit of the credit is retroactively applied to the fourth quarter. Including the estimated impact of currency and the tax credit adjusted diluted earnings per share guidance in the fourth quarter is expected to be in the range of 72 to $0.76. This represents EPS growth of between 20 and 27% from the same period last year or adjusted for impact of the R&D tax credit catch up growth of between 30 and 20%.
The near unprecedented dislocation of the world economy and the very significant strengthening of the US dollar in response to this economic decline has made it somewhat difficult to respond with inclined adjustments to our normal business practice.
Regarding full year guidance for 2008, Allergan is updating the 2008 adjusted diluted earnings per share guidance range to between $2.53 and $2.57 which represents growth of between 16 and 18% for the year. We have provided a broader than typical range of EPS guidance as a consequence of the ongoing difficulty in predicting consumer confidence levels and ongoing uncertainty within the currency markets.
With respect to currency, our current assumptions are based upon the prevailing US dollar rates versus our major currencies. Allergan's previous guidance for the full year tax rate assumed that the US R&D tax credit would be renewed and therefore we continue to anticipate a full year tax rate of approximately 26%.
Regarding full year 2008 total sales guidance Allergan is adjusting the range to between 4.290 billion and 4.340 billion. Updated product sales guidance is included in our earnings release. Please note that the LUMIGAN franchise guidance assumes the approval of LUMIGAN X during the fourth quarter.
Our solid results, during the third quarter is another testament to the value of the depth and breath of Allergan's diversified lines of business. Allergan prides itself on the disciplined approach taken with respect to how our dollars are spent and what kind of investment returns to require to justify the spending. This focused approach and our commitment to leveraging of our cost structure will continue to place Allergan in a position of strength within our markets and enable us to emerge strong from this economic downturn.
So, with that operator, I'd like to ask to open the call to questions.
Thank you. (Operator Instructions). Our first question is from Ronny Gal of Bernstein Research.
Hi, good morning guys. First, David, are we okay in assuming that the bottom of that guidance range for '09 assume kind of early approval for Roloxin and ongoing of global pressure on the aesthetics market?
Yeah. Obviously, as we looked at the future, it's getting more and more difficult to predict. I think we've taken a view of let's called it subdued demand. That was the kind of commentary I made in my text you know in the base item. I think most people believe that Roloxin will suffer a minor delay, but we're not counting too much there because we don't want to be caught the wrong way. I think when you really step back from it and I attempt it to do that in tax and it gets you to think about all the products that are awaiting approval. We have a lot of new growth drivers on the horizon. And they're going to be very important to get us to the kind of top line growth that we need for 2009.
Thanks. And Scott, congratulations on the positive results. Can you please contrast to us, I know you cannot release the absolute numbers, can you contrast both the efficacy and the safety further that will drive outside transferring alone based on the best data you have?
Sure. I think both on the efficacy side I can't give you sort of a ratio one to one because as you know, the best data in the expand to trial that probably won't be out until my guess is somewhere around out of time next year. But at least in the published literature, that efficacy is better and the safety is better as well. We did give you a little bit of information on the interact with pressure piece and noted that sort of a high pressure was rare, less than 7% across both dose groups. And at the six month time point, it was less than 1% of patients with a pressure over 25. So we've reviewed this with a number of people who are experts in the field, and all of them point to both really good efficacy but very impressive safety.
Interesting. You actually have better efficacy than times?
We believe again there's no head to head comparison. But just people who use the product and looked at the data and we think the efficacy it's better than times that alarm and the safety is way better than time. Based on the data that we have to date with the caveat no head to head.
Thanks, I'll go back in queue.
Our next question is from [Mark Gipson] of [Credit Suisse].
Yeah, Jeff I just want you to go through the FX impact one more time. Can you help us understand how much the impact was to the bottom line in the quarter and what you're thinking about for the fourth quarter and '09? Second of all, David, can you talk about how much SG&A leverage we're going to see in '09 to help you get to the guidance range that you provided? And then third question is can you talk about BOTOX therapeutic and just specifically therapeutic and the growth rates and how that's changed or if it has changed, and still Double digit growth worldwide in that range.
Let me give first Mark on the FX question, that's a tough question. And I think any company you ask that question of is going to struggle with providing you with a precise answer. So we'll do the best we can. Every market is different of course, and that's because currencies move in different ways. Over the trend is the same. The variability amongst movement is pretty dramatic. You look at euro versus Australian dollar Canadian dollar. The Australian and Canadian dollar has devalued by some two the amount of the euro. It's also its influenced by the cost structure we have in place in those markets. And that's going to have an impact as well on the drop through. I can't give you a specific answer. We have an estimate of what we think it is how it drops through market to market in the aggregate. And that's how we look at it. It is not a small number. But it's a number that we think we can control through an aggregate oversight of company expenses as well as our hedging strategy as well as having operations offshore. Those expenses we have offshore actually work to our benefit when the dollar strengthens. So we look at all three pockets. And I'm afraid that's the best I can do it.
What was it in the quarter? The bottom line impact of FX.
We actually didn't report that number. Again our aggregate goal is to get to the guidance target. So as we are working through that process this is one of the areas that factors into the forecasting process that we have here on a quarterly basis.
Right just understand. But you don't want to talk about the bottom line impact on the quarter? Forget about the guidance.
Sure. We haven't spoken about currency a lot in the past. So we're not going to lean too heavily on it now. It's impacting us and we're trying to work through it as diligently as we can and using our natural hedges and our options based approached to address it. You know, we haven't taken credit for it in the past. So we're not going to lean on it as a crutch now.
I think if you go back to first principles, just have a couple of thoughts there. First of all BOTOX is manufactured in Ireland. All dermal fillers JUVEDERM fillers are made in France. In terms of ophthalmics, our big plant is in way koa, Texas, but we export very little of that volume. And all the rest are supplied from Ireland or within Latin America from Brazil. And then breast implants is currently either Ireland rapidly transitioning to Costa Rica. So you can see the result out of this is that we have a lot of assets outside the United States. Which is a benefit? Even where Jeff also stated was once you get through all the reporting of foreign profits in our foreign subsidiaries, that's clearly where we have to take a big swallow and enhance why our treasury team did such a good job. I said this is probably a good time to pull the trigger and looking back, it was one heck of a good time to pull the trigger. I think we've given you the of this. And I should move on to the next two questions. One is SG&A leverage. Absolutely, we're fortunate that we built our sales forces over a year ago. Looking at the '09 plan there'll be very little add. A little bit in Asia because we still see some growth there. Elsewhere, it will be pretty much working with what we've got and we feel very good with the structures we've built. Your third question was on therapeutic growth rates. We don't give the growth rates throughout the year. We will give you this for the full year. What I will say is directionally a little bit of moderation driven by two things. One is if you think about the United States where therapeutic BOTOX is reimbursed. Per say the co pays would be around $250. So at the margin you may see a little bit of lengthening between treatment cycles as patients try and save some copay dollars. And then in my remarks, I stated there was some marginal market share loss to the new entrants. And that really is at the account of therapeutic when I referred to the government and those relative to aesthetic where we still have high, high market share gainers. So then if you think that through you can see the major flex is here on the data aesthetic side. And I'm sure that's what you were really going to. Next question.
Our next question comes from the line of Larry Biegelsen of Wachovia.
Hi. Thanks for taking my question. First, Jeff, what organic and growth rate that’s the 5 to 12% EPS growth assumed for 2009? And if you won't give us that, maybe just the FX impact on the top line growth for '09. My second question for Scott, has anything changed on the slouch and rest in the plan, you mentioned that is I think earlier as a possible approval in '09. And then also for Scott on BOTOX headache, do you think you'll need another study. There are pros and cons to starting another trial now. How do you weigh those? Can you give us an example of a product that's gotten an indication where the primary input one of the two trials? Can you give us a precedent? And lastly, the headache data is it going to be presented in April at AIN? Thanks
Okay. Why don't I take the first one. So this is how do you solve the rubic cube of our guidance for EPS for next year in a range of five to 12%. When you think about sales for a major part of the year, we're sailing into negative comps in terms of the dollar. Because at the moment we're planning on current rates which I think is a prudent approach. If you think back even to -- I can remember when I was in Europe on vacation, thinking how expensive everything was. American tourist you know the rate was pretty close to 150. so you can say just since early August, the euro strengthened by some 15% and as Jeff stated if you go to Canadian dollars or exotic currents it's just that they want just off the charts in terms of how the dollar has strengthened. So that's why I think little most difficult job you probably all have to do is try and think through what is the value of those new products. They are related to because they are very important for producing enough at the end of the day dollars sales growth, not just local currency dollar sales growth. So that we can get to that EPS range as we leverage down our SG&A expenditure.
David the FX impact on the top line in '09 is that something you can give us that today's exchange rate.
No, I can't. This is where it's so difficult. Because if you could tell me what the middle rate for say the euro is next year, you and I should set up the biggest foreign exchange hedge fund in the world. It's very difficult. We're just taking what we think is reasonable assumptions and then off course there's lots of other puts and takes that we try the manage to. And off course very important is that in terms of our exposures, we've covered a lot of them. Now we can say it's a very favorable rate.
Okay. And the other questions. Sorry thank you.
On the 410, nothing much has changed other than we've got basically all the data to the agency that we believe that they'll need if questions come up we clearly answer them as quickly as possible. But we still think an approval this year or early next year is possible. On the headache, yet a number of questions. First do you start a second trial and having been through the data and starting to put the package together, we believe that we have data to support approval. It's difficult to look for precedent of in this case because we have documented in FDA has stated that the end point that the FDA wanted which was headache days, we hit in both trials. It's hard to look for a precedent where the FDA this is really the endpoint we’re looking at that you’re going to hit thrice.
Despite the fact that we didn't call it a primary in the first. If you think you'd ever find that scenario. Because the FDA was so clear on the end point to day one and we believe the data will be strong enough to support approval, especially given that this is the high end met need. These are the severe end of the migraine spectrum with no approved therapies. So we believe that the data support we are going to have in the Phase 3 meeting hopefully with the agency that will give us some further information if we're writing our assumptions.
Finally, are we going to present this today? Our current plan is to publish this first its usual what we would like to do especially with the major Phase III program, a top tier journal usually like to published before you go and give all the details in a meeting. So our initial plan is to put all the data together, send it to you one of the major journals if we can get it published first, that's our plan.
Your next question is from Gregg Gilbert Merrill Lynch.
Thank you. My first one is for David. Thanks for proactive the comments on '09. If we put aside the new product launches on '09 how would you characterize your level of conservatives on both your cash pay reimbursed businesses relative to the economic conditions would exist adjust right now, and that sort of qualitative but can you hit that a bit?
Yeah, well, you know from our history that we don't like chasing freight trains because it's a kind of annoying and tiring exercise. Our general attitude is to trying call something and hopefully call it right. And I think that's so important.
Particularly when it comes to our spending plans. Because clearly you can imagine this year has been quite irritating in the sense that if you'd asked me -- and you did -- but we looked at the world in the springtime in April, May and the world still looked pretty good in the sense the US was beginning to show signs of fatigue, but the rest of the world was bumming along in a fairly nice way. And then clearly the storm clouds have moved in to Europe and then you can see them spreading. I mean just reading the newspapers and what you read in the newspapers, you can see as well. I think as a result of that we've tried to take a sanguine look not only at the end of this year but extrapolating through to next year and make sure that we have a plan that we can act against. And act against once because the worst thing is where you're asking the army to constantly regroup. That is very tiresome. And I think you know that both Mike and I are kind of tough guys. In terms we'd rather take tough decisions up front and then execute. And when the sun comes out a little bit, somewhere in '09 will I count from sun is a good thing. In California it's all the time. I'm thinking more of my youth in Scotland. We really do appreciate sunshine. And then life certainly gets good and it's always easy to move to the upside case. It's where you're moving to a further downside case, things are bad.
You are planning for cloudy days during ’09 and you are hoping for sunshine.
Yeah, in inventory comment, you can see that particularly when you read the transcript. I'm saying let's assume storms right through ’09. I think that's a good working assumption. And if we are wrong, I will really be the happiest guy around.
Okay, thank you for that. And then Scott, my second question, an update on what’s going on LUMIGAN X and on bimatoprost for eyelash, maybe you have covered in particular and how will be progressing from your point of view? Thanks.
Okay. So first question on LUMIGAN X. There continue to be no review issues in terms of the NDA filing sort of getting through the agency. We don't expect any additional questions. We're sort of waiting for hopefully an approval in the fourth quarter. In terms of bimatoprost for eyelash growth, we've had good interactions with the agency. I don't think that there are any specific issues that they have for the committee. But since this is a new indication, you see the agency more and more having advisory committees just to get the group of outside experts to review the file as well. So as far as we know, no specific questions for the committee. Just input on the product use and we look forward to it.
So no briefing documents yet that you've seen?
No. We basically interacted with the agency to tell them what's going to be in our briefing documents and they said that's fine. We asked if there were specific issues, they said no. But since it's a new indication per FDA guidelines, you can see more and more of these advisory committees. And as you thought, it’s not a full two day or even a full one day committee. It will be probably a little bit less than half a day (inaudible) no big issues.
Great, maybe you can get an early approval. Thank you.
Our next question is from David Buck with Buckingham Research.
Yes, thanks. A couple of questions. First on LUMIGAN in Japan and China, how are we going to see that flowing through the P&L, can you just give us a reminder there? Can the - for Posurdex, what's the best sense at this point, Scott in terms of when we could see a potential approval and launch there? And then more of a big picture question for David. If you look at purchasing the Inamed business and also purchasing the additional assets for the dermal fillers, you've become more of a diversified company outside of Medicare Part D and some of the pharma businesses but you're also more of a cyclical company. So what can you do? And obviously that's been impact on your stock prices. So what do think we should really do in terms of changing the cyclicality of those businesses if anything? And can you be a little bit more specific in terms of SG&A leverage as we look at ’09 in terms of planning EPS estimates. Thanks.
I will take the Posurdex question first. The team is really working hard to get the NDA put together we assumed that it will go in roughly the end of the year. Although we can't guarantee a priority review, this is an unmet need and the first drug for this indication. So if it was a priority review for midyear, standard review would put it out a little bit more, but we feel pretty good with the priority.
David, with respect to LUMIGAN in Japan, it will appear as other revenue. We are receiving a royalty, so the low bimatoprost sales for next line is other revenues and that's where all of our royalty revenue will be booked.
On the issue of diversity of three of our businesses, currently last year was just a fabulous year the way we grew the Inamed businesses where it has 49%. I thought at Christmas time last year that 2008 was going to be a repeat, my goodness to mention that a year is difference when it to go from heaven to something else. But in looking forward when this really go, if one tries to look beyond 2009 and maybe into ‘10 and ’11, at some point this economy is going to turn if one looks at the base driver of Botox cosmetic and dermal fillers and just to one degree from breast implants, people's desire to look and feel good isn't going away. And it's people's ability to pay for it right now is the issue. So I will see in my prediction this will come back. And that could be very useful because I personally predict much tougher times for a particular Medicare Part D reimbursement. I would say reimbursement in general, not only in this country but the pressures on health care systems around the world. So right now we're at the toughest point of this cycle, I hope. Hope it doesn't get worse. I think our balance over time will flip the other way and then we'll feel really happy that we have this business, which is roughly aesthetic which clearly is more exposed to cyclicality. I think in terms of what can we do to influence it? Well, directly we can't. But if you think about the comments I made about Botox, very clearly, it is a big deal. We know that's one of the biggest uses around the world, not approved in the United States. So getting it approved in the US is a big deal. And then we also are filing for JCP in Japan. A lot of the economics are shared with GSK; that is good. And then of course we have JCP left. And then of course headache Scott remarked about that. Hopefully, being an approval by 2010. So as we've often said for a long time, even before this downturn, we foresaw therapeutic coming back into the ascendancy. And we commented at the end of ’08 the split was roughly 50/50; 50 for Botox, cosmetic, 50 for therapeutic. Clearly and depending on the economy, we see Botox going back to the therapeutic side as the new approvals come through.
And just the question I guess on SG&A leverage, can you be more specific, so maybe for Jeff?
Clearly you should assume the SG&A ratios will be coming down. And I think there's such turbulence at the moment. And obviously, I have models that we've done. One of the things that gets really tough is do you take it to 130, do you take it to 125, do you take to 120. These things have a difference. And so as we plan, we’d be looking at some of prevailing rates. Then we also look at flex in terms of what we are going to do. If it gets better, we're always good at spending money because we know where is the highest return, there is always on the downside. Do we have enough reserve, enough flexibility to recover from an even tougher case? And those are the things we're still working through because we had one time we thought we completed a plan for next year. I think like so many companies and other companies, the best thing is almost just throw them all away and start again because there's been such dramatic shifts.
Okay, thank you.
Our next question comes from Peter Bye with Jefferies & Company.
Hey, thanks guys. Just a thought on your comments by looking beyond ’09 based - I mean, one of the things that why guys have always said that over the last six months bringing multiple of the confusing earnings and good times and bad times you can do SG&A leverage and now that’s sort of an 18%, is that stable in bad times. While ’07 was a huge year, we still only got 18%. So if I am an investor, I am looking at a five year CAGR. Do I get a make-up when things were troubling in 2010, 11 with therapeutic approvals coming and that sort of stuff in the bottom line or do I have risk for that sort of long-term five year 17, 18% EPS CAGR?
Well, first let me take a shot on first. We thought a lot about what we were going to say about the fourth quarter. Clearly one thing that I want to protect is our ability to continue to develop our clinical programs and R&D because that’s what it’s all about for the long term. And so when I step back and say based on the guidance that Jeff and I read that still gets us to a range of 16 to 18%. So given that we've been talking about mid-to high teens as our aspiration for a long time, I kind of step back and say I'm not happy, but at least I’ve delivered what we said we would do.
Now getting to the second part of your question, I would like to put myself into the rosy world where the economy has recovered. People have discovered that they really, really want to spend a lot of money on Botox and Juvederm, and then what happens? Well in that other scenario, while we said we really don’t want to give you much more than 20% and I got criticized for that and I am happy they criticized because I think we did the right thing in terms of the effects of that, the most positive effect, the doubling of R&D budget in three years from roughly 400 to almost 800 million this year. So being very specific it would all depend if we had great projects to spend on R&D then let's say the aesthetics market would have sort of woken up again, was on turbo charge. I would prefer to go and reinvest in R&D again. And you wouldn't get much more than 20% EPS growth in that kind of what I would say very economy.
Okay. And you just said that it’s not big -- there wasn’t the leverage in the SG&A line during bad times that perhaps is communicated. I'm just referring if I look at your chart that you guys march out every conference about you in the top right of the SG&A category across Medtech and pharma and how much leverage do you have on that line item? And I am just trying to push you here a little bit just because I appreciate the R&D and that budget has been growing huge and people understand it's not that much sort of - you have got long term projects but just - is that an accurate reflection when you put out that chart, you are at sort of midpoint of Medtech and pharma in the low 30s and you at 41.8, trying to graphically demonstrate how much leverage you have. Is that an accurate chart? What you are trying to communicate in the amount of leverage you have left?
Yeah, clearly the chart numbers are correct. As you step back and say, okay, to get to 9 to 12% EPS growth rate next year and when you factor in those currency headwinds running through a good part of year because it’s only since what shall we say, September of this year the dollar has really taken off, we have headwinds. And we're lucky that we have all these new products hopefully, being approved. Without that, we'd be in a bath of very hot water. But we still have leveraging to do and we leverage and we will make sure that we spend our money on the right things. Clearly we're wanting to protect R&D because we have attractive programs and then sales and marketing. We know very well which are the highest return items. That's where we want to spend our money and clearly we want to launch these new products properly. New products is the life blood of our company.
Just one more thing Peter. I think this past quarter is a good example. We are going to do what we can and what’s appropriate with respect to leveraging and the chart is fine. And I think what we did in Q3 is illustrative of our commitment to trying to fulfill the words we have used. If you look at Q2, we spent some $496 million in SG&A. If you look at Q3, we spent 434 million. So also, 42.9% of sales versus 40.1% of sales. I think that answers your question. It reflects some commitment by the company and it reflects our ability to manage the process. So one data point, but if you go back over to prior four years, the previous Q3, you can see the trends as well.
Alright, great. And just maybe one follow up on the new products. Your pipeline is starting to come through which is nice and what - you have got products. What are you dialing in for sort of contribution from new products next year? I know your budget process is next week or I understand this next week. But maybe just kind of - some kind of commentary on that.
We have accurate models for every single new entity. So the one where we have probably the least information is the eyelash growth. We've been working on that for nine months now. We've done not only internal work but we have done external market research to triangulate what we need to do. Spasticity is an easier one because there we have the models of all the current markets. So then it's an application of those insights to the US market. For Posurdex, we've been working on that one for a long time. You could say to some degree the market doesn't exist. It does in terms of patients. And then you have to decide what percentage would be applicable to this treatment. And then again, coming back to say Juvederm plus there we can lean on the experience in Europe in terms of what does it do for market expansion as well as internal cannibalization admittedly in a good way at a higher price.
So I think we have got good models and that's the advantage of a company that we're not just a company with two or three products. We're a company with probably 13 products that really count.
No, I agree. You guys have always had great models. I am just wondering what the sort of the absolute or percentage bump you're going to get from the sort of -- rough sort of contribution?
I think you and your colleagues, that's where you're going to have some interesting, get your thinking caps on.
Fair enough. I appreciate it. Thanks.
Merriam, we have time for one more very quick question.
Thank you. Our next question is from Gary Nachman of Leerink Swann.
Thanks. Just to follow up on one of the last points Jeff was making. As you have been cutting on SG&A spending, where is most of that coming from? Is it mostly DTC? It sounds like the real change is to the sales force and what franchise that are being impacted the most, which ones are really more includes to sell?
Gary, given that I am closest to the commercial operations, on the sales force side, we basically kind of finished all our ads there at the beginning of the year. So as you've heard and seen often we start with a high SG&A ratio at the beginning of the year as we've added sales forces not just as last year but years prior to that. And so then as sales grow, that ratio falls. Something we've attempted to do is really protect DTC and public relations as much as we can. Those are high return areas. And then basically the places that we really start chopping into are all the many other things like meetings, training, advisory boards, medical education, there's lots and lots of meetings and smaller conferences and we've been saying no to quite a lot of those things. And that's what you have to do to manage through times like this.
Are there some franchises that are feeling the effect more than others in terms of how we think going into next year?
Clearly, we have certain things like ophthalmology and I think even if you take a very critical eye and I'd invite you to do that of our worldwide ophthalmology business, it’s performing tremendously well. So we've scarcely touched that because we want to make sure it continues to work tremendously well. So clearly the greatest pain has been applied to the business that created the problem. And that's the way it should be in terms of people's discipline.
We’d like to thank you for your participation today. If you have any other further questions Joann Bradley, Emil Schultz and I will be available immediately following the call. Joann will now take five minutes to give you market share data.
Thank you, Jim. The following market share data we are providing is Allergan's base estimate based upon the best available resources for data such as IMS, as well as Allergan's internal estimates. The market share and growth rate information is a moving annual total for trailing 12 months as of the end of June 2008.
The market for ophthalmics is approximately $12.4 billion growing at a rate of 10% and Allergan's market share is 16%. The market for glaucoma approximates $4.9 billion, growing at a rate of 7% and Allergan's market share approximates 18%. The market for ocular allergy approximates $1.1 billion, growing at a rate of 2% and Allergan's market share approximates 5%.
The plain ocular anti-infective market is roughly $1.1 billion, growing at a rate of 4%, and Allergan's share of 13%. The market for ophthalmic non-steroidal anti-inflammatory is about 309 million, growing at a rate of 13%, and Allergan's market share is 35%.
The artificial tears market inclusive of ointments is approximately $1.2 billion, growing at a rate of 10% and Allergan's share is 22%. The US topical market to for acne and psoriasis is roughly $1.8 billion, with an annual growth rate of about 2% and Allergan's market share is around 6%.
The top ten markets for neuromodulators are roughly $1.3 billion, growing at a rate of roughly 15% and BOTOX has approximately 91% market share. The worldwide market for neuromodulators is roughly $1.6 billion, growing at a rate of roughly 21% and BOTOX has approximately an 84% market share.
The worldwide market for facial filler, substance aesthetics products is roughly 730 million, growing at a rate of roughly 30%, and Allergan has approximately a 30% market share. The US market for facial filler substance aesthetics product is roughly 330 million.
The worldwide breast aesthetics market including aesthetics and reconstructive is roughly 800 million, growing at a rate of roughly 17%, and Allergan has approximately a 38% market share.
The US breast aesthetics market is roughly 380 million and Allergan Medical has around 45% market share, and the worldwide bariatric surgery market, the band and balloon segments only is roughly 360 million, growing at a rate of roughly 40 to 45%, and Allergan has approximately an 80% market share.
And that concluded our call. Thank you.
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