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Allergan (NYSE:AGN)

Q2 2013 Earnings Call

July 31, 2013 11:00 am ET

Executives

James M. Hindman - Chief Financial Officer

David E. I. Pyott - Chairman and Chief Executive Officer

Jeffrey L. Edwards - Chief Financial Officer and Executive Vice President of Finance & Business Development

Scott M. Whitcup - Chief Scientific Officer and Executive Vice President of Research & Development

Joann Bradley

Analysts

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Marc Goodman - UBS Investment Bank, Research Division

Liav Abraham - Citigroup Inc, Research Division

David W. Maris - BMO Capital Markets U.S.

David G. Buck - The Buckingham Research Group Incorporated

Ken Cacciatore - Cowen and Company, LLC, Research Division

David Risinger - Morgan Stanley, Research Division

Jami Rubin - Goldman Sachs Group Inc., Research Division

Seamus Fernandez - Leerink Swann LLC, Research Division

Randall Stanicky - Canaccord Genuity, Research Division

Andrew Finkelstein - Susquehanna Financial Group, LLLP, Research Division

Douglas D. Tsao - Barclays Capital, Research Division

Tim Lugo - William Blair & Company L.L.C., Research Division

Operator

Hello, and welcome to the Allergan Second Quarter 2013 Earnings Call. [Operator Instructions] At the request of the company, today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would like to introduce today's conference host, Mr. Jim Hindman, Senior Vice President, Treasury, Risk and Investor Relations. Sir, you may begin.

James M. Hindman

Thanks, Christie. 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, Finance and Business Development, Chief Financial Officer; Dr. Scott Whitcup, Executive Vice President, Research and Development, Chief Scientific Officer; and Jim Barlow, Senior Vice President and Corporate Controller.

Before we move ahead, I would 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 businesses. 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 forward-looking statements that is included in our second quarter 2013 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 it 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 address this information on our website at www.allergan.com.

At this point, I would like to turn the call over to David Pyott.

David E. I. Pyott

Great. Thanks, Jim. Good morning, ladies and gentlemen. Performance this year is in line with our long-term growth aspirations of delivering sales growth around the 10% mark in local currencies and earnings per share growth in the mid-teens.

In the second quarter, sales increased over Q2 of 2012 by 10.9% in local currencies and by 10.6% in U.S. dollars, with year-to-date year-over-year growth at a similar rate of 10.0% in local currencies and 9.5% in U.S. dollars.

Regarding operating performance, we generated non-GAAP diluted earnings per share of $1.22, an increase of 16% over Q2 of 2012 and well above the outlook provided in the last call of $1.18 to $1.20, thanks to robust sales.

Year-to-date, non-GAAP diluted earnings per share increased 17% over 2012 after we continued to strongly invest into R&D, the long-term driver of business success in our industry. On a non-GAAP basis, we have this year increased R&D investment by 15%, with R&D standing at over 17% of sales. For a reconciliation of these numbers to GAAP, kindly consult our press release.

Regarding progress with our pipeline, we are pleased that we're on the way to delivering most of our regulatory milestones for the year. We're able to file OZURDEX for diabetic macular edema a few months earlier than planned, both in the U.S., as well as in Europe.

Regarding LEVADEX, subsequent to a meeting with FDA in mid-June, we received input regarding stability metrics for our optimized manufacturing process in our newly-acquired facility. We have full agreement with the FDA on all these requirements and expect to submit stability data by year end, which should lead to an approval in Q2 of 2014.

Regarding DARPin, Allergan started in Q2 the third stage of the Phase II clinical trial, studying the safety and efficacy of the anti-VEGF DARPin in age-related macular degeneration. In this trial, patients are randomized to 1 of 2 doses of the anti-VEGF DARPin, or ranibizumab, i.e. LUCENTIS.

All patients received 3 loading doses of their assigned treatments at weeks 0, 4 and 8. Patients in the ranibizumab group will then receive additional ranibizumab injections at weeks 12 and 16, with the final study visit at week 20. Patients receiving the 2 anti-VEGF DARPin groups will receive sham injections at weeks 12 and 16, with the final study visit at week 20.

This study employs the conventional use of 3 loading doses to eliminate existing retinal fluid and then assesses the duration of this treatment effect. This study design will help finalize the treatment regimen for Phase III. In addition to studying dose, duration and efficacy, this trial will also assess safety, including the potential effects of improvements in the manufacturing process on ocular inflammation as we saw some limited ocular inflammation in the second stage, although substantially less than with the original manufacturing process. Results from this trial may be used to guide additional changes in manufacturing that are planned prior to Phase III studies and commercialization.

Regarding bimatoprost for scalp, we plan to start enrolling patients this quarter, the first of the 2 additional planned Phase II studies. The details are now posted on clinicaltrials.gov.

Commencing with ophthalmic pharmaceuticals, Q2 worldwide sales growth recovered to 8.0% in local currencies, closer to the long-term trend line as worldwide sales of the LUMIGAN franchise came back to 5.1% growth over Q2 of 2012. This was mainly due to return to ex-factory sales growth in the U.S. for LUMIGAN. In the U.S., we have now virtually completed the transition of prescriptions to the newer and improved LUMIGAN 0.01% formulation.

During the process of discontinuation of LUMIGAN 0.03% formulation in the last 6 to 9 months, overall inventories of LUMIGAN, both at wholesale and more importantly at retail, were reduced. This trade in inventory reduction is now behind us.

Year-to-date, in terms of withdrawals from wholesale, IMS reports an acquisition dollars sales increase of 7.6%, caused by an increase in price of 12%, offset somewhat by increasing rebates to secure formulary positions.

As a marker of volume performance, trailing prescriptions of LUMIGAN are down 3% in the glaucoma market, impacted by generic latanoprost. Regarding future performance, we are encouraged that we have recently published data on the benefits of lowered intraocular pressure when patients are switched from generic latanoprost to LUMIGAN 0.01%.

A key driver of growth in ophthalmic pharmaceuticals was also RESTASIS, where sales increased 10.5% in local currencies, with strong growth in the U.S. and even stronger growth in the small base in overseas markets, such as Turkey and Korea.

In the U.S., we experienced strong volume growth, driven both by a large increase in the number of details delivered by our sales forces in both the ophthalmology and optometric channels, as well as by an increase in investment in DTC, including a new TV commercial, which has delivered measurable improvement in terms of recall of advertising and patient action.

Regarding the FDA's draft guidance on generic cyclosporine, we'll be submitting potent cautionary arguments regarding the scientific challenges of in vitro assays and patient safety. We'll further contemplate taking every appropriate legal and regulatory action. This being stated, we'll be conducting in our strategic planning process, as is the norm, various scenarios of outcomes and timelines for potential RESTASIS generics.

Regarding worldwide ophthalmic performance and referencing the IMS report for Q1, the last period for which data is available, IMS shows the ophthalmic pharmaceutical market growing by a robust 12%, boosted by retinal therapeutics increasing 30% year-over-year and Allergan growing at 10%, and the glaucoma category growing only 2% due to the impact of generics. Allergan in Q1 grew 8%, also thanks to a strong uptake of COMBIGAN.

Regarding the LUMIGAN franchise, it is of note that IMS reports 3% growth for the U.S., with international sales increasing 12%, also benefiting from GANFORT. As a point of difference to foreign markets, only the U.S. has a profit in scientific retail for the pharmacists to try and switch a branded prescription to a generic.

In Europe, the LUMIGAN franchise has been boosted by the launch of LUMIGAN unit dose in Germany, the U.K., the Netherlands and Scandinavia. In Europe, there is a submarket for BAK-free products, which we're now entering.

We also received, for GANFORT unit dose, a positive opinion from the European Medicines Agency, which will lead to the first licenses and launches later in 2013. GANFORT was also approved in China, an important approval for that market, but it will take some time to establish formulary coverage.

The artificial tears category in Q1 per IMS grew 5%, with Allergan sales being flat. In Spain, due to austerity, the Spanish government de-reimbursed almost all artificial tears, which has led to the market being virtually halved in volume. As Allergan enjoyed an almost 50% share of that market, we have been impacted hard.

Allergan should improve with the introductions of OPTIVE and OPTIVE Plus unit dose in many additional markets around the world. This product is marketed in the U.S. as OPTIVE Advanced. In the U.S. year-to-date, Allergan tear sales have increased 11% and the category growing 9%.

OZURDEX growth continues on a steep trajectory, driven particularly by Europe and the United States. The product was recently launched in Russia, Turkey, Kuwait and Jordan.

Moving on to BOTOX. Sales in Q2 grew 11.8% in year-to-date, 13.5% year-over-year in local currencies, with double-digit year-to-date growth in both the therapeutic and aesthetic categories. Regarding the global market in Q1, the last period for which data is available, we estimate the growth was 15%, with Allergan increasing at 16%. Accordingly, BOTOX market share moved up slightly to 76%, with share gain in therapeutics as we build up with the newest indications for chronic migraine and bladder being offset by small share loss in aesthetics.

Since the last earnings call, we have received approvals for BOTOX for neurogenic overactive bladder in Singapore and Morocco; and for overactive bladder in Hungary, Poland, New Zealand, India, Oman and Chile. Importantly, we've also reached agreement on public reimbursement for BOTOX for neurogenic bladder in Australia.

In the U.S., the therapeutic business continues to grow strongly, driven by chronic migraine, the 2 bladder indications and upper limb spasticity. Regarding chronic migraine and reimbursement, we have high levels of coverage in terms of policy, with 92% of commercial lives covered and 100% of Medicare lives. As almost all physicians submit for reimbursement prior to injecting patients within a prior authorization process, it is significant that we have been able to drive down the numbers and percentage of claims being rejected to quite low levels, thus, securing access for most patients.

Regarding training, we're continuing to invest in deepening injector experience by local live programs and preceptorships in order to increase rates of adoption and productivity. In addition, we have created a dedicated practice management group to assist physicians with the organization of a BOTOX clinic and improve the patient flow.

Beyond working on increased physician capacity to handle patients, we've also stepped up our efforts to educate patients about the availability of BOTOX by launching the first branded television campaign for BOTOX for chronic migraine, which started at the end of June. Since that date, we have seen a major increase in a number of website visits and also page views of what we call Find A Headache Specialist. Since approval of neurogenic overactive bladder, we have trained over half of the universe of urologists and urogynecologists. User and patient satisfaction is high.

During 2013, we have almost doubled our sales in the neurology channel, albeit off a small base in 2012. Reimbursement for overactive bladder is still a barrier as we complete negotiations with insurance providers. As of June, we now have 82% coverage of Medicare lives and 42% of commercial lives, just a short 5 months post FDA approval, but [ph] now our rates for prior authorizations are falling steadily.

In the movement disorders area, we are both growing the market, as well as maintaining high market share. With Ipsen's recent announcement to restructure their U.S. operations, we will face less competitive pressure as less than 10 field personnel will be deployed in the key account structure.

In Europe, we are pleased that the market seems to be growing above mid-single digits, and that BOTOX is gaining share based on initial uptake of chronic migraine and in neurology and in addition, thanks to improved execution in movement disorders.

Turning to the aesthetic side of the BOTOX business. We enjoyed strong growth in Q2 in most of the principal markets of the world. Exceptions are Canada, where we are drawing down inventory in Q2 in the doctor's office after a combined promotion with JUVÉDERM in Q1, strategically timed to be just ahead of the launches of Xeomin and Dysport; and also in Australia, where Galderma is heavily price discounting Azzalure, the cosmetic brand of Dysport.

We're enjoying very strong in-market growth in Russia, Japan, China and most countries in East and South Asia. In the U.S., based on survey data, it seems that the market in the first half of the year grew high-single digits, and that BOTOX, at 81% market share in April, enjoyed the same share as in April 2012.

Xeomin share has stagnated at 5% for several months now, with the significant part of the share stemming from free goods and samples. In Western Europe, we believe that the market is growing mid-single digits, and that we have now been able to contain our market share loss to Azzalure and Bocouture.

Facial aesthetic sales in Q2 increased 9.4% in local currencies year-over-year after the torrid [ph] Q1 year-over-year growth of 33% in local currencies, thus, producing a more normalized growth rate of 19.5% year-to-date. As we advised in the last call, Q1 was boosted in the U.S. by a buy-in against a price increase and due to the timing of promotional activity in the U.S. and Canada. Hence, Q2 sales growth in the U.S. and Canada was modest. Market conditions in the U.S. remain healthy as the market seems to be expanding around 10% year-to-date in volume.

We're very pleased that JUVÉDERM per survey data enjoyed record market share with almost 40%, making some gains against Restylane. The growth in the market is particularly encouraging as demand from patients has not yet been further stimulated by the introduction of VOLUMA, which, after the positive recommendation from the FDA panel, we expect to launch before year end.

Outside the U.S., JUVÉDERM sales grew strongly in Q2, with major increases being recorded across the Europe, Africa, Middle East region and in Asia and all of those countries where the Vycross collection has been introduced, that is VOLUMA; then followed by VOLBELLA for lips; and VOLIFT for nasolabial folds, a product with superior malleability. The new products create growth on top of continuing growth for base JUVÉDERM.

In the European Union, the market is continuing to grow in the mid-teens despite general consumer spending restrictions as patients respond to the advantages of the newest generation of products in terms of performance, durability and comfort.

The market has also responded to the Vycross collection in the same manner in Brazil, Argentina and Chile. VOLBELLA was launched in Q2 in Canada, Greece, Bulgaria and the Ukraine, utilizing training experts from Western Europe.

Performance in the breast aesthetics business improved in Q2 for 2 reasons: firstly, as we begin to anniversary the surge in demand we experienced in early 2012 in the aftermath of the PIP scandal and an ensuing need for replacement surgery; and secondarily, due to the introduction in the U.S. of the shaped-anatomical 410 Natrelle impact. Sales in Q2 increased 5.7% to local currencies but are still down 1.3% year-over-year due to the unusually high Q1 in 2012 for the reasons aforementioned.

In Europe, our survey data for Q1 shows that the market declined 19% year-over-year. As a better measure of long-term trends, it is noteworthy that the European markets in units in Q1 of 2012 was only 3% smaller in units than Q1 of 2011 despite the poor economic conditions and any negative perceptions of breast augmentation surgery due to the scandal. Over this time, Allergan, as the quality and price leader and, by far, the #1 player, has gained considerable market share.

In the U.S., sales in value increased strongly due to the introduction of the premium-priced 410 implant and due to further mix shift from low-priced saline to higher-priced gel implants. In terms of volume, we believe that the market in units is marginally declining at 2% to 3%.

In units, we're also impacted by the launch of the Sientra products, which had virtually no base in the prior year. As a strategy, we have not engaged in the price discounting practiced by Mentor to defend their position against Sientra, but have preferred to lose a few points of unit share.

Year-to-date, we have enjoyed major growth in the emerging markets, principally Russia, China, Brazil and Argentina. Our skin care and other franchise grew 38.6% in local currencies, boosted by the acquisition of SkinMedica, offset by the disappearing sales of SANCTURA XR, post the launch of generics, and very strong growth of the medical dermatology business, which grew about 35%.

In the topical acne market growing about 2% in prescriptions, ACZONE is rapidly gaining share, with more and more physicians adopting the product, with IMS reporting an increase in Q2 acquisition dollar sales of 52% versus prior year. In order to further stimulate growth, we commenced TV, as well as print advertising, targeted to the adult female patient in June.

Regarding TAZORAC acquisition dollars, again, as reported by IMS, Q2 growth is 21% versus prior year, with TAZORAC being the only growing branded single retinoid agent.

LATISSE sales increased 6.1% in Q2 and 6.8% year-to-date in local currencies versus prior year. 2013 sales in Canada and Brazil benefited from our promotional investments. In the U.S., LATISSE has benefited from the larger sales force deployed after the integration of LATISSE into an expanded SkinMedica sales organization. The SkinMedica product range is benefiting from some new product innovations, as well as becoming part of the overall Allergan product offering.

I'll now pass it over to Jeff Edwards, who will comment on our financial performance.

Jeffrey L. Edwards

Thanks, David, and good morning to all of you on the call. Allergan's high-quality second quarter performance was a reflection of our ability to generate consistently strong sales investments and earnings performance.

During the quarter, we were able to overachieve both sales and EPS expectations, while we continue to support our objective of making meaningful investments into the present and future growth drivers of the business across both the commercial portfolio and our research and development pipeline. The depth and breadth of our product portfolio and significance of both our therapeutic area and geographic footprints provide the company with the flexibility and latitude needed to balance performance and investment decisions.

Non-GAAP diluted earnings per share from continuing operations for the second quarter were $1.22, with the growth of 16% compared to the second quarter of 2012 from continuing operations. A reconciliation of all of the adjustments to GAAP earnings is set out in our earnings release.

Excluding the effect of non-GAAP adjustments, amortization of acquired intangibles and discontinued operations, Allergan's Q2 2013 gross margin of 87.4% increased 110 basis points when compared to Q2 of the prior year, driven primarily by improved standard costs and the continuation of favorable pricing, region and product line mix, as well as positive royalty dynamics, led by substantially reduced SANCTURA royalties and further offset in other revenue by good performance from both of our partners in Japan, Senju on ALPHAGAN and LUMIGAN and GSK on BOTOX Therapeutics.

The non-GAAP selling, general and administrative expenses to product net sales ratio from continuing operations for the second quarter was 38.4%, totaling $606 million. The comparable ratio and expense value for the same period in 2012 were 38.6% and $551 million, respectively. We continue to believe that Allergan's non-GAAP SG&A expense to product net sales ratio will be further leveraged in the second half of this year.

Non-GAAP research and development expenses were 16.9% of product net sales for the quarter, totaling $266 million, an increase in spend of approximately $38 million over the $228 million, or 16% of product net sales spent in the second quarter of 2012.

With respect to our balance sheet, consolidated Allergan days sales outstanding was 53 days, while consolidated Allergan inventory days on hand was 126 days. In the second quarter, operating cash flow after CapEx was approximately $442 million. At the end of the second quarter, Allergan's cash and equivalents and short-term investments and cash and equivalents and short-term investments net of debt positions, totaled to $2.7 billion and $513 million, respectively.

As a reminder, we issued approximately $600 million of new long-term debt at an effective weighted average rate of approximately 2.23% in the second quarter of 2013 to help offset the use of cash and equivalents for the recent acquisitions of SkinMedica and MAP pharmaceuticals.

With respect to our performance aspirations for the third quarter of 2013, Allergan estimates product net sales in the range of $1,500,000,000 to $1,575,000,000 and non-GAAP diluted earnings per share from continuing operations to be in the range of $1.18 to $1.20, including the dilutive impact of the MAP acquisition.

Regarding full year expectations for 2013, Allergan estimates product net sales in the range of $6,050,000,000 to $6,200,000,000 and our full year non-GAAP diluted earnings per share from continuing operations to be in the range of $4.72 to $4.76, which excludes the impact of the 2012 R&D tax credit reported in Q1 2013 as non-GAAP adjustment and includes the $0.07 estimated dilution impact related to the MAP Pharmaceuticals acquisition.

With respect to the divestiture of the obesity intervention business, we continue to make progress toward separating this business from Allergan. We have received several purchase offers for the business unit, progressing with additional diligence processes that may lead to other offers. If we are not fully satisfied with the value and related terms of these offers following further negotiations, we would consider other options such as of the sale of specific assets or a wind down of the business.

For your information, expectations for other lines of the income statement and specific product sales expectations are included in the current release.

So with that, operator, I'd now like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Larry Biegelsen with Wells Fargo.

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

Maybe the first -- my question is on RESTASIS and maybe the generic guidance. Maybe if you can talk little bit about when we'll see your response to the FDA draft guidance and maybe if you could give us a little bit of color as to why you believe the in vitro pathway is inappropriate.

David E. I. Pyott

Okay. I'll take that one, Larry. Thanks for the question. I think it's obvious to all that we have put to work the best minds in terms of internal resources from clinical, regulatory, legal. And we've also hired some of the best external experts with experience in these matters. I think you'll appreciate that we are working through all of our strategies, all of our arguments, and that these will become public right around the deadline, which is due, which is, of course, I think everybody knows, August 19. So I think that will be the next time where you can really take a very close look at the approach we are embarking upon.

Operator

Our next question is from Annabel Samimy with Stifel, Nicolaus.

Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division

Just curious, given some of the recent developments with the pipeline and potential lowering of the generic hurdles for RESTASIS, can you tell us how in the near and medium term you're prioritizing some of the various options to drive shareholder value, whether it's BD, M&A or use of capital for share buyback or dividends? And also, with regard to M&A, historically, you've done some smaller strategic acquisitions, given the recent activity. Do you have any compulsion to go -- to start thinking bigger?

David E. I. Pyott

Right, that one sounds like for me again. So I think, really, top of the heap there is delivering very solid operating performance. And many occasions, I've talked about our midterm growth aspirations being around about 10% sales growth in local currencies and then around mid-teens in terms of our earnings per share. So I think when you reflect upon what we've done in Q2, you think about the outlook for the rest of the year, I think we're well on our way to delivering that. I think also, it's very important to remember the huge number of approvals that we've received since 2010, and we still have several more to come this year, beginning of next year. So then moving on to the subject of M&A. We constantly look for external assets, whether there be technology assets to add to our pipeline. Also, as a quick reminder, I have explained on several occasions that in the coming 5 or so years, there will be a major step-up in R&D from roughly $1 billion-plus this year to roughly $1.5 billion some 5 years from now. So you can see we have resources available to bring in more technology. And of course, in addition, we're always looking at companies for marketed products. So despite, I think, many observers believing that something materially has changed, really not that much has changed. We're going about our business to deliver strong results. And then afterwards, it's up to those who are investing capital to decide whether Allergan, at this current price, is a good investment. I can only show you the numbers. The investment community clearly has to come to their own investment choices and trade-offs.

Operator

Our next question is from Greg Gilbert, Bank of America Merrill Lynch.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Yes, my question is for Scott, since we only have one, I'll ask it this way. I was hoping, Scott, you could summarize what you know DARPin now and what you need to see from here and when you might see it in order to recommend to David and the board that going into Phase III is the right thing to do.

Scott M. Whitcup

So thanks, Greg. David outlined the study design for the third stage of our Phase II. Clearly, our goal is to have a product that gives patients benefits and physicians benefits compared to the already approved and commercialized anti-VEGF treatments. In that second stage, we were looking at doses that were giving anti-VEGF blocking effect of about tenfold greater than what's out there. Some of the comments were that we should have gone to loading dose and fixed dose right off the bat. But because we're giving substantially more drug than previous trials, ethically and investigative feedback suggested that we needed to look at the effects of the single injection. We did that in Stage II. And of course, you can't learn everything you want to in a given trial. We felt comfortable based on those data that we could go to the study design that's more conventionally used, where you give 3 loading doses of the drug to get rid of most of the VEGF in the eye and then see what the actual duration is with a fixed dosing schedule. So we will get that from our third stage. I think those data will give us good information to the dose, duration and guide us on our Phase III study design. We also noted in David's comments that we saw some inflammation in the initial studies. As is common with biologics, we're continuing to improve the manufacturing. We saw a decrease in the inflammation in the second stage from the initial material, but we have additional manufacturing improvements that are planned. And so looking to see in this next Stage III how much inflammation there is, if any significant inflammation, will also guide us on what we need to do before Phase III. So in sum, we believe that a lot of the data from this next Stage III will be critical to determining final study design and what, if any, additional manufacturing changes need to be made prior to Phase III. And as we've also stated, these retinal programs are very expensive. So we want to be sure when we go into Phase III that we've worked out all the science and that we have a very good chance of getting a commercially successful product at the end of that. So hopefully, that helps.

Operator

Our next question is from Marc Goodman with UBS.

Marc Goodman - UBS Investment Bank, Research Division

David, if you could just come back to the question about strategy and M&A. I guess, let me just ask it maybe a different way. I mean, DARPin is clearly going to be a great product, but it's delayed and it's not going to come out in the next, let's say, 4 years. And if RESTASIS does, in fact, go generic during the next, let's say, 2, 3 years, whatever it is, during this 4-year period, what in the pipeline is going to be critical enough in addition to maybe the base business that's just going to grow longer than we think and better than we think in order for you to reach your goals of roughly 10% and 15% top and bottom line?

David E. I. Pyott

That's why when I answered the earlier question, I think most importantly is to think through of the carrying power of growth in our markets, our ability to grow or sometimes where we have very high share, like BOTOX, defend on market position. And as I've often shared with many of you, I think some people maybe underestimate the carrying power of the business, of the recent approvals. On top of that, of course, we still have some to come. I think VOLUMA is a very important one. When you reflect upon all the data points I've given you on this call and prior ones, this is a very unique product that leads to major market expansion. Obviously, we realized with OZURDEX that we were going into the 2 smallest of the retina segments first, that's because the trials were easier to execute. And we all know the famous foot in the door is better than -- in a small segment, than waiting for the big segment that just takes double the time. That moment is coming with the hope for approval of OZURDEX for diabetic macular edema in the U.S. and Europe, which won't be so far apart. And then based on those 2 regional approvals, of course, we would expect the normal roll-through to all the other principal markets of the world. So one other thing I need to come back around is to say, -- reiterate what I said about RESTASIS in my prepared remarks, which is, clearly, there are various scenarios. Obviously, our plan is to win in this argument. However, we will clearly work on scenarios of downside. And then, of course, as you somewhat hinted in your comment, one can also -- on a downside case, also start opening up various sub-scenarios of what the timing of the entry of a generic might be. So as is the norm for us, that's just part of our strategic planning process. And when you look at scenario A, maybe that's the best one, easiest. And then you look at B and C, and under those scenarios, you then ask yourself, "What else would be do to readjust our business plan so we can continue to deliver numbers?" Obviously, the other ones that are out there still, LEVADEX, the short delay really doesn't have an effect of any materiality in 2014, a bit more in 2015 but not large. And then, of course, we also have Vicept coming along for rosacea. And I think when you reflect upon my comments, you'll also probably realize that the incremental investments we've made in DTC for RESTASIS, for BOTOX, for chronic migraine and ACZONE will all drive further growth. One other one I should probably mention would be Serenity or SER-120 for nocturia. So there are plenty of things out there. And obviously, as part of our overall franchise building in facial aesthetics beyond the filler side, we're also continuing to make sure BOTOX gets appropriate use, once trained and was approved, for other areas of the face, such as crow's feet lines, which should be approved both in U.S. and Europe shortly. So lots of good things going on. And I would like to humbly submit relative to most companies of our size really a lot of different growth vectors that we can play with to deliver the results that we are aspiring to.

Operator

Our next question is from Liav Abraham from Citi.

Liav Abraham - Citigroup Inc, Research Division

My question is for Scott. I'd be interested in your thoughts on the competitive dynamics in the dry eye market even if we don't see a generic RESTASIS in the near to medium term. I understand that the hurdles for the approval of a novel dry eye products are high, but there are a few products in development that seem very interesting and are either in or approaching late-stage development. And I'd be interested on your thoughts on these and how you view the potential for incremental branded competition in the market for 2016.

Scott M. Whitcup

Sure, I'm happy to do that. I'd say, firstly, that dry eyes is one of the most common conditions in that market, and patient demand will continue to grow. I think that's, in large part, what's driven the growth of RESTASIS. We've always expected that down the line, RESTASIS won't remain the only prescription dry eye product. So we looked that there may be things like Shire's acquisition of a dry eye candidate and some others in the Phase II stage that eventually, some of those may get approved. As you point out, the approval of any dry eye product is very difficult, mostly because of patient variability, so the hurdle rate remains high. And in addition to what's on the outside, we, as well, are looking internally at some additional pipeline candidates. So probably within the next year, you'll hear about a couple of new entries for us in dry eye, as well as we've been working on the so-called RESTASIS accent. We've publicly stated that, that should enter the clinic next year. So in terms of the RX side, yes, there's a competitive market. The hurdle remains high. We will also have some candidates. And there's room for more than one product. Again, the market is so large and the patient demand so high that we expect the market to continue to grow despite competition. The second piece of that is the tears market. Because dry eye is such an important category, the tears market continues to do well. And we spend a fair bit of R&D dollars on continuing to innovate in the tears market as well. David mentioned that we do have a number of approvals and launches, and we'll continue to be bringing new products out continuously over the next several years.

Operator

Our next question is from David Maris with BMO Capital Markets.

David W. Maris - BMO Capital Markets U.S.

David, having the top line and EPS aspiration goals, I think, are very good for investors. But if you didn't have to worry about those goals and earnings and growth targets and the public markets for the next few years, what would you do differently? Where would you invest differently? Would it be more in selling and promotion? Would it be -- what type of R&D areas would you go after? Would they be giant things, like stem cells and artificial vision? Or would it be more into the aesthetics? Trying to get an idea of -- again, not that you should do away with the aspirational goals, but what areas are most interesting thing for you if you didn't have those constraints?

David E. I. Pyott

Well, the way I'd answer that question is that I really don't believe in the very hypothetical situation that we're a private company, that there would be any material difference in our behavior. I'm a great believer in operating discipline and increased efficiencies. And in fact, if I start with R&D, when I talk with Scott Whitcup and his team, I sometimes say, "Well, it's great that the R&D budget could be another $500 million per year roughly 5 years from now." But of course, with that comes great challenges in terms of how do we maintain our clarity of thinking, how do we maintain our agility and maintain our ability to continue to bring things through the pipeline? I think on the sales and marketing side, you've heard for a long time, in our case, well over a decade, my belief that in the pharmaceutical and medical device industry, all of us need to get more efficient. And therefore, I'm quite pleased with the improvements we're making year in, year out, and we plan to continue along that road, all of which gives me a fair degree of confidence and, of course, predicting anything with absolute perfection 5 years out, wouldn't that be cool? I should be probably working on the buy side. That was a joke, by the way. I'm very happy where I am. But you'd appreciate what I'm saying. I think then, stepping back further, when you think about Allergan's portfolio, both of marketed assets, as well as pipeline, we remain an extremely diversified company. And diversification is a good thing when it comes to ability to handle, hopefully only small shocks [ph]. And so far, over the years, we've risen to all the different challenges that came our way. If I think back historically, a major worry of the investment community, say, 6, 7 years ago, was how will BOTOX fare in the face of competition, whether it was therapeutic or aesthetic. And I think if I'd, at that point, read the market share number that I just read 20 minutes ago, 76%, you'd have all thought that there are probably some drugs that will be very useful to my forms of delusion. But this is true. So we've come through that challenge very well. And we're really putting all our efforts beyond dealing against some of -- dealing with these other challenges, and focus and concentration of great minds of ability is a great thing.

Operator

Our next question is from David Buck with Buckingham Research Group.

David G. Buck - The Buckingham Research Group Incorporated

Just a clarification first, I guess, if I heard the answers to the prior questions, David, there's not an incentive to necessarily speed up the funnel of M&A candidates. But getting on to the question, since you have had SkinMedica and also LEVADEX acquisitions in the past year and some buy-ins with the distributors, maybe for Jeff, can you talk a little bit about what the sales and earnings benefit and decrement for those might have been and what the expectation should be as we close out the year?

Jeffrey L. Edwards

Thanks, David. We don't break out the specifics related to those transactions. As you would imagine, given that they were both relatively modest in size, the contribution, certainly, with respect to SkinMedica first year have been modest. I think I can say without question that our commercial teams, R&D organizations, G&A organizations, have done a very good nice job of integrating those assets into the Allergan business. Likewise, with respect to MAP, focusing on the research and development organization and our manufacturing organization, getting their arms around all of the issues and loose ends that existed at the time we acquired those businesses has been done with great professionalism. We've made wonderful progress and organizing our thoughts so that they were consistent with the thoughts of the FDA, identifying timelines that were achievable at a high probability of success. So I think we're making great progress on both fronts. We're seeing an acceleration of performance with respect to SkinMedica year-over-year. And our expectations is that, that acceleration will continue into the second half of the year. On the BD front, we don't make specific comments about what we're doing and what we intend to do. I say the same thing internally. Every morning I wake up and I put my pants on the same way. And that will continue on a going-forward basis. We know it's important. It has always been important. Whether it was a year ago or this year, we look for opportunities with the focus on logic and discipline, making sure that they fit with our strategy and our business model, whether they be large or small, early stage, late stage or product. We understand, just like you do, the importance of that process. So we're marching on. We're very focused. We're not taking our eye off that one. I can say, "Trust us." Well, that's hard to do, I understand. But we work forward, and we're not changing the way we're going about this. We understand the importance of being very, very focused and very, very diligent.

Operator

Our next question is from Ken Cacciatore with Cowen and Company.

Ken Cacciatore - Cowen and Company, LLC, Research Division

Just a clarifying question first. Is this new formulation or the new DARPin study, did you already make some tweaks to the manufacturing and, therefore, this new set of products that you're using has that tweak? Or are you going to wait and see what the results are? And then secondly, did the inflammation cause a high level of discontinuation, meaning, was the inflammation a separate issue? Or did it have some impact on the durability findings that you had?

Scott M. Whitcup

So thanks, Ken. We made changes in the manufacturing between the first study and the second stage. The second stage and the third stage will be the same manufacturing process. But there were already changes that we knew we were going to be making subsequent to that. In terms of the inflammation that we saw, I don't believe that it was a major cause of discontinuation and didn't really change our ability to assess the data. We didn't see actually that much inflammation that it impacted study results. But our goal is clearly to get this manufacturing as optimized as we can and to get inflammation rates as low as possible before we commercialize.

Operator

Our next question is from David Risinger from Morgan Stanley.

David Risinger - Morgan Stanley, Research Division

My question is related to the BOTOX pricing lawsuit against HHS. As I understand it, Allergan is requesting that HHS declare that it's not required to report ASP data for BOTOX Cosmetic. And if Allergan is successful, then you'd have more flexibility to raise the price of BOTOX Cosmetic and separate that from the medical side. I guess, my first question is, am I characterizing that right? And second, when will we get an answer, please?

David E. I. Pyott

Right. Well, the first part to what you said, I'd agree with you that we're requesting that we're no longer obligated to provide pricing data for Cosmetic. What we then choose to do after that, I'm not sure I would characterize it exactly the way you said it. But clearly, it gives us options that we don't currently have. I wish that I had the government on an exact timeline, but I think we'll be able to tell you a bit more by the beginning of next year.

Operator

Our next question is from Jami Rubin with Goldman Sachs.

Jami Rubin - Goldman Sachs Group Inc., Research Division

David, just to get a follow-up. Obviously, FDA is very difficult to predict, and I think we were all surprised to see the new RESTASIS guidance and appreciate that you're putting up a good fight. But in your contingency plans, I would imagine that there will be a lot of room to restructure, given how high your SG&A ratio is. Can you talk about how variable your costs are and how realistic it would be to bring down those costs and, at the same time, continue to reach your ambitions of 10% top line growth? And then, just secondly, can you remind us what sales are of RESTASIS outside the U.S.?

David E. I. Pyott

Okay. Well, first of all, I think you'll get a much closer look at what our arguments are, you will decide how potent or not that you find them. I think then moving to the other side of the ledger where we're planning for success, but we also have to plan for intrusion. You're quite right that we've had very high SG&A ratios relative to the rest of the industry. And of course, if you think of the ratio I mentioned for R&D as well, 17% of sales, that's on the high end as well. So the good news is that we have a lot more room for maneuver than most companies, and that will be helpful as we start doing that form of scenario planning. I think then we've never broken out the non-U.S. portion of RESTASIS, but you should just consider them as being modest.

Operator

Our next question is from Seamus Fernandez with Leerink.

Seamus Fernandez - Leerink Swann LLC, Research Division

So David, just a question on the international opportunities for some of the existing products. You talked about some approvals, BOTOX migraine and overactive bladder in some other markets. We are seeing some gains in the U.S., with the U.S. sales kind of picking up. How much of that is sort of FX related in the short term? And then, longer term, how do you sort of see the international versus U.S. sales balance really shaking out? And again, obviously, considering -- I think we can consider a better case scenario for RESTASIS as you are at this point.

David E. I. Pyott

Well, obviously, I like your final comment. I hope that both you and I are right. Going back to BOTOX, clearly, in the short swing, the biggest opportunity for migraine and bladder is the U.S. And part of that is just because of what you hear from all companies is the delay effects elsewhere in the world. So even once you've got an approval in some country in the European Union, the time required to then get full access to patients across the European continent probably is about 2 to 2.5 years. And it depends on each country, whether you have to go through Nice, whether you -- France is probably -- well, Germany would be the best in terms of quick action. France, probably, it's a major market, comes on stream fairly quickly. And when you look to Southern Europe, basically, the Spanish government has been saving money by just not getting around to issuing answers on what is the reimbursement price. So we're pleased that we've cracked those codes in Spain and Italy. But the point I'm making is it's a long swing effect in many of those markets. Another one that I mentioned today, Australia, the so-called PBAC. This is the government reimbursement plan where we've now come to an agreement on how Australian patients will get access to chronic migraine. Another one would be Canada, which, of course, these days is a 2-speed market. There's not only a private -- a public market, there's also a considerable private market. That part, we've accessed. On the public side, we're still working through many of the provincial formularies. So net-net, what does that all mean? Assume that new BOTOX indications are just longer swing. They take time to come through, but they will come through.

Operator

Our next question is from Randall Stanicky.

Randall Stanicky - Canaccord Genuity, Research Division

Scott, maybe for you, what's the earlier we could see RESTASIS X hit market? And then if we did see a generic RESTASIS, is OTC an opportunity for you or are the hurdles too high there?

Scott M. Whitcup

So in terms of timing on RESTASIS X, when something's in Phase II, we don't give approval timelines. It will depend a lot on the data. In terms of OTC, I think the review division tends to be conservative. It would be a ways out before RESTASIS could, if ever, go OTC.

Operator

Our next question is from Andrew Finkelstein with Susquehanna Financial.

Andrew Finkelstein - Susquehanna Financial Group, LLLP, Research Division

So my question was on the expenses. As we think about the rest of the year and your guidance, it seems to imply that SG&A, in particular, on an absolute basis, comes down a bit in the second half. Can you talk at all about the timing of the investments you've made this year? It seems like the DTC was a big factor in 2Q. But as you're evaluating the return on those investments, how do you think about the potential to -- where you're putting your marketing dollars in the back half of the year, given the demands of your various businesses?

Jeffrey L. Edwards

The investments we make on an absolute basis in dollar terms typically continue to go up over the course of the year. However, on a ratio or percentage basis, because sales are higher, those ratios improve. So it's not like we're hitting the brakes on what we'll be investing behind in the promotional, selling and marketing categories, and that would include DTC. It's simply a function of how the ratios work. So all of the promotions, all of the investments we choose to make are pressure tested. Of course, each of the functions are asked to tell us what kind of return they expect to generate. And we do go back after the fact and discuss whether or not those returns were achieved or not. And of course, that data is used for subsequent decisions. Sometimes they work; sometimes they don't. More often than not, they do because of the way we approach the process. So with respect to DTC, we know that we get very nice results with respect to RESTASIS. We've seen nice results as it relates to our dermal filler platform. We're beginning to see nice results as it relates to BOTOX for chronic migraine. So in each case, those items are successful. David, anything else? ACZONE is something we've begun this year as well, and we're beginning to see nice results for that as well. So it's not as if we spread the peanut butter very, very thinly. We take a very focused approach. We focus on those areas that have seen good response in the past, and that's our expectation going forward. We'll do the same. We're considering things like OAB as well, but that will be in the future once the product is better established.

Operator

Our next question is from Douglas Tsao with Barclays.

Douglas D. Tsao - Barclays Capital, Research Division

Scott, perhaps you could provide some perspective on the positioning for OZURDEX in the DME market and do you see it taking share from other steroids being used? Or do you think that it has the opportunity to take share from laser phototherapy?

Scott M. Whitcup

So on the DME, as David said, we got OZURDEX approved for 2 of the smaller indications first, and we've always felt that the diabetic macular edema was probably one of the best markets for OZURDEX. We know that the anti-VEGF therapies work quite well. The problem is that, depending on the data you look at, somewhere between 30% up to 40% of patients are resistant to anti-VEGF treatment. We believe that represents a good opportunity for OZURDEX. I think it will take some share from laser and other corticosteroids. I think as there is an approved reimbursed product with a good efficacy and safety profile that can take those anti-VEGF resistant patients, it will establish a nice commercial opportunity for OZURDEX.

Operator

Our final question comes from Tim Lugo with William Blair.

Tim Lugo - William Blair & Company L.L.C., Research Division

Perhaps I missed this, but can you update us on your primary care aspirations for BOTOX migraine? I know you spoke about this a couple of quarters ago. Is this still dependent on the LEVADEX approval?

David E. I. Pyott

Yes, absolutely. I think in our own minds, we've had the view that roughly 12, 15 months post LEVADEX availability on the market, we would go into a deployment at the very top end of PCP. Just to repeat what I've often said before, when you actually buy the SCRIP data, which obviously is anonymous from data sources, you can see a lot of these people who are not board-registered as neurologists sure look like neurologists when you look at what they're prescribing. So that gives us a very good guide to where there could be a productive cause [ph]. So in the short term, of course, the fact that we're delaying the deployment into that physician group is saving SG&A dollars. Obviously down the road, we will make that appropriate investment because we believe that's another driver of growth not only for LEVADEX, but also back into BOTOX for chronic migraine. And reiterating something I was really saying before, beyond the way I answered the question about x U.S. sales in BOTOX Therapeutics, remember, all of the BOTOX indications have very long cycle compared to most pharmaceuticals. And I think it's difficult for you to gauge that as analysts on the outside. But that's one of the reasons I talk about the long-term carrying power from all the approvals we had since 2010 and the ones that are still around the corner and is really our way to get through the next 5 years.

James M. Hindman

We'd like to thank you for your participation today. If you have any further questions, Joann Bradley, David Nakasone and I will be available immediately following the call. Joann will now take 5 minutes to give you market share data.

Joann Bradley

Thank you, Jim. The following market share data we are providing is Allergan's good faith estimate based upon the best available sources for data, such as IMS, as well as Allergan's internal estimates. The market size, share and growth rate information is a moving annual total or trailing 12 months as of the end of March 2013, except where noted as year-to-date through March 2013.

The market for ophthalmics is approximately 19.6 billion, growing at a rate of 11%. Allergan's market share is 16%. Year-to-date, the market growth is 12%. And year-to-date, Allergan market share is 16%.

The market for glaucoma approximates $5.3 billion, growing at a rate of 1%. Allergan's market share approximates 26%. Year-to-date, that market growth is 2%. And year-to-date, Allergan market share is 26%.

The market for ocular allergy approximates $1.5 billion, growing at a rate of 1%. Allergan's market share approximates 3%. Year-to-date, market growth is 10%. And year-to-date, Allergan market share is 3%.

The plain ocular anti-infective market is roughly $1.4 billion, declining at a rate of 1%. Allergan's share is 7%. The year-to-date market is declining 1%. And year-to-date, Allergan's market share is also 7%.

The market for ophthalmic nonsteroidal anti-inflammatories is about $530 million, growing at a rate of 13%. Allergan's market share is 7%. Year-to-date, that market is growing 9%. And year-to-date, Allergan share is 6%.

The artificial tears market, inclusive of ointments, is approximately $1.8 billion, growing at a rate of 7%. Allergan's share is 21%. Year-to-date, that market is growing 5%. And year-to-date, Allergan share is also 21%.

The U.S. topical market for acne and psoriasis is roughly $2.5 billion, with an annual growth rate of 7%. Allergan's market share is roughly 10%. Year-to-date, that market is also growing 7%. And year-to-date, Allergan share is 11%.

The top 10 markets for neuromodulators are roughly $1.9 billion, growing at a rate of around 14%, and BOTOX has an approximately an 85% market share. Year-to-date, that market is growing 15%. And year-to-date, BOTOX share is 84%.

The worldwide market for neuromodulators is roughly $2.5 billion, growing at a rate of roughly 13%. BOTOX has approximately a 77% market share. Year-to-date, that market is growing 15%. And year-to-date, BOTOX market share is 76%.

The worldwide market for dermal facial fillers is roughly $1.1 billion, growing at a rate of 9%, and Allergan has approximately a 38% market share. Year-to-date, that market's growing at about 18%. And year-to-date, Allergan share is about 39%.

The worldwide breast aesthetics market for aesthetic and reconstructive is roughly $880 million, growing at a rate of roughly 2%. Allergan has approximately a 42% market share. Year-to-date, that market is declining about 9%. And year-to-date, Allergan share is about 41%.

I would also like to note a correction in Mr. Pyott's text, his comments on the breast aesthetics market. In terms of longer-term trends in the European market, this 3% smaller in units is from Q1 of 2013 to Q1 of 2011. I believe he said Q1 of 2012 to Q1 of 2011. And that concludes our call. Thank you.

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