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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

Marc Harold Goodman - UBS Investment Bank, Research Division

Seamus Fernandez - Leerink Swann LLC, Research Division

Vamil Divan - Crédit Suisse AG, Research Division

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

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

Liav Abraham - Citigroup Inc, Research Division

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

David Risinger - Morgan Stanley, Research Division

Aaron Gal - Sanford C. Bernstein & Co., LLC., Research Division

Ken Cacciatore - Cowen and Company, LLC, Research Division

Jami Rubin - Goldman Sachs Group Inc., Research Division

Allergan (AGN) Q4 2013 Earnings Call February 5, 2014 11:00 AM ET

Operator

Welcome -- hello, and welcome to the Allergan Fourth Quarter 2013 Earnings Call. [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 now 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

Thank you, Mary Anne. 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 fourth quarter and year-end 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 may access 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. Fourth quarter sales increased strongly over Q4 of 2012 by 15.6% in local currencies, and by 14.6% in U.S. dollars, thus making Q4 an even stronger quarter than Q3, and demonstrating continuing strong momentum across almost all of our businesses as we benefit, firstly, from the many regulatory approvals we've received, both from FDA and other agencies around the world since 2010; and secondly, from healthy cash pay markets as the economy picks up steam in many countries.

For the full year 2013, we're pleased that we fulfilled our long-term goal of growing sales double-digits. In fact, sales increased by 11.7% in U.S. dollars, and by 12.4% in local currencies.

Regarding operating performance, we generated in Q4 non-GAAP diluted earnings per share of $1.35, an increase of 20.5% over Q4 of 2012, and well above the outlook provided on the last earnings call of $1.31 to $1.33. This strong result was achieved off the healthy increases of expenditure for R&D and sales and marketing. For the full year of 2013, earnings per share on the same basis were $4.77, an increase of 18.1% over 2012, and thus, again, fulfilling our long-term aspirations of mid-teens earnings growth.

For reconciliation of these non-GAAP numbers to U.S. GAAP, kindly consult our press release.

Spending on direct-to-consumer advertising is a good example of how Allergan invests to establish brands and grow markets. In 2013, we spent approximately $180 million worldwide, an increase of approximately 13% over 2012, with larger increases for RESTASIS, for BOTOX, for Chronic Migraine with the new branded TV campaign, and for ACZONE with the first TV and print campaign.

Regarding the RESTASIS TV advertisement, a Nielsen report on the most memorable ads across all product categories placed RESTASIS at #9, and is the only pharmaceutical brand in the top 10. More significantly, RESTASIS was rated as the #1 ad across all categories by females 13 years and older. This corroborates that branded TV has contributed to strong RESTASIS growth in 2013 of 19% in local currencies over 2012.

For Chronic Migraine, a recent survey amongst appropriate patients showed an 89% aided awareness rate after we had run our branded campaign.

Looking forward to 2014, and referring to the outlook we have provided in our press release, you will note that we plan to deliver some leveraging of our SG&A expenses. Regarding regulatory approvals, we made further strong progress since the last earnings call. For BOTOX Cosmetic marketed as VISTABEL in most of Europe for the crow's feet indication, we have now secured the national licenses across 21 countries in the region. The establishment of our global partnership with Medytox outside Korea was cleared by the Korean government.

Regarding LEVADEX, we resubmitted an NDA to the FDA, which we believe addresses the concerns identified in the complete response letter received in the second quarter of 2012.

Enrollment into the third stage of our Phase II trial for the anti-VEGF DARPin was completed in Q4 of 2013, and we expect to provide you an update to the results in the second half of 2014.

In terms of our ability to continue to maintain strong long-term growth, we're pleased to report on some substantive steps for maintaining strong intellectual property positions. Regarding LUMIGAN 0.01%, a District Court in Texas ruled that Allergan's 5 patents are valid until their expiries, the last of which is in 2027.

For RESTASIS, we have so far had 3 new patents issued by the U.S. Patent Office, 2 formulation patents and 1 method of use patent with expiries in 2024, and have submitted all of them to the Orange Book. In addition, we have filed a citizens petition with the Generics Drugs division of FDA. This provides us several legal avenues to vigorously defend RESTASIS, although uncertainty remains as to the status of ANDA filers. Since receipt of a Paragraph IV certification notice from Actavis, we have received no further such notices. So therefore, the situation may become clearer by midyear.

Now commenting on the performance of the businesses, I'll commence with ophthalmic pharmaceuticals, which, after good growth in Q3, again posted strong growth in Q4 of 11.6% in local currencies and 10.8% in dollars. Encouragingly both U.S. and ex-U.S. sales posted double-digit increases in Q4. In the U.S., IMS reported in-market sales growth of 12.7% for Allergan in Q4, and of course, that's in acquisition dollars. The U.S. performance was driven by very strong growth of RESTASIS, OPTIVE and Refresh artificial tears and OZURDEX, offset by single-digit decline in LUMIGAN sales.

As in earlier quarters, LUMIGAN performance in the U.S. is impacted by activities at the pharmacy level, where pharmacists attempt to switch LUMIGAN scripts to generic latanoprost, and were also impacted by heavier rebates to maintain Tier 2 and Tier 3 access in managed care. The results of a Phase IV clinical trial called the drop study showed significantly lower intraocular pressure when patients switch from latanoprost generic to LUMIGAN 0.01%.

Since utilizing the study since the midyear of 2013, we're at least pleased that LUMIGAN trailing prescriptions in the second half of 2013 grew 2% versus the prior part of the year, having declined 0.5% in the first half. Ex-U.S., the bimatoprost franchise, i.e. LUMIGAN and GANFORT, grew double-digit, both in Q4 and for the full year.

In Europe, we are rapidly gaining market share in glaucoma, also due to approvals of our new Unit Dose products. The introduction of LUMIGAN Unit Dose across the European Union is now complete, and we continue to roll out GANFORT Unit Dose across the region. We're pleased that GANFORT became the #1 fixed combination product in Europe, overtaking Xalacom in November. COMBIGAN is now approved in all countries in the European Union.

RESTASIS in the U.S. continues to be driven by strong unit growth, plus the benefit of price increases, based on effective DTC and a strong uptick in optometry, as well as further expansion in the ophthalmologist channel.

Regarding the global ophthalmic market for the IMS Q3 report, the last period for which data is available, IMS shows 9-month growth of the market at a robust 12%, boosted by 28% growth in retinal therapeutics, and Allergan growing in-market at 11%. Allergan is the fastest-growing global full-line branded pharmaceutical company for the year-to-date September.

In Q3, RESTASIS became globally the #1 prescription ophthalmic product.

In the glaucoma market, year-to-date September, Allergan gained considerable share, growing 9% in the global market, increasing only 3% in value, as Pfizer and Merck exit or scale down their activities.

In artificial tears, as we launched OPTIVE Plus and Optive Plus Unit Dose and also OPTIVE Fusion across Europe in new markets outside the United States, we enjoyed double-digit growth in Q4. The IMS Q3 report showed Allergan in the third quarter growing only 3% in the category, which was expanding globally at 8%. Therefore, it is to be expected that Allergan will start to come up, too, and then exceed this global market growth.

OPTIVE Advanced was approved in Mexico, Chile and Turkey, OPTIVE Plus in Kuwait, Unit Dose in Bahrain and OPTIVE Fusion in Turkey.

Regarding the retina market, OZURDEX is performing strongly in the retinal vein occlusion and uveitis submarkets. OZURDEX was approved for retinal vein occlusion and uveitis in the Philippines, and in Korea for uveitis, and was launched in Taiwan.

With physicians already trained on how to use our device, we look forward to receiving approvals in the U.S. for diabetic macular edema later in 2014, and in Europe in early 2015.

In the LUCENTIS so-called RISE and RIDE pivotal study, it was estimated that as many as 35% to 39% of patients with diabetic macular edema had an inadequate response to anti-VEGF therapy alone.

Moving on to BOTOX, sales increased in Q4 by 12.1% in local currencies and by 10.7% in dollars, with full year performance at 13.2% in local currencies and 12.2% in dollars. In terms of the split to therapeutic and aesthetic sales for 2013, therapeutic indications accounted for 54% of the total, and grew 16% in local currencies and 17% in dollars, with aesthetic indications constituting 46% and with 10% growth in local currencies and 8% in dollars.

Regarding the global market for neuro modulators, we estimate that both the therapeutic and aesthetic markets grew double-digit throughout 2013. Up to Q3, the last period for which data is available, our analysis shows the market in Allergan growing at 13%, with share gains for Xeomin coming at the expense of Dysport. BOTOX enjoyed approximately 76% world share in Q3.

Thanks to the new indications of Chronic Migraine and in overactive bladder, BOTOX gained share in therapeutics, offset by minor share loss in aesthetics. Since the last earnings call, we received several BOTOX product approvals. For crow's feet, we now have national licenses in 21 countries across the European region, with only Italy outstanding amongst the major markets. We also received this approval for this indication in Korea.

Regarding Chronic Migraine, we received approvals in Norway and Greece, and now have all the approvals of the European economic area. Regarding BOTOX for overactive bladder, we received approvals in Canada, the U.K., the Netherlands, Switzerland, Slovakia, Egypt, Saudi Arabia, Israel, Hong Kong, and reimbursement by the Australian government.

In the U.K., we also received the additional indication of lower limb spasticity.

In the U.S., we announced a price increase on January 2 for both BOTOX Therapeutic and BOTOX Cosmetics, and it is in such a way to avoid any pull forward of sales into December. The therapeutic business continued on the same trajectory in Q4 of strong growth, driven by an acceleration in Chronic Migraine and the 2 bladder indications.

Regarding Chronic Migraine in the U.S., we have completed the process of securing reimbursement for commercial and Medicare lines, experienced only low levels of denials for prior authorizations, and therefore, now strive to improve the quality of coverage. Training is focused on deepening injector capability and productivity rather than training brand-new physicians.

Our heavy investment in branded and unbranded advertising is driving steady increases in numbers searching our Chronic Migraine websites.

Regarding urology, we're able to secure coverage in December for 81% of commercial lines, for 82% of Medicare lines, and good levels of approvals for prior authorizations. About 4,500 urologists and uro-gynecologists are regular users of BOTOX, out of a universe of about 13,000 physicians, many of whom do not treat incontinence at all.

In Europe, we've invested heavily in medical education and training for Chronic Migraine in neurogenic and overactive bladder in those countries where we have secured reimbursement.

Turning to the aesthetic side of the business. We estimate in the U.S. and based on survey data that the market grew in the high single-digits. BOTOX Cosmetic's share remains high at 79% at December versus 84% in December of 2012, with Dysport at 14% share versus 15% a year ago, with Xeomin at 6.5% versus 1% a year ago as this was when the product was being reintroduced into the market after the lifting of the injunction. A significant amount of Xeomin's current share stems from free samples.

In Western Europe, we estimate that the market is growing mid single-digits with VISTABEL or BOTOX growing slightly in excess of market, despite strong competition from Merck's and Galderma.

Facial aesthetics. The rate of growth picked up with an increase in Q4 of 35.4% in local currencies and 34.0% in dollars versus the same period of the prior year. The contribution of initial sales of VOLUMA in the U.S. was modest as all our efforts were focused on injector training versus selling product.

All regions of the world contributed to the acceleration in growth as each 1 introduces the new products in the bi-cross line. The response to VOLUMA in the U.S. has been enthusiastic. In the U.S., based on survey data, we estimate that the market in Q4 grew around 10% in volume, and of course, we believe that it was be stimulated by the introduction of our category-changing product.

Regarding share, the JUVÉDERM line enjoyed record market share at 44% in December versus 36% in December of 2012, with share gains stemming from Restylane, which stood at 25% share, as well as with [indiscernible].

In Europe, survey data for Q3, the last period for which data is available, shows the market continuing to grow double-digit, even in an economically challenged Southern Europe, and with JUVÉDERM and VOLUMA and the rest of the bi-cross line rapidly gaining market share.

Since last earnings call, VOLBELLA was approved in Mexico, and also in VOLIFT in Mexico, the Philippines and Vietnam.

Breast aesthetic sales as reported declined 2.0% in dollars and local currencies. This was largely due to management decisions to reduce end-market inventories, ahead of going direct in early 2014 rather than selling via distributors in Mexico and Colombia. On an underlying basis, worldwide sales in Q4 actually increased approximately 10%. In the U.S., sales increased double-digit as we benefited from a strong mix shift to the premium-priced 410 shaped anatomical implant and tissue expanders for reconstruction, plus we deemphasized highly priced competitive saline implants. We consciously ceded some market share to Mentor and Sientra as we decided to defend value-added pricing.

In Europe, we returned to growth as we get past the prior year comparisons in the wake of the PIP scandal, and the then resulting surge in our sales as patients underwent revision surgery. Survey data for Q3 shows a small increase in unit volume in the European Union, however, with declines in Italy, Spain and France and the U.K. offset by growth in other countries.

Clearly, breast augmentation as a large expenditure is more affected by consumer spending levels than is the case for facial aesthetics.

Our so-called skin care and other franchise grew over 67% in local currencies and 66% in dollars in Q4, boosted by the acquisition of SkinMedica. In terms of real performance, sales of our U.S. medical dermatology products, led by ACZONE and TAZORAC, grew 48% year-over-year.

Regarding ACZONE, investments in DTC targeted at the adult female patient, focused sales effort and diminished branded competition, has led to an increase of 35% in trailing prescriptions year-to-date November, as reported by IMS.

In 2014, we expect ACZONE to become the #1 acne brand in the U.S. in value. TAZORAC trailing prescriptions for the same period increased 12%. Furthermore, both brands have benefited from net price increases.

Regarding real performance of our topical physician skin care business, SkinMedica continues to gain substantial share as physicians benefit from including SkinMedica line in their overall purchases of Allergan's medical aesthetics products.

Regarding LATISSE, sales declined 5.3% in local currencies and by 6.1% in dollars with ex-U.S. growth in Latin America and Asia offset by a decline in U.S. sales. U.S. situation is primarily explained by the timing of promotions to physicians and a small movement in trade inventory.

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

Jeffrey L. Edwards

Thanks, David, and good morning to all of you on the call.

During the quarter, Allergan once again generated high-quality operating results, as we have experienced strong revenue growth across most products and geographies, with particularly strong growth in the U.S. and Europe. The strong growth combined with our continued commitment to thoughtfully managing expenses and carefully targeting higher volume investment opportunities have enabled the company to deliver non-GAAP diluted EPS results above the top end of our earnings per share guidance for the quarter and for the full year.

Non-GAAP diluted earnings per share for the fourth quarter of 2013 was $1.35, and for the full year, it was $4.77. A reconciliation of all the adjustments to GAAP earnings is set out in our earnings release.

Excluding the effects of non-GAAP adjustments in amortization of acquired intangibles, Allergan's Q4 2013 gross margin of 87.7% increased 30 basis points when compared to Q4 2012, and Allergan once again saw sequential quarterly improvement in both its pharmaceutical and medical device margins. This continuing positive gross margin trend has been primarily -- has been driven primarily by improved year-over-year standard costs, favorable pricing, favorable region and product line mix, lower royalty expense and lower year-over-year inventory provisions.

The non-GAAP selling, general and administrative expenses to product mix sales ratio for the fourth quarter was 39%, totaling $648 million. The comparable ratio and expense value for the same period in 2012 were 38% and $550 million, respectively. This increase in spend was largely attributable to the launch of JUVÉDERM and VOLUMA in the U.S., the addition of our SkinMedica business, and increased selling and promotional expenses around BOTOX, including both the Chronic Migraine and OAB indications in the U.S.

Our commitment to prudently manage Allergan's cost structure in an effort to maximize efficiency and direct our capital to the highest yielding investments will continue to be resolute. With the focus of meeting our short and long-term aspirations and commitment to maintaining a dynamic high-performance operating environment, Allergan regularly analyzes its organizational structure to ensure we can best serve our customers, generate shareholder value and maximize operational efficiency.

As a result of these analyses, earlier this year, we initiated a restructuring that will impact approximately 300 of our colleagues with the reduction of nearly 150 positions. We estimate that these actions will have an aggregate cost of approximately $45 million, with the majority of this cost recognized in Q1 2014 and reported as a non-GAAP adjustments, and the remainder recognized across the remainder of 2014 and 2015, and reported as non-GAAP adjustments.

Additionally, we estimate that these restructuring activities will have a payback of under 2 years.

Non-GAAP research and development expenses were 16.2% of product net sales for the quarter totaling $269 million, an increase in spend of approximately $29 million over the fourth quarter of 2012, and $18 million over the third quarter of 2013. Allergan's consistent commitment to investment within our R&D process has proven to be a productive one and has resulted in many product approvals around the world over the past several years.

With respect to our balance sheet, consolidated Allergan days sales outstanding was 49 days, while consolidated Allergan inventory days on hand was 127 days. Although our DSO performance was quite strong for both the year and the quarter, it is worth noting that the driver from the 2-day year-over-year increase in the DSO is largely attributable to the challenges our Venezuelan distributor partner, Merck KGaA, German company, has in receiving central bank approval for dollar payments. Allergan generated operating cash flow after CapEx of approximately $441 million in the quarter and just over $1.5 billion for the full year of 2013. This compares to operating cash flow after CapEx of slightly below $1.5 billion for the full year of 2012.

At the end of the fourth quarter, Allergan's cash equivalents and short-term investments and cash and equivalents in short-term investments net of debt positions total approximately $3.6 billion and $1.5 billion, respectively.

For the first quarter of 2014, Allergan estimates product net sales in the range of $1,525,000,000 to $1,600,000,000. Regarding the full year of 2014, Allergan estimates product net sales in the range of $6,650,000,000 to $6,950,000,000, which assumes a negative currency impact of approximately 2% on sales growth throughout the year. Please note that product net sales expectations excludes any anticipated revenue from transition service agreements related to the sale of the obesity intervention business.

With respect to SG&A expense, and as is typically the case, our spend as a percent of net sales is expected to be greater in the first half of 2014 than in the second half of 2014. Allergan estimates non-GAAP diluted earnings per share for the first quarter of 2014 in the range of $1.09 to $1.12.

Regarding the full year 2014, Allergan estimates non-GAAP diluted earnings per share in the range of $5.36 to $5.48, representing growth of between 12% and 15%, which is consistent with our aspiration of mid-teens EPS growth.

As a reminder, this EPS expectation assumes that the U.S. R&D tax credit will be renewed in the fourth quarter of 2014, with the full year retroactive benefit impacting Q4 results. This was -- this will result -- this will generate a higher effective tax rate in the first 3 quarters of 2014, and thus lower EPS results in those quarters, while benefiting both the Q4 effective tax rate and reported Q4 EPS.

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

With respect to 2014 capital expenditures, we project capital expenditures of between $200 million and $250 million for the full year. Regarding 2014 cash flow, we again expect to generate operating cash flow after CapEx in excess of $1 billion. We have assumed moderate levels of share repurchase activity of approximately 6 million shares in 2014, with our repurchase objectives limited to approximately match expected employee stock option-based compensation programs.

So with that, operator, I would now like to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Marc Goodman of UBS.

Marc Harold Goodman - UBS Investment Bank, Research Division

Can you talk a about the spending a little bit in the quarter? Obviously, you came in much higher than what we were expecting on the spending and where did you spend and how much of that spend was kind of upfront for launch expenses that may not have to be spent in '14? And if you can just, on that question, talk about DTC and where you're going to be spending your money on DTC in 2014, what's going up, what's coming down?

David E. I. Pyott

Okay. I think, the simplest in terms of new spend, which clearly is bolus, was the launch cost for JUVÉDERM, VOLUMA in the United States. Obviously, we continue to invest in the rollout of Chronic Migraine and OAB, particularly in the area of DTC, where if you look at Q4 2013 and Q4 2012, the upticks in DTC were quite substantial for Chronic Migraine and also RESTASIS. And I'm sure you all noticed that RESTASIS was really growing very, very strongly in Q4. And I don't want to say alone because of DTC, also due to other selling and promotional efforts. Then coming around to answering your question on DTC for 2014, overall, we'll spend more as a company on DTC, although, of course, as you ably point out, some can come down because they are further in their period since launch. But I'd say, in terms of the really big ticket items, we're going to be spending heavily on RESTASIS, BOTOX Chronic Migraine. And later in the year, we'll also start to initiate more modest but a print campaign for BOTOX for bladder as well. And I think that probably answers all of your questions. So very targeted spending and I think you can tell that we have good metrics. We believe we had good returns. And sales are accelerating and that's all very good.

Marc Harold Goodman - UBS Investment Bank, Research Division

But would you agree with the comment that the fourth quarter spend was higher than it was planned to be because the top line was so strong? Or was it planned to be at that $650 million range the whole time?

David E. I. Pyott

At the margin, of course, we're always adapting the flight path. And if we see opportunities, particularly in the short term, we're not shy about spending them because we see the return. So next questioner, please.

Operator

Our next question is from Seamus Fernandez of Leerink.

Seamus Fernandez - Leerink Swann LLC, Research Division

David, can you just talk a little bit about your interest in acquisitions going forward? I guess, particularly, you guys have done a good job of building in-line product portfolios. And I was just interested to get a sense of the appetite for acquisitions going forward, particularly in the context of the relatively modest, I guess, announced share repurchase plans for this year.

David E. I. Pyott

Okay. Well, maybe ending with the easiest part. On share repurchase, over a long period of time, our goal has been to hold the share count roughly flat. We'll go up and down at the margin quarter-to-quarter, so the treasury is on the other side, if you like, of the dilution caused by employees appropriately exercising their stock options. I think, then coming back to the whole M&A question, clearly, you can see our first objective always is to make sure we're growing our markets, we're establishing new product categories and performing well in line. So it's just good old-fashioned getting products approved and executing against those product launches. Now clearly, when I'm being asked many times about what is our order of use of very strong cash flows, Jeff referred to we had record cash flow generation in 2013, roughly $1.5 billion. Always, it will be to acquire new technology, whether it be licenses, a good example of that would have been Vicept for rosacea,even bigger one in terms of monetary outlay, DARPin. And then, of course, bringing the products in and spending R&D on it, and that's in the context of pretty strong increases of R&D, both last year, you can see it in our guidance for 2014. And we stated roughly 5 years from now, we should be spending about $1.5 billion on R&D. So clearly, in addition to internally derived programs, we'll be grafting in new technology. On top of that, of course, we're always looking to see other products or companies that would fit our business model, but also fulfill the very rigorous criteria of providing growth, because, clearly, with our strong internal growth, we would have no interest in buying, and I'll exaggerate, a product or a company that were only growing 2% or 3%, because all we do would be diluting our already really strong internal performance. So I hope that gives you a good framework about how we think about these targets. And obviously, I can't give you the names, that we just can't do.

Operator

Our next question is from Vamil Divan of Crédit Suisse.

Vamil Divan - Crédit Suisse AG, Research Division

Maybe I'll just follow-up on the question an M&A. One area in particular that I just had a question on was around urology, it sounds like you're getting some good traction there with BOTOX. I'm just curious as to what the sales force, if you can just remind me sort of the focus there, what else are they working on, what else are they promoting besides talking to the urologist? And is there any excess capacity there that could be attractive to maybe focusing some of your M&A efforts in boosting the urology portfolio?

David E. I. Pyott

Well, you're quite right because if you look at -- I'll give you sort of a couple of examples of history, when we originally acquired the SANCTURA product line, that was really to provide some scale and a sales force onto which we could graft the launches of the 2 approved, thank goodness, since approved indications for BOTOX. Going forward, we have a partnership with a company called Serenity. They have a very interesting product for nocturia. So that is in the plans that our sales force will -- obviously, we plan to get it approved in the partnership with Serenity to give us the second product. And you're quite right, we'd be very happy to look for other things. Further down the road, of course, we have an internal R&D program for BOTOX for premature ejaculation that would go through the same sales force. And if you look back in history, say it neurology and BOTOX for Chronic Migraine, that was precisely why we acquired MAP Pharmaceuticals to add LEVADEX into the bag. So clearly, in summary, we're always looking to see if we can add other neurology or urology products to our product range where we can leverage the relationships we've created and also leverage the fixed cost of our sales and marketing organizations.

Operator

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

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

For David and for Jeff, I think, short of a major overhaul on the tax rules in the U.S. seems unlikely to us, do you believe that management should be considering transactions that could level the playing field on your tax structure as long as there are other strategic reasons to consider such a transaction? And Jeff, could you confirm that your tax rate, independent of any deals, should stay in the mid to high 20s over the longer term?

David E. I. Pyott

Well, I think, first of all, at the highest level, I would say we're always looking for the validity and quality of technology. That has to be the highest order of choice versus trading off, and sort go the other way around, low technology juiced up by a tax rate. That would feel very uncomfortable to me. And Jeff will give you some color on the tax rate, which to some degree, of course, is high because we make it high because of the way we also conduct some of our R&D through our Irish entities.

Jeffrey L. Edwards

So Greg, the guidance we provided for tax in 2014 is 27%. But I'm sure you've noted, over the course of, say, the last 5 years, that the rate has moved down gradually, moving towards the mid-20s. So you asked a question mid to high 20s over the expected future, I'd say closer to the mid-20s if you look out 3 to 5 years would be our objective. The opportunities we have to lower that rate will be driven by product mix. So the more BOTOX, obviously, the better off we are. Likewise, the R&D that we conduct out of or through our Irish entities represent a bit of a tax anchor today because we get a very low deduction given the low tax rate that exists in that country today. However, to the extent we are able to generate approvals through those activities in Ireland, we'll have the benefit of that same rate on profits generated through that entity. So we believe we have a sustainable strategy to continue lowering the tax rate. To the effect there's external transaction available to us that is consistent with our strategy, we would consider that as well.

Operator

Our next question is from Larry Biegelsen of Wells Fargo.

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

I assume we have Scott on the line today, David?

David E. I. Pyott

Yes, Scott is ready.

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

Great. So Scott, it would be helpful to hear from you what pipeline data we can expect to see in 2014, and an update of the status of the Medytox liquid formulation.

Scott M. Whitcup

Sure. So some of the key programs that we've talked about, where data would be available, clearly, the DARPin is in the third stage of the Phase II program. That Stage III is fully recruited and so we'll have data in the second half of 2014. We also said that we would present the early Phase IIA data from the bimatoprost hair growth study at dermatology meeting in Hawaii, so that's scheduled, I believe, later this quarter. In addition, we have a very exciting program of sustained relief for bimatoprost or LUMIGAN for glaucoma. Those data will probably come out end of the year, we're looking to present those data. The DME data are out, but, clearly, we expect the next big item would be approval from the U.S., which we expect midyear. And then, as David commented, the LEVADEX file, we responded to the complete response letter. Those data were refiled to FDA, and we're expecting approval on that midyear. Last piece, I don't know if it's new data, but we did announce that our third fairly big indication for BOTOX would be depression and that should go into the clinic midyear. And on the dry eye side, we showed you the clinical trial design at the end of the year, we said in December, you'd see that on clinicaltrials.gov. That will go into the clinic. The plan is first half of this year but the goal is to have multiple shots on go in the dry eye area. And so look at clinicaltrials.gov, we will have another novel NCE for inflammation go into the clinic this year, with the potential use for dry eye. So the goal will be lots of data. But over the course of the next 12 months, more NCEs going into the clinic than in the history of the R&D organization.

Operator

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

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

Well, you just answered the R&D question where you're going to be spending your R&D dollars. And the acquisition question has been asked -- answered -- or asked rather, not necessarily answered. But maybe you can talk about glaucoma because that seems to be an area that's still a little bit of a weak spot. And what are some of the efforts that you're going to be making to essentially bolster that segment given some of the pressures you're seeing from latanoprost? So maybe you can help us out there.

David E. I. Pyott

Yes. Well, I think, as I've said in prior quarters, it really is a world of 2 speeds. We have double-digit Allergan glaucoma growth, ex-U.S. Of course, we have a couple of advantages from a product line point of view where we have GANFORT that doesn't exist in the U.S. And also, more recently, the benefit of the 2 Unit Dose products, LUMIGAN Unit Dose, GANFORT Unit Dose, ex-U.S. So really, the real issue that we have to address is the United States, where I think, very soon, we're getting to the point of kind of lapping ourselves in terms of managed care rebates because the coverage for the glaucoma product line, principally, LUMIGAN in 2014 is this puts and takes always, but at a high level same coverage as in 2013. The rebate pressures continue. But of course, once you granted the rebates and you come around to 12 months later, if you like, the increase in rebates is reduced and therefore, the drag on sales, because, of course, it's all about gross to net sales decreases. On top of that, in my opening remarks, I made comments about the use of a study showing that when you go from latanoprost generic to LUMIGAN 0.01%, you get about 4 millimeters of mercury pressure reduction, which is really very, very significant. And that data is working and we plan to really emphasize that. And then, finally, in the U.S., a greater emphasis in 2014 on COMBIGAN and ALPHAGAN because there is a very strong position for Allergan in the so-called adjunctive position, i.e. when a prostamide or a prostaglandin alone doesn't provide the results the glaucoma specialist requires. Anything to add, Scott?

Scott M. Whitcup

So on the R&D side, we have really looked to change the paradigm of how glaucoma is treated. We know patients don't like drops chronically, and more importantly, they don't use them and lose vision as a result. So we've been working with our NOVADUR biodegradable implant technology to see can we get sustained relief implants for glaucoma. That program is going very well, we presented some of the data and we believe we can get 4-plus months with a micro implant to control pressure. And so we're working to accelerate that program as a paradigm shift for treatment and to gather the data to show payers and physicians and patients that this is a breakthrough technology. In addition, further back, we're working to get some new chemical entities for glaucoma. As you're quite aware, there haven't been really new products, new chemical entities for glaucoma in quite a while since actually LUMIGAN was approved. So we still have an effort there that we could look at either as a drop or sustained-release technology.

Operator

Our next question is from Liav Abraham of Citi.

Liav Abraham - Citigroup Inc, Research Division

My question is for Scott. Scott, I'd be interested in reports on your strategy with respect to RESTASIS X. Would you be looking for label in this asset that includes both the signs and symptoms of dry eye? And what is your confidence in obtaining positive signs and symptoms data given your experience with RESTASIS over a decade ago? And then, just as a follow-on, I was wondering how recruitment is progressing for AGN-195263, which you're investigating for meibomian gland dysfunction?

Scott M. Whitcup

Okay. So I'll start with RESTASIS X question. So what I said from the beginning is that we wanted a very differentiated product. If you look at what we've posted in clinicaltrials.gov, you can get a sense that this is quite differentiated from RESTASIS drops. We will figure out what the exact label will be based on our Phase II data, I tend to be very data-driven. The goal probably will be sign and symptom. But if we can get a validated single endpoint and increase our chance of approval, just like we did for the initial RESTASIS, which was based on tear production alone, we might do that. The other product that you commented, a different Phase II, it's a topical drug for meibomian gland dysfunction or blepharitis, but could also have a potential use in dry eye. Those data, we'll read out probably end of the year. But my goal is to have 3 to 4 potential compounds that could be used in dry eye in the clinic. And so we'll have a third compound, so you have the 1 you mentioned, RESTASIS X. We have a third one going in the clinic midyear, and then early next year, a fourth NCE that could be used in dry eye. So clearly, this is big business for us. It's a tough area, but we probably know more about clinical trial design than anyone. And the goal will be to have at least 4 novel compounds that could progress to Phase III and to get a drug to supplement topical RESTASIS.

Operator

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

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

A couple of questions. First, if we were to look at the BOTOX and filler sales as a proxy for how the consumer is doing, it would seem that the consumer is back in a strong way. Is there anything that you see in the numbers that, as happy as you are, you're still a little bit concerned about how the U.S. consumer is? Is there concentration of the growth among the high end or is it a broadening base? And if there's anything else that you're seeing globally? And separately, Scott, you mentioned you're going to have an update on DARPin in the second half. Specifically, will this update be a decision on whether or not you're moving into Phase III?

David E. I. Pyott

Okay. I'll take the first part. I think, when you look through the transcript carefully, you can see all the market numbers in facial aesthetics are all very good, both in the U.S., and even in Europe, The markets are surprisingly strong. And of course, in both of them, we're in a very good share position, where, clearly, VOLUMA and overseas, with the additions of VOLIFT and VOLBELLA, we're really growing the market, but we're also gaining share at the same time. In the U.S., I think, we have a little bit more share to lose at the margin in BOTOX, but it's pretty small. And of course, given the good market growth, in fact, sales are just doing just fine in volume, as well as we now have the benefit of the 3% price increase we posted. A lot of emerging markets, there, you see huge growth rates as people move into the middle class. They desire this kind of luxury that exists in the United States or Canada or Europe. So when I look across the consumer, all really good. The one little -- the margin watchout that I called out was in breast aesthetics, where you can see in certain markets in Europe, where, clearly, spending by consumers is constrained, we see some weakness. And in France, for instance, they just put out the VAT quite substantially and that has an effect on the market, as one would expect, that's just economics 101. But I think, overall, your conclusion is the right one, worldwide, with just very, very few little exceptions that I watch carefully, the consumers doing really well and that's good for the growth of our product line. So I'll now pass to Scott.

Scott M. Whitcup

So David, on the DARPin, our goals for the Stage III are really to further define how this product is differentiated from the current anti-VEGF treatments and to learn a little bit more on the safety profile. But as you know, we're making improvements and optimization to our manufacturing, and that new product would be the product we'd be using in Phase III. So I think, the Stage III Phase II data will give us conviction and study design to go into Phase III. I think, it will make the decision, yes, we're moving forward. We may do a small Phase IIB with a new material just to make sure it's well-tolerated and that there are no surprises as we gear up getting all the sites for the Phase III ready, but our goal would be that if we had to do a small safety study for the new material to make everyone feel a bit more comfortable, that it wouldn't delay the start of the Phase III, would be gearing that up. So to your question, yes, I think, that the Stage III data will give us a conviction to move into Phase III. It may not mean that the Phase III starts a week later, we'd get there as quickly as possible, but those data will be the ones that will flip the switch to say, yes, we're moving forward.

Operator

Our next question is from David Risinger with Morgan Stanley.

David Risinger - Morgan Stanley, Research Division

I had a follow-up on that, Scott. So with respect to the DARPin, could you just characterize what differentiation you're hoping for with the DARPin? And could you just walk us through the evolution of the material? I think, it's been adjusted in manufacturing before, and I thought that you had run this latest leg of Phase IIb with new material, but you also mentioned more new material. So if you could just frame that evolution of the new material and the improvements, and then, I guess, your confidence in having the appropriate final material later this year?

Scott M. Whitcup

Sure. So we'll have the chance to go through the data, the Stage III is really designed to figure out how well this works and how long it lasts. So we still think there's an opportunity for this to work more quickly and to last longer, we'll know that better with the Stage III data. And so we're looking for a meaningful product differentiation from both LUCENTIS and [indiscernible]. On the manufacturing side, it's typical to continuously improve manufacturing. So from the initial studies, we did make some improvements. We saw less inflammation, but our goal is to have near 0 inflammation. And so there are a number of improvements in the manufacturing process that are standard in biologics that we're implementing. The current Stage III is being done with the same material that was done with Stage II. So we won't have the brand new what we think will be both Phase III and commercial product ready until probably end of this year. So that would be ready for us to use in the trials following this -- the data that we'll get from the Stage III. So again, if those data are positive we'd move forward to Phase III with the new material, and as I said, before we may do a smaller study with the new material prior to Phase III, just to make sure that it's well-tolerated as we expect it to be.

Operator

Our next question is from Ronny Gal of Bernstein.

Aaron Gal - Sanford C. Bernstein & Co., LLC., Research Division

Just a 1 -- 2-part question. First one is just for clarification. I noticed you're guiding COGS next year for 87%. I mean, it seems [indiscernible] so close to 13%. It seems to be going the wrong way. I mean, BOTOX and RESTASIS are both growing most of the higher margin product. Why should 2014 COGS be higher than 2015 as a percentage? And second, still to Scott. Scott, can you just give us a little bit more depth about on the pipeline for the botulinum toxin, if [indiscernible] you guys have now been talking about the osteoarthritis indication. Can you just give us a little bit of a picture where is BOTOX going if you kind of think 5 years ahead? What should we expect from that product in terms of expansion off an indication, expansion of formulations more importantly?

Jeffrey L. Edwards

So Ronny, on the gross margin question, it's an easy answer, we provide a number that is approximate in nature. Our expectation is that it will be a range. There certainly is the potential for gross profit margins to be better. But certainly, at this point in the year, the best approach, we think, is to provide you with a number and allow you to assume that there is a range around that number.

Scott M. Whitcup

So Ronny, on the BOTOX side, we have a pretty exciting pipeline. Just with new indications for BOTOX, we are moving forward with the Phase IIb for osteoarthritis pain. We'll probably present some of the data from the initial Phase II probably late this year as we finish up the analyses, but we're moving forward with that program. We're starting the Phase II for depression. And then, the premature ejaculation Phase II is in progress. We also will have 2 BOTOX X programs. We're not talking a lot about what they are for competitive reasons. But 1 is in the clinic and the goal for a very novel BOTOX X, that should enter the clinic end of this year, early next year. We also have our collaboration with Medytox, so they have a liquid formulation, we've been meeting with them, the collaboration is going very well. And I'm sure David or myself or Jeff will update you on the development plan as soon as we finalize those plans, but a lot of resources going there. And last but not least, we have our TEM program, the targeted exocytosis modulator for pain. We're currently in a Phase II with higher doses. If that works, that's a very exciting program, not quite BOTOX, it's really a novel platform. But potentially in the neuropathic pain market, it's a large unmet need. And so we're excited about that. So you can see we've got multiple prongs on the BOTOX botulinum toxin side with new indications, 2 BOTOX Xs, our Medytox collaboration and TEM. So a lot is going on.

Operator

Our next question is from Ken Cacciatore of Cowen & Co.

Ken Cacciatore - Cowen and Company, LLC, Research Division

David, you indicated on the RESTASIS generic filers that you needed a few more months with -- you could probably get some more clarity. Just wondering though if you could share with us what your internal experts or even external experts are advising you? You're the boss, I'm sure you ask them, give us your best guess if there's anyone else there. I'm sure there's technical reasons why they have to be conservative. But I'd love to hear what they're sharing with you in terms of thought process that, at this point, you would likely know or not know, if there was anyone else there.

David E. I. Pyott

Well, of course, I'd like to always admit that I'm a fully recovered lawyer. So take that with a grain of salt. Clearly, we understand this is a poker game. And we are pleased that at least the first part of the poker game kind of flushed Actavis out of the jungle so we now know what they've said. And you all need to interpret on your own what that means. I also stated in my remarks earlier that we've received no other notices. That doesn't mean, of course, that we won't receive any others. And you can go through then lots of different permutations. But given the timing, it sort of becomes somewhat more probable that it's probably more and more likely that a next step from a generic filer would be a Paragraph IV. But you can go down certain scenarios where you wouldn't get to that conclusion. So that's why I'm just saying things will get clearer the next couple of months because we're obviously engaging in various legal strategies where others will have to respond. And then, we start seeing, back to the jungle analogy, we see the whites of their eyes, what's really going on. So that's the way we should think about it. And I think, at the very high level, it's clearly there's lots of hurdles here. This is far from a trivial product to genericize. And let's remind you that our submission to the FDA on the draft guidance was in excess of 60 pages. We commented, when you follow the generics division's cookbook, you end up with something very different than RESTASIS, and we filed all that data to our NDA with the review division of FDA. So very complicated. And of course, any normal market, there should be alternatives to RESTASIS one day. And as Scott very ably pointed out, let's hope that at least some of them will be from Allergan in the next 7 to 10 years. So clearly, a great opportunity and we plan to be a major player in this with RESTASIS and follow-on products.

Operator

Our final question comes from Jami Rubin of Goldman Sachs.

Jami Rubin - Goldman Sachs Group Inc., Research Division

David, apologies for going at this again on M&A, but it's obviously an important topic. Do you view M&A as a high priority this year or less so given the removal, largely removal of the RESTASIS and LUMIGAN overhangs? And do you see a scenario where you could bring down your SG&A ratio to the low 30s from, what, 37%, 38%?

David E. I. Pyott

Okay. First, on M&A, I've always said that I'm not really ruled by what's going on internally at any given time, 6 months ago, I actually felt relatively confident about LUMIGAN and RESTASIS, and I'm glad that I was right. Things have moved very favorably. But we're always looking. And this doesn't change just because other circumstances with the rest of the business change. We're always working hard on how to deploy our capital efficiently and for targets that make a lot of sense. Going back to SG&A leverage, we've always stated that our target in the midterm is the mid-30s, so I'd reiterate that. And clearly, this is not by cutting. It just means the rate of increase for SG&A is lower than the rate of sales growth. So let me just reiterate, the target hasn't changed.

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 September 2013, except where noted as year-to-date through September 2013. The market for ophthalmics is approximately $20.2 billion, growing at a rate of 12%, Allergan's market share is 16%. Year-to-date, that 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 3%. Allergan's market share approximates 27%. Year-to-date, that market growth is 3%, and year-to-date, the share is 27%.

The market for ocular allergy approximates $1.5 billion, growing at a rate of 6%. Allergan's market share approximates 4%. Year-to-date, market growth is 5%, and year-to-date, Allergan's market share is 4%. The plain ocular anti-infective market is roughly $1.4 billion. That market is flat and Allergan's share is 7%. Year-to-date, that market is also flat and the share is at 7%. The market for ophthalmic nonsteroidal anti-inflammatories is about $540 million, growing at a rate of 8%, and Allergan's market share is 6%. Year-to-date, that market is growing 7%, and year-to-date, the 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 20%. Year-to-date, that market is growing 7%, and year-to-date, the share is also 20%.

U.S. topical market for acne is roughly $2.3 billion, with an annual growth rate of 12%, and Allergan's share is roughly 13%. Year-to-date, that market is growing 15%. Year-to-date, Allergan's share is also 13%.

The top 10 markets for neuro modulators are roughly $2.1 billion, growing at a rate of roughly 14%. BOTOX has approximately an 84% market share. Year-to-date, that market is growing 13%. Year-to-date, BOTOX share is also 84%.

The worldwide market for neuro modulators is roughly $2.7 billion, growing at a rate of around 13%, and BOTOX has approximately a 77% market share. Year-to-date, that market is growing 13%, and year-to-date, BOTOX has a market share of 76%.

The worldwide market for dermal facial fillers is roughly $1.2 billion, growing at a rate of 12%. Allergan has approximately a 38% market share. Year-to-date, that market is growing 14%. Year-to-date, the share is also 38%.

The worldwide breast aesthetics markets, including aesthetic and reconstructive, is roughly $920 million, growing at a rate of 2%. Allergan has approximately a 41% market share. Year-to-date, that market is growing 1%. Year-to-date, Allergan's share is also 41%.

That concludes our call. Thank you very much.

Operator

This does conclude today's conference call. You may disconnect your phones at this time.

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