Doug MacHatton - VP, Treasury & Investor & Public Relations
Kevin Buehler - President and CEO
Rick Croarkin - SVP and CFO
Sabri Markabi - SVP, R&D, and Chief Medical Officer
Amit Bhalla - Citi
Peter Bye - Jefferies & Company
Frank Pinkerton - SunTrust
Matt Miksic - Piper Jaffray
Marc Goodman - UBS
Louise Chen - Collins Stewart
Alcon, Inc. (ACL) Q1 2010 Earnings Call April 27, 2010 8:30 AM ET
Welcome to the Alcon Inc. earnings conference call for the first quarter of 2010. (Operator instructions) As a reminder, this conference is being recorded and will be available for replay from 11 a.m. on April 27, 2010, through 11:59 p.m. on May 4, 2010.
I will now turn the conference over to Doug MacHatton, Vice President, Treasury and Investor and Public Relations.
Thank you. Good morning and welcome, everybody. Presenting today are Kevin Buehler, President and Chief Executive Officer; and Rick Croarkin, Senior Vice President and Chief Financial Officer; and for the Q&A is Dr. Sabri Markabi, Senior Vice President, Research and Development, and Chief Medical Officer.
Before we begin, I'd like to remind you that certain statements that we will make in this presentation maybe considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and you should not place undue reliance on these forward-looking statements in this webcast. We refer you to our full disclaimer regarding these statements, which is included in our first quarter earnings press release issued last night and in our Form 20-F filed on March 16, 2010, with the SEC.
In addition, this presentation may also include certain financial measures used to better understand our business, which may not be prepared in accordance with U.S. GAAP. These non-GAAP measures are reconciled at the end of this presentation or in associated SEC filings.
This conference call and accompanying webcast are being simultaneously broadcast over the Internet with replays available on our website at www.alcon.com in the Investors & Media section.
I'll now turn the call over to Kevin Buehler.
Thanks, Doug, and good morning, everyone, and thank you for joining us on the call today. As our first quarter results clearly show, Alcon was able to build on the momentum coming out of the back half of 2009 to again achieve strong operational and financial results in the first quarter of 2010.
Sales rose 9.6% on an organic basis or $15.3%, including the contribution from foreign exchange and acquisitions, to over $1.7 billion. With this strong top-line growth and our continued efforts to manage discretionary expenses, we were able to generate leverage in our P&L to grow net income faster than sales, which translated to a 23.2% increase in adjusted diluted earnings per share to $1.91.
These financial results were achieved while total R&D expenses increased 20.7% on an adjusted basis over the same period last year. These adjustments are covered in our earnings release and reconciled to reported earnings at the end of this presentation.
Our results for this quarter and the last several quarters reinforce the value of the Alcon business model around the three separate ophthalmic business lines with the potential to deliver sustainable growth and improving profitability.
As this slide shows, our performance in the quarter is a result of solid broad-based contributions from each one of our pharmaceutical, surgical and consumer product lines. Pharmaceutical sales grew fastest and achieved organic growth of 11.7% as we build on our leading market shares around the world.
The glaucoma category in particular continues to perform well and the category rose 24% on an organic basis in the first quarter. This performance is attributable to the global share expansion of the TRAVATAN and Azopt family of products based on the differentiation of new products like TRAVATAN Z in the U.S. and Japan and combination products such as DuoTrav and AZARGA in the E.U.
Our prior additions to our global pharmaceutical sales force with heavy concentrations in Japan and the E.U. are yielding accelerated growth and market share gains.
Sales of products to treat infection and inflammation, which include VIGAMOX and NEVANAC respectively, increased 10% organically. VIGAMOX did exceptionally well, posting global organic growth of 18% which, along with our return to normal shipment pattern for NEVANAC, more than offset the TOBRADEX generic switch.
Allergy sales were relatively weak in Q1 due to weather conditions in the U.S. and other countries. But recent allergy reports, prescription trends and wholesale ordering patterns indicate that the spring season may be more severe than last year. Also, it looks like the split of allergy sales for Alcon products between Q1 and Q2 will be more heavily weighted to Q2 in 2010 as compared to last year.
The generic conversion of TOBRADEX continues to go as expected with the market now about 95% converted. Our generics division, Falcon, has maintained a majority position around 60% in the TOBRADEX generic since its conversion in 2009, and with the strong performance of the Brimonidine 0.15% product introduced last year, posted solid strong first quarter results.
Sales of surgical products rose 8.3% organically and with the acquisition of the Ex-PRESS Ophthalmic Glaucoma device contributing 50 basis points of incremental growth to our surgical sales.
Our performance in the quarter is largely attributable to the global strength of total IOLs. Total IOLs increased 10.9% on an organic basis with contributions from both
Monofocal IOLs, which grew 5% in units, and advanced technology lenses that jumped 48% in units. This rapid growth in advance technology IOLs is the result of class leading performance of AcrySof IQ ReSTOR +3.0 for the correction of presbyopia and increased adoption of the gold standard AcrySof IQ Toric to address astigmatism.
Although somewhat negatively impacted by weather, early indications are that the growth in Q1 U.S. cataract procedures was approximately 4% to 5% based on our internal estimates. However, we expect full year 2010 cataract procedure growth to be in the historical range of 3% to 3.5% growth in the U.S. and 4% to 5% globally.
In addition, the other key disposable product segments used in the cataract procedure such as viscoelastic, cataract procedure packs and equipment cassettes all reflect unit growth in excess of 5% on a global basis in the first quarter, reflecting solid procedure volume.
In emerging markets, our LAUREATE World Phaco System remains a key growth driver for our surgical sales in those markets with first quarter unit sold increasing 34% over the prior-year quarter. We're also seeing (full-serve) benefits of our machine transaction with sales in increased IOL and disposable product volume in these same markets.
Sales of consumer products increased 7.7% on an organic basis. We continue to see strong growth from our global artificial tear franchise as the Systane family of products accumulates market share in the U.S. and additional volume from international markets. Since its launch in the U.S. in mid-2008, Systane Ultra has been the fastest growing artificial tear product, leading the Systane franchise to a very strong number two U.S. share position.
Contact lens disinfectants returned to growth in the quarter, but this was mostly due to the favorable comparison to the first quarter of last year when U.S. retailers reduced trade inventories.
Complementing the breadth of our product lines is the value of Alcon's diverse global reach. Sales in the U.S. were strong in the first quarter, growing 10.3%, including a 30 basis point contribution from acquisitions. This performance was attributable to the stabilization of prescription volume as well as the impact of strong growth in the surgical product lines.
Additionally, we benefited from a favorable comparison to a prior-year quarter that included the loss of patent protection on TOBRADEX and the effects of retail or inventory reductions in consumer lens care.
International markets continue to play an increasingly important role in the achievement of our global growth objective and represented 58% of first quarter sales. Emerging markets were once again our fastest growing markets with first quarter organic growth of 12.2%. The BRIC nations, comprised of Brazil, Russia, India and China, remained core to our continued success in these markets, growing more than 22% organically.
I'd like to recognize the positive growth trend in India with 57% organic growth reported in the first quarter based on our continued development of the cataract business and promotional efforts on selected pharmaceutical products.
At this point, emerging markets are approaching 20% of our global sales, and I believe that we're in the early stages of development in these countries based on the prevalence of unmet medical needs and Alcon's ability to meet them with our full portfolio of products and services.
One of the hallmarks of Alcon's success has been the investment we have made in commercial capability and the way that we've been able to execute our marketing and sales initiative.
In our pharmaceutical business, we've established the commercial presence necessary to optimize shareholder belief against our entire line of products in each of our markets. As you see here, our sales and marketing teams again have achieved global growth in excess of the market in all of the major ophthalmic categories.
I am especially pleased by the steady performance in the glaucoma category where we're rolling more than twice as fast as the market in the key branded categories of prostaglandins and CAIs.
We see much the same thing in the surgical segment as we've posted constant currency sales ahead of the market. As I'd mentioned earlier, our core cataract products grew by more than 5% in units. But in the most important part of the market, IOLs, we posted unit growth of almost 8% globally for total IOLs.
In the U.S., while our total IOL market share has been pretty constant in the high 50s, even against the introduction of two new monofocal competitors, we significantly increased the value of our share by converting a significant portion to advanced technology IOLs.
Since the introduction of the AcrySof IQ ReSTOR +3.0 lens in Q1 2009, we have gained 12.5 share points in the advanced technology category with a Q4 2009 share of more than 57%. As a result, we have achieved IOL dollar growth in the U.S. of 16.5% in Q1 2010 versus same period last year.
Prior to spending a few minutes on the R&D pipeline, I want to highlight that we have closed on the Optonol Surgical Shunt transaction and initiated commercial activities in the first quarter.
The priority to date has been to train our various sales organizations on the features and benefits of this product designed to change the clinical results of a traditional trabeculectomy to more consistent improved results in terms of both efficacy and safety and then to start the surgeon targeting process.
In addition, we've finalized the DUREZOL, ZYCLORIN portions of the Sirion transaction, which will allow for a full promotion of the DUREZOL steroid product in the U.S. starting in Q2. Both of these transactions are examples of WIND projects designed to expand our product portfolio and to realize incremental revenue and profits in the near term.
I've spent a good deal of time in recent calls and other meetings talking about how we're transforming our R&D organization to support the delivery of science-based responses to unmet medical needs in eye care. I am very pleased with the progress we've made by our teams in developing both incremental products and breakthrough innovations.
This chart shows a selection of key projects from the broad array of research programs we have at all stages of development, targeted at critical ophthalmic areas, including cataract, glaucoma, retina, anti-infective and anti-inflammatory, advanced technology IOLs and consumer products. Including those listed here, we currently have more than 70 specific early-stage projects that are advancing through the first phase of our research process.
We're also beginning to generate several new candidates targeted against our key areas of interest from our acquisition of ESBATech and our collaboration with AstraZeneca. These new projects compliment our existing initiatives and early clinical testing.
In the coming months, we will begin enrolling patients in a large global Phase III study with a potential new glaucoma product. Once we commence that enrollment, we'd be able to tell you more about this project.
In the late-stage pipeline, we're developing several products to registration in key markets, including AcrySof ReSTOR Toric in the E.U., AcrySof ReSTOR +3.0 in Japan and AcrySof Cachet Phakic IOL in the U.S.
One of the highest potential of these projects is the AcrySof ReSTOR Toric, an important new technology to combine astigmatism and presbyopia correction in a single IOL. This lens will provide cataract surgeons with an additional option to meet the full vision needs of their patients and we believe will support further market expansion of the highly important advanced technology IOL category.
We also have several late-stage projects that will enhance our consumer product line, including a multi-purpose disinfectant solution for silicone hydrogel lenses and an extension of our broad dry eye franchise with Systane ORB.
For Japan, other late-stage projects include NEVANAC, PUREPOINT and WaveLight ALLEGRETTO. We are pleased to report the approval of DuoTrav in Japan, which will provide another growth driver in glaucoma in this important pharmaceutical market.
When I look back on how Alcon has performed during the last 18 months, I am tremendously proud of our people have met the challenges of the global economic turmoil. Our mid-to-high single-digit organic sales growth and the maintenance of our operational and financial excellence is a testament to the strength and resiliency of our global business model.
Vision is the most critical of our senses, ensuring that eye care will remain a priority of healthcare consumption. And with the underlying attractive market fundamentals and aging global population and the opportunities presented by the prevalence of unmet medical needs, especially in emerging markets, I believe that Alcon is uniquely positioned to leverage its leadership position and global scale to deliver sustainable long-term growth into the future.
I believe our results in the first quarter validate our dedication to delivering sustained operational and financial performance. And I again want to thank all of our employees for their contribution to these results.
With that, Rick will now review our financial results in more detail.
Thank you, Kevin. Good morning, everyone, and thank you for being on the call today. As Kevin mentioned, Alcon's solid performance in the first quarter was a continuation of the momentum coming out of the second half of 2009.
In the first quarter, we built on the continued market stabilization and recovery that we've seen in most of our markets and using our superior commercial execution leveraged our global infrastructure and broad product portfolio to deliver the strong results announced today.
Turning to first quarter sales, Alcon achieved organic sales growth of 9.6%. With the positive impact of foreign exchange and the contribution from an acquisition, reported sales rose 15.3% to $1.7 billion. Our performance in the quarter is a testament to the strength of Alcon's diversified business model with each of our pharmaceutical, surgical and consumer product lines making solid sales gains.
In particular, though, we continue to see the strongest performance coming from two important product categories, advanced technology intraocular lenses and glaucoma pharmaceuticals, as they grew 43% to 24% on an organic basis respectively. In addition, we're achieving solid growth across most of our global markets with sales in emerging markets leading the way, rising 12.2% on an organic basis in the quarter.
The acquisition of Optonol and its Ex-PRESS ophthalmic glaucoma device added 20 basis points to our reported global sales in the quarter.
With the passage of healthcare reform in United States, we began to see an impact on our sales in the first quarter through increased Medicaid rebates and the extension of the fee-for-service rate to managed Medicaid. In total, this amounted to a reduction in Q1 sales of about $5 million.
Despite the slight headwind created by the new legislation, our reported sales growth of 15.3% illustrates the value of our globally diversified business model that helps reduce the impact from changes to any one payer system.
I'll provide more detail on our outlook for the full year impact of U.S. healthcare reform when I walk through our guidance in a few moments.
Our operating income for the quarter rose 27% to $653 million or 37.9% of sales. Our strong top-line growth was a key driver of this profit performance which as in past quarters has been combined with SG&A leverage to drive faster growth of operating income than sales. This result, as noted earlier, includes absorbing the $5 million of ongoing revenue impact related to the impact of the recent healthcare reform legislation.
On an adjusted basis, our operating income rose 19% to $633 million when compared to adjusted operating income in Q1 2009. Adjustments for two periods include: in 2010, a $24 million reduction to COGS related to a change in estimate for our accrued royalties; and in 2009, $18 million in restructuring costs associated with reduction in force initiated in the quarter.
I call to your attention that we have added a new line item to the P&L above EBIT labeled other operating expenses. We are reporting into this line item expenses related to change of control and the proposed merger.
In Q1, our adjusted operating profit excludes the $4 million of expenses in this line, which are primarily legal and consulting expenses. Adjusted operating income margin increased 120 basis points from 35.6% to 36.8% of sales. This improvement was largely due to our top-line growth and sustained company-wide cross-management programs that held SG&A 28.6% of sales in Q1 2010 versus 31.6% in the prior year.
I am particularly pleased with this result as we were able to create this leverage while still growing R&D spending by almost 21% versus last year on an adjusted basis. This reinforces our commitment to achieving operational leverage without sacrificing our high levels of investment to drive long-term growth.
Net earnings in the first quarter of 2010 grew 26.8% to $573 million or $1.89 per diluted share. Excluding the cumulative $17 million net after-tax impact of the previously mentioned adjustments and a period charge of $25 million for the write-off the deferred tax assets related to the loss of deductibility of medical benefits provided to retirees under the recent healthcare reform legislation, adjusted net earnings in the quarter would have been $581 million or $1.91 per diluted share.
Adjusting for the after-tax impact of the reduction in force in Q1 2009, this translates to a growth rate of almost 25% over the prior year. This strong net income growth is due to the items discussed previously regarding operating profits. Also contributing were smaller foreign exchange losses and realized gains from our investment portfolio.
On this note, I would like now to turn to full year guidance. When we first provided our 2010 guidance in early February, we excluded the impact of healthcare reform in United States, because there was no bill on which to base an estimate. Now that we have final legislation, we can reasonably estimate the impact it will have on our results in 2010.
As noted previously, we incurred $25 million period expense related to our taxes as a result of the change in tax treatment of retiree medical expenses, and we experienced $5 million in sales due to the increase in Medicaid rebates.
The tax impact was specific to Q1, but the Medicaid impact will continue and have the effect of reducing sales by about $20 million for the full year. Even with this change, we expect to be able to achieve our original full year organic sales growth guidance in the mid-to-high single digits.
Given our strong Q1 performance, we believe we can maintain unchanged our February guidance for adjusted earnings per share in a range of $7.30 to $7.55, while absorbing the ongoing impact of healthcare reform. That guidance includes absorbing the roughly $0.06 per share full year cost of the healthcare reform ongoing impact.
R&D expenditures are expected to build in the back half of the year as core project spending increases. As with the case in the second half of last year, we continue to be active in our external technology acquisition initiatives and this could also add to second half R&D spending. These factors should result in full year R&D spending of greater than 10% of sales.
Our guidance excludes the Q1 change in royalty estimate, the retiree medical tax charge and all changing control related costs. It also assumes that the U.S. Research and Experimentation tax credit will be renewed in the fourth quarter with retroactive applicability, resulting in a higher year-to-date tax rate in the first three quarters than for the full year.
As you know, we do not hedge our income statement, so we'll have exposure to fluctuations in foreign exchange rates. In formulating in our earnings per share guidance, we have considered a reasonable range of variants attributable to foreign currency which given the volatility and current trends in the currency markets we feel is appropriate.
If rates to were to stay where they are, we would expect to see a positive contribution of exchange in Q2, though smaller than in Q1. However, the impact would be negative in the second half of the year.
Before I turn the call over to the operator to begin the Q&A, I want to remind you that consistent with last year's call, we will not be responding to questions about the merger proposal or the status of the transaction between Nestle and Novartis. Thank you for taking this into consideration as you pose your questions.
Your first question comes from the line of Amit Bhalla from Citi.
Amit Bhalla - Citi
My first question is on guidance. Your organic performance of all three segments has been solid for the past two quarters, and you guys again handily beat consensus this quarter. In addition, you've already talked about some of the R&D increases last quarter, foreign exchange conservatism.
So I'm all the curious about why you weren't able to tie the guidance range possibly to the high end. Is there anything else besides what you just discussed that could be impacting your outlook for guidance?
No, there is nothing in addition to add. I would just say that we're at this stage in the year looking at the kind of spending we would like to make behind R&D both on internal projects and with the potential that we could be doing some external acquisitions as well to add to our technology. And in light of this, it would seem prudent to maintain guidance.
Amit Bhalla - Citi
So any external acquisitions are already factored into the $7.30 to $7.55 then?
Yes, to the extent that there is small transactions that are included. Of course, if there was a large transaction, that would be called out.
This is Kevin. When you're starting to see some of the indication as to our spending in R&D, you saw the increase that we reported on an adjusted basis over 20%. But the last year-and-a-half, we've really been looking at the R&D spending and rationalizing projects, and our spending levels were not as obvious in terms of the acceleration that we're starting to see at the back half of '09 and going into 2010.
So clearly, if you're looking for something that's behind this a little bit, I would be looking at our R&D spending as we identify projects that we have confidence in.
Amit Bhalla - Citi
My follow-up is on cataract. Long-term, how do you think some of the new technologies such as refractive cataract surgery are going to impact the long-term dynamics of the market and your ability to continue to compete in this space?
Sure. Again, this is Kevin. I think we're very pleased with the opportunities with advanced technology IOLs. We've been going through the process of improving the technology as we've gone through product improvements.
And when you think about the opportunity as most healthcare systems around the world are struggling with the challenge of how to pay for healthcare, the opportunity to address the covered benefits of a cataract procedure with the non-covered benefits of the refractive component I think represents a unique opportunity for the entire industry.
And so I think what we're going to see over time is it becoming more traditional to shift from part of this non-covered costs to the patient, which represents a great opportunity to accelerate both the technology as well as the value of that technology in the market.
Your next question comes from the line of Peter Bye from Jefferies & Company.
Peter Bye - Jefferies & Company
On the R&D, to follow up on that, a part of the program was to spend smarter, not to spend more. I mean you guys are spending close to a couple of billion over to a three to five-year period. But you haven't come out with a new chemical entity in a while in the U.S. Can you just talk about what you're doing besides spending more versus spending smarter?
You're correct; we want to spend smarter in R&D. So fundamentally, what we did is we enhanced our ability to generate scientific evidence very early on in the testing and then eliminate the products that we do not believe will have a good potential in responding to the medical needs.
But in order for this to be successful not only we need to eliminate the candidate that won't make it, as you said, we need to generate new molecular entity that will be successful. So that requires increasing the source of the campaigns, just adding shots on goal.
And last year, as you know, we completed the acquisition of ESBATech, which is a biotech technology, that can generate multiple compounds against the key areas in ophthalmology. So this year, we've added already three preclinical projects coming from ESBATech.
In addition, we had the collaboration with AstraZeneca, which also generates new molecular entities, and we continue our acquisitions or in licensing approach on a compound-by-compound.
So we really dramatically increased our early portfolio, as Kevin said, more than 70 projects early on. In pharmaceutical, most of these are new molecular entities. And we believe we're going to bring new molecular entities to the market in the next few years based on this approach.
I think we said, Pete, also when we do have a positive proof-of-concept which goes along with that, then there is going to be the acceleration of spending, because historically we used to look at our registration approach almost split in the three parts: the U.S., Europe and Japan.
And when we have a positive proof-of-concept, what I think we're also committed to doing is accelerating the spending to develop the two replicated studies on a global basis that would allow us to get to the market as fast as we possibly can. And that was my reference in the one glaucoma product that we did get a proof-of-concept positive result on.
Peter Bye - Jefferies & Company
And just on your surgical front to follow-up on the IOLs, you guys have been fairly successful over the history, just keep inching up on especially in G8, if you will, the price point with new technology IOLs. But in the last couple of years, there has been a huge gap in terms of the uptick in the price differential. How far can that go and then how much does AcrySof ReSTOR Toric add to that sort of bump-up in penetration?
Clearly, we've probably as an industry been somewhat disappointed with the penetration of premium IOLs in the U.S., especially when you think about what the reimbursement position is. But I think if you balance that against the development of the technology and the incrementalism of what we've been able to add to the ReSTOR platform, it starts to show in terms of share initially. And then what I think you'll see is penetration of the segment in total.
But all through this process, we have not, up to this point in time, been managing astigmatism other than through a secondary laser procedure or an LLI. So the opportunity with ReSTOR Toric is obviously to combine both technologies. It does give us a price opportunity to create another tier of pricing.
And as I said to one of the previous questions, I think the entire premium IOL segment has the opportunity to accelerate the portion of the payment that is applied to the patient for the non-covered benefit. And as we continue to see challenges around the world with pricing pressure on monofocal, this gives us confidence that we've got the opportunity to increase our value both in terms of what we realize in terms of revenue, but also our value share of the IOL segment. But it's going to be driven by this technology segment as compared to dealing with only the pricing challenges that we see on the monofocal side.
Peter Bye - Jefferies & Company
Just one last quick follow-up on that. Last year, you put up some big numbers in that maybe of a smaller base than we would have thought four or five years ago. But how much the economy played in a manner that just has sort of rules for a number that leverages that bigger factor? How much faster could you have grown actually? Was the economy rate limiting or not?
I think logically, Pete, you would have to assume that the economy plays some role in terms of a discretionary purchase, albeit, though, I think the patients realize the value of their eyes and the willingness to invest against their eyes. The real challenge, I think, against presbyopic-correcting IOL is that still today relatively targeted number of surgeons who are performing the procedures as compared to a larger pool of patients or of surgeons who are still performing primarily only monofocal IOL.
So I think once this penetration rate starts to go deeper into the surgeon base, I think then you are going to see a more consistent offering presented to the patient that says you have a choice of a monofocal IOL as compared to a presbyopic-correcting IOL or a Toric. And our position obviously is that that should be offered to every one of the patients as they come in as compared to simply limiting it to a monofocal, because that's what the doctor does today.
And your next question comes from the line of Mike Weinstein from JPMorgan.
Hi, guys, this is Kim here actually for Mike. A couple of questions, I guess the first one on SG&A. I'm wondering if you can talk a little bit about what you expect the SG&A trajectory to look like as we more through 2010. it did come in a little bit below what we thought in the quarter. So wasn't sure if you're willing to offer a range as a percent of sales like you did on the R&D side for 2010.
I think at this stage, I'd prefer not to give a range. But I can say that as with past years, we do expect leverage on the SG&A lines. And that will help drive what we believe is a sustainable margin improvement.
Well, in terms of healthcare reform and the impact on you guys, you gave a pretty good overview for how you're looking at it for 2010. But there is obviously kind of another leg added in 2011 for the pharmaceutical companies. Do you have any kind of ballpark estimate as to how your (ED) impact for you guys would increase in 2011?
The next big impact, Kim, and I would say it's actually not that big as in 2011 the pharmaceutical fee. To take 2009 as a base for calculating, we're estimating that that would be less than $10 million on our 2011 impact.
Okay. So no significant impact for you guys for Part D in 2011?
The doughnut hole I would say is there will be an impact, but again less than $10 million.
Your next question comes from the line of Frank Pinkerton from SunTrust.
Frank Pinkerton - SunTrust
Thanks for the color on the high-end IOLs. But just in the U.S., I guess it was about a year ago you launched the 3.0. Are we coming into what would be a difficult comp. So what's the next kind of product in the U.S. to maybe offset that?
Clearly, when you look at the U.S. and you look at the growth rate that we put up in the first quarter, I think we were pleased with the acceleration that we got in the first quarter. I think to your point, we referenced the impact from the economy in the first quarter, and clearly that played a role. But when you think about this segment, I mean we're very early with something in the range of 11% or 12% penetration.
So what we have today is obviously the technology of both ReSTOR and Toric continuing to penetrate the market opportunity. For example, where we really see movement is in the Toric segment where we're seeing at a fairly rapid click the number of doctors coming into the implanting pool, accelerating at a very good rate.
I think the other piece that we mentioned is that AcrySof ReSTOR Toric where you combine both technology, we're expecting to be CE-marked second half of this year. I think logically that would put you in '11 for the U.S.
So clearly, when you think about the existing technology, the ability to penetrate, Toric taking on new implanters and then our ability to bring in ReSTOR Toric, I think it's a pretty powerful franchise to keep moving forward.
Frank Pinkerton - SunTrust
And then I know that Alcon has an agreement to sell Lucentis in certain countries. Can you give us any type of disclosure around that agreement, what the profitability might have been either last year in the quarter, and is that something that's significant in adding to profit?
I think we're probably not at a position to give a lot of detail, but I have to say this is a very limited relationship where we're in a cooperative relationship in Japan. I think what we were doing was looking at Alcon's ability to cover the full base of position in Japan more from an awareness standpoint.
And then secondarily, we have a select list of accounts. I would call those accounts as a second pool of opportunity for Lucentis in Japan, while Novartis is covering the first tier of that Lucentis pool. So I would think of it is as a niche opportunity in one market. And we do not any other Lucentis co-promotion terms at this point.
Frank Pinkerton - SunTrust
Okay. And then just one final question. Can you just speak to, I guess, morale overall for employees? Have you seen any turnover or anything else either in the sales force or in any other departments and just how the employees have handled the last several months?
Sure. I think in general the employees are taking the information in good stride. I think most people have to recognize that Alcon has been public only about 10 years. And we've clearly outlined to the employees that it is a process first between closing on the Nestle-Novartis portion of the 77% with regulatory approval.
And then obviously, the process if it moves forward between Novartis and the independent directors, it's a public process, so they have the ability to read whatever the respective parties are putting out. But again, our focus is around doing what we do everyday, and that's focusing on operating the business. And so for the most part, I think they're patiently waiting for the process to be completed. And no, we're not seeing exceptional turnover.
Your next question comes from the line of Matt Miksic from Piper Jaffray. Please proceed.
Matt Miksic - Piper Jaffray
On guidance and the beat, there was an earlier question around what are we missing around the back half. I think I understand maybe possibility and potential strategic investments, you sound you're thinking for the rest of the year. Can you walk us through what the change in FX may have contributed also to back half, thinking there is a rates of change a little bit here on the first quarter?
Sure, Matt, just let me predicate my response by saying we've effectively raised our guidance by keeping guidance unchanged, while absorbing the healthcare reform. But specifically to your question around FX, it is something that I'm watching carefully. Over 50% of our revenues come from outside the U.S., and the dollar has been strengthening of late. So that is a consideration in how I'm thinking of guidance.
Matt Miksic - Piper Jaffray
Okay. And just to be clear, I guess there'd be less of the impact left us looking at our back half numbers, thinking of why they might need to come down a little. And it sounds like FX would be one of the reasons. Is that fair?
Well, it is difficult to forecast FX. There's so much volatility now. So I would say that included in our guidance is a reasonable range of volatility around in case exchange rates were to take another movement.
Matt Miksic - Piper Jaffray
Okay. And then a follow-up just on the comments on IOLs and premium IOLs and where they're going. But on this question of sort of what's next both in terms of surgical portfolio, but may be more importantly what's next in terms of the industry in driving adoption higher among surgeons, would you add more versions, more flavors of these premium IOLs, or is it some other instruments, equipment to help put them in more reliably? Your thoughts Kevin on that are appreciated.
Sure. I think when you reference the penetration, I think the surgeons clearly are influenced by consistent and positive clinical outcome. And when they don't have that level of confidence, I think you'll see people standing on the sidelines and not moving into the IOL segment.
And so if were to contrast a little bit, looking at Toric and looking at the acceleration that we clearly have seen in the Toric area, tells me that more surgeons over time are getting comfortable with implanting a Toric when correcting for that level of astigmatism and getting very, very positive clinical outcome.
I think on the premium segment related to presbyopia, I think what we've seen is certainly improved clinical outcome as it relates to +3.0 IQ. And I think that has certainly helped. But I think we're going to need to get a higher level of confidence in order to increase the penetration. So it's not just more styles, but more styles that are delivering consistent outcome.
And then all through this process, astigmatism continues to be a problem. And as a result, the doctor has to be comfortable with dealing with astigmatism. And I think the ability for us to bring a combined product clearly is going to start to address that residual issue that is preventing them from getting the most optimal clinical result.
So that one is not just a line extension. That's a significant way to treat. Today, the doctor is having to choose between ReSTOR and Toric. In the future, they're not going to have to make that choice.
Matt Miksic - Piper Jaffray
Post-LASIK population, there's increasing number of patients flowing through the cataract centers that have had LASIK surgery. Is that something that you're seeing now, or is that something that you think will influence the adoption or the complexity of these lenses?
When you think about the penetration rate of LASIK, clearly it's going to be something that the doctor is picking up on in terms of the pre-op workup with the patient. But at the level that we've got penetration on the premium IOLs today, that's probably neither an accelerator nor a deterrent to where we're trying to go with these lenses. It's really about getting clinical outcome and getting more doctors in the implanting pool.
The next question comes from the line of Marc Goodman from UBS
Marc Goodman - UBS
First of all, can you comment on TOBRADEX ST, why you decided to actually launch the product? Second of all, Rick, can you talk about the gross margin and the impact of foreign exchange on the gross margin this quarter, and how we should think about that for the rest of the year?
And then the third question, ESBATech, I believe the lead product for uveitis is supposed to be in Phase II, and we're supposed to get data this year. Is that still the case? Just an update there please.
Okay. Marc, I'll take the first one. TOBRADEX ST, we look at ways that we could position this product and clearly looking at the combination of tobramycin and dexamethasone and then looking at what are the advantages versus a pure generic. And I mentioned earlier that the TOBRADEX original product was 95% converted.
So clearly, what we have looked at is a way for us to bring a product to market. I think it's fair to say it's going to be niche against a relatively small indication or opportunity. But again, we're going to wait and see how the market accepts the product. But it's clearly against the niche of really combining the steroid level with the opportunity against specific therapeutic areas.
The gross margin, of course, was on a reported basis impacted by the royalty adjustment. So we pull that out and look at our adjusted numbers. We did have a positive impact from foreign exchange on gross margin in Q1 of 2010. It was less than the positive impact that we had in Q1 2009. So year-over-year, there was a negative impact, even though in the actual quarter itself it was positive.
Now in terms of the full year outlook, the impact of FX is difficult to predict, because it depends on where the currencies move. But if currencies were to stay where they are now, I would see that our gross margin would be at the high end of 75% to 76% range.
For ESBATech, yes, you're right. There is a product for uveitis. It's a TNF-alpha antibody. The study is well on track. It will be completed before the year end. We'll have the results before the yearend and make a decision about that product.
I just want to take the opportunity to comment more on the new molecular entity aspect, what we're doing about that. So the ESBATech compound together with two others, as I said, and more from AstraZeneca, constitute part of the new molecular entities we're moving ahead with in addition to what we had initially from individual transactions.
However, I wanted to signal that in addition to advancing new molecular entity, we are continuing actually our efforts into incremental products as well which could be improvements over existing products. For example, we just completed a Phase III study that was quite successful with a new formulation of VIGOMOX, moxifloxacin, we'll be filing this year, which we believe will bring improvement to the product.
So we've created in our capability for new molecular entity that's much larger than before. We also sharpened our activity for incremental products. So we have these both capabilities. We call that dual focus internally. I just want to make sure that you have the full picture in there.
Marc Goodman - UBS
Thanks. Can I ask one other question with respect to spending in SG&A? Where are we with respect to investing in emerging markets right now, your key markets that you want to be in? Are you 50% of the way through or you're 80% of the way through? Just give us a sense of that please.
Yes, Mark, I think, clearly we have said that we are looking to realign resources and we really are not putting a limitation on the key emerging markets and I would define that as certainly brighter than the BRIC market. But obviously the BRIC market's getting awful lot of attention. Where we are in terms of build out, is somewhat dependent upon each market as you look at it. I think like most companies, one of our challenges against building out these markets is not the lack of resources but rather the limitation around people resources.
I would say our sales organizations against our core pharmaceutical and surgical opportunity as its defined today is certainly built out. I think the opportunity though when you think about markets like China, we are still focusing an awful lot of effort on the eastern seaboard and we're really not covering the full geographic market. And then I would point you to India, I reported on the 57% organic growth, and really for the most part that's being driven by the surgical business with a limited impact from selected pharmaceutical products.
But clearly, we are talking about investing to build the market and move the market from extra-cat procedure to FACO. So we're built out in terms of commercial capability at the level that we're defined today. But what we're looking for is how do we build the market for tomorrow, make FACO the standard of care, move from low technology pharmaceutical products like tobramycin to higher technology products like glaucoma agents.
So I think we're going to continue to invest at an accelerated rate proportionate to two things, building out the revenue opportunity; and secondly, with whatever limitation we can get over in terms of people resources. And obviously, we think about PLC. I would tell you that's very limited in terms of it's build-out at this stage across those sort of markets.
Marc Goodman - UBS
And the way you think about it is reallocation of resources? So some comes out of developed markets and boost the developing markets?
Yes I think clearly we are looking at the way that we invest in those markets is we really signal to the operational management group that we want them to investment, spend and move as fast as they can. Clearly, operationally at a higher level, we're looking at the rest of our commercial and back-office operations and saying. Where do we want to reallocate, so that we can afford to invest in emerging markets, how we can invest in R&D against specific projects? So clearly reallocation is part of that process.
Your next question comes from the line of Louise Chen from Collins Stewart.
Louise Chen - Collins Stewart
Hi, just a few questions. First question is wondering if you cold comment on the competitive landscape in ophthalmology. There's been a lot of changes over the past few years and just wondering what you're seeing from the competition?
And I assume you're talking about AMO going into Abbott and Bausch & Lomb inside of the (inaudible) structure?
Louise Chen - Collins Stewart
You know, clearly ophthalmology is a relatively small space. We tend to know each other relatively well. I think both companies that I mentioned are good competitors. I think the working assumption that we have was AMO inside of Abbott is that their resource allocations structure is probably significantly enhanced, specifically their ability to spend in terms of R&D. Obviously it requires more than just money. You need to be able to bring the technology to market and obviously to create the technology.
But I think clearly AMO is probably enhanced as being part of the Abbott structure. I think when we look at Bausch & Lomb and we've competed against Bausch & Lomb in multiple product categories, they're also a very good competitor. Obviously, they are focused in our space primarily against contact lens care solutions. Obviously, when we look at the share position, we like our position in terms of contact lens care and the ability for us to hold the share that we were able to achieve through the market withdrawals.
Obviously, on the surgical side of the business, they've obviously got a full portfolio of products. They've taken some steps to enhance the portfolio. but again when you look at our IOL and our equipment installed base and our share position gains recently, I think we've generally feel good about how we've been able to compete against both players.
Louise Chen - Collins Stewart
Okay. And another question I had was that you mentioned several important new product opportunities you're developing. Could you give us some timelines around the commercialization of those products, for example, the glaucoma product that you said you're going to enter Phase III trials for?
I mentioned that we've got a positive proof-of-concept which is very exciting for Alcon, because obviously as Dr. Markabi highlighted, we've gone through a very disciplined stage-gate approach. And so when you go through that process and you get a positive proof-of-concept test, obviously that was very inviting for us.
We're just starting the Phase III studies. Obviously, we would need to replicate the result in both studies and then obviously plan to submit. But when you look at some of the other ones that you know we've mentioned in late stage, whether we're talking about ReSTOR Toric or Phakic, those timelines are a little more defined from where we've made the submissions and we're waiting on the approval or the CE mark.
And the same with obviously the piece with DuoTrav in Japan, obviously we'll go through more or less maybe two or three months in terms of pricing approval. But then our expectation is we get commercial operation in the second half. So that's clearly something that's a little ahead of our schedule originally.
Louise Chen - Collins Stewart
And last question is just on the allergy season. I think you said it's shaping up well. When would we get a sense of how strong the season is going to be this year?
I think April is going to be a good gauge. I mean we've only seen prescription volume through March. March was clearly an improvement over January and February, but still relatively flat in the U.S. And when I say flat, I'm talking about March. Obviously, by reference year-to-date, it's down. But when I look at some of the trends that we're seeing in terms of wholesale or purchasing pattern, it starts to give us the indication that April looks strong.
And our final question comes from the line of (Saqib Mirza) from JPMorgan.
Can you give us an idea of employee ownership of Alcon equity through the various incentive plans? And in particular, I'm talking about employees outside of senior management, so scientists, middle-level managers. And if you could provide a range of expenditures shares outstanding that's great? If not, any anecdotal comments would help. For example, how big that group of scientists and middle-level managers is relative to top 10 executive managers? How far down the chain this skin in the game extends?
I think the primary program that you're referencing is what we call long-term incentive. Each year, we have two programs, one that is more traditionally a bonus program, which we would call AIB, and that is a cash program that is a combination of group results and individual performance results, but as I said, cash.
The second program is long-term incentive. It's typically offered on a broad basis. If you were to look at it, it would be in our case grade 24 and above. We use an external benchmarking system to reference who is eligible for long-term incentive. So I think you could think of it as very traditional across the pharmaceutical and med segments. Clearly that LTI is a combination historically of stock options and restricted stock. Most recently we've made that long-term incentive 100% restricted stock.
So I think it's fair to say that we have relatively broad ownership of Alcon shares through that long-term incentive program. I would want to give you a breakdown between how much the top 10 executive have versus the broad employee base, but it is institutionalized as part of our compensation structure.
And would you say it's pretty much typical of companies in the biopharma space?
Yes, we would use benchmark data to identify who is eligible, which would be consistent with that same segment, and also the percent allocation of long-term incentive as a percentage of salary would also be representative of that same industry.
Could you just give us an idea of grade-24?
Think of it as a first-line manager where you would have broad people responsibility.
Ladies and gentlemen, this concludes the question-and-answer session. I will hand the call over to Mr. Doug MacHatton for closing remarks. Please proceed.
Actually we're fine. We're running out of time here. So thank you to all of you who are on the call.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.
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