Allergan Q1 2010 Earnings Call Transcript

Apr.30.10 | About: Allergan plc (AGN)

Allergan (NYSE:AGN)

Q1 2010 Earnings Call

April 30, 2010 11:00 am ET


David Pyott - Chairman and Chief Executive Officer

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

James Hindman - Senior Vice President, Treasury, Risk and Investor Relations

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

Joann Bradley - IR


Peter Bye - Jefferies & Company, Inc.

David Maris - Calyon Securities (NYSE:USA)

David Buck - Buckingham Research

Gregory Gilbert - BofA Merrill Lynch

Marc Goodman - UBS Investment Bank

Ken Cacciatore - Cowen and Company, LLC


Hello, and welcome to the Allergan First Quarter 2010 Earnings Call. [Operator Instructions] I would like to introduce today's conference host, Mr. Jim Hindman, Senior Vice President, Treasury Risk and Investor Relations. Sir, you may begin.

James Hindman

Thank you, Tara. 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 first quarter 2010 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 Q&A session of this call with a short listen-only segment, where we will provide additional miscellaneous information that relates to our business. Under Regulation FD, in order to be able to discuss this information freely during the quarter, we must be sure that it is in the public domain. This conference call and accompanying webcast are being simultaneously broadcast over the Internet, with replays available for one week. You can access this information on our website at

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

David Pyott

Great. Thanks, Jim. Good morning, ladies and gentlemen. First quarter sales growth demonstrates the continuing trend of recovery in our cash pay businesses, which had commenced around the spring of 2009. First quarter results were negatively impacted, albeit modestly in ophthalmic pharmaceuticals by the authorized generic of ALPHAGAN P 0.15%, and genericization of Acular, both in the United States.

First quarter sales increased year-over-year 11.2% in dollars and 6.9% in local currencies, boosted by the strong pickup in the sales of medical devices, which grew 18.4% in dollars and 13.4% in local currencies. The growth in the Medical Aesthetics businesses was even stronger outside the U.S. in all regions and across a wide range of countries, with surprisingly strong performance in Europe.

Operating performance was strong, with non-GAAP earnings per share at $0.65, marking an increase of 18.2% versus the result for Q1 of 2009, and comfortably exceeding the Q1 expectations shared with you, the investment community, of $0.57 to $0.59.

Earnings growth was driven by strong gross margin expansion, especially in the Medical Device segment. Careful spending in the selling, general administrative area, whilst we increased investment in R&D by 11.1% on a non-GAAP.

Within SG&A, we however doubled our DTC expenditures versus Q1 of 2009, which of course was the low watermark for spending when the world economy was in crisis. Our plan is to continue to invest in 2010 across our brands and into the recovery of our markets.

During the quarter, we were pleased that we continued to strengthen our R&D pipeline, supplementing our internally development programs with acquisitions and licenses. In January, we acquired Serica, a company with proprietary technology for use in tissue regeneration especially applicable to breast reconstruction, as well as the license for Ser-120 in Phase III clinical development for nocturia. Strategically, we have made good progress in building up a portfolio of urology assets.

We also furthered our aspirations to be the leader in medical aesthetics also in Asia, by reacquiring the rights to BOTOX Cosmetic in Japan and China and expanded our footprint in fast-growing emerging markets by establishing direct operations for all of our businesses in Turkey, effective from the second quarter.

After the out-licensing transaction with Bristol-Myers for neuropathic pain, we've increased our degree of R&D focus on our core specialty areas.

Now I’d like to comment on our expectations for 2010. For the full year earnings outlook, we have brought up the bottom of the EPS range by $0.02 to $3.11 and have left the top end of the range at $3.15 which at the time of the last earnings call expressly excluded the costs of any healthcare reform bill in the United States. With the increase of the Medicaid rebate, extension to managed Medicaid and expansion of eligible hospitals in the so-called 340B program, we estimate that the cost of healthcare reform in 2010 will be approximately $12 million. This is now included in our outlook.

Looking out further into 2011, we forecast that the expanse of healthcare reform will be limited, costing Allergan in the range of $50 million to $70 million, pretax. Impact on Allergan is proportionately less than that commented by several large pharmaceutical companies reporting before us due to the following factors: First of all, Allergan's mix of medical devices and pharmaceutical businesses, our relatively lower exposure, our low exposure to Medicaid as well as the relatively lower costs of our pharmaceutical therapies.

Now turning to the performance of the businesses, I'll commence with ophthalmic pharmaceuticals, which had a solid growth quarter growing 8.1% in dollars and 3.9% in local currencies, given the headwinds of generics in the U.S., which I commented earlier.

Outside the U.S., the business grew double digit even in local currencies, with exceptionally strong performance in Asia and Latin America. Our focused brands grew strongly, expressed in local currencies, RESTASIS increased 20.5%, LUMIGAN including GANFORT by 12.8% with solid performance from LUMIGAN and massive growth from GANFORT. The ALPHAGAN family declined 12.1% in local currencies affected by the launch of an authorized generic of ALPHAGAN P 0.15% in the U.S. as well as brimonidine generics in parts of Europe, Latin America and Asia. Within the ALPHAGAN family, Combigan grew strongly in double digits even in local currencies.

For the full year 2009, Allergan per IMS Global was the fastest-growing global company for the eighth consecutive year. Looking ahead, we’ll lose this title in 2010, but are determined to regain the position as we roll out new OZURDEX indications, LUMIGAN line extensions and bring our next-generation pipeline products to market.

Our strategy in the U.S. to defend our brimonidine franchise with ALPHAGAN P 0.1% and Combigan has been rather successful. Four months after the launch of an authorized generic of ALPHAGAN P 0.15%, our originator brands are still holding on to more than 70% of the trailing prescriptions of all brimonidine-containing products.

In the U.S., RESTASIS continues a strong track record of growth, as its prescriber base has grown, access is improved through better coveraged managed care plans and patients are educated by our DTC advertisements. We continue to work on getting RESTASIS approved in Europe, Canada and Australia.

Regarding OZURDEX, we are pleased that we’re now beyond the initial challenges of reimbursement. CMS has just added OZURDEX to the so-called Not Otherwise Classified list to establish average selling prices, so-called ASP, plus 6% for all the Medicare carriers. The permanent J Code should be established by January 2011.

In Europe, we continue to gain share in glaucoma and artificial tears. The European glaucoma market is undergoing many changes. Cosopt has been genericized in several key markets. Alcon is investing heavily in the launch of Azarga. The LUMIGAN 0.01%, that’s our product, is now on the market in the U.K., Germany, Netherlands and parts of Scandinavia, with most of the other key European markets to follow during the course of 2010. We are very pleased with the performance as is the case with GANFORT.

GANFORT was also approved in Austria and South Africa. OPTIVE was approved in Korea and New Zealand. In Latin America, we're gaining further market share in tears and are holding share in glaucoma, even as ALPHAGAN is impacted by generics.

Turning to BOTOX, sales growth has picked up relative to trends seen across 2009, with growth versus the first quarter of 2009 at 11.3% in dollars and at 6.6% in local currencies. Sales of $331 million were only modestly lower sequentially than Q4, which is always seasonally the highest quarter of the year. Most of this increase was due to the more economically sensitive aesthetic side of the business, as the benefits of the upper-limb spasticity FDA approval in March occurred too late in the quarter to contribute to our sales results.

Outside the U.S., we enjoyed very strong double-digit increases across a wide range of countries, with surprisingly strong growth in several of the main European markets. These global markets are precisely where we are successfully dealing with multiple competitors.

It would therefore seem that the market is recovering as we can measure our market share with only a short time lag. In Europe, on the aesthetic side, we’re holding share at just under 80%, as we deal with the incursions of both Merck’s, with their Zymine and Bocatua [ph] brands and Galderma with Azzalure.

On the therapeutic side, it seems that most of ZMM’s market share gains have been at the expense of Dysport. In the U.S., BOTOX sales growth is less buoyant, as there was no base of Dysport sales in the prior year, but it is clear that the market is growing again.

We estimate that in the aesthetic market, Dysport had somewhere between 13% and 14% share in the first quarter. We'll be curious to see the lasting impact of the Dysport Love It or Leave It promotion after it terminates at the end of May.

In the therapeutic market, Dysport’s share is so far negligible, given the long history and experience of BOTOX use. In Europe and the U.S., we have recently introduced a 200-unit vial, which is useful for injectors treating large muscle groups, as well as for differentiation from competition. Regarding global market share for the fourth quarter, the last quarter for which data is available, we estimate that BOTOX held 79% share in a market growing 13% year-over-year.

Regarding the clinical program for BOTOX for chronic migraine, the clinical trial results of our PREEMPT program were published in Cephalalgia, the journal of the International Headache Society. Regarding facial aesthetics, we've experienced an even stronger rebound in sales than observed with BOTOX. Dermal filler sales grew year-over-year, a very strong 42.4% in dollars, and 34.5% in local currencies, with great growth in all operating regions of the world, with Europe again surprising on the upside.

In the U.S., we've seen huge growth in the JUVÉDERM line since the launch of JUVÉDERM Ultra XC, this is the lidocaine-containing product, in early February. Although we have gained some market share, it would seem that the market is responding strongly to the reduction in treatment pain experienced with this lidocaine-containing product and already a substantial share of the mix is attributable to JUVÉDERM Ultra XC.

We have just initiated print advertising for JUVÉDERM XC and have a PR campaign with TV host Dayna Devon, as our spokesperson to further drive growth. In Europe, we launched new additions to the JUVÉDERM product line, JUVÉDERM Smile at the IMCAS Conference in Paris in January and JUVÉDERM Hydrate at the Anti-Aging Conference in Monaco in March. JUVÉDERM Smile was also approved in South Africa, JUVÉDERM XC in Korea and JUVÉDERM Ultra Plus in Taiwan.

Voluma was recently launched in Brazil and also approved in Taiwan.

Based on our analysis of the world market in Q4, which we estimate grew 12%, it is clear that global market growth has accelerated since then. Our analysis also points to JUVÉDERM market share gains in all regions of the world. Beyond superior product performance characteristics, Allergan also benefits from having full product line.

For breast aesthetics, Q1 registered a further improvement in business conditions, with sales growing year-over-year 17.7% in dollars and for the first time since the recession began, at 14.0% in local currencies, with all operating regions growing double digit even in local currencies. In the U.S., we estimate that overall market share was stable, with Allergan gaining some share in gel and losing some share in the lower cost saline segment.

Outside the U.S., we estimate that we've gained some share due to the strength of our local operations that enjoyed the scale of a full line versus some of our smaller competitors.

In France and Brazil, sales of PIP have been suspended by the French and Brazilian Ministries of Health. Our Natrelle line was approved in the Ukraine.

Moving on to skin care where almost all of our sales are in the U.S., sales increased year-over-year by 32.1% in dollars. Axon sales expanded massively given the small prior year base, which occurred shortly after launch. Sales growth of TAZORAC and Azalex were modest whilst LATISSE sales soared by 52.6%, Q1 sales of $18.8 million were sequentially $7 million lower than in Q4.

Some part of the decline is perhaps due to seasonality as Q4 is the highest quarter of the year for BOTOX dermal fillers. At the margin, trade inventory was also in retrospect a little higher than our normally targeted level. But perhaps most importantly, experienced LATISSE users are learning how to stretch out a bottle of product, which is good for the economics of the use but of course means that we have to recruit more users to attain the same value sales.

Reflecting back on the experience with the early years of BOTOX Cosmetic, we have probably brought on board the earlier doctors, but now need to expand into the mainstream. Clearly there's lots of potential, as doctors and consumers are pleased with the performance of the product. And we estimate today that only 20% to 25% of BOTOX Cosmetic users are buyers of LATISSE. Our investment in DCC will continue throughout the year.

In order to stimulate demand for LATISSE from existing users of Allergan products, we are currently running a LATISSE anniversary offer with coupon which gives $50 off for BOTOX treatment and $50 off a treatment of JUVÉDERM for a total of $100 rebate with the purchase of LATISSE.

Regarding the obesity intervention product area, sales remained rather flat, with an increased year-over-year of 2.3% in dollars and a decline of 2.2% to local currencies. A small decline in the U.S. was offset by reasonable growth x U.S. with varying performance around the world.

In the U.S., we believe that the cash pay portion of our business, which is extremely sensitive to the economy and unemployment, has now bottomed out. And that we're beginning to see growth in the reimburse segment of the market. This LAP-BAND cash pay business was disproportionately impacted, relative to the facial and breast aesthetics businesses as the out-of-pocket expenditure at over $14,000 is the highest.

Furthermore, regarding our performance in the U.S., it seems that our market share losses to the REALIZE Band from Ethicon have been stemmed with only a loss of approximately two market share points comparing Q1 2010 to Q1 of 2009.

For March, we estimate the LAP-BAND has regained to a 75% market share. LAP-BAND sales returned to good growth in Canada and the U.K. Our ORBERA Intragastric Balloon sales grew strongly on a small base in Europe, parts of Latin America and Australia. Given the central role of treating obesity in the health care debate both here in the U.S. and around the world, we remain convinced about the long-term potential of this category.

Finally commenting on urology. Sales of SANCTURA and SANCTURA XR declined 22.6% in the quarter year-over-year. However, based on acquisition dollars reported by SDI-Verispan, sales for the first quarter only declined 3.2%. The difference between ex-factory sales is mainly explained by an accrual for a Patient Rebate Program, which started at the end of March, as well as a very minor change in channel inventory from one year to the other. With the merger of our medical dermatology and urology sales teams into a larger combined force, as well as the addition of a Quintiles sales force in the primary care and OB/GYN channels, both at the end of last year, we’re confident that we’ll see a build in sales across the remainder of 2010.

I would now like to pass over to Jeff Edwards who will comment our financial performance.

Jeffrey Edwards

Thanks, David, and good morning to all of you on the call. The first quarter of 2010 represented a strong start to the year for Allergan as we have experienced strong performance across each of our geographic regions, particularly on an x U.S. basis. We’ve also continued to see signs of improvement in the economy and as a result have seen improving performance across our cash pay aesthetic businesses. Allergan was again able to over-achieve our sales and earnings per share expectations due to our broad base of business and strong competitive positions within our specialty areas. Non-GAAP diluted earnings per share for the first quarter was a very strong $0.65 per share. Coming in above the top end of our range of expectations and marketing an 18.2% increase of 2009 results for the same quarter. It is worth noting that these favorable results were generated in the face of the genericization of both ALPHAGAN P 0.15% and the Acular franchise. Moreover, Allergan was able to deliver this strong first quarter earnings performance even as we continued to reinvest into the future growth drivers of our business. A reconciliation of all of the adjustments to GAAP earnings is set out in our earnings release.

Excluding the effects of non-GAAP adjustments in the amortization of acquired intangibles, Allergan's Q1 2010 gross margin of 84.6% increased 150 basis points when compared to the prior year, as Allergan saw modest improvements in its pharmaceutical margins and very strong improvement in its medical device margins. This increase in medical device margins was driven primarily by year-over-year standard cost improvements, favorable volume-based manufacturing variances, favorable inventory pricing -- breasts being the biggest contributor given our low-cost manufacturing base in Costa Rica -- and lower year-over-year inventory provisions. The non-GAAP selling, general and administrative expenses to product net sales ratio for the first quarter was 42.3%, totaling $468 million, an increase of approximately $46 million over the same quarter of 2009, as we continued to see signs of recovery in our cash pay aesthetic businesses and implemented targeted investments to further stimulate and support our future growth.

Importantly, we continue to believe that the economic recovery will be somewhat slow and gradual. As such, our commitment to managing Allergan's cost structure wisely to limit waste and direct our capital to the highest-yielding investments will continue to be unwavering. Non-GAAP research and development expense were 16.3% of product net sales for the quarter, totaling $180 million, an increase of approximately $18 million over the first quarter of 2009, as we continue to fund new projects and invest into a promising pharmaceutical and medical device pipeline. We anticipate that Allergan's quarterly research and development spend will increase on a sequential basis over the course of 2010.

Excluding the effects of non-GAAP adjustments, Allergan's first quarter operating income ratio increased by 170 basis points when compared to the first quarter of 2009. Allergan's disciplined approach focused on maximizing investment return, improving cost structure and controlling general expenses has enabled the company to produce its improved operating income margin. With respect to our balance sheet, consolidated Allergan day sales outstanding was 46 days while consolidated Allergan inventory days on hand was 118 days.

At the end of the first quarter, Allergan's cash and cash net of debt positions totaled approximately $2 billion and $471 million, respectively. Allergan continued to maintain exceptional cash flow generation capabilities in the first quarter, with operating cash flow after capital expenditures of approximately $161 million, an increase of approximately $56 million over the first quarter of 2009.

These strong cash balances and broader access to liquidity provide Allergan with the ability to remain proactive with respect to our ongoing pursuit of strategic acquisitions and licensing opportunities, as was apparent with the various business development activities announced during the first quarter.

As we move forward through 2010, Allergan's plan is to continue to carefully monitor each of our markets and manage business expenses and investment opportunities in appropriate manner and with the goal of producing high-quality financial and operational results. As I've mentioned in the past, we continue to be very thoughtful in our evaluation of our expense base to ensure we are leveraging in the appropriate areas and are operating the business with the most efficient and appropriate cost structure necessary to remain competitive in today's markets. Although we believe that the markets have clearly stabilized and, in many cases, have shown signs of positive trends, we understand that some continued caution is prudent.

For the second quarter of 2010, Allergan estimates product net sales in the range of $1.190 billion to $1.230 billion and non-GAAP diluted earnings per share to be in the range of $0.79 to $0.81. Regarding full year expectations for 2010, to repeat what David Pyott previously said, Allergan now expects non-GAAP diluted earnings per share to be between $3.11 and $3.15, which represents growth of between 12% and 13%. This expectation now includes the estimated impact of U.S. healthcare reform legislation which was specifically not included in our previous expectations provided during our fourth quarter 2009 earnings call. For 2010, we estimate the impact to our business from healthcare reform to be limited to approximately $12 million. As a consequence of our current strong performance and confidence in our 2010 expectations we’ll be absorbing the healthcare reform impact and raising the lower end of our full year non-GAAP diluted earnings per share expectations by $0.02 to $3.11 while maintaining the top end of our expectations at $3.15.

We are also adjusting our full year projections for the effective tax rate on non-GAAP earnings to approximately 28%. All other expectations provided on the February 4, 2010 call remain unchanged. The first quarter represented a strong beginning to 2010 for Allergan. We hope to continue to build on this momentum as we continue through the year and look forward to new opportunities emerging for Allergan this year. So with that, operator, I'd love to open the call for questions.

Question-and-Answer Session


[Operator Instructions] Our first question comes from David Buck of Buckingham Research.

David Buck - Buckingham Research

Can you talk a little bit about the decision to take back BOTOX in Japan and China and what you see the impact being near-term as you launch those products? And then for Scott, on the migraine indication, can you give us some sense of whether you're expecting at this point a panel to discuss the application before the PDUFA?

David Pyott

Okay I'll take the Asia question first. I think first of all, we’re very pleased with the collaboration with GSK. Their skills and the knowledge base in regulatory affairs in both Japan and China are really first rate and I'd really like to acknowledge all that they have done in our collaboration. I think as everything we do we really believe in focus. And it became very clear that GSK is a great company in urology. But aesthetics was more of a new field for them. And I think secondly, as we’ve learned more and more about the construction of this medical aesthetics market, there are tremendous benefits of having a full line of products, i.e., not only BOTOX Cosmetic and JUVÉDERM and breast aesthetics or now in the case of the U.S., LATISSE as well, and so bringing all this together makes eminent sense. Now of course, sales build in Japan and China great potential, great opportunity, but will be relatively slow. So I think you should see more results from this in 2011 than 2010. I think now over to Scott?

Jeffrey Edwards

So David, on the question of the review, the review continues in our view to be progressing well. We don't comment on specific interactions with the agency and ourselves. But as you know, the guidance is that FDA needs to notify and post a projected advisory committee approximately two months before it occurs. So I suggest you just need to look for postings. Obviously, the closer we get to the summer, the less likely an advisory committee will come.


Your next question comes from Annabel Samimy, Thomas Weisel Partners.

Annabel Samimy

Really quickly in terms of the aesthetics, are you seeing more of an expansion of the market or market share grab when you're talking about a recovery of the market?

David Pyott

Well, I think it's kind of a mixed picture. If you reflect upon my opening statements, first of all, on the BOTOX aesthetics side, clearly we have new competition. And so, we have to accept on a worldwide basis and especially in the U.S. that we have to lose some share, as much as I'd love to keep 90%, that's not going to happen. And therefore, it's all about market growth. And I think there's two factors to that. One is what I’d call the recovery aspect and we’re looking carefully in all our markets to see when do we get back to the – or when can we project we will get back to the high water mark pre recession. We look at that carefully. And secondly as market leader, our job is intrinsically to expand the market through our marketing efforts and through product innovation. So that covers BOTOX. On the filler side, I remarked that there the market seems to be really picking up both in the U.S. and around the world. And looking through regions, it's quite clear that we have a strong market share gain underway. If we look at breast aesthetics, I'd say my remarks, U.S. relatively stable, international’s more difficult to gauge. But there it seems that we’re marginally gaining share in most regions of the world. So I think that covers the, kind of, the big areas. And of course, LATISSE still to come in many markets x U.S.

Annabel Samimy

One more regarding OZURDEX. We haven't really heard much about adoption of that product or about the data that came out, in combination with Lucentis and where you're going to go with that combination?

David Pyott

Maybe I'll cover the commercial side and then if I've missed something Scott can add his views, of course, as a retina specialist himself. He's uniquely qualified. As we predicted, OZURDEX is one of those slow build products, also due to complicated reimbursement. We, of course, very much knew that retinal vein occlusion was the smallest indication. But, of course, Scott also understood with his R&D team is the quickest way to market. So that was step one. Step two is uveitis and then, of course, the expanding on from there. And in this field, date of publication as your reference is really important.

Scott Whitcup

This is Scott. Just a couple of other things to add to David's comments. You raised one of the other studies. We have a couple of additional studies that we've presented at a couple of meetings. One was OZURDEX Plus Lucentis in Patients with Age-Related Macular Degeneration. The goal of that initial study was to see if adding OZURDEX had some benefit in terms of visual acuity, decreased retinal thickness times the injection and we did see a biological effect and so the plan is to do some follow-on studies to that. The other indication, which is of interest to study is following the vitrectomy. As you know, many patients with retinal diseases need to have the vitreous removed. That changes how other drugs injected to the back of the eye act. But OZURDEX is a sustained relief. It looks like the same in a – that’s had a vitrectomy as one that’s not. And so we've been urged by a number of retina specialists to look at that in clinical trials. We did a small trial in diabetic macular edema with good effect, despite the patients having vitrectomy where other therapies don’t work. So as David said, we have uveitis, which is sitting at the FDA, with hopefully approval later this year. DME, diabetic macular edema, further out because it requires three-year study. We’re also doing a number of additional studies and publications. Finally, we're looking for our initial approval of OZURDEX in the macular edema with retinal vein occlusion in Europe later this year, which I think will also help sales.


Our next question comes from Marc Goodman, UBS.

Marc Goodman - UBS Investment Bank

Jeff, you mentioned that you're assuming that the economy is going to be slow coming back and yet it feels like it's much, much faster and you kind of start feeding your revenues, so I'm just curious are you all spending as if it's going to be slow coming back, as if we’re going to get some real leverage if, in fact, you get another second or third quarter like the first quarter with the cash pay businesses returning like that? And I'm also just kind of curious your thoughts on, like, how much pent-up demand do you think there was for these products, and maybe that's what happened in the quarter or is this just real demand and you're just experiencing the same thing? The rest of the economy? And then just on the gross margin, can you just comment on the sustainability of some of the things you brought up already. You mentioned -- whatever the reason, I forgot what you mentioned, lower inventory provisions, all sorts of things, I wrote them down, I can’t even read my writing. But all those things, I mean how much is sustainable is really what I want to get to?

Jeffrey Edwards

With respect to the economy, it's nice to see that our business is rebounding. We’re showing some spunk here, which is great. That being said, if you look at most economic indicators, it's not obvious that there's going to be a rapid recovery, so I think we're being cautious because of what we see with respect to those indicators. So the investments we're making are really focused where we believe the investments will have an impact. So there's fewer investments being made that are reaching investments, if you will, and more investments that we’re making that we believe will have a notable impact. So we're being cautious because of the indicators we see. However, we definitely see some improvement in these businesses, particularly on the cash pay front, particularly those that are more affordable. So we want to make sure that we’re investing in front of a more aggressive recovery. So that's our approach. It is focused. It is thoughtful. And then I'll let David respond to your question about, well let me hit gross margin first. And then David will respond to your question about the… yes. So on the gross profit side, we provided guidance for the year and we haven't altered that guidance. We think that our cost structure is really well positioned. 2009 in spite of being a very difficult year operationally, for all of us, resulted in some really interesting sustainable improvements, particularly on the standard fronts. The standard cost was one of those areas where our operational organization focused on putting sustainable long-term improvements in place. And we’re the beneficiary of that this year. Of course you've got Costa Rica, which we’ve talked about for a long time on the breast front. But we're seeing higher volumes there as well. So not only have we moved to a lower cost location, of manufacturing, but we’re also seeing the benefit of much higher volumes. So of course we’re throwing off favorable variances and as long as we’re seeing very high volumes, we're going to see wonderful variances that are favorable in nature. So we’re positive with respect to the margin, but the guidance is the guidance at this point in time.

Marc Goodman - UBS Investment Bank

If I look at sort of the market dynamics, the only area that I still ask myself the question, is there pent up demand is the breast aesthetics area? Was there a conscious postponement, thinking there obviously this is a higher ticket item than facial aesthetics, whether it be JUVÉDERM or BOTOX? Frankly, we don't know yet, and we're just watching to see and unfortunately it’s like lots of economics, we'll know better when we look back than when we're trying to forecast the future. I think as I said for fillers, I have the sense that with these lidocaine-containing products and I think we really have an excellent product with JUVÉDERM Ultra XC, I think there's a lot of new consumers either coming into the market for the first time or people who for whatever reason tried one, didn't like it and now are saying I'm going to come back and use this new product because it really is dramatic in difference, in terms of pain and really more comfort, and less bruising. And then, of course, on the LATISSE front, it's very clear there's new users coming into the market. Not only off the product, i.e., those that use BOTOX because they’re in their -- let's call it late 30s, 40s, 50s -- but clearly there's a younger age group coming into this category as well. And that's very healthy when one thinks about the very long-term creation of this medical aesthetics market as a broad, broad category, a collection of products and procedures.


Our next question comes from Greg Gilbert, Banc of America - Merrill Lynch.

Gregory Gilbert - BofA Merrill Lynch

Back on headache, has there been any noticeable uptick in BOTOX use for headaches since the publication of the data? I know it's early and maybe, David, you could offer some comments on the commercial planning that's underway now in case this is a 2010 launch?

David Pyott

Right. Well, first of all, physicians read the papers and posters but, of course, we assiduously are avoiding any discussion of migraine. And I think also this is in any case because of the nature of the product, long cycle, because this isn't the case of read their paper, prescribe the drug as if it was an oral drug. You actually have to find out how to use it, how to mix it, how to administer it. It's quite complicated. And there is the real benefit that once we have an indicated approval then we can go and educate physicians in an appropriate manner. I think on the commercial side, as normal we plan for success, and so we've thought very carefully about deployment both in the United States, Europe and elsewhere. And clearly that will be an area where the more certain we become, the more we’re going to keep opening the purse to spend appropriately. Because it is one of our biggest opportunities in the coming three, four, five years.

Gregory Gilbert - BofA Merrill Lynch

And then the geographic question, David. What geographies do you want to build a new presence in or perhaps enhance an existing presence? We see your sales mix is up, it's shifting outside the U.S. a bit. And you’ve made some announcements of late, so any crystal ball comments about other regions?

David Pyott

Well first of all, clearly with the impact of healthcare reform, and all of you have been reading the diatribe of numbers from all companies, it's lessened the attraction of the U.S. market, relative to the rest of the world. We too just like the big Pharma companies are looking at emerging markets. Now fortunately we've had a great presence in many of those markets historically. I’d particularly point to India and Brazil of the big ones, but you've seen us build really almost a zero direct presence in Korea to covering every single business ourselves. Today we announced Turkey, which will be all businesses, and we're actively working on other markets, which I'm sure we'll announce in the next 3 to 6 months, and things are really underway. And here again, we see the benefits of a really strong management team where we have to add people, clearly when we set up direct operations. But given the regional management structure, this is, I don't want to say trivial, but something we can take in our stride.


Our next question comes from David Maris, CLSA.

David Maris - Calyon Securities (USA)

First on Brazil, can you talk a little bit about your business there and how the new tax deductibility for implants and fillers has affected it. Is it meaningful? Have you seen it yet? Separately, on the recovery that you mentioned, that you said is gradual but steady, how is that differing from the U.S. to Europe and Asia in the aesthetics market? And is it average ticket or volumes or both? And then lastly, on healthcare reform, there's some changes that could kick in, in 2011. I know given the business mix and how it changes and it’s a year away that you may not be able to give exact guidance on that. But relative to this year, what sort of proportion should we be thinking about incrementally year-over-year '11 to '10, as you look at it right now?

David Pyott

Maybe I'll take the last one first. In my prepared remarks, basically, this year we said we estimate around about $12 million, which is due to basically Medicaid rebates going from the 15% to the, what is it, the 23%. We are relatively unaffected by the expansion of the eligible hospitals and the 340B and managed Medicaid. So we've been looking at other companies’ numbers and it's very clear even on a proportionate basis our impact’s rather low. I also then talked about 2011 where we gave you a kind of a bracket of everything costing somewhere between $50 million and $70 million. And clearly the biggest component of that is the drug industry fee. And one of the reasons this has the highest impact is because it's non tax-deductible. So you kind of get a double whammy. And we don't get any breaks, because whether the products are reimbursed or cash paid, unfortunately, we are paying our portion of the pot. So I think that gives you a good bracket there. And really the only other material change is whether the industry fee changes, and we've all read that kind of schedule of numbers. And then just as a quick reminder, the medical device fee doesn't kick in until 2013. So there's another tiny little shoe to drop later on.

Now talking about Brazil, we have a very strong presence there because we have almost 40% market share in ophthalmology. That was our foundation stone. If you look at aesthetics, that's a market culturally that is very responsive to these products. And in fact, if we look at, say, the breast aesthetics business, in units it's the second largest market in the world after the United States. And about a year and a bit ago, we established a direct selling operation, which has really produced first-class results and I’d really like to compliment our Brazilian management team. And as a sort of further booster to all of this, given that there are import duties going into Brazil and there’s a entrenched Brazilian competitor who also exports to Europe and other places, that’s Silimed. With our Costa Rican manufacturing base, we're now really able to compete in a very effective manner.

Next question I think you had was in terms of kind of what the gradient of recovery and, of course, I too look at that very carefully market by market, region by region. And in my remarks, I think, I said it two or three times, which usually means that it really caught my attention, the real surprise for me when I look around the world is Europe. When I kind of read the newspaper and because I've lived in many of those countries, think about all the malaise, in particularly Britain or Spain or Portugal and all those places, yet the markets are real strong. And admittedly coming off a very weak base of Q1, but of course I'm looking through Q1, Q2, Q3, Q4 and so on. So it appears that although we look at indices, these are products that are quite high on people's desire to open up their purse and start using the products again or shortening the gap in the cycle between treatment A -- or one, two and three. So I'm only giving you a sense of this because it's real mix of different gradients and I'm looking at them very carefully, market by market, around the world. And I think really the next time for you to talk to us about this will be when we have the earnings call roughly three months from now, where we'll have much better trend lines.


Our next question comes from Ronny Gal, Bernstein.

Ronny Gal

Now that you’ve signed an out-license deal with Bristol on one of your pain medications, I’m kind of assuming that you kind of know what you’re going to go with or likely to want to go with in terms of pain development. If you can comment on that. Where do those products stand in development? Second if you can remind us on the timing of your European, I guess equivalent to PDUFA, for BOTOX headache and LATISSE? And third, if you can help us a little bit understand the economics of beginning to do your own marketing in international countries. Essentially on an operating profit basis, what kind of profit are you seeing when you out-license a product and when you keep that portfolio in-house?

David Pyott

Scott, if you want to cover the BMS question first?

Scott Whitcup

Ronny, we announced a compound that we had in early-stage development for neuropathic pain. We out-licensed to Bristol-Myers. We actually had three pain programs that we said we were going to take those to an early stage. And then make the appropriate portfolio call on what we would do internally and what we would look to out-license. Among our pain programs, we had the reengineered BOTOX targeted for pain. And given that that fits what I'd liked as our R&D model, which is where possible local delivered therapy, and since it’s in the BOTOX realm, where the leaders in R&D, we made the call to move ahead with that program. So that's basically finishing its Phase I testing. Although we designed our Stage I studies to have some proof of concept, those data probably will be available I would guess end of the year publicly. And we're already in the process of designing our Phase II programs for the targeted toxin.

David Pyott

So regarding Europe for chronic migraine, we announced that we'd filed in several European countries just after the FDA submission. So usual time clocks, we expect some action also from a couple of European countries during the remainder of 2010.

And then you had a question about LATISSE. This was one where, unfortunately, we had to do an extra study in Europe. And so that one is in the 2011-plus category. So unfortunately, I’d love to tell you it's right round the corner but, well, in drug terms, it's right around the corner. But in any other terms, it's a little bit away.

Then your last question was about direct operations. And I think I'll give you the example of Turkey, where clearly up till now we were paying a margin to our distributor, an excellent company, in fact, the largest Turkish pharmaceutical company. And naturally, it was a very old contract and these days, we're a lot smarter than that in terms of the way we write our distribution agreements. But there it’s basically pay the partner something for lost profits in future and basically recapture the much higher margin. So the punch line there is we increased dramatically our gross margin, have greater spending below that line, of course, because we have to pay for sales force and marketing and so on, which then leads to higher contribution margin. And also of course, we’re changing our revenue base from priced-to-distributor to price-to-wholesale. And so there's a pickup from that as well. And Turkey actually is one of the largest markets. If you want to be politically correct because it's kind of right on the edge of Europe, one part of it literally is in Europe, not yet in the European Union, but a very substantial market within the European, Africa, Middle East region.

Ronny Gal

And if you could just overall, if you kind of think about it sales and particular [indiscernible] of $100 million, $150 million, what would be the difference in profit in operating margin between a distribution model [indiscernible] itself and kind of on a long-term running basis?

David Pyott

Well clearly particularly a market say like Turkey and there’s some other ones where you have scale, there you see all the benefits that you see running right through our global P&L. So we know how to do the math and there’s markets that have scales that are really interesting. And then there's some markets, I used to work in them that are quite small. And it’s probably best just to leave them with your partner and make sure you have a good partner.


Our next question comes from Peter Bye, Jefferies & Company.

Peter Bye - Jefferies & Company, Inc.

A couple of questions maybe related to the build-out internationally and your sales and marketing expenses. Just tell me if the math we're looking at is correct, maybe it’s a $17 million hit to FX and SG&A. And if you're doubling your DTC this quarter, it took about 10% of your expenses last year of $185 would be $18. It really appears you only spent an incremental $10 million x marketing on SG&A, a lot more leverage than we’ve sort of seen in the tab financial leverage? Are you planning on spending a lot of that going out and building the infrastructure as you guys sort of move from Europe into East Asia?

David Pyott

Well, first of all, I made the remark in my initial statement, regarding DTC year-over-year it doubled but, of course, before one gets too excited about that, we were being really, really cautious in Q1 of '09 because, of course, everybody whether you worked in the financial community or on our side of the house, we’re all trying to work out where was the bottom, where are we going, how do we survive. And so really, I think you were kind of backing into the question of if we spent $185 million last year, what could we be spending this year? And I'd say at a very high level, broadly comparable, because we've said over time, there’s an ability to leverage some DTC because I understand consumer marketing models very well given my prior life before I came to Allergan. I think then the second sort of thing you were pointing to was really a bit similar to Ronny Gal's question about when we take on direct marketing operations, clearly you're going to see at the margin an increase in sales and marketing expenditure, i.e., for you within the SG&A line. But of course it’s more than offset by an increase in gross margin, as we go from sales to distributor price level to the much higher capture of direct to market. So I'd say all those kinds of exercises that we're going through, you've got to be careful with the thought of instant payback, but it's really, really short, certainly within a calendar fiscal year.

Peter Bye - Jefferies & Company, Inc.

On the follow-up on the healthcare reform, when you think about your annual growth targets to deliver EPS and shareholders, do you consider like the incremental cost next year to be, I know they're ongoing, but is that a one-time hit? Did you think about well, hey, maybe I can't deliver 15% because I've got this one-time hit? Or do you think you can still sort of deliver your 15%-type growth with that kind of hit? I mean how do you view the healthcare implementation, that incremental cost next year?

David Pyott

Well, first of all, as I alluded, if one thinks even further out, either you have the initiation of the medical device fee starting in 2013. So that's a disparate event. But then when you look through all those schedules of taxation, it was, if not a leap, there's a gradual ramp. I'm sure you're all -- whether it be Allergan or other companies you cover -- trying to do the same model and, of course, we've done it. Surprise, surprise. And we don't have the perfect crystal ball, but we can certainly analyze each segment of these fees and taxes. So then kind of getting into the question of what are we going to do about it? I've been very vocal inside the company, not only with the management, but even with the board to say I think a bad company just rolls over and says, okay, it costs “x” and therefore that just comes off the aspirations we have. We really want to work on how do we further tune up, tone up our sales and marketing process to become more efficient. How do we do that with an R&D and we've already done it in G&A, but basically everywhere and, of course, I refer to sales and marketing and R&D as the biggest cost blocks.

So the final question in terms of long-term guidance. That one I can't answer, because we always give guidance at the beginning of the year. And of course in expectation of that question if you could tell me how many products I'm going to get approved when, that's just a joke. That would be very helpful as well so you understand the issue, right? And in terms of maybe one last remark, when I was listening to questions answered by Jeff, he very appropriately talked about the caution in terms of economic recovery, but we still have a couple of products that we should get approved this year. And once I've got them in the bag, I'll feel better than just being hopeful about them.


And that will come from Ken Cacciatore, Cowen and Company.

Ken Cacciatore - Cowen and Company, LLC

First on spasticity, David, you alluded to the point that it really hadn’t impacted the quarter yet. Can you just give us a sense, and we know it's used fairly broadly already in spasticity, but can you give us a sense of maybe some of the other channels you're targeting now that you have an approval and help us once again size that opportunity and then maybe Scott, on overactive bladder, if you could give us a sense of timing of the neurogenic filing and maybe some commentary on the enrollment in the idiopathic and timing there as well?

David Pyott

Actually I'll cover both because Scott has just had to leave for a plane to go to Oslo in Florida, which is the big meeting for the retina group. First of all on upper limb spasticity, many times I pointed out that this is the largest use of neurotoxin around the world. And a bit like what I said earlier regarding training, this is a product that is almost like a surgical procedure, although it's a drug. And so knowing about something is cool, but actually how to do it, how to administer it, how to get the optimal treatment, I don't want to call it an art form, but it's certainly an accumulated knowledge bank. And so having the ability to actually train doctors appropriately is a huge deal. I think the other thing that we knew for years from Europe and elsewhere around the world, is the fact that getting into the referral networks of physiotherapists and physiatrists is really, really important. And, of course, now we’ll be able to do that. Whereas, of course, that was totally prohibited by our selling and marketing and all of our ethical guidelines. In terms of the two OAB questions, neurogenic will be filed before the end of this year, 2010. And idiopathic, we're kind of coming towards the end of our Phase III enrollment, so everything's on track. And that’s still then in terms of approval, a little bit further out. And that really goes back to this issue that I kind of at a high-level talked about that we're pleased that we're now building a urology platform with the external deals we did complemented by our internal programs.

James Hindman

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

Joann Bradley

Thank you, Jim. The following market share data we are providing is Allergan's good-faith estimates based on the best available sources for data such as Biomass, as well as Allergan's internal estimates. The market size, share and the growth rate information is a moving annual total or trailing 12 months as of the end of December 2009. The market for ophthalmic is approximately $14.6 billion, growing at a rate of 12% and Allergan's market share is 16%. The market for glaucoma approximates $5.4 billion, growing at a rate of 7% and Allergan's market share approximates 19%. The market for ocular allergy, approximates $1.2 billion, growing at a rate of 8% and Allergan's market share is approximately 5%. Plain ocular anti-infective market is roughly $1.2 billion, growing at a rate of 8% and Allergan's share is 12%. The market for ophthalmic nonsteroidal anti-inflammatories is about $480 million, growing at a rate of 17% and Allergan's market share is 33%. The artificial tears market, inclusive of ointments is approximately $1.4 billion, growing at a rate of 9% and Allergan's share is 21%. U.S. topical market for acne and psoriasis is roughly $2 billion at an annual growth rate of 13% and Allergan's share is roughly 7%. The top 10 markets for neuromodulators are roughly $1.3 billion, growing at a rate of around 3% and BOTOX has approximately an 88% market share. The worldwide market for neuromodulators is roughly $1.7 billion, growing at a rate of around 3% and BOTOX has around an 81% market share.

The worldwide market for dermal facial fillers is roughly $650 million, declining at a rate of roughly 8% and Allergan has approximately a 33% market share. The U.S. market for dermal facial fillers is roughly $270 million. The worldwide breast aesthetics market, both aesthetic and reconstructive is roughly $770 million, declining at a rate of about 7% and Allergan has about a 37% market share. The worldwide bariatric surgery market for the Band and Balloon segments only is roughly $360 million, declining at a rate of around 7% and Allergan has approximately a 59% market share. And that concludes our call for today. Thank you.


Thank you. Once again, that does conclude today's conference. Please disconnect all remaining lines.

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