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Allergan (NYSE:AGN)

Q2 2010 Earnings Call

August 02, 2010 11:00 am ET

Executives

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

Analysts

Stephen Willoughby - Cleveland Research Company

Ken Cacciatore - Cowen and Company, LLC

Corey Davis - Jefferies & Company, Inc.

David Maris - Credit Agricole Securities (NYSE:USA) Inc.

David Buck - Buckingham Research

Frank Pinkerton - SunTrust Robinson Humphrey Capital Markets

Ronny Gal - Bernstein Research

Larry Biegelsen - Wells Fargo Securities, LLC

Gregory Gilbert - BofA Merrill Lynch

Randall Stanicky - Goldman Sachs Group Inc.

Marc Goodman - UBS Investment Bank

Operator

Hello, and welcome to the Allergan Second 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, Terry. Good morning. With me for today's conference call is David Pyott, Chairman of the Board and Chief Executive Officer; Jeff Edwards, Executive Vice President, Finance and Business Development, Chief Financial Officer; Dr. Scott Whitcup, Executive Vice President, Research and Development, Chief Scientific Officer; and Jim Barlow, Senior Vice President and Corporate Controller.

Before we move ahead, I would like to remind you that certain statements that we will make in this presentation are forward-looking statements. These forward-looking statements reflect Allergan's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting Allergan's businesses.

Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our second quarter 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 question-and-answer session of this call with a short listen-only segment, where we will provide additional miscellaneous information that relates to our business. Under Regulation FD, in order to be able to discuss this information freely during the quarter, we must be sure that it is in the public domain. This conference call and accompanying webcast are being simultaneously broadcast over the Internet, with replays available for one week. You can access this information on our website at www.allergan.com.

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

David Pyott

Great. Thank you, Jim. Good morning, ladies and gentlemen. With year-over-year growth in the second quarter of 10.1% in dollars and 9.3% in local currencies, it is apparent that the trend of recovery in our Cash Pay businesses continues around the world. Given European economic reports, we are pleased that we have not observed any recent negative growth trends across the quarter, even in the more challenged economies in the eurozone or in the U.K. We are pleased with the overall corporate performance as we have, so far, successfully mitigated the impact to generics of ALPHAGAN and ACULAR on the U.S. Ophthalmic business.

In addition to solid growth in developed economies, we enjoyed around 20% local currency sales growth in both Latin America and Asia-Pacific. We further expanded our presence in fast-growing emerging markets by the establishment of direct operations in Poland and Turkey on July 1.

Operating performance was strong with non-GAAP earnings per share at $0.85, marking a strong increase of 13.3% versus the result for Q2 of 2009, comfortably exceeding our expectations shared with the investment community at the end of April. The strong earnings growth was driven not only by good sales growth on a broad product front, but also by gross margin expansion in both Medical Devices and Pharmaceuticals and consciously offset by a strong increase for R&D of 16.3% year-over-year on a non-GAAP basis as we build the strength of our pipeline for the long term.

In the second quarter, we modestly increased our overall investment in direct-to-consumer advertising relative to Q2 of 2009, especially for RESTASIS. Since the last earnings call, we are pleased that we have achieved some notable regulatory approvals. BOTOX for the prophylactic of chronic migraine was approved in the U.K. The European Medicines Agency issued the license for OZURDEX for retinal vein occlusion, and the U.S. FDA approved ZYMAXID, our second-generation gatifloxacin. We furthermore strengthened our pipeline and our future urology portfolio by in-licensing Ser-120 for nocturia from Serenity Pharmaceuticals. Regarding the review of BOTOX for chronic migraine by the U.S. FDA, we have announced that the PDUFA date has been extended by three months as they complete their review of our file. In Europe, we filed BOTOX for chronic migraine with the European Medicines Agency through the Mutual Recognition Procedure.

Now commenting the outlook for the remainder of 2010. We are pleased that we continue to make good progress relative to the expectations we provided at the end of Q1 as we have increased the bottom end of the sales range and maintained the top end of the range, even as we face the impact of a stronger U.S. dollar relative to other principal currencies and absorb pricing pressure in Europe. As we analyze growth in the second half of the year, it is clear that we face tougher comparisons versus the quarters in 2009, especially in the Cash Pay businesses. We estimate the impact of increased rebates and lowered prices in Europe at approximately $30 million for 2010 and an incremental number of $30 million for 2011. It is to be noted that we'd already anticipated a substantial number for price reductions in our 2010 operating plan as this is a regular occurrence, unfortunately, in Europe.

Regarding the expectations for EPS, we're making no changes as we absorb the aforementioned items. As we prepare for the costs of U.S. healthcare reform and now European pricing pressures, it is our intention to drive further efficiency and productivity programs across all areas of the company as a way to pay for as much as we can of these expenses.

Turning to the performance of the individual businesses. I'll commence with Ophthalmic Pharmaceuticals, which showed a strong pattern of growth, increasing 9.8% in dollars and 9.2% in local currencies. This Q2 growth number is in line with the overall global year-over-year market growth of 10% reported by IMS Global for Q1, the last quarter for which data is available.

This is a commendable result, given that we're enduring the effect of the authorized generic of ALPHAGAN 0.15% and ACULAR generics in the United States. Our focus brands grew strongly expressed in local currency. RESTASIS increased a massive 26.8%. LUMIGAN, including GANFORT, by 12.4% with good performance from LUMIGAN and continued very significant growth from GANFORT. The ALPHAGAN family performs much better in Q2 relative to Q1, meaning year-over-year, declining only 0.2% with very strong growth with the newest brimonidine-containing products, that is ALPHAGAN 0.1% and COMBIGAN. Our strategy to defend the brimonidine franchise in the U.S. with ALPHAGAN 0.1% and COMBIGAN has continued to be successful. Seven months after launch of the authorized generic of 0.15%, we continue to hold more than 70% of the trailing prescriptions of all brimonidine-containing products.

Regarding the ketorolac franchise, ACUVAIL and branded ACULAR are enjoying just under 30% of the trailing prescriptions. In Europe, we are pleased with the progress of GANFORT, which is supported by a strong clinical data presented at the World Ophthalmology Congress in Berlin in terms of its clinical efficacy relative to other prostaglandin or prostamide combinations with timolol. GANFORT was approved in Turkey. Uptick of LUMIGAN 0.01% is excellent with limited cannibalization of the original LUMIGAN, with launches in France and Denmark expanding the presence from either to Germany, U.K., other parts of Scandinavia and Holland. Regarding LUMIGAN 0.01%, we continue our efforts to bring the file to a successful conclusion with the U.S. FDA.

In the Artificial Tears segment, we're further extending our worldwide leadership as our growth clearly outstrips the market growth of 7%. OPTIVE was approved in Austria, Switzerland, Egypt and Singapore. Furthermore, OPTIVE unit dose was added to the list of reimbursed products in Australia. With the issue of the OZURDEX license in Europe, we are rapidly moving to launch the product in Germany and the U.K.

Moving on to BOTOX. The pickup in sales continues at a comfortable level to that seen in Q1 on a local currency basis. In Q2, year-over-year growth was 7.0% in dollars and 5.8% in local currencies, with lower growth in the U.S. due to new competition, being offset by double-digit sales increases across the broad group of foreign country markets. These are precisely the markets where we've been successfully dealing with multiple botulinum toxin competitors for many years. On a global basis, we estimate that BOTOX enjoyed 80% market share in Q1 in a market that grew 15% year-over-year worldwide.

In the U.S., after upper limb spasticity FDA approval in March, we are observing an initial pickup in sales. Based on more than a decade of experience abroad, it takes time for new customers to learn how to inject BOTOX, for referral pathways to be developed and for doctors to integrate BOTOX into their spasticity clinics. We're also engaged in a national disease awareness campaign in cooperation with several patient groups, also supported with the well-known celebrity Henry Winkler acting as spokesperson. Impact to Dysport in the U.S. therapeutic market has been marginal. In Europe, given the states of government finances and funding pressures on national healthcare in many countries, we are pleased that the therapeutic market is growing double digit, and that BOTOX is almost holding its share as Xeomin enters several new countries.

Regarding the Aesthetic segment, we see the market growing double digit in all geographic regions. In the U.S., we estimate that year-over-year market growth accelerated from 9.5% in Q1 to 11% in Q2, even as the prior-year comparisons get tougher. Regarding Dysport market share, we believe that procedure share increased from 13% in Q1 to 18% in Q2, boosted by the so-called Love It or Leave It campaign, which is price-oriented. Since April, share gain has, however, been rather flat as we countered with various value coupons for patients across our whole product line.

Since May, we've also returned to category building with a print campaign called There's only one BOTOX. Regarding facial aesthetics, we're enjoying continuing very strong growth. In Q2, sales expanded 32.3% in dollars and 30.5% in local currencies, broadly at the same pace as in Q1. In Q1, we estimate that the market grew 24% year-over-year, with Allergan steadily gaining share in all regions of the world, except for Asia, where we only recently launched JUVÉDERM in several key markets and still have to secure approval in important markets such as Japan and China.

Worldwide, Allergan had, for the first time in Q1, the number one brand share in dermal fillers. The addition of lidocaine to JUVÉDERM has clearly improved patient experience and thereby, stimulated the market. TV and print advertising, both in the U.S. as well as in the U.K., France and Germany, coupled with PR campaigns, is building the market and leading to market share gains for us. The launch of VOLUMA in Canada and Australia is creating a new market segment for volumizing. JUVÉDERM XC and VOLUMA were recently launched in Mexico. Fortunately, we've just brought a new, more efficient production unit onstream at our sites in France to keep ahead of the surging demand.

For breast aesthetics, Q2 sales increased a strong 9.5% and 10.1% in local currencies, as all regions outside the U.S. grew strong double digit. Q2 growth relative to Q1 growth in local currencies was a little lower, impacted by the contractual effect of a buyback of inventory from our distributor in Australia as we prepare to go direct from September 1. In the U.S., we believe that we have observed the phenomenon of pent-up demand as we saw strong expansion in lower-cost salient products in the peak spring season, which is at the margin favored Mentor, as Mentor is relatively stronger than Allergan in the salient category. Pent-up demand has been unique to breast aesthetics versus our other aesthetic categories.

Regarding category analysis in Q1, we estimate that the market grew 19%, with Allergan growing in market at 17%. Regarding skin care, with most sales being in the U.S., sales increased year-over-year by 40.2% in dollars. ACZONE sales are growing very strongly as we gain share and given the small prior-year base. In-market sales growth of TAZORAC and AZELEX are modest. Year-over-year sales of LATISSE increased by 83.3% and increased sequentially from $18.8 million in Q1 to $23.9 million in Q2, in part thanks to a successful one-year anniversary promotion.

We're still rather encouraged by several insights from our battery of consumer and market research. Women love our product as it really works, which explains a very low discontinuation rate. Advertising and brand awareness is extremely high for a brand that has only been on the market for one and half years. We still have only penetrated about a quarter of our facial aesthetics users, so a large opportunity remains ahead of us. Use of Claire Danes as a second spokeswoman, in addition to Brooke Shields, provides us a connection to an additional, younger-user audience.

On the negative side, it is apparent that women have, in practice, learned to extend the use of the product to an average consumption of two to three bottles a year. In addition, we have consumer brands and illegal product that make unsubstantiated claims as they seek to capitalize on the category that we are creating. Such indirect competition has occurred in many markets in the past. Over time, it becomes apparent which product really works for the long term and which claims are backed by clinical evidence.

Over the course of the year, we have plans underway to fine-tune our marketing and product mix. Our investment in TV and print will continue unabated. LATISSE was approved in Canada, and we'll launch later this year.

Commenting urology. Sales of $15.6 million declined year-over-year 3.1%. On a year-to-date acquisition dollars basis, they are absolutely flat. With slowly improving shares in the urology specialty, we expect some modest improvement in performance during the remainder of the year. The next key event for this business, after securing FDA regulatory approval in 2011, is the launch of BOTOX for neurogenic overactive bladder.

Finally, regarding the obesity intervention product area, sales declined 6.6% in dollars and 7.5% in local currencies. The decline in sales in the U.S. was offset by an increase in sales in foreign markets. Regarding the U.S., it is now clear that the overall gastric band market is lagging in the timing of market recovery and is correlated to unemployment and consumer confidence. This is explicable as the out-of-pocket expense is the highest compared to any other product in our portfolio. Based on our market research, the Cash Pay segment of the market has declined enormously, with the Reimbursed segment remaining very stable. Within the overall bariatric market, we're encouraged that bands now have 50% share relative to gastric bypass and sleeve gastrectomy.

The share of LAP-BAND relative to Ethicon's REALIZE Band is now stable, with LAP-BAND share in May estimated at 74%. Outside the U.S., we had strong LAP-BAND performance in Canada and the U.K. and are pleased with the strong performance of our ORBERA Gastric Balloon in certain European markets, parts of Latin America and Australia. We're working to increase public awareness and recognition for gastric banding as a viable intervention tool, especially in the U.S. In order to address this goal for the long term, we filed LAP-BAND for a lower body mass index population with the FDA.

I'd now like to pass over to Jeff Edwards, who will comment on our financial performance and outlook for 2010.

Jeffrey Edwards

Thanks, David, and good morning to all of you on the call. During the second quarter of 2010, Allergan continued its positive trend and generated strong operating results, and we experienced good performance across each of our geographic regions and benefited from double-digit sales growth in both our Pharmaceutical and Medical Device businesses. Allergan was again able to overachieve our sales and earnings per share expectations despite increasing headwinds in currency markets versus prior year and the ongoing generic impact to our ALPHAGAN P 0.15% and the ACULAR brands. The depth and breadth of our businesses, as well as our strong competitive positions within our specialty areas, have enabled Allergan to generate non-GAAP diluted earnings per share for the second quarter of $0.85, coming in above the top end of our range of expectations and marking a 13.3% increase over 2009 results for the same quarter.

As has been the case on a consistent basis in the past, this strong second quarter earnings performance was generated even as we continue to invest into the current and future growth drivers of the business. A reconciliation of all of the adjustments to GAAP earnings is set out in the earnings release.

Excluding the effects of non-GAAP adjustment and amortization of acquired intangibles, Allergan's Q2 2010 gross margin of 84.5% increased 160 basis points when compared to prior year as Allergan saw strong improvement in its Pharmaceutical margins and very strong improvement in its Medical Device margins. This increase in gross margin was, again, driven primarily by improved year-over-year standard costs; favorable volume-based manufacturing variances; favorable inventory repricing; breasts being the biggest contributor, given our low-cost manufacturing base in Costa Rica; lower year-over-year inventory provisions; and lower royalty expense.

The non-GAAP selling, general and administrative expenses to product mix sales ratio for the second quarter was 40.1% as compared to a comparable ratio of 42.3% in Q1 2010 totaling $495 million, an increase of approximately $61 million over the second quarter of 2009 as we continued to implement targeted investments to further stimulate the positive growth trends observed in our Pharmaceutical and Cash Pay Aesthetic businesses. We continue to believe that the economic recovery will be somewhat slow and gradual and as such, we'll maintain our commitment and focus to managing Allergan's cost structure wisely to limit waste and direct our capital to the highest yielding investments.

Non-GAAP research and development expenses were 15.2% of product net sales for the quarter totaling $188 million, an increase in spend of approximately $26 million over the second quarter of 2009 and sequentially above the same level of spend for the first quarter of 2010 as we continue to fund new projects and invest into our promising Pharmaceutical and Medical Device pipelines. We anticipate that Allergan's quarterly investment into research and development will continue to increase on a sequential basis over the course of 2010.

Excluding the effects of non-GAAP adjustments, Allergan's second quarter operating income ratio increased by 320 basis points sequentially over the first quarter of 2010. This positive trend was a result of Allergan's ongoing commitment to focus on enhancing operational efficiencies through improvement of the company's cost structure, while maximizing investment returns. With respect to our balance sheet, consolidated Allergan days sales outstanding was 45 days, while consolidated Allergan inventory days on hand was 96 days. Each of these results represents improvements over prior-year Q2 results.

At the end of the second quarter, Allergan's cash and cash net of debt positions totaled to approximately $2.2 billion and $688 million, respectively. Allergan continued to maintain exceptional cash flow generation capabilities in the second quarter, with operating cash flow after capital expenditures of approximately $321 million. On a year-to-date basis, operating cash flow after capital expenditures totaled approximately $481 million, which compares to $422 million generated for the same period in 2009. These strong cash balances and broad access to liquidity allow Allergan to remain proactive with respect to ongoing pursuits of strategic acquisitions and licensing opportunities.

The first half of the year represented a strong beginning to 2010 for Allergan. As we move forward, Allergan's plan is to continue carefully monitoring each of our markets and manage business expenses and investment opportunities in an appropriate manner, with the goal of producing high-quality financial and operational results. Although we believe that markets have clearly stabilized and in many cases, shown signs of improvement, we understand that some continued caution is also prudent.

For the third quarter of 2010, Allergan estimates product net sales in the range of $1,130,000,000 to $1,180,000,000 and non-GAAP diluted earnings per share to be in the range of $0.75 to $0.77. Regarding full year expectations for 2010, since our first quarter earnings call, when we last provided estimates for full year sales, we have achieved better-than-expected sales performance in both our Pharmaceutical and Medical Device businesses.

During this same period, however, currency markets fluctuated, somewhat offsetting this improved business performance and creating an approximate $50 million headwind versus our thinking at the time. Taking into account the better-than-expected sales trends observed in the second quarter and the impact of negative foreign exchange movements, as well as some pricing pressures within the European markets, we are adjusting our full year sales expectations to between $4,620,000,000 and $4,750,000,000. Please note that we have raised the bottom end of our full year sales expectation and in spite of the currency and pricing pressures, have maintained the top end of our full year sales expectations provided on our previous earnings call.

Allergan's expectations for full year non-GAAP diluted earnings per share remains unchanged between $3.11 and $3.15, which represents growth of between 12% and 13%. As a reminder, these expectations assume that the U.S. R&D tax credit will be renewed in the fourth quarter for this year, with full year retroactive benefit impacting Q4 results. For your information, expectation for other lines of income statement and specific product sales expectations are included with our earnings release.

We are pleased with the strong operating performance achieved in the second quarter across our broad base of business and geographic regions. We will strive to continue to build on this momentum and effectively execute against our business strategies, further strengthening Allergan as a leader in our selected medical specialty markets.

With that, operator, I'd like now to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] It comes from Marc Goodman, UBS.

Marc Goodman - UBS Investment Bank

Could you talk a little bit more about the migraine filing and what the FDA is kind of giving you as far as feedback with respect to efficacy? We see the REMS. Obviously, if it's just REMS, three months is probably enough or maybe it's an extra month to take care of it. But as far as the efficacy, have there been a pretty good dialogue with respect to that and CMC issues and safety? I mean, can we feel pretty comfortable about all the other issues?

Scott Whitcup

Marc, this is Scott, just a comment. As we said from the last call have been pretty consistent. The review's been ongoing, and we don't really make specific comments on individual items in the review other than it's been an interactive process, and the current focus has been on the REMS program. So what you saw in the press release was that FDA asked us to update the REMS with three specific things: one, was to update the Medication Guide to include a chronic migraine indication; two, to provide details on physician training for chronic migraine; and then three, detail a communication plan, which includes a dear healthcare practitioner letter informing them of the chronic migraine indication. Once that was refiled, they told us that this was considered a major amendment and to review it, they extended the user fee date by three months. But that review is focused on the REMS.

Marc Goodman - UBS Investment Bank

And just one follow-up question on a different area, which is the Cosmetic BOTOX [BOTOX Cosmetic] versus Dysport. David, can you just give us a flavor for the past couple of months, what extra couponing, and what's really changed? You said you've changed your value coupons to help offset what's been happening. Can you give us a little more color there?

David Pyott

Well, I think, clearly, we understand there's sort of two elements here. One is defending our market position, and the other one is how do we grow categories? And clearly, we have the benefit now that we are the market leader in dermal fillers. We're creating the eye lash category and of course, we're by far and away, the originator or leader in BOTOX. So we can basically offer, if you like, value coupons on one product linking to others because clearly, there's a real benefit from consumers if, say, they start with BOTOX, they can then go to fillers next or in reverse. And as I stated on my LATISSE commentary, still, if we use BOTOX as the kind of the gold standard, the first product that created the medical aesthetics category, only 25% of Botox users use LATISSE. So as a marketing person, I see that as a huge upside. It's just a question of how do we specifically talk to those people to bring them into the category. You can see lots of, let's call it, both defensive and offensive strategies in place to manage our complete portfolio.

Marc Goodman - UBS Investment Bank

But it's fair to say you got a little more aggressive in the past few months?

David Pyott

Not really. I would say very much the same kind of cadence as we had maybe a full year ago. And at that time, we clearly saw the feedback of the coupons actually brought people back into the market, stimulated earlier use. And you remember well the issue of people stretching our treatments. So we were able to start pulling that time zone in again through stimulation, through deals basically. And that exists in tons of consumer categories.

Operator

Randy Stanicky, Goldman Sachs.

Randall Stanicky - Goldman Sachs Group Inc.

Just a follow-up on BOTOX migraine. Given the update today, how do we think about any revenue contribution and maybe in the 2010 numbers? And then maybe more specifically on the cost side, how should we think about the build out there for many sales force needs related to a potential approval?

David Pyott

Well, first of all, given the extension by another three months, it's clear there isn't much of the year left. And so given also what I said on spasticity, this isn't the kind of category where you make product available day one and people in masks start injecting day two or three. It's just not like that. You need to go out and train people appropriately, and then they have to start incorporating the product into their practice. So analogous to what I said on spasticity headache in terms of new users, new doctors will be relatively slow. Although one would imagine there will be a lot written in the press, given the huge interest and the huge unmet medical need in this condition. So that kind of covers the issue of revenue, very modest if we look at the United States. U.K., not the biggest market in the world, but not the smallest either. In terms of costs, we are very pleased with the structure we have in the United States, so in terms of sales force, it's there. Obviously, we need to spend some more money to increase awareness of the treatment, and also we need to spend money on training. In Europe, they're slightly different in that our base therapeutic sales force was smaller. Therefore, we need to expand it on a percentage basis slightly more. But at the end of the day, these are not numbers that will be visible through our SG&A spending worldwide. When we have such a base of spending hypothetically, it's not the right number. But if it was $10 million, you wouldn't really notice it.

Randall Stanicky - Goldman Sachs Group Inc.

And then, David, you wouldn't expect any reimbursement issues around approval either here or U.K. or other geographies, is that fair to say?

David Pyott

Well, always with BOTOX, we're fortunate that the therapeutic category per se is reimbursed, and then it goes right down into the issues of each country. For instance, say Germany, you've got to talk to all the different major sickness funds. In the U.K., always the question is, "Do you have to go to NICE for a review?" And in any case, the U.K. is always very slow in terms of addition of any drug to formularies. So we know this all the way from glaucoma, all the way now through to migraine. It's the same pattern every single time. And then, of course, as I remarked, we've now filed for pan-European approval through the mutual recognition procedure, so U.K. done. Now we have another 22 countries to lock down.

Operator

Larry Biegelsen, Wells Fargo.

Larry Biegelsen - Wells Fargo Securities, LLC

If the FDA asked for a follow-up trial for migraine, would it be known at this point in the review process?

Scott Whitcup

This is Scott. Usually, there are not requests for additional trials till the clinical review's complete, so I think it would be atypical that you'd be told up front of additional requirements until the review are complete.

Larry Biegelsen - Wells Fargo Securities, LLC

And then second, Xeomin was approved today in the U.S. for therapeutic use. Could you give us some color on how that product has performed outside the United States, in Europe and Canada, please?

David Pyott

Right. I'll take that one. If you look at all the therapeutic markets, market share change is very slow. You could say that actually for aesthetics, too, but even slower in therapeutics. If we look at close to home, Dysport only has a couple of share points after almost a year, and some of that share is actually free samples, and of course, we all know at some point, you've got to stop giving things away. You've got to actually sell them, which is a much tougher proposition. If we look at Canada, even say Quebec, which is always the first province to reimburse for all drug categories, negligible share for Xeomin. It's, I think -- I mean the numbers are so small, measuring a point, but we think it's 2%. If we look at Europe, really, the only share position that is multiple is in Germany, which is the first market for Xeomin, also the home market of Merz. Outside Germany, rather small shares. So I think looking back to the U.S. market, clearly, they'll gain something, but I would imagine it will fairly modest in the therapeutic category.

Operator

Gregg Gilbert, Bank of America.

Gregory Gilbert - BofA Merrill Lynch

Two bigger picture ones for you, David. First, I think you're still in the Ophthalmology business, so I was hoping you could comment on how you expect your Ophthalmology business to weather payer pressure in generic Xalatan in the U.S. before you get to some of the sexier launches a few years from now in your Ophthalmology category? And the second question is not specific to Ophthalmology, but aside from the SG&A ratios that we've been discussing for a long time now, can you comment on whether you think the commercial model for Allergan has already largely been optimized to reflect the current world or do you think we could see some significant structural changes in the years ahead?

David Pyott

Well, I'm always delighted to talk about Ophthalmology, that mysterious half of our business that we don't get so many questions on. I'm rather pleased, as I covered in my opening remarks, that despite, for the first time really in 12 years, having to face generics, growing almost in line with the worldwide market of ophthalmology is pretty good while we have to go through that, let's call it, the 12-month phenomenon of post-launch of the generic where you unfortunately get really pushed down, and then it kind of laps itself out, and then you can start recovering off that lower base, so pretty pleased with that. Really, as one could well imagine, the U.S. is growing a little bit thanks to RESTASIS, which is growing like a freight train and then a lot of good growth overseas. Answering your second question, with the prospect for generic latanoprost or generic sort of Xalatan from March, April of next year, we've done a lot of work on this, and the more we do, we can't say there'll be a zero effect on LUMIGAN, but we think it's going to be relatively marginal. So we took [ph] (44:05) rather confident with that given our managed care team isn't just looking at the ceiling. They're out there talking to all the customers on a very, very consistent basis and also are in the process of negotiating the contracts for 2011 already. Second question you had was on SG&A. I certainly pointed to us looking for ways to offset European pricing pressures and the cost of U.S. health care reform, and that goes right across the company whether it's greater efficiency in R&D where we have some really good programs in place that when I see those trends, I don't need to be an optimist to believe it will continue, same coming back to sales and marketing. I think we have very good deployment models. Really, where we're adding people is in particular the emerging markets. That has the greatest rate of increase and then very much at the margin, say, in Europe, where I referenced modest increase in the number of representatives for migraine. And clearly, we need to add some and have already started for the launch of OZURDEX for retina, a highly specialized area with various specialized people. So I would certainly, in conclusion, say that we will look to further fine-tuning SG&A, which is really all about the S part, selling and marketing, and it is our absolute goal in the next couple of years to start bringing down that ratio as we've said for a long time and then marginally increase in percentage R&D because it's all about growing, well, creating the pipeline for the long term.

Operator

David Maris, Crédit Agricole.

David Maris - Credit Agricole Securities (USA) Inc.

On the approval of BOTOX and migraine in the U.K., for the patient population that the label's for 15 or more headaches a month eight of which are migraine, is that the same target population or the same subsegment that you're hoping for in the U.S.?

David Pyott

Yes, maybe from a marketing point of view, yes, exactly the same data set was used in the U.K. as was used in the U.S. It's a worldwide file, and therefore, barring what I'd call literary differences to the label, one would assume the patient population will be exactly the same, and then it's just the idiosyncrasies of a U.K. label versus a U.S. label to, down the road, a Canadian label, an Australian label and so on, which are just related to the mores of each local regulatory authority.

David Maris - Credit Agricole Securities (USA) Inc.

And my second question's on the pipeline. One, I don't really care about, but can you tell us about LUMIGAN and hair growth, where that is? And the other is on BOTOX and OAB, what the next data that we'll see.

Scott Whitcup

So with LUMIGAN and hair growth, that's a fully funded program, but still, the formulation for hair growth on the scalp is very different than a formulation to get it into eyelid skin. So we're going through the formulations. We should have those ticked as our first milestone and then hope to get into patients some time next year with our initial study.

David Pyott

BOTOX...

Scott Whitcup

And in terms of BOTOX, OAB, we have two programs. One is the neurogenic overactive bladder, that's our most advanced program, which finished Phase III, and we still are on target to file a supplemental BLA to FDA this year, and probably the next data will be next year at one of the urology meetings. You'll have visibility to those Phase III data. The Phase's II in the idiopathic OAB are ongoing, going well and it'll be a while before you'll see those data.

Operator

Corey Davis, Jefferies.

Corey Davis - Jefferies & Company, Inc.

I don't think the FDA's ever had a panel for any of the toxins, but do you think there's a chance that this pushout in the PDUFA results in an advisory panel once they have all the information they want or is precedent a good predictor of the future?

Scott Whitcup

Yes, this is Scott. I would say that it would be rare for a advisory committee to be called after an extension of user fee date for a fairly short period of time. So again, they only extended it three months. So I never say never because you can't 100% ever predict what regulatory agencies would do, but I would say it would be unlikely.

Corey Davis - Jefferies & Company, Inc.

Then secondly, managed care seems to be using a heavy hand these days to have a big impact on slowing the rate of new drug launches, and their default seems to be no, no, no until they're almost forced to embrace a new product launch. So how does the migraine indication for BOTOX fit into that? Does it fit into that, or the fact that they've already been used to receiving requests for that mean that they might embrace this new indication a little more quickly than we're seeing on other new products coming to market?

David Pyott

I think I would answer that in sort of three ways. First of all, clearly, this is a very severely impacted populations, so huge medical need, which any medical director of a managed care organization would recognize, so clearly, need. Second, let's call it just pure economics. Managed care knows that this very severe population frequently end up in the emergency room, and a visit probably costs somewhere between $4,000 and $5,000. So if they can avoid just one emergency room visit, they've already played the monopoly game in terms of passing go and collecting money. So I think in all our contracts with managed care, they realize there's a real economic benefit from avoidance of emergency room visits. And then thirdly is the issue of drug sparing where a few years ago, the math was a little simpler because at that time, TOPAMAX was not generic. None of the triptanes were generic. So now it gets more complicated to do the math. Are we talking of sparing a generic drug or sparing of a high-cost innovator drug? But still, you can look through averages and realize that there is money to be saved there. So net-net, I would say, Corey, managed care will actually be interested in this even from an economic point of view. Therefore, I do not see any major blockages being put in because, clearly, people that have 15 headache days per month in their history, they have a whole medical file. And it's quite clear, people who are milder can be weeded out very quickly for being inappropriate.

Scott Whitcup

And Corey, the one thing that I'll add to it what David said is we were very proactive in the Phase III programs to ensure that we had the right quality of life, health economics data incorporated into the trial, and managed care is really focused a lot now on good, randomized controlled data. They've raised the bar as well, and so we think we have the data set to give them what they need.

Operator

Ken Cacciatore, Cowen and Company.

Ken Cacciatore - Cowen and Company, LLC

A question on the internal discussions on whether or not to co-promote migraine. I don't know if that's too premature. Those discussions kind of internally are going on, and as well, have you been approached by anyone, any companies on the outside about a potential co-promote in migraine, so some thoughts there? Then as well, Scott, on the neurogenic overactive bladder, is there any thoughts to maybe even just releasing top line results at the time of filing or do we have to wait for the conferences?

David Pyott

I'll take the first one in terms of headache and co-promote. Clearly, as always with BOTOX, the first step is to build BOTOX in academic medical centers in the specialty. There's a lot of knowledge required, there's injection training required, and I think it will be way down the road once neurologists have really discovered how to use this product in clinical practice before one would be going out into a broader population of, say, GPs or family practitioners, so we have time. We think about it, but we've got time to have those thoughts and also conduct those conversations.

Scott Whitcup

And Ken, in terms of top line, there are preferred procedures always to have more data presented to release the key findings either in a manuscript or the scientific meetings, so that physicians get a little bit more than the sentence or two because they tend to be then approached by patients what this means and often times, from a press release, they can't do that. So probably won't see top line results at the time of filing, but it'd be unlikely that we would move ahead and file if the data were, which hope negative [indiscernible] (45:35). My guess is you'll have to wait until we presented it at probably one of the first urology early next year.

Operator

Ronny Gal, Bernstein.

Ronny Gal - Bernstein Research

First, guys, a question about the margin expansion derived from buying your distribution channels overseas. Dollar for dollar, what is the difference in operating profit that you generate over in margin, you generate from selling something on your realm versus having a distributor? And obviously, difference from first from country to country, but if you can use one of the countries as an example, that will be great. And second, the obligatory migraine question, we know that you have patent protections in the United States for a few years, but can you describe the patent situation on the migraine indication in a major European country and Japan?

David Pyott

First of all on margin expansion. Clearly, we have a boost in gross margin given that we'd be selling to a distributor at a lower price because they're paying for the sales and marketing expenditures, so clearly, boost to gross margin, increase in sales costs or marketing costs, and then it really depends on the scale of the operation. I would say certainly in the most recent two, Turkey and Poland, together, they're well over $100 million. So there we have scale. If I think of Turkey, whereby -- clearly the market leader in ophthalmology, so there's a nice, if you like, cascade all the way through to net margin or operating profit, pretax. But in general, [Audio Gap], ones like Poland and Turkey, they're, if you like, net profit generators off the bat.

Scott Whitcup

Yes, in terms of your second question, we have not commented on specific patents regarding indications other than that we do aggressively file and acquire patents to protect most of our major indications. The other piece of this is that an equal barrier to entry is just doing all the clinical trials to get the indication. As you know, we've been working on this for quite a while, not only getting the right dose and the paradigm, but the right investigators and how to conduct the trial is all critical to our success. I think that will be a big barrier to someone else coming in with a chronic migraine indication years and years down the line.

David Pyott

Yes, and I think if we look at Europe in specific, governments would be very leery of paying for a drug where there's no randomized clinical data available, and really, there's no motivation for physicians to run the gauntlet, if you like, of those reimbursement hurdles when, hopefully soon because we're just filing, our drug is actually approved for the use that there's no motivation there at all that I can see.

Operator

Steve Willoughby, Cleveland Research.

Stephen Willoughby - Cleveland Research Company

Jeff, first, if you could talk about -- here in the second quarter, you beat your earnings guidance by $0.04 for maintaining the full year. I know there were some comments on pricing pressure in Europe. I just wanted to see if there is anything else in there. And then second maybe for David, have your thoughts on the long-term potential of LATISSE changed at all?

Jeffrey Edwards

So yes, I think you pretty much nailed it. In terms of guidance, there's a few things to think about. Number one, there's still some uncertainty out there with respect to the economy. I made comments during my talk about some improvement, some stability, albeit limited, so we're watching over that with great care. If you think about Europe and Europe pricing, of course, that's something we've chatted about as well. And then you've seen the dollar strengthening that, of course, has some rather substantial impact on us. We're going to manage that. Certainly, on the top line, we talked about our guidance there, and obviously, we're well aware of how it'll impact our bottom line. So those are really the three principal drivers to our decision to hold guidance as is.

David Pyott

Secondly, on LATISSE, clearly, we brought down the outlook for this year, which is mainly a U.S. sales number. I think you can probably tell from my script and my remarks that I think the biggest single driver is women discovering how to use the product more sparingly. Certainly, the practice is quite different than what is in the clinical study and the label. So the good and bad news about that is that it's much cheaper for consumers than they initially thought, and I'm sure physicians by now have worked that out as well, and so it's more accessible. The bad news is in the short term, we now need more ladies to get to the same $100 million or $140 million number that we originally planned. I think then when you look around the world, of course, there's lots of different regulatory situations in different markets. As I reflect upon LATISSE, it's like so many other things I've done in my career. When you create a new category, at the beginning, you think you know a lot, and then you discover all the things you didn't know. This is the great journey of creating a market. But the good news is the product really works. Women really like long eyelashes, and so we just have to keep working and discovering what the answers are to various matters and just keep building this category, and it will be a very major product in Allergan's portfolio.

Operator

Frank Pinkerton, SunTrust.

Frank Pinkerton - SunTrust Robinson Humphrey Capital Markets

The first one, David, if you don't mind, can you just talk to us maybe over the next maybe three to five years, what's the plan on building out the obesity effort? Good start with LAP-BAND, but a lot of talk on drugs and other things, and what's Allergan's plan there on building that out? And then secondarily, Jeff, can you just confirm that you said R&D absolute spending is up quarter-over-quarter as opposed to R&D as a percentage of sales? And the given what FX is going to do, does that mean we're looking at a contracting operating margin?

David Pyott

Maybe quickly on R&D, in my opening remarks, I stated on a non-GAAP basis, so this is apple-to-apple. R&D spend was up 16%. That was very much the plan. You probably recollect last year that we were in a kind of changing of the guards because we had finished some big trials. We're about to start new ones and, of course, that was in the depth of the recession. And Scott and I, we're being very careful not to get ahead of ourselves in the early part of the year. And by the time, June, July came along of 2009, then saying to Scott, okay, now, really start spending quickly. R&D isn't like that. It takes three, four, five, six months to really start spending in an intelligent meaningful way. Now coming back around on obesity, I'm absolutely convinced that there's enormous amount of positive work to be done for LAP-BAND. As I commented, the market of course has been fragile for the last two years. I think it's a matter of waiting and preparing just as the market starts to recover. You should see us really stepping up our efforts, both through public awareness campaigns. I think an awful lot of work has to be done with employers and payers. We have a great data in terms of health economics. You commented indirect competition. I'm personally very skeptical about drugs for obesity. The hurdle for approval is extremely high as you've seen on many different occasions, not just with FDA but also the European agencies. Unfortunately, even once approved, many of these drugs have some quite awkward side effects in terms of people's ability to tolerate them. Then the next sort of chapter would be further innovation from us. Obviously, we'll look to continuing improving LAP-BAND over time, but then we have the ORBERA Gastric Balloon that I commented. And then we also look at other intragastric devices: when might they come to market, what is interesting, and we track all of those technologies very carefully, deciding whether we'd want to purchase them or license them or distribute them. But they must -- it depends on what it is and what the economics might be.

Operator

That'll come from David Buck, Buckingham Research Group.

David Buck - Buckingham Research

Just a couple of quick financial ones for Jeff and just a follow-up for Scott on the migraine indication. First, Jeff, you talked about an incremental $30 million in Europe for next year in terms of pricing and reimbursement. Could you talk about what that assumption is? Is it just an annualization of this year's number? And looking at the spend in R&D for this year, are we expecting a similar ramp in 2011? And then for Scott, can you just clarify -- from your response, it sounds like you haven't yet heard on the whether or not you'd actually have another trial required. Is that. . .

Jeffrey Edwards

On the first one, Europe pricing, your assumption is correct. There's the year-over-year effect. And then every year, we anticipate impacts to pricing in Europe. It's an ordinary part of our process. We expect it on an annual basis. So two fronts: A, the regular decrease that we anticipate; and B, the carryover effect from 2010 to 2011. With respect to R&D in 2011, we're not providing guidance for 2011 yet. We'll provide guidance at some point in January for you.

David Pyott

But I already remarked, to answer one of the prior questions, very much the intention to keep ramping up R&D directionally. It's all about the long term, how Allergan even, lets say, five years from now, we can still be talking about a very strong pipeline. That is the goal.

Scott Whitcup

And then David to your last question, so we've commented that we've had an interactive review with the agency. Recently, the written communication focused only on REMS and that the extension of PDUFA date again was to review the changes that we have made. You wouldn't expect to hear anything until the review is complete.

David Buck - Buckingham Research

So simply put, you essentially don't know whether or not you need another trial. Is that correct?

Scott Whitcup

Until you get your final letter from the FDA, which hopefully will be an approval, but could be a completely response. You really just don't know. It's not atypical that we should have heard or not heard something. And again, the recent interaction has been focused on the updating the REMS for the chronic migraine indication.

David Buck - Buckingham Research

And the new PDUFA date would be some time in October. Is that correct?

Scott Whitcup

It's three months from where it was, and we haven't commented on the exact PDUFA date.

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 estimate based upon the best available sources of data such as IMS as well as Allergan's internal estimates. The market price, share and growth rate information is a moving annual total or trailing 12 months as of the end of March of 2010 except where noted as year-to-date through March 2010. The market for ophthalmics is approximately $15 billion, growing at a rate of 12%, and Allergan's market share is increasing [indiscernible] (1:07:40). The year-to-date market growth is 10%, and year-to-date, Allergan's share is 16%. The market for glaucoma approximates $5.4 billion, growing at a rate of 7%, and Allergan's market share approximates 19%. Year-to-date, the market growth is 6%. Year-to-date, Allergan's share is 19%.

The market for ocular allergy approximates $1.3 billion, growing at a rate of 2%. Allergan's market share approximates 4%. Year-to-date, the market growth is actually declining 11%. Year-to-date, Allergan's share is 4%. The plain ocular anti-infective market is roughly $1.2 billion, growing at a rate of 10%. Allergan's share is 11%. Year-to-date, the market growth is 13%. Year-to-date, Allergan's share is 11%.

The market for ophthalmic nonsteroidal anti-inflammatories is about $480 million, growing at a rate of 13%. Allergan's market share is 30%. Year-to-date, the market is declining 2%. Year-to-date, Allergan's share is 20%.

The artificial tears market inclusive ointments is approximately $1.4 billion, growing at a rate of 8%. Allergan's share is 21%. Year-to-date, the market growth is 7%. Year-to-date, Allergan's share is 21%.

The U.S. topical market for acne and psoriasis is roughly $2 billion, and the annual growth rate is 13%, and Allergan's share is roughly 8%. Year-to-date, that market growth is 8%, and year-to-date, Allergan's share is 8%.

The top 10 markets for neuromodulators was roughly $1.4 billion, growing at a rate of roughly 4%, and BOTOX has approximately an 88% market share. Year-to-date, that market growth is 9%, and year-to-date, BOTOX's share is 87%. The worldwide market for neuromodulators is roughly $1.7 billion, growing at a rate of roughly 7%. BOTOX has approximately an 80% market share. Year-to-date, the market growth is roughly 15%, and year-to-date, BOTOX's share is 80%.

The worldwide market for dermal facial fillers is roughly $680 million, growing at a rate of roughly 2%. Allergan has approximately a 35% market share. Year-to-date, the market growth is roughly 24%. Year-to-date, Allergan's share is about 36%. The U.S. market for dermal facial fillers is roughly $280 million.

The worldwide breast aesthetics market, aesthetic and reconstructive, is roughly $800 million, growing at a rate of roughly 1%, and Allergan has approximately a 37% market share. Year-to-date market growth is roughly 19%, and year-to-date, Allergan's share is about 37%.

The worldwide bariatric surgery market, the Band and Balloon segments only, is roughly $370 million. That's declining at a rate of roughly 4%. Allergan has approximately a 59% market share. Year-to-date, market growth is about 6%, and year-to-date, Allergan's share is about 68%. That concludes our call. Thank you.

Operator

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

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Source: Allergan Q2 2010 Earnings Call Transcript
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