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Allergan Inc. (NYSE:AGN)

Conference Call Regarding Valeant's Proposal

May 12, 2014, 08:30 AM ET

Executives

Jim Hindman - SVP, Treasury, Risk and IR

David E.I. Pyott - Chairman and CEO

Jeffrey L. Edwards - EVP, Finance and Business Development and CFO

Analysts

Ken Cacciatore - Cowen and Company

Aaron (Ronny) Gal - Bernstein Research

David Maris - BMO Capital Markets

Larry Biegelsen – Wells Fargo

Seamus Fernandez - Leerink Swann LLC

Liav Abraham - Citibank

Marc Goodman – UBS

David Risinger - Morgan Stanley

Vamil Divan - Credit Suisse

David Buck - Buckingham Research Group

Shibani Malhotra - Sterne Agee

David Amsellem - Piper Jaffray & Company

Annabel Samimy - Stifel Nicolaus

Andrew Finkelstein - Susquehanna Financial Group

Operator

Hello, welcome to the Allergan Conference Call. Following today’s presentation there will be a formal question-and-answer session. (Operator Instructions). At the request of the company today’s conference is been recorded. If anyone has any objections you may disconnect at this time. I would like to introduce today’s conference host Mr. Jim Hindman, Senior Vice President Treasury Risk and Investor Relations. Sir, you may begin.

Jim Hindman

Thank you, Jill. Good morning. Thank you for joining us on such short notice. With me for today’s conference call is David Pyott, Chairman of the Board and Chief Executive Officer and Jeff Edwards, Executive Vice President, Finance and Business Development and Chief Financial Officer.

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. 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 statement to be made in this conference call and webcast we refer you to the disclaimer regarding forward-looking statements that is included in the presentation accompanying this conference call, which is available on our website, www.allergan.com as well as our filings with the SEC referenced in that disclaimer.

This conference call and the accompanying webcast are being simultaneously broadcast over the Internet with replays available for one week. You can access this information along with a copy of the presentation that will be referenced on our website at www.allergan.com.

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

David E.I. Pyott

Good morning. Thank you for joining us today. As you saw in the press release we issued earlier this morning Allergan’s Board of Directors has unanimously rejected the unsolicited proposal announced by Valeant Pharmaceuticals on April 22 of this year. Allergan’s Board thoroughly reviewed Valeant’s unsolicited proposal in consultation with our financial and legal advisors and concluded that the proposal substantially undervalues Allergan, and creates significant risks and uncertainties for our stockholders and is not in the best interest of the company and its stockholders. Allergan has a long history of producing consistent growth and delivering solid results through a combination of innovation, execution and discipline.

Valeant’s proposal substantially undervalues Allergan’s leading market positions, sales and marketing foundation, industry leading research and development efforts as well as future revenue and earnings growth. The Board is confident that our plan will create significantly more value than Valeant’s proposal.

The Board also has concerns regarding the sustainability of the Valeant business model and therefore the value inherent in its stock. Furthermore it is the Board’s belief that the Allergan management team is best equipped to deliver this value and our track record speaks for itself.

If you now turn to slide four, assuming that many of you are on the Internet with the slide presentation up. So on slide four this provides an overview of Allergan now and in the future. Allergan is the premier specialty pharmaceuticals company with a strong track record of innovation and execution. We own the number one or number two positions in high growth markets and are pursuing a targeted expansion into high value geographies and specialty areas. We have taken advantage of the market dislocation and weakening competitors to excel in our industry.

Our success stems from our innovation in products and marketing. We have unparalleled R&D efforts and a sophisticated sales and marketing infrastructure, which has been key to our continued growth. Moving forward we believe we are best positioned to thrive and have a management team and Board that are capable of accelerating this growth and driving innovation and value well into the future.

Now turning to slide five. Based on the tremendous momentum we see in the business and our recent work to optimize operations we believe it’s important to give an updated view of guidance, to clarify what we can do in the future and why we are confident that we can deliver more value than the Valeant proposal. Importantly this process began approximately nine months ago when Doug Ingram was appointed President. At that time our Board and management teams started discussions to review our strategic plan and how we could do even more to enhance value. In particular Doug was mandated with the task of determining how to better leverage our existing infrastructure in promotion sales and marketing to improve margins.

Thanks to our strong performance in 2013 and our even stronger performance so far this year we have great momentum in our businesses and greater confidence in our expected performance for the remainder of 2014 and into 2015. As you all know just last week we announced exceptional first quarter results, exceeding our first quarter guidance and raising our outlook for 2014 year-over-year earnings per share growth to 18% to 20%. Usually, we don't give one year forward guidance but given our updated view of the strategic plan that has been endorsed by our Board, we now feel comfortable providing additional guidance for the year 2015.

For the year 2015 we expect to generate double digit revenue growth and EPS growth in the range of 20% to 25% from 2014 guidance. Beyond 2015 we believe we will grow revenue in the double digits and now think given the critical mass that we built over the last several years we can achieve EPS growth of 20% on a compound annual basis over the next five years. The reason we are confident that we can achieve this earnings growth is because of the many products coming on line in the years to come that are in existing therapeutic areas where we already have fully developed promotion sales and market infrastructure not only in the U.S, but also around the world.

We are leveraging years of investment in our promotion sales and marketing as well as our R&D franchises. Based on the strong foundations we built we can improve profitability, maintain the 20% EPS CAGR over the next five years.

Now moving onto slide seven, and that’s the introduction onto slight eight. Allergan is a global market leader in key specialty areas. We are proud of our 60 year heritage and our history of innovation, Allergan is a global market leader in key specialty areas and that is core, a company that consistently delivers solid results. We are the number one or number two players in each of our therapeutic areas thanks to our track record of innovation.

Our markets enjoy strong growth and continuing growth potential as we address the therapeutic needs of an ageing world population. But in addition aesthetically we would like to maintain a youthful appearance. These market positions combined with our presence in all continents of the world and considerable investment in R&D ensures that we will continue our impressive track record.

Moving over to slide nine, over the 15 years I've been CEO, I've seen accelerated periods of growth. The first was when I joined due to innovation in products and streamlining of operations. The second was in connection with the Inamed acquisition and the creation of a portfolio of products. The third period of acceleration is now, during which we are able to accelerate revenue growth after many global regulatory approvals and also leverage our existing infrastructure and critical mass to drive future growth.

Financially we have achieved mid-teens sales growth on a compounded annual basis over the past 15 years with strong year-over-year earnings growth as well. Our EPS overtime shows that we've grown consistently and for the past few years has been in the mid-teens. As we look forward we expect to grow EPS at a 20% CAGR over the next five years. Commercially, we have benefited from a broad and balanced portfolio of products that are market leaders in several important and growing categories. And scientifically we continue to deliver on our promising pipeline.

We have also been able to capitalize on the dislocation and distraction among competitors in our markets due to either a recent acquisition, change in ownership or lack of investment in the business. As we will show through this presentation these are significant results and they matter. They demonstrate Allergan's winning formula for achieving consistent growth, despite A challenging business AND healthcare environment. They illustrate the value of rooting our success in strong and durable relationships with our customers and they point to a promising future.

Results matter to the many people who have a stake in Allergan; our customers, our patients, employees, partners and most importantly our stockholders.

Moving on to slide 10, the building of these specialty franchises over time had led to continued outperformance and significant shareholder value creation. Since 1998 there has been a 2000% share price appreciation in Allergan's stock compared to the S&P which only had a 94% appreciation over that same time period. At the bottom of the chart you can see we have a strong track record of beating company guidance. Under the direction of this management team we’ve delivered massive growth and value creation.

Now turning to page 11 initially and then 12; as slide 11 shows Allergan had a much smaller footprint nearly 15 years ago with just three pillars in ophthalmic, medical dermatology and neurology. In the past 15 years effective investments in R&D have led to tremendous innovation, leading to the creation of two new pillars; medical aesthetics and urologics.

In addition the other pillars that existed 15 years ago have been built up significantly with new products you can see this on chart 12. This is the result of smart R&D spending, building new markets in aesthetics, urology and neurology and expanding existing markets to become a leader. We’ve accomplished this by bringing new products to the market, and by building market leadership positions consistently over the years. These investments combined with extreme discipline have allowed us to build a strong franchise we have today as you can see on slide 12.

Now skipping over 13 to 14, this is Allergan today. You can see the large continuously growing markets that we are operate in including ophthalmology where we have decades of experience in innovation and new product developments and we continue to gain market share. The neuromodulator market is one we’ve essentially created. Most of the sales in the market are due to new indications for BOTOX that we’ve discovered and brought to regulatory approval. Aesthetics is growing to healthy rates as well. This is where it's most evident that we are taking advantage of the dislocation in the market and enhancing our product offering.

On slide 15 our focus and commitment results in leading market share positions. We are the number two player in ophthalmics and rapidly growing. Since Novartis acquired Alcon they reduced investments causing sales to slow. Now Alcon's growth is significantly less than Allergan's. Alcon also has a weak pipeline pharmaceutical pipeline. In addition large cap pharma is exiting the ophthalmic market. In fact Pfizer sales have decreased significantly. Our product innovation and our competitor's distractions in their respective businesses have allowed us to grow market share.

In neuromodulators Allergan created this market. Allergan has always been a number one player and even with competitors entering we still have a commanding market share position. In fillers we’ve been number one since 2009 and we continue to accelerate our growth and market share gains. We know what customers want, we have the broadest offering and continue to gain share of a growing market. In breast aesthetics when Johnson & Johnson acquired Mentor we acquired the number one position.

Now moving on to slide 16, this demonstrates an important point of distinction for Allergan that we believe has been critical to our growth efforts and future prospects. We put our customers first and we believe our ability to continuously gain market share is a direct result of our focus on our customers, physicians and their patients. We know how to execute direct to consumer advertising well, and have used it to great success to launch new products, create new categories as we raise patient awareness and build high quality brands.

In addition we thoroughly understand what patients want and need, facilitate access to our medicines and optimize their treatments for best results, to put a focus on physician's execution and hands on training and then help them get reimbursement. This customer-focused approach runs completely counter to Valeant's strategy and we question how Valeant could maintain Allergan's growth especially considering the huge level of cost cuts that Valeant is proposing.

On slide 17 you can see that our approach to sales and marketing really differentiates Allergan from our competitors, and is one of the factors for our sustained significant growth. Our sales model is different, builds value for customers and goes far beyond classical pharmaceutical detailing.

We've built a great foundation and infrastructure worldwide. Physicians and consumers have confidence in Allergan's range of products. At its essence we take a partnership approach that builds long-term loyalty. Partnerships start from the ground up by helping physicians build their practices, educating and training them, helping them understand what the products do well and don't, how to inject and how to improve the business processes of their practices. Creating consumer demand for our trailblazing products has been a hallmark of our marketing. Regarding reimbursed products we help to secure broad coverage by commercial and government payers and then work to drive patient compliance.

Turning to slide 18, innovation is the foundation that enables the success of our sales and marketing approach. Our ability to introduce new products has allowed us to create new markets where non-existed before. For instance by applying targeted R&D efforts we successfully created RESTASIS, indicated for chronic dry eye, a product with sales approaching U.S. $1 billion here in the U.S. alone. We also thought out-of-the-box in creating Latisse for eyelash enhancement, a side effect of our market-leading glaucoma product, Lumigan.

Our R&D model is efficient with a higher probability of success than the industry. Ozurdex is one of many examples, treating diabetic macular odema, a serious eye disorder that is on the increase due to rising rates of Type 2 diabetes. We anticipate U.S. approval of this important new indication in Q2 and before the end of the year in Europe. Our R&D strategy targets specialties and local and topical drug delivery, which have a higher probability of success. Botox, when we acquired the product in 1989 it was indicated for an orphan eye disorder. It is now approved for 28 indications around the world.

Finally we have a track record of developing differentiated commercially successful products. Our differentiated offerings engender customer loyalty. We constantly optimize our products, customizing the approach to match patient's needs. By developing a pipeline within each product we maximize our probability of success for new trials and new indications.

Turning to slide 19, as I mentioned RESTASIS is an example of our ability to leverage our R&D expertise to expand existing markets and trade new ones. In this instance we took a drug used for suppression of organ transplant rejection to develop a therapeutic dry eye agent utilizing a complex formulation technology. Today RESTASIS is the first and only therapeutic product indicated for the treatment of dry eye. Many other companies have tried and failed in this indication.

We own this market because we understand it thoroughly. We know more about cyclosporine than anybody in the world because we have deep rooted ophthalmic scientific knowledge. RESTASIS is still growing double-digits, 10 years after its launch. This is because we've consistently educated ophthalmologists and optometrists and have then built awareness with patients.

The Botox chronic migraine launch in 2010 led to a considerable increase in therapeutic sales. Botox is the first and only product for prophylaxis of headaches in patients with chronic migraine and would not have been possible without a 10 year commitment to clinical development in order to secure this breakthrough approval. Some new indications for Botox may offer the greatest opportunities yet. But capitalizing on these opportunities does require R&D investment, expertise and experience.

Turning to slide 20, on the left side of slide 20 you will see that even with the entrance of two new competitors into the U.S. aesthetic neuromodulator market we still hold 78% market share. On the right side you will see that since Valeant acquired Medicis we've rapidly accelerated our capture of market share. Thanks to selective R&D investment we've been able to develop superior market leading products; JUVÉDERM without lidocaine and VOLUMA. Providing a broader array of products allows our physician customers to cross market treatments for their patients.

Turning to slide 21, this demonstrates how making investments to pursue new indications has created an entire pipeline with one of our products, Botox. This methodology has generated remarkable sales growth. It transformed Botox from being less than a $100 million product in 1989 to a $500 million product prior to cosmetic, to now a $2 billion product comprising both aesthetic and therapeutic parts with more promising indications to come. As you can see we spend our R&D dollars prudently.

Allergan has unique expertise in toxins and we've been very successful in utilizing our clinical expertise to expand the number of Botox indications and then launch them commercially with great success. Given Valeant's aversion to early stage investment, under Valeant's ownership, this franchise would not have yielded the growth and remarkable value that Allergan has achieved. The new promising indications for Botox would be axed under Valeant's proposal as is evidenced by their presentation.

Turning to slide 22, we talk about innovation and R&D. 15 years ago Allergan embarked upon a strategy of building products that people want in a differentiated way. We built an efficient R&D model and increased our [product road to] success. This is evidenced by the approvals we continue to secure year after year.

As calculated by a top global consulting firm that I am sure everyone on this call is familiar with and of course including Valeant and Pershing Square, Allergan has been consistently rising in the rankings of products launched and is projected to be number one in 2015. Their peer set comprises leading global pharmaceutical companies. This is a testament to the productivity of Allergan's R&D spend. Therefore it is not appropriate to conflate the Allergan story with other productivity issues in the industry as a whole.

Turning to slide 23, this presents an analysis by CMR, part of Thomson Reuters which compares Allergan's R&D success with the industry at different points in the development cycle. As you can see we materially outperformed the industry in every phase of development.

In slide 24, this is the example of Alphagan through relentless product optimization and life cycle expansion Allergan has achieved substantial sales return. As you can see on this slide we started out with an active pharmaceutical ingredient, brimonidine, that was generic. We created a uniquely formulated product with each time less systematic exposure that led to better tolerability, reduced incidence of allergies but still similar efficacy. This is just one example. Another one would be LUMIGAN and GANFORT.

On this chart in total, for ALPHAGAN and COMBIGAN we invested $400 million in R&D and have produced returns of approximately $5 billion in cumulative sales to-date and of course they continue to run.

Turning to slide 25, here we demonstrate the value Allergan has created through investments in all its pre-Phase III products. Our $7 billion investment in pre-Phase III work over the last period 1992 to 2013 has yielded sales returns over 25 times and sales still continue. Some would argue that abandoning early stage R&D helps drive profitability. However we think that's a short sighted approach. By investing $7 billion over a 10 year period we generated more than $50 billion in cumulative sales to-date and expect to generate approximately $120 billion in potential additional sales over the next 10 years. Our approach to value enhancement results in significant sustained growth.

On the right hand side of the chart, for example, if Allergan were to stop DARPin development today, this the retina program, we would forego the potential for $20 billion in sales in the product's first 10 years in the market, while saving $350 to $400 million in R&D investment. We believe our results demonstrate that abandoning pre-Phase III projects will be value destructive for our stockholders.

Slide 26 shows how our R&D investment has resulted in 11 FDA approvals in the last four years in the U.S. alone, supplemented by Europe and other countries around the world. These approvals helped drive growth in the medium term.

So moving on from Allergan tomorrow let’s go straight to slide 28. Quarter-over-quarter sales growth is accelerating. Given the momentum we have in the business we are confident these trends will continue. Furthermore having built a critical mass where we can leverage our infrastructure we can drive enhanced earnings growth.

Turning to slide 29, this shows the eight most significant drivers of growth that give us confidence that we can achieve our strategic plan. As you know most of these products already have regulatory approval in the U.S. and internationally. OZURDEX for diabetic macular edema and LEVADEX should receive approval shortly. With Allergan’s tried and tested business model we are confident that Allergan is best equipped to maximize the commercial success of these many opportunities.

Turning to 30 on the balance sheet, this slide highlights our cash flow deployment over the last four years. As I noted before business development and bringing commercial products and technologies to market is our priority. This slide highlights the approximately $1.6 billion spent on acquisitions and licenses. While business development is an important aspect of our business we are also focused on returning capital to our stockholders through share repurchases, offsetting stock option exercises and dividends. This represents about $2.5 billion over the last five years.

So moving onto slide 31 and 32 before I open up the call for questions I want to reiterate our confidence in our plan, which is laid out in all the details on slide 31. We believe it will create significantly more value than Valeant’s unsolicited approach. We know that our success stems from our innovation. Our unparalleled R&D efforts and sophisticated sales and marketing infrastructure have been key to our continued growth. Allergan has a long history of consistently producing industry leading growth and delivering solid results through a combination of this innovation, execution and discipline.

While we are proud of what we have accomplished we are even more enthusiastic about the opportunities ahead and confident in our ability to extend our track record and continue enhancing value for our stockholders. Allergan is entering its third period of accelerating sales growth built on the investments in R&D, in sales and marketing infrastructure which we can now leverage. We already have a strong balance sheet. Our plan generates approximately $14 billion in free cash flow over the next five years. This gives us financial flexibility and strategic options, none of which are contemplated in this plan.

With that said we carefully reviewed Valeant’s proposal and believe it substantially undervalues Allergan and creates significant and unnecessary risks and uncertainties for Allergan stockholders. Given the unsustainability of Valeant’s business model we will continue to focus on doing on what is best for Allergan, our stockholders, customers and patients around the world.

With that operator we would now like to open the line for questions.

Question-and-Answer Session

Operator

Thank you. Today's conference call is scheduled to conclude at 9:30 AM Eastern Time. To ensure that we are able to answer questions from as many participants as possible we ask that each of you limit yourself to one question. (Operator Instructions). Our first question is from Ken Cacciatore with Cowen and Company. Sir your line is open.

Ken Cacciatore - Cowen and Company

Thanks very much. Thanks, David for walking us through this. I think most investors had a belief that your earnings were understated and this presentation seems to confirm that fact and a lot of discussion about all the wonderful work that you have done and investments you have made, which I don’t think anyone would disagree with. I do believe though the investors are trying to understand a little bit better beyond what they could see which was under leveraged earnings, where you will go differently strategically. You talked a little bit about cash deployment, but may be if you could talk a little bit more about more aggressiveness in the balance sheet.

And then also little bit of clarification on DARPin, you indicate it could be big product. Can you give us some indication as to why believe that as we await the last stage of the Phase II development? Thank you.

David E.I. Pyott

Okay so let me start with the things we know best and that is our internal business model, which is all about organic self-sustaining growth. Obviously we have huge visibility of that. I effectively said when you looked at that top eight growth drivers in the next five years most of them are approved. Reiterating what we’ve said about DARPin in the past this is potentially the biggest single product opportunity that has ever faced the company. We expect to have data in the second half of this year and clearly this could be the biggest single product ever.

If we think of our external options of-course generating that amount of free cash flow $14 billion on top of the $3 billion that we already have on the balance sheet gives us not only financial flexibility but strategic options, and of course we’ve spoken consistently not just now, given the new situation, that we would always look to deploying those assets to buying new technologies, they could be companies that come with those technologies providing of course that those assets have the ability to drive consistent long term sustainable growth. We're not about roll outs at all.

Jim Hindman

Next question please.

Operator

Our next question is from Ronnie with Bernstein.

Aaron (Ronny) Gal - Bernstein Research

Thank you for taking my question. David I was wondering if essentially you are telling us this is the proposition you have taken to shareholders. I completely understand your argument for long term growth but realistically talking about shareholders they'd all have to meet kind either one year and two year targets. And therefore their level of commitment to long term returns is there, it's tempered by the need to show some performance to the investor in the near term. It has been discussed before regarding some of deeper cost in R&D, it has been discussed the potential to leverage the balance sheet in the near term. Essentially are those options being contemplated, or are you currently -- this is roughly what you are going to go to investors with and argue for the track record and the current proposition as superior to what Valeant is offering.

Jeffrey L. Edwards

Ronny, this is Jeff Edwards. I’ll start and David wants to chime in he's certainly welcome to. We have a perspective that we can generate substantially greater standalone value by pursuing the model we described during the call thus far. We produce mid-teens growth; double-digit top line and we are going to accelerate that bottom line growth too on a compounded basis 20% by focusing on scale and leverage and focusing on the great foundation that's put in place based upon some very significant historic investments.

We are at an inflexion point now where we believe we have the ability to create meaningful additional leverage with really only modest cost rationalization. We’ll continue to invest behind our businesses because we believe that’s what is required for growth, that’s what we believe is required to produce best possible stockholder value creation. We take these responsibilities very, very seriously. We believe we can produce significantly greater value by continuing to apply this model and we believe its value creating.

David E. I. Pyott

I think going back to your question about the balance sheet. Of course use of the cash flow hasn’t yet been contemplated in the numbers that we put in our presentation. So that does give further options as we go down this road.

Aaron (Ronny) Gal - Bernstein Research

Is it fair to say this is one of the things you're kind of like asking your bankers to look at in the near-term?

David E. I. Pyott

This is nothing new. We’ve said for years that we constantly and consistently look at external opportunities. Of course you and the market place don’t know what those are and I would submit that when you look at the rumor mill this would be inconsistent with years of Allergan behavior where we are known for our discreetness and therefore I think that those rumors potentially emanate from those that have a vested interest in creating them.

Aaron (Ronny) Gal - Bernstein Research

Thank you.

Jim Hindman

Next question please.

Operator

It's from David Maris from BMO Capital Markets. Your line is open sir.

David Maris - BMO Capital Markets

Good morning, David and Jeff. When talking about the Valeant business model not being sustainable you outlined a few different things; one, and maybe if you could tell us which one of these maybe the focus or is it a combination of all of them. Is it the not cutting -- the idea of cutting R&D just doesn't give you a future or is it that you know specifically that if you make these cuts to SG&A they hurt the business or is there anything specific that you saw so far in the Valeant accounting like DSOs or EBIT or tax liabilities that make you worried or is it some combination of those factors?

David E.I. Pyott

I think David where I would go to is just look at the very low rates of organic growth which are clearly depicted in Valeant's earnings presentations. If we take the same-store organic growth for 2013 it was zero. In this last quarter it was plus one. We, of course also look to IMS numbers where particularly for pharmaceuticals they are available worldwide and it's interesting to see when one looks back to and of course the last numbers we have available worldwide are fourth quarter because we're always three months behind. And you can see in the last quarter of 2013 the ophthalmic Bausch + Lomb Valeant business grew 3% whereas Allergan grew 13%.

So a large part of this is we see pretty rapid effects of cutting expenses. I think this is also the reason probably that Valeant didn't speak a lot about the performance of the products that came from Medicis because of course the Medicis acquisition is now of the order of 18 months back and the impact is now beginning to set in. You can interpret that from our analysis of the U.S. filler market where I've really in my career seen such dramatic market share change in such a short time. Of course I'd like to think it's because we're so good but of course it does help where the other side is being dismantled at a rapid rate.

I think then on the R&D side obviously that's a longer term issue but I think in our slide deck we've shown many examples of tremendous value creation from our model. And finally I think when one looks at the new products that Valeant talks about I would ask you to check with them very carefully, as they launch those products what has been the results they have actually achieved. In our view most of them are very small products indeed.

Jim Hindman

Next question please.

Operator

The next question is from Larry Biegelsen with Wells Fargo. Your line is open, sir.

Larry Biegelsen – Wells Fargo

Good morning. Thanks for taking the questions. Hopefully you can hear me okay. David can you share with us which pipeline products and key new indications you are including in your outlook over the next five years and one of them is that you included on the list is Bimatoprost Sustained Release. Is there any data you can share with us this morning to give us confidence in that product? And just lastly the double-digit EPS growth over the next five years is that organic or does it include M&A or inorganic activity? Thank you.

David E.I. Pyott

Okay I'll answer that. So for Bimatoprost SR we will be producing data later in 2014, might even roll into the early part of 2015. Otherwise going back to that slide 29 you know a lot about all of those products. They are either already approved or right around the corner from being approved i.e. obviously we have Ozurdex approved for retinal vein occlusion and uveitis but the big one is coming diabetic macular edema. And also when it comes to the ability to grow organically I can assure you that we never put any numbers in for anything that hasn't been signed i.e. if it 's license out there that we're interested in or a company that would not be included in our numbers.

One thing I missed when I was going through my answer to David Maris, something else when you look at the Valeant model, please dig in what are the price increases behind those very low numbers because there are some eye popping increases of price. And this occurs typically right before the target company is acquired and then very shortly and after the company has been acquired another major price increase has been posted. Those numbers are available from all the usual pharmaceutical industry data sources.

Jim Hindman

Next question please.

Operator

Our next question is from Seamus Fernandez with Leerink Swann. Your line is open.

Seamus Fernandez - Leerink Swann LLC

Hello, thanks very much, thanks for the question. So David, as I look at the forward-looking outlook, just wondering, a couple of quick questions relative to how we should think about the growth that’s being projected. You know the implied cash flow that’s going to be turned off by the business is going to be quite substantial. Wondering if as you review the forward-looking prospects of the business how you’ll be thinking about returns to shareholders. Should we be thinking about the prospect of a stepped-up dividend, the prospect of incremental or more compelling share repurchases because it does appear that from the business outlook that you have quite a robust organic view of the business that may not be reflected currently?

And then is the second question just wondering if one of the criticisms that we’ve heard of Allergan, at least as it relates to pipeline and the revelation of Phase II data, just wondering if there will be more disclosure around that going forward or are we going to stick to sort of the same process of disclosure, simply primarily providing information for Phase III products at medical meetings? Thanks a lot.

David E. I. Pyott

I will like Jeff take the first part on the use of balance sheet.

Jeffrey L. Edwards

The free cash flow mentioned during David's presentation was approximately $14 million of the time horizon mentioned. As you know historically we’ve produced strong free cash flow as well and we’ve managed to deploy a lion's share of that free cash flow. The number one priority is always business developments or M&A. But by all means we will continue looking aggressively for opportunities across the therapeutic areas we presently do business but also looking for adjacencies or other specialty areas that can provide significant value. So this is very consistent with the message we’ve delivered.

In terms of share repurchase as you know we’ve typically repurchased the same number of shares back or approximately the same number of shares back that we issue for employee compensation purposes. Occasionally we would buy more than that. Typically we do these through 10(b)5-1 programs but we consider other open market purchases and then we would consider other programs. So certainly returning capital; we are deploying capital wisely for the benefit of our shareholders, something that absolutely we will continue to focus on as a priority.

Lastly you mentioned dividends; we will continue paying a dividend. We will continue focusing on trying to target what we think is the appropriate level of dividend and we look at that in combination with share repurchase. So when we benchmark ourselves versus the industry we look at a combination of both dividends and share repurchase and we compare the capital deployed or the return of capital to our shareholders by both dividends and shareholders and try to be somewhere around the median.

David E. I. Pyott

Okay, now going to the pipeline if I’ll address that one. Obviously we have a great clear presentation in all of our IR materials on what’s going on. Later this afternoon as an aid to some of the meetings we're having with the buy side we will actually be posting a longer version of this presentation for the real pharmaceutical data hounds and there are a large number of new programs that have not been hereto disclosed which are not nearly in the pre-clinical phase. They are also some that are in Phase II and even some in Phase III. So that will be out later today. I am sure we'll post that on our website that this is available so you don’t have to go digging for it.

Seamus Fernandez - Leerink Swann LLC

Great to know, thank you.

Jim Hindman

Next question please.

Operator

Our next question is from Liav Abraham with Citi Research. Your line is open.

Liav Abraham - Citibank

Good morning. My question is on steps going forward. Mike Pearson last week claimed that Allergan shareholders are in favor of the deal and that he intends to undertake a shareholder referendum. Can you talk about the next step forward from your end, any preliminary thoughts of feedback as to how you believe your shareholders will respond to the updated targets today and your plans to engaging with shareholders? And how do you plan to respond to this referendum that Pearson plans on undertaking, does indeed indicate a preference for Valeant acquisition?

David E. I. Pyott

Well, I think I’ll be much more equipped to give you a really precise answer towards the end of this week because we will be meeting with a very large number of our shareholders and we will be listening loudly in terms of what their views are both regarding Allergan's stock but more pertinently about Valeant's stock. Because of course from a stockholders point of view, given the very large amount of stock that's being offered, the stock component is large. So to a great degree Allergan stockholders are buying Valeant where depending what the numbers are well into the 40% of the total company will be -- would be owned by Allergan's stockholders.

After that I think it's a matter of asking Valeant what they choose to do. Obviously we're well prepared; we believe we have a great story here. This is one of the greatest periods of our revenue upswing and we're in a position to now leverage the investments that we have. And of course the most important thing is that our model is sustainable. So adding all that up we're confident that Allergan's stockholders will recognize the value that is being created by this plan.

Liav Abraham - Citibank

Great, thanks.

Jim Hindman

Next question, please.

Operator

Our next question is from Marc Goodman with UBS. Your line is open.

Marc Goodman – UBS

Good morning. David just to be clear the R&D goal of 14% to 15% and the SG&A mid to high 20% is that going to be achieved by 2019 or should we assume that that's going to be achieved every year of that '16, '17, '18 kind of '19 period. And then just as an extension of that, can you talk about what exactly are you cutting in the R&D side and in the SG&A side? Thanks.

David E.I. Pyott

Well, I think the hallmark here is because of the very strong revenue growth, you will appreciate to get to these new ratios it's actually all about moderating the rate of increase versus cutting and of course that is the Valeant model, it's cut and slash, axe; ours will be moderate growth. That being said we're looking at a couple of moderate things around the edge where we will look for even greater efficiencies and that's typical of us. You've seen it over a very long period, over the last 15 years where we really are quite dispassionate when it comes to improving performance.

Jeffrey L. Edwards

Marc you won't see us get to the target immediately but you will see us move towards the target rapidly. So you should assume that '15 will look substantially different than '14 but you will see a fairly rapid progression towards those targets immediately thereafter.

Jim Hindman

Next question, please.

Operator

Comes from David Risinger with Morgan Stanley. Your line is open.

David Risinger - Morgan Stanley

Yeah. Sorry about that. My question relates to consideration of transformational alternative M&A. I am just hoping that you could discuss your plans for consideration of alternative transactions to the proposed Valeant deal and the timeline for assessment? Thank you.

David E.I. Pyott

Well. I think the whole purpose of today's call is to talk about the things we know about, i.e. our ability to deliver strong organic growth and even stronger earnings per share growth. So I think about external moves those are options but it would be totally premature to discuss them.

Jim Hindman

Next question, please.

Operator

Your next question is from Vamil Divan with Credit Suisse. Your line is open.

Vamil Divan - Credit Suisse

Yeah, thanks for taking the question. So just your comments around the long-term sustainability of Valeant's model. Assuming they do come back with another offer after this, would you be willing to accept any stock as part of an offer or are you suggesting that this needs to be all cash before you concur?

David E.I. Pyott

Yeah I really can't speculate about different combinations of this and that. I think at the time such a change would occur then our Board would obviously in consultation with our financial and legal advisors fully evaluate the proposal on that date, it would be [impervious] to speculation.

Vamil Divan - Credit Suisse

Okay. Thank you.

Jim Hindman

Next question, please.

Operator

Is from David Buck with Buckingham Research Group. Your line is open.

David Buck - Buckingham Research Group

Yes. Thanks for the question. First question I guess is if we look at the R&D target of 14% to 15% maybe more for Jeff. Does that include any type of external partnership with financial players or is that just essentially as you mentioned a moderation of the growth rates? And secondly can you talk a little bit about how you might be narrowing the gap in terms of tax rate versus yourselves and Valeant and yourselves and other specialty pharmaceutical companies that you can look for deals? And I guess the final question is if I look at the upgraded targets for EPS growth what maybe external but was lacking is sort of a big bump in terms of value creation for next year as sort of an alternative to the Valeant deal and I am wondering if you could talk about the proposals for that? Thanks.

Jeffrey L. Edwards

I'll talk about the first two items by the way, we have three questions into one.

David Buck - Buckingham Research Group

Okay.

Jeffrey L. Edwards

Well done.

David Buck - Buckingham Research Group

Thanks.

Jeffrey L. Edwards

So in terms of the R&D target now there is nothing exceptional in that. So we're not assuming any unusual one-off transaction with a third party. So it is as you see it. In terms of tax we talked about this before, we thoughtfully develop a tax strategy inside of our organization, we believe through thoughtful placement of intellectual property through cost sharing, through mix. We will see our tax rate, organic tax rate continue to decline to the extent there is a third party transaction that we can enter into that would benefit that, great but it has to be strategically aligned with our broader goals and objectives.

David E.I. Pyott

I think another consideration I will give you is we have obviously seen an enormous number of articles in the press in the last few weeks regarding tax, U.S tax reform. We have seen comments from members of Congress. I suppose one of the things that we have to think about is okay even if Congress doesn't make a change tomorrow, is this situation and this gap between inverted companies or foreign companies and U.S. companies going to be maintained and if that gap narrows of course that will affect different players in a different manner. So projecting current differences long into the future I think personally and I think the Board's view, Allergan's Board's view is somewhat unlikely.

Jim Hindman

Next question please.

Operator

From Shibani Malhotra with Sterne Agee. Your line is now open.

Shibani Malhotra - Sterne Agee

Hi. Thank you for taking the question. Just a quick clarification, have you been able to speak to Bill Ackman yet about your proposal or have had any conversation with him? And then a bigger picture question for David, given that a lot of Valeant's benefits are coming from tax and cost cutting, are you surprised that the U.S. government hasn't had anything to say about such acquisitions unlike the British government and what they are doing with AstraZeneca and Pfizer?

David E.I. Pyott

Okay. I can say that I and our Lead Director Mike Gallagher did speak to Bill Ackman about 10 days or so ago. We listened very carefully to what he had to say to us. One comment of course that I would make is that of course Bill Ackman given that he is effectively a co-bidder with Valeant that his views and interest may not be completely the same as other stockholders. So I think one has to think carefully about that.

Regarding U.S. governments we watch the press, we watch the, if you like the daily news letters from all the tax experts with great interest. Whether it will stay the way it is today I would doubt and I think that needs to be factored in when one considers different companies, strategic advantages or disadvantages.

Shibani Malhotra - Sterne Agee

But just about the job cutting et cetera and protecting interest of the workers, I guess at Allergan, is that something you think the government might look at the way it's being looked in Britain?

David E.I. Pyott

I can't speculate about that, but what I would submit is that our model works, whereas Valeant's model of cutting and slashing really doesn't work for more than a very short period of time and that shows up that in the same store low growth that they produce.

Jim Hindman

Thanks Shibani.

Shibani Malhotra - Sterne Agee

Thank you.

Jim Hindman

Next question please.

Operator

From David Amsellem with Piper Jaffray. Your line is open.

David Amsellem - Piper Jaffray & Company

Thanks. Just a broader question the industry it appears, it’s pretty clear that in terms of shareholder appetite for large R&D expenditures, large R&D risk that the ground has being shifting and I know you have made your case for why you should have robust R&D spend and maybe can you talk about your thoughts of how the ground is shifting and how that would play into your decisions to actually do earlier stage pre proof-of-concept research, in other words do you think that shareholders are going to have an appetite for that? Thanks.

David E.I. Pyott

Obviously how the works are shared has changed over time between start-up companies and larger companies has changed quite dramatically. Our view is that we have never really spent very much in terms of early stage in this longer presentation that we will be posting later in the afternoon we will show you those numbers. In fact we have been really in a position to benefit because many of the start-up companies when they look for a business partner given our preeminence in ophthalmology and dermatology and medical aesthetics we always get to look at these things first.

And I will not ever criticize other companies or things other companies have been licensed. You don’t know whether we thought it wasn’t so great or was it just it was okay, but the price was far too high. So just for the record if you look at really early stage work it is only if we look at 2013 13% of the total spend. The vast majority of our spend, well over half is on Phase II and Phase III programs and in the deck I showed you what the affect would have been had one killed all the pre-phase III work, it would have been dramatic, it would have been value destructive.

Another thing also that you will see later in the day is that we have also considerable post approval requirements from government agencies including FDA, EMEA and money is required to be spent on maintaining products. So that actually adds up to about $200 million a year. So looking at Valeant’s numbers if they want to pull the products off the market that’s their choice but otherwise they are going to have to bump their R&D budget because they will have nothing to spend in R&D at all.

Jeffrey L. Edwards

Just to add a small bit of color there we are big believers in looking at both internal means and external means and I have said that repeatedly during presentations I've made to the investment community we believe that you have to pursue all various forms of alternatives in terms of partnering and licensing and collaborating. So many of the programs we are currently pursuing within the development process or the clinical process are a function of those partnerships you mentioned. So absolutely I agree with it, I believe in it and we will continue to pursue the same methods we've pursued historically.

Jim Hindman

Next question please.

Operator

Next one from Annabel Samimy with Stifel Nicolaus. Your line is open ma’am.

Annabel Samimy - Stifel Nicolaus

Hi, good morning. Just wanted to ask an obvious question, I guess we have also expected that you have flexibility to generate the level of growth, this level of growth through the operating leverage that you have. But I am just wondering it doesn't really seem like you are making any dramatic cuts in your expenses, only on the fringes I guess. So outside of the obvious urgency what has stopped you in the past from using this flexibility a little bit more aggressively? It is not really impacting your top line growth, and what is that you cannot invest in now that was part of your prior plans? Thanks.

David E.I. Pyott

Okay, well I think first of all and of course our books and records can prove this emphatically, we had already started the discussion of how do we further even further improve our performance and that started nine months ago. I think of the margin I would say that we've built a critical mass so we are in a much better position to leverage. I think also if you would have asked me this question two months ago versus today, I would have taken a slightly longer term optic of our company’s progression, given the situation we are in, some of the things that are at the very end of kind of the ten year period may be we need to put in the refrigerator and keep them cool for better weather, and bring forward things a little shorter because clearly the market place appropriately is expecting us to perform and to step up our performance.

And that’s we believe that we have a great plan on the table and one that's substantially is better than the alternative you have with the cutting and slashing from Valeant.

Jim Hindman

We have time for one more question.

Operator

And this is going to be from Andrew Finkelstein from Susquehanna. Your line is open.

Andrew Finkelstein - Susquehanna Financial Group

Thanks very much for taking the question. Just sticking on the theme of the expenses, if you extrapolate from your longer term growth guidance add a few years, it still suggests expenses on an absolute basis being pretty comparable or even slightly above where they are today. How much does this budget allow you to continue making investments for the next acceleration down the road? How much is the maintenance of the platform you already have? And what is still within that investment even longer term?

David E. I. Pyott

Well I think because we have some really big numbers now, we have if you like the surround sound critical mass and you will notice from the very, kind of towards the end of our deck -- if you look at the short presentation I am just getting to page so I can direct you to page 31 is very clear on that page that answering the perennial question of SG&A where people have said well you’ve always had very, very high SG&A we’ve always said we thought we’ve get it down into the mid-30s. Now we are really cranking this in terms of leverage and by the end of this period it will get to the mid to the high-20’s. So that’s the way you can recast all your models.

I think we’ve given you pretty much all the bits and pieces you need to go and do that work and to the degree you are struggling at the margin I am sure my collogues in investor relations will be able to help you within the rules kind of get the math to work as we lay out on slide 31.

Jeffrey L. Edwards

So the only other point I’d add to that Andrew is that yes the percentages are smaller but in fact the dollar components are still very significant and provides Allergan with building off the current base we have continued great ability to make investments that will be important to continue driving the innovation in growth model that we sustain.

Jim Hindman

So that concludes our call for today. I would like to thank you so much for your participation.

Operator

That does conclude today’s conference call. We thank you all for participating. You may now disconnect and have a great rest of your day.

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