Allergan, Inc. (NYSE:AGN)
Q2 2014 Earnings Conference Call
July 21, 2014, 10:30 AM ET
Jim Hindman - SVP, Treasury, Risk & IR
David Pyott - Chairman & CEO
Jeff Edwards - EVP, Finance & Business Development, CFO
Scott Whitcup - EVP, R&D, Chief Scientific Officer
Jim Barlow - SVP & Corporate Controller
Joann Bradley - IR
Liav Abraham - Citi Research
Ronny Gal - Bernstein
Annabel Samimy - Stifel Nicolaus
David Maris - BMO Capital Market
Larry Biegelsen - Wells Fargo
Marc Goodman - UBS
Shibani Malhotra - Sterne Agee
Ken Cacciatore - Cowen
David Steinberg - Jefferies
Seamus Fernandez - Leerink
David Buck - Buckingham Research
Jami Rubin - Goldman Sachs
Andrew Finkelstein - Susquehanna
Hello, and welcome to the Allergan Second Quarter 2014 Earnings 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 being recorded. If anyone has any objections, you may disconnect at this time. And now I would like to introduce today’s conference host, Mr. Jim Hindman, Senior Vice President, Treasury, Risk and Investor Relations. Sir, you may begin.
Thank you, Jane, 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’d 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 2014 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 the accompanying webcast are being simultaneously broadcast over the Internet with replays available for one week. You can access the information on our website at www.allergan.com.
At this point, I would like to turn the call over to David Pyott.
Great. Thanks, Jim. Good morning, ladies and gentlemen. In Q2, Allergan enjoyed the strongest increase in absolute dollar sales in any quarter in our history with strong contributions from nearly all of our businesses and major products with overall sales increasing 15.9% in dollars and by 16.3% in local currencies.
These results demonstrate a continuation in the strong momentum in our businesses that commenced in the early part of 2013, driven by strong market conditions and many regulatory approvals all over the world, including 12 since 2010 from the FDA alone.
Our strong results are also a testament to our employees’ continuing focus on delivering high value to our customers, generating positive R&D outcomes and productively attending to other top corporate priorities. It is very important to note that our employee base is galvanized around our commitment to create an even better stronger company.
In this context, voluntary employee turnover in Q2 was in fact lower than in the prior year. Regarding earnings, the upswing is even more notable than the growth in sales. In Q2, non-GAAP earnings per share of $1.51 leapt 23.8% versus Q2 of 2013. EPS topped the upper end of the outlook provided on the last earnings call by $0.07, which we’ve added to the upper end of the outlook for full-year 2014.
The revised outlook for EPS for full year of 2014 is now in a range of 20% to 22% growth versus 2013. For a reconciliation of these non-GAAP numbers to U.S. GAAP, kindly consult our press release.
It is to be noted that channel inventories at the end of the second quarter were at a low level. Looking to the full-year, we raised guidance for the top end of our sales and indeed 2014 is on track to be our best year ever in terms of sales growth.
After I’ve covered the highlights of our Q2 operating results, I’ll provide further commentary on our value creation plan for stockholders, which is contained in our press release. The essential elements of this plan are that we will reduce costs in 2015 relative to our earlier strategic plan by approximately $475 million and reduce our workforce by approximately 1,500 employees or 13% to drive a further major increase in EPS relative to the last strategic plan that we presented to stockholders in May.
This plan is based on deep knowledge of our business as well as on a thoughtful and detailed analysis of our cost structures, operating processes, and ranked order of returns from investments. The carefully accretive approach in developing this plan serves the twin goals of minimizing the impact of the cost reductions on our ability to grow sales at a double-digit rate in the period after 2019, as well as preserving the strength of our R&D pipeline.
We believe that we can deliver on these goals whilst greatly increasing EPS for 2015 in a range of $8.20 to $8.40 and for 2016 to approximately $10 per share. A presentation on our plan is to be found on our website and has been filed with the SEC this morning.
Returning to the highlights of Q2, whilst we drove the strong increase in earnings, we continue to invest in our greatest opportunities, namely the launch of VOLUMA in the U.S. supported by direct-to-consumer advertising, our businesses in Japan, China and Southeast Asia, as well as DTC for BOTOX for chronic migraine, DTC for BOTOX cosmetic, and for ACZONE.
Overall expenditure in Q2 on non-GAAP SG&A increased by 13% and within this, expenditure on DTC increased by 45% in Q2 versus Q2 of 2013 to approximately $70 million. Investment in non-GAAP R&D in Q2 increased by 8% to $288 million.
Regarding the individual businesses, I’ll commence with ophthalmic pharmaceuticals. Q2 sales year-over-year grew strongly at 14.8% in local currencies and 14.5% in dollars. The second quarter produced growth at a higher rate than in Q1 with the year-to-date growth standing at 13.0% in local currencies and 12.0% in dollars. Year-to-date growth has been diversified with every operating region growing double digits, namely; North America; Europe, Africa, Middle East; Latin America; and Asia Pacific.
RESTASIS was an outstanding contributor with local currency growth of 25.2% in Q2 and 19.3% year-to-date. In the U.S., year-to-date June growth reported by IMS was 21.8% with approximately 10% in volume and the remainder in price. We attribute the continuing success to earlier treatment of therapeutic dry eye symptoms, strong uptake by a larger group of optometrists, and increase in consumer awareness driven by our DTC advertising.
Year-to-date, our glaucoma franchise has grown 5.8% in local currencies with strong double-digit growth ex-U.S., being offset by challenging market conditions here in the U.S. We have the impact in the U.S. of generics on the branded glaucoma business and rebate pressures from Medicare and commercial managed-care plans.
We are, however, pleased that LUMIGAN in the U.S. is steadily improving in volume. As we detail the benefits of LUMIGAN 0.01%, and improved pharmacy fulfillment of the brand as written. Year-over-year growth trends of trailing prescriptions were as follows; first-half 2013, minus 1.1%; second-half 2013, plus 2.1%; year-to-date May, 2014, plus 4.7%.
Overseas, every operating region enjoyed double-digit growth in glaucoma, both in terms of ex-factory and in-market sales as reported by IMS. In Europe, GANFORT unit dose was launched in Italy, Spain, and Switzerland.
Our artificial tears franchise, led by OPTIVE, also recorded double-digit growth in local currencies in Q2, as OPTIVE Advanced, marketed as OPTIVE Plus, in most overseas markets is launched. OPTIVE Advanced unit dose was approved in Canada and will be launched shortly. In the U.S., our tears share is approaching that of the market leader, Alcon Systane.
Due to shortages of some ophthalmic generics in the U.S. market and the resulting ability to increase prices for both branded and generic PRED FORTE and FML, we again had very strong sales in Q2 as we cleared production backlogs.
In Europe, our tears franchise is growing double digit year-to-date May in a market growing 9% as we introduced OPTIVE unit dose and OPTIVE Fusion. OZURDEX in Europe has garnered a 14% share of retina patients, which augurs well for the expected European approval of the diabetic macular edema indication later this year.
Regarding the global ophthalmic market per the IMS Q1 market report, the last period for which data is available, IMS again showed Allergan as the fastest-growing full-line branded company. In a market expanding a robust 12%, Allergan grew 16% with Novartis, including Alcon, at 6%; and Valeant, including Bausch & Lomb, at 5%. In the U.S., Allergan also gained more market share than any other company in the ophthalmic pharmaceutical market.
Moving on to BOTOX, Q2 sales increased year-over-year by 13.7% in local currencies with double-digit performance in both therapeutic and aesthetic categories and by 12.9% in dollars. Whilst we were able to ship some product in the quarter to Venezuela where we hold a commanding share position, sales were down considerably versus prior year as we manage our receivables exposure to this dynamic and challenging market.
In the U.S., we’re seeing a strong upswing in sales for chronic migraine and the two approved bladder conditions, as we have continued to enhance our patient access programs, physician training and practice efficiency support. In addition, with the benefit of the upper limb spasticity indication and weakened competition, sales are growing double-digit in the neuro-rehabilitation channel.
With a new TV commercial for chronic migraine that aired since mid-June, we’re increasing awareness and driving patients to train physicians. Regarding overactive bladder, we’re also excited about a new print campaign entitled Calm Your Bladder and will initiate TV advertising in August.
The American Urology Association and the Society for Urodynamics and Female Urology updated their guidelines in May that established BOTOX as the only standard third-line treatment after, firstly, behavioral therapy and, secondly, pharmacological treatment, typically anticholinergic drugs. This will be helpful for creating appropriate therapeutic pathways for BOTOX.
Regarding regulatory approvals for BOTOX, we now have lower limb spasticity approval in 10 of the 14 countries in the mutual recognition procedure in Europe and, with this, approval in all of the major Western European markets.
In Western Europe, we’re growing BOTOX therapeutic in-market over 10%, driven by good performance in movement disorders, benefiting from the expanded label as well as the reimbursed launches of chronic bladder and migraine. Overactive bladder was approved in France, Taiwan and Ecuador; and neurogenic bladder in Malaysia. Of course, in my prior remarks it was chronic migraine and the two bladder conditions in Europe.
Turning to the aesthetics side of the business, we estimate, based on survey data, that the U.S. market year-to-date grew high-single digits with our sales growth being further boosted by our 3% price increase posted in January. BOTOX market share remained high in June at over 77% with a point of shared loss versus June 2013 as Xeomin re-entered the market, now with 7% share and 1.5 points up versus June 2013. At 16% share, Dysport dropped one share point. In Europe, we are successfully holding share in a growing market, as we deal with price competition from Galderma and Merz.
In facial aesthetics, we had a blowout quarter with 46% growth in local currencies and in dollars. This was propelled by the launch of VOLUMA in the U.S., but also by the introduction of VOLBELLA and VOLIFT in many foreign markets. Every operating region recorded huge growth.
Vycross is a game-changing technology. The second quarter marks the continuation of the strong growth in the first quarter with year-to-date growth of 41% in local currencies and 40% in dollars. In the U.S., based on survey data, we estimate that the market in units grew mid-single digits, but also enjoyed a huge pickup in value due to the premium pricing of the Allergan product range.
We trained over 12,000 U.S. physicians via training events, heavily invested in DTC, and are using our CRM programs to bring new customers into the facial aesthetics marketplace. Based on our analytics, the introduction of VOLUMA has expanded the market in volume and led to an approximately 25% reduction in the volume of competitive products with the heaviest impact on the earlier-generation volumizing products i.e., RADIESSE, SCULPTRA, and PERLANE, and additionally close to zero cannibalization of base JUVEDERM.
In terms of market share, Allergan in June held 49% of the total market, 12 full market share points up year-over-year, with Valeant down 8 share points to 31% and Merz down 3 points to 20%. In the U.S. facial aesthetics and medical dermatology segments, we have profited greatly from the dislocation in the marketplace after the announcement of the Valeant offer, as physicians have literally voted with their pens and syringes.
Since late April, we have taken almost 450 accounts away from Valeant and almost 100 accounts away from Obagi. In the European Union, based on syndicated data for Q1, enormous market expansion continues with the market growing over 20% and Allergan growing at over double the rate of the market.
Allergan now has an estimated 45% market share despite the presence of literally hundreds of competitive products. In Japan, we launched base JUVEDERM products without lidocaine in March, creating a broad portfolio of aesthetic products. VOLBELLA and VOLIFT were launched in New Zealand. In terms of regulatory approvals, VOLIFT was approved in Canada.
Breast aesthetics sales in Q2 increased by only 2.9% in local currencies and by 3.2% in dollars. Market conditions in the U.S. were weak where we estimate that the implant market actually marginally declined in units and we accepted minor loss of share in low-priced saline and round gel implants as we migrate our mix to higher-priced products including the 410 shaped implant.
We’re also dedicating selling resources to the introduction of our SeriScaffold product for tissue support, which is being rapidly adopted by U.S. hospital formularies. In Europe, the market was also weak, and we were prepared to walk away from some low-priced accounts. Per syndicated data for Q1, the European market for implants grew 7% in units with Allergan posting low unit growth. In other regions, we enjoyed strong growth in Japan, following our market introduction, as well as in China, Australia, Canada, and Brazil. Mexico had almost no sales in Q2 after initial large Q1 shipments when we commenced direct selling operations.
Our skin care and other franchise grew 6.8% in local currencies and 6.6% in dollars. Commenting the important constituent parts, we recorded strong growth of ACZONE in Q2 with IMS showing a 47% increase in acquisition dollars year-over-year driven by ACZONE’s unique positioning for adult female patients, successful DTC advertising, and market share gains.
For TAZORAC, IMS recorded Q2 year-over-year acquisition dollar growth of 16%. Our topical skincare line, led by SkinMedica, had a weak performance quarter given a wraparound with a strong Q2 2013 when we introduced a new key skin lightening product called LYTERA.
LATISSE sales declined 9.4% in dollars, impacted by a decline in wholesaler inventory in the U.S. We presume that this was in reaction to a court ruling regarding our patents and permitting the approval of generics. Notwithstanding the court ruling, it is our belief that no genetic introduction is imminent given packaging challenges with brushes.
We also believe that the mid-term impact will be limited as consumers look to the LATISSE brand when product is dispensed in-office. In the quarter, in-office sales of LATISSE increased modestly.
One comment on Valeant, on July 18, Valeant pre-announced sales figures for Bausch & Lomb for Q2. We were impressed by some of the eye-popping growth numbers which are outside any range of normal growth of these global ophthalmic market segments. We would encourage investors to ask Valeant about in-market growth relative to inventory changes as well as any rebating or promotional programs. Finally, we also look forward to Bausch & Lomb growth figures for Q3 so the trends can be monitored.
I will now pass on to Jeff Edwards who will comment our financial performance and then, I will return to addressing our value creation plan for stockholders. Over to you, Jeff.
Thanks, David, and good morning to all of you on the call. During the second quarter of 2014, Allergan once again continued its very positive trend and generated strong operating results as we benefited from double-digit sales growth across most of our geographic regions and businesses.
The company’s thoughtful approach relating to investment decisions along with its continuing strength in operational execution allowed the company to once again overachieve both our product net sales and earnings per share guidance for the quarter. We continued to make selective investments in the components of our business where we’re most likely to generate significant financial returns while leveraging areas that were deemed to produce less favorable financial returns.
Non-GAAP diluted earnings per share from continuing operations for the second quarter of 2014 were $1.51 with growth of 23.8% compared to the second quarter of 2013 from continuing operations. A reconciliation of all of the adjustments to GAAP earnings is set out in our earnings release.
Excluding the effects of non-GAAP adjustments, amortization of acquired intangibles, and discontinued operations, Allergan’s Q2 2014 gross margins of 87.9%, increased 50 basis points when compared to Q2 of the prior year, driven primarily by favorable pricing as well as favorable regional and product mix.
The non-GAAP selling, general and administrative expenses to product net sales ratio of continuing operations for the second quarter was 37.4%, totaling $684 million. This represents a 100 basis point decline compared to the second quarter of 2013 and reflects our commitment to leverage expenses. We’re committed to direct an even greater focus on further enhancing our investment decisions on a going-forward basis. The comparable ratio and expense value for the same period in 2013 were 38.4% to $606 million, respectively.
Consistent with our annual budget and most current forecast, we continue to anticipate that Allergan’s non-GAAP selling and general, administrative expense to product net sales ratio will be further leveraged in the second half of this year. Non-GAAP research and development expenses were 15.8% of product net sales for the quarter, totaling $288 million, an increase in spend of approximately $22 million over the $266 million or 16.9% of product net sales spent in the second quarter of 2013.
With respect to our balance sheet, consolidated Allergan days sales outstanding was 53 days while consolidated Allergan inventory days on hand was 123 days. Important to note, our in-channel or trade inventories continue to track towards the very low end of our internal targets.
In the second quarter, operating cash flow, after CapEx, was approximately $410 million. At the end of the second quarter, Allergan’s cash and equivalents and short-term investments and cash and equivalents and short-term investments, net of debt positions, totaled approximately $3.7 billion and $1.6 billion, respectively. During Q2, share repurchase relating to stock-based employee compensation programs totaled $436 million.
With respect to our performance aspirations for third quarter of 2014, Allergan estimates product net sales in the range of $1,675 million to and $1,750 million and non-GAAP diluted earnings per share from continuing operations to be in the range of $1.44 to $1.47.
Regarding full-year expectations for 2014, Allergan estimates product net sales in the range of $6,900 million to $7,050 million and our full-year non-GAAP diluted earnings per share from continuing operations to be in the range of $5.74 to $5.80.
As a reminder, this EPS expectation assumes the U.S. R&D tax credit will be renewed in the fourth quarter 2014 with the full-year retroactive benefit impacting Q4 results. This will generate a higher effective tax rate in the first three quarters of 2014 and thus lower EPS results in those quarters while benefiting both Q4 effective tax rate and reported Q4 EPS.
Consistent with the previous quarters, please note that product net sales expectations excludes any further anticipated revenue from the transition services agreements related to the sale of the obesity intervention business.
As a reminder, the product net sales associated with the transition services agreement primarily relate to distribution services outside of the United States and contract manufacturing services. These transition services agreements are expected to continue to have a minimal impact to the bottom line for both 2014 and 2015. For your information, expectations for other lines of the income statement and specific product sales expectations are included in the current release.
Before we open it up to questions, I’m going to turn the call back to David for a few additional comments.
Great. Thank you, Jeff. As you know, we committed to shareholders that we will be taking action to drive value both in the near-term and into the future. Today’s results demonstrate that we’re clearly on the right path and the actions announced today will only accelerate our trajectory.
As I stated during the introduction, our overarching goals with our value creation plan for stockholders is to drive sustainable operational efficiencies without compromising our effectiveness and to adhere to our core corporate values but focus on the customer and innovation. In this way, we can make Allergan an even stronger company than before.
So referring to the deck that we filed in our website and found with the SEC about 45 minutes ago, you can consult page 8 which is a good summary. We strongly believe that the reductions, whilst deep, serve two important goals; ability to grow sales in a double-digit rate up to 2019, the last year of our current strategic plan; preserving the strength of our R&D pipeline as we do not cancel any program that is in the clinic.
On page 20 of our deck, we lay out the plan and how we wish to generate $10 per share in 2016. Important to emphasize is that these earnings are reached before we deploy the considerable free cash flow of approximately $18 billion during this plan period.
Based on carefully listening to many investors, we heard that this level of EPS performance is what is required. We also heard a desire for deployment of our balance sheet, which is laid out in page 21. First order of preference is for a meaningful strategic acquisition that provides for accretion and further shareholder value. With many alternatives available, we’re presently pursuing various options.
With this, operator, we’re now open to questions.
Thank you. (Operator Instructions) Our first question comes from Liav Abraham with Citi Research. Your line is open.
Liav Abraham - Citi Research
Good morning and congrats on a fantastic set of results. My question is regarding your tax rate. The reduction of tax rates has become of increasing focus for companies in this space, and several inversion plans by companies have been announced over recent weeks. One could argue that this is almost a necessity at the moment, a lower tax rate, and not a relative advantage in an industry that is rapidly consolidating. I’d be interested in your updated thoughts on this, where do you stand with respect to lowering your tax rate? And is this a priority for you over the near to medium term? Thank you.
Okay. I think I will answer that, Liav, at a very high level. Obviously, tax rate is one of the ways to create value. I would still argue that the ultimate one is driving sales growth and the greatest value of all is organic sales growth as demonstrated by what we're able to achieve this year.
I think another consideration I would have is how long these huge differentials in tax rate will remain. Clearly, that has an effect on valuation. One would assume that the U.S. Congress at some point, watching the mass exodus of U.S. companies to lower tax jurisdictions, at some point will act, although I would take the view that that certainly won't happen in the next couple of months.
So very high level, when we look at all our options, tax rate reduction is one of them. And in fact, there are some internal things we are doing outside the field of acquisitions that follow the rules to somewhat mitigate the very high rate of tax we pay in the United States.
Our next question comes from Ronny Gal with Bernstein. You may ask your question.
Ronny Gal - Bernstein
Good morning and let me add my congratulations to Liav's for this set of results. Let me ask, essentially, a question and a half. The first one is, you obviously had a very successful growth rate to your revenue. Can you just go through a little bit a couple of details and explain how could that be possible, or more correctly, how would that not be possible if you did not have the resources you have at hand? That is, if you adopted the Valeant model, what would have happened to the growth acceleration you currently have?
And second, and that’s probably the main one if you have to pick one, is in my talk today with some investors the pushback I got on your cost cuts is the, why now? This is a company that could have cut costs a year ago, two years ago, three years ago, and suddenly when they are under threat they got religion around cost. Is this really something that they will execute if the drive, the bid from Valeant, will go away?
So I would ask you, David, if you could directly address that. Essentially as you think about the credibility of your management team in driving down costs, why is it possible to do now while it was not possible to do the same costs cut a year ago, two years ago?
Okay, so taking them one by one. So I think when you look through all the details, you will see the growth was extremely broad. There was literally contributions from many, many parts of the business. I think when you -- there is actually a chart in the supplemental deck that we filed this morning, which very nicely lays out the trajectory of growth acceleration. It’s actually on page 5 of the deck we just filed.
In terms of then addressing the why now, let me remind you what I said on the first quarter earnings call, and that is, that every year in September senior management meets with the Board of Directors. Our Board very rightfully challenged us last September to say, things looked so good on the sales growth side, obviously internally we had plans at that time for dealing with the RESTASIS generic challenge. And they said, frankly, you can do better than mid-teens earnings growth. And we agreed.
Fortunately, we had already started on that work and Doug Ingram, our new President, really started working in great detail already from January of this year. And that was how we were able to turn the first round of improved performance so quickly.
After that, it was very clear that we needed to do more. That was the feedback from our investment community. And the whole team, not just the commercial team, the R&D team, the G&A team, are all very galvanized around making this a better company and producing the results.
In terms of investors' ability to believe this new set of numbers, I’d make two comments. One is, in my 16 years here, we have never disappointed you in any one single quarter. The only time we ever reduced our outlook during a year was during 2009, that was the year of the Great Recession. You saw us reacting very quickly that year to cost reduction.
And I think going forward, a very important point is we are asking our Board of Directors to approve really a new form of compensation for the very top people in this company and that compensation will be pegged to delivering the earnings per share numbers that we have in the sheet of paper for 2015 and 2016.
So the way it should be, if we deliver those numbers, speaking for the top management, we get paid and you get paid. If we don't deliver those numbers, then we will be looking at fresh air and that’s the way it should be. So very strong commitment to delivering the numbers I had laid out in this presentation and in the earnings release.
Our next question comes from Annabel Samimy with Stifel Nicolaus. You may ask your question.
Annabel Samimy - Stifel Nicolaus
Hi, thanks for taking my question. Again, congratulations on a great quarter. I guess I wanted to focus on the launch from guidance, the 2015, the 2016 EPS guidance that you provided, which is significantly higher than the Street, even when we consider some of the cost-cutting restructuring plans that you have. So, is there anything more outside of what you’ve laid out, the $475 million and I can't remember the last number you provided in terms of cost restructuring when you first announced it back in May.
And if it's strictly just the $475 million, is this to suggest that the revenue growth is actually going to make up for the rest of it? And right now, it suggests that it should be probably above the 15% range. So can you just help us frame that a little bit because it’s significantly higher than where the Street is right now, even with some of these measures put in place?
Yes, okay. I think the best place to look is on page 20 of the supplemental deck that we filed with SEC this morning. It is on our website, and let me just walk you through the numbers quickly. So going to 2014, in simplicity, we beat the quarter by $0.07. We rolled that through to the full year. So currently, earnings per share outlook is $5.74 to the top end of $5.80.
Then, we’ve put out a number of -- a range for next year of $8.20, going to in a range at the top $8.40 and then approximately for 2016, $10.00. And when you look at all those numbers across the top with greater than 20% five-year EPS CAGR, you can do your own math on the fact that we still will continue to have interesting rates of earnings per share increases for 2017, ‘18, and ‘19.
Now, coming back to the comment you made about cost reduction, clearly $475 million, as a quick reminder, the prior plan we announced in -- it was in May really contemplated moderation of increase, not absolute reduction. So that’s why now we’ve really gone back into great detail of where can we reduce cost
And very saliently, we’ve real protected those areas that we believe lead to the greatest revenue growth. So on the commercial side, DTC is untouched. Obviously, every year, there is a portfolio of different programs and when you think back to my remarks from this quarter, you can see us even increasing DTC this quarter, bringing on new campaigns. And that kind of thing will continue.
Also, when you look at the sales force side, there you have only a 6% reduction on roughly 4,000 salespeople worldwide. So, very modest, very limited. It really addresses the conditions in the glaucoma market for intraocular pressure-lowering drugs as well as aesthetics, breast aesthetics.
And that’s why we believe that, relative to the last plan that we put out, the impact on revenue growth is only about 50 basis points per year and restating the obvious, still keeps us in that double-digit revenue growth range. So there was some moderation, but still we retain an extremely attractive growth profile and I think I would argue relative to most other companies, especially of our size, in the pharmaceutical and medical device industries.
Our next question comes from David Maris with BMO Capital Markets. You may ask your question.
David Maris - BMO Capital Markets
Good morning. I want to ask a question around the statement in the press release that there are a number of options, such as business development that are available. And I think today might be the first time that you’ve said that you are presently exploring the options. So, first on the plural part of that option versus options, that’s very interesting, but how confident are you in being able to complete something?
And given your historical P/E has been around 25 or so for the last decade and if you could do $10 in EPS in 2016, there is no reason to think that the stock can't be at $250 within a year or so. So since buying stock at $170 that is worth $250 seems like a pretty good deal, is it possible that a buyback would be part of the shareholder value creation plan, if a transaction -- if you had excess cash flow and balance sheet capacity after a transaction? Thank you.
Right. Well, I think based on -- first of all, I very much like your arithmetic projections and I am sure a lot of people will be thinking about what multiples they should be applying to 2015 and 2016 numbers. Then going back to the options, I think when we listened very carefully to our major stockholders, their order of preference, as I stated in my remarks, would be that we complete a strategic transaction. I think that is logical, because if we found the right company with the right level of accretion, that is the biggest booster of further EPS growth on top of -- if we're talking 2016 above that $10 number.
Clearly, on the other side, if for any reason we weren't satisfied with finally completing a transaction of that nature, we always have two fallback positions which can be executed very quickly. One is stock buyback and I think we understand the mathematics pretty well. At different stock price levels and even at very high prices, there is still accretion.
And then in some quarters, we’ve even heard the desire for a special dividend, which of course is a different set of calculations. So that’s what we’ve heard. And I would like to say that there are multiple options on the table and we intend to execute against those ideas.
Our next question comes from Larry Biegelsen with Wells Fargo. Your line is open.
Larry Biegelsen - Wells Fargo
Good morning. Thanks for taking the question. I just wanted to follow up, David, on the last question on M&A. Can you talk about the sense of urgency to get something done? You have had a few months to look for acquisitions. How would you describe the environment and any color on whether you would consider a new therapeutic area or something within your current or therapeutic area? Thank you.
Well, going back on the question of time, you should assume that even in normal times we’re looking at not only small acquisition opportunities but large ones. And clearly since April, in addition to the work that we’ve been engaged in, we certainly stepped it up in terms of our analysis of various options.
I think when I’ve been speaking to investors, I’ve been very clear that to find a strategic acquisition of scale and fit within our existing pillars, if you like, is relatively difficult, because we have very large market positions within them. And so the likelihood is that it’s much more directed to a new pillar or it could be pillars depending on what the profile of the acquisition candidate would be.
And so obviously I can't comment on names. But certainly you should think about the interest being specialists in nature, that’s our fit, growth profile, obviously, normally these companies have good margins because they have differentiated technology positions.
And we believe that such a new pillar would just be a start on which we could fit further add and if you think back what we did in all that time ago with Inamed in medical aesthetics, you saw that was the first step. Corneal was the second with JUVEDERM. And we’ve done other things since then both in terms of adding from the outside but also dramatically developing new, innovative products, probably the most spectacular of which in recent vintage would be the Vycross range i.e., VOLUMA and then VOLBELLA and VOLIFT currently overseas.
Our next question comes from Marc Goodman with UBS. Your line is open.
Marc Goodman - UBS
David, the previous guidance for 2016 would have gotten you to like an $8.60 type of number, at least that’s what I was thinking and so with this type of new cost-cutting you’re adding, I don't know whether it’s $1.15 or $1.20 or whatever it is. You're not quite at $10. And so I guess the question is, how do you get the math to work to get to the full $10? Is there any share buyback in there?
And then just secondly, just on the cost cutting, in the R&D productivity enhancing slide here, it just says, streamlining organizational structure, $65 million. I’m curious like, was that something that you were thinking of doing already? I know outsourcing has been something that you've been pushing for the past couple years, but why had you not done this already?
It seems like cutting R&D pre-Phase I is very easy to do and doesn't really matter as much to the shareholders probably from that standpoint, but why not do the streamlining of the organizational structure before? Why now? Thanks.
Well, I’ll take the first part. So getting to the $10 there, there is no exceptional buyback at all. There will be the usual, what you’ve seen in the past with any -- I mean obviously, we have a historical run rate of employee stock option exercises. And as you know, broadly speaking, we offset that, not exactly within a calendar year but pretty close.
If you then do all the math, when you look through the $475 [million] [ph] of cuts, obviously on the other side we have that very strong revenue growth that produces a huge amount of increased EBITDA. We also have a little bit of a tax rate reduction, I alluded earlier on the tax question. These are the margin things that we can do internally without any external transaction.
And obviously, handing over now to Scott on the R&D side, we really went to great lengths to protect programs that are in the clinic, because those are the kinds of products that should lead to an approval in this -- some of them admittedly at the very end of the planning period, but, of course, we’re bright enough to work out that if we produce some huge earnings per share number in 2016, but then we'd really crippled the R&D pipeline. I would take the view that you should penalize us in terms of the P/E multiple that you described to the company and that view has never changed over the years and certainly not now.
So let me pass the baton to Scott who’ll address the R&D question.
So, Marc, as you noted, we spent a lot of time looking at the R&D structure. We didn't want to decrease any program in the clinic. In terms of efficiencies, why now and why not several years ago? If you looked at the R&D portfolio five to 10 years ago, we had multiple small projects, which made it difficult to streamline the organization.
Over the past several years we now have, although a balanced portfolio, a number of larger projects like the anti-VEGF DARPin, abicipar, like glaucoma sustained release or bigger BOTOX indications like depression. So that’s allowed us over the last year to contemplate a much more efficient, streamlined organization.
The other piece was geographic expansion. So over the last, I would say three to four years, we’ve had to build a geographic regulatory and clinical footprint. Geographically, Eastern Europe, Asia Pacific and now we are able to leverage the investment that we made over the past several years.
So I think it’s the right time for a number of reasons to streamline the organization. But the major reason of why now as opposed to before, bigger projects in the balance and leveraging a geographic footprint that we’ve already built.
Our next question comes from Shibani Malhotra with Sterne Agee. You may ask your question.
Shibani Malhotra - Sterne Agee
Hi, thanks for taking my question. David, Valeant put out a press release today basically accusing Allergan of making some misleading comments around its business model. And then, you talked about the spectacular growth seen with Bausch & Lomb and said that maybe investors should question where this growth came from.
I guess, could you expand on your comments a little bit and also kind of address the accusations that Valeant has made? Do you have any basis to believe that there could be inventory increases or rebates or that business is a house of cards or something? We're just trying to get beyond the back and forth and really understand the two businesses.
Well, I think at the very high level, at the end of the day it’s up to Valeant to explain what is going on. If I just glance at their sheet, I’ll give you -- this is their numbers. They have 38% growth in contact lenses and 12% growth in consumer. Very interestingly, if you look at Novartis, they’ve put out their numbers for Alcon last week. Alcon's vision care unit grew 1% in local currency.
So two very, very different sets of numbers. And as you well know, Alcon and J&J, if we take contact lenses, are the big players. So when you see those kinds of disconnects, I think it should just lead to some really detailed questions on your part. And as I stated, we will be very interested to see whether this kind of growth continues into the third quarter.
And I think another baseline, which we’re always one quarter behind for pharmaceuticals on a worldwide basis, but IMS shows in-market worldwide 5% growth for Bausch & Lomb and that includes legacy Valeant businesses as well. So very different numbers than what we saw from Valeant's pre-announced 17% growth for pharma. We’re still getting the June numbers in terms of dissecting what is value versus volume in the United States. But I am sure that will come out in due course.
Our next question comes from Ken Cacciatore with Cowen. You may ask your question.
Ken Cacciatore - Cowen
Great. Thanks, David, just wanted to know, what would be lost in having even at a lower level of an internal group from your shop go over to their shop and square some of the commentary that you are making and they are making? Is there something that would be lost if you sat down again, maybe not at a high level, but at a low level to assuage some of your concerns? Thank you.
Well, I think in terms of absolute understanding of Valeant, given that major parts of their business now stem from Bausch & Lomb, obviously there’s still some Medicis business left, although declining precipitously and I’m talking about post-divestiture of the facial injectables business. We understand these businesses very well. We have access to a lot of data.
IMS is clearly the most reliable. But then we’re also -- we have access to other data through industry surveys and industry experts. So we feel we understand their model very, very well. And at a very high level, when their offer is so far away from the intrinsic value of this company, which by the way, has just been increased again based on the numbers we put on the table, there was no basis for a substantive discussion. If Valeant wants to change that number, that’s up to them.
We have a question from David Steinberg with Jefferies. Your line is open.
David Steinberg - Jefferies
Thanks. In facial aesthetics, clearly it was a very, very strong quarter. I know that VOLUMA is off to a great start. You have also mentioned that you took very substantial share from the Valeant products, RESTYLANE, PERLANE, et cetera as well as from Dysport vis-a-vis BOTOX. I was just curious now that Galderma has purchased those assets from Valeant, do you think you can keep that share that you captured or should we expect that Galderma will retake much of what you took this past quarter?
Well, I think the best way to answer that question is if you reflect upon the remarks I made about the European market, where we have access to syndicated data there and the market is growing in excess of 20% and Allergan is growing double the rate.
Now, given that the other key player is Galderma and then on top of that, there is lots and lots of small competitors, it’s very clear we’re massively picking up share in Europe as well where our key competitor has been for years now post their acquisition of Q-Med, Galderma. So we believe Galderma will be a more normal competitor than Valeant in terms of running a business for the long term. But I think the results speak for themselves, if we look at our ability to compete successfully and gain market share outside North America.
We have a question from Seamus Fernandez with Leerink. You may ask your question.
Seamus Fernandez - Leerink
Great, thanks so much. So David, can you talk a little bit about the targets that you have for SG&A? I think R&D of 13% certainly makes sense in the context of the cuts that you're talking about. But on slide 20, you state that you are targeting SG&A ratios of the low-to-mid 20% range.
And when I think about the businesses that you run, as well as sort of the global growth nature of the business, getting to the low-to-mid 20% range as I look across the industry, it tends to be limited to companies that are at extremely high price ratios. Cancer care businesses like Celgene, things like that.
And the business at Allergan just seems structurally different in that regard. So just wanted to get a better understanding of how we’re getting to that low-to-mid 20% range and if that is truly sustainable over the long term? Thanks so much.
Obviously, one of the things we looked at too was where do we fit within the larger group of pharmaceutical companies. And we agree with you that if you look at companies with very limited numbers of physicians that they have to service or highly concentrated product sales, it makes it easier.
But when I look at, what I’d call, diversified companies, there are several that are in the mid-20s. And when we also look at their projections of what they plan to do in the next five years clearly they are going to leverage as well.
So I think the very big backdrop to this is the pressure on our industry worldwide, and I mean pharmaceuticals in the broadest sense to become much more efficient. And I think the days of share of voice wars and battles I don't want to say it’s over, because point-to-point when new products are being launched, if there's two products going toe-to-toe, people will invest a lot.
But I think broadly we’ll see lower spend across the industry and when I look through the peer set, I think we will be a very good company by the end of this plan period. Also for us, of course we invested a lot over the years to create critical mass. Our dollars are getting pretty big now and that’s very different than when I started when let's say we were probably spending less than $0.5 billion in SG&A. Now the numbers are really, really large.
And we all know economies of scale, ability to negotiate better terms with vendors, you can go down and down the list. And our team is very, very committed to delivering these numbers. And because of the teams involved, a lot of the ideas, frankly, came up from middle management. And that is the most powerful guarantor for me versus some fiat from the guys at the very top with the middle management going, they must be crazy, no, no, these ideas came from them and were looked at diligently by Doug Ingram and his team. And they are very confident that we are going to deliver this.
We have a question from David Buck with Buckingham Research. Your line is open.
David Buck - Buckingham Research
Yes, thanks for taking the question. A couple of quick ones, first, David, if I look at the sort of second phase of the value enhancement plan with potential for strategic M&A or return of capital, can you talk about -- you talked about it a little bit, but talk about just whether we should be looking at a series of transactions, whether you’re looking for one larger strategic transaction?
And can you give a sense of how you are looking at the potential need to withstand a shareholder vote if you use equity of more than 20% or if it’s a tax inversion and how you look at return hurdles and what type of level accretion you’d be looking at? So, in other words, is this one deal that you may be looking for or should we be expecting you in the next six to 12 months to be acting on a series of transactions? Thanks.
Right. Well, let me take probably the simplest one. From an executability perspective, obviously doing one largest transaction is the easiest. Of course, I could also point out, if one did something somewhat smaller, you could always accompany it with a stock buyback or some form of capital return because when it comes to capital return, I take the view that that is very -- relatively quick and fairly mechanical exercise and hence something one would do fairly late in the whole management of the Valeant proposal.
In terms of your comment about different options which would either lead to less than 20% of stock being issued, in theory it could be an all-cash deal because you all know that we have an enormous amount of balance sheet capacity which, of course, actually is the real origin of the Valeant proposal in the first place because really their intent is to buy us with our own balance sheet.
Now, if we go the other way and say that it did require greater than 20% of shares outstanding, clearly it would require a shareholder vote. In such an instance it would have to be a very compelling transaction that I would be confident, along with the Board of Directors, that we would get a majority of investors voting for that proposal versus whatever might be on the table from Valeant at that point in time. So I think we just look through all these options very pragmatically and think about how do we create the greatest value for Allergan stockholders.
We have a question from Jami Rubin with Goldman Sachs. Your line is open.
Jami Rubin - Goldman Sachs
Thank you. David, just a high-level question, if I look at since earlier in this year when you started to announce plans to raise the long-term earnings projections, and again today, it just seems that the bulk of those -- the bulk of the driver is cost cuts, not top line. While the top line was very strong this quarter, you are not really changing the overall top line growth and in fact, as part of the new cost-cutting effort you acknowledge a 50 basis point decrement to long-term revenue growth.
When you talk about acquisitions, is it your priority to acquire assets that would provide pipeline visibility, technology that would give better top line visibility to your double-digit prospects? Or is just earnings accretion the highest priority?
I’ve heard you kind of comment on both, and I’m wondering if you could just - what’s more important to you? Is it buying a pipeline or is it buying a company that would add more value near term to earnings?
And then, just the other follow-up question is what is the timing of capital allocation, acquisitions, et cetera because Valeant and Pershing Square are trying to convene a special meeting and I would think that that would really give you sort of a limited runway to complete all your strategies? Thanks.
Okay. First of all, the greatest creation of shareholder value is through very robust top line revenue growth. And I think you would all agree that double digit for a five-year period is substantial. If you then look at the reduction in revenue, I think you would all say it would be incredible if we take $475 million out of the business, of which some close to - it’s over $350 million is from the commercial side i.e., short term, if we were to say this has absolutely no impact on revenue whatsoever.
We’ve reduced it, as I commented, by about 50 basis points. But that still gives us, as based on our plan, every year double-digit revenue growth. If I then think about your question on potential acquisition targets, I think the most important characteristic is that such a company could not substantially decrease our revenue growth, because this company is a growth company.
So, to kind of exaggerate, we would not buy a company that is growing 1% even if it had massive bottom line accretion in the very short term. I don't think that would have any real strategic fit. I think it would be very difficult to explain to our investor base.
And, of course, going back to the timing question, what you on the outside can't know is when did some of these projects start, and obviously I can't comment on that. So I’ll just give you the conclusion that I think that whatever we need to do can be done before a special meeting is held. And so our job is to not only deliver the plans as on the table, but then also to deploy our extremely strong balance sheet in a value-creating manner for Allergan stockholders.
Our final question comes from Andrew Finkelstein with Susquehanna. Your line is open.
Andrew Finkelstein - Susquehanna
Thanks very much for taking the question. If I could just slip in, ask for a final comment on your perspective on M&A. If you could comment about, particularly with the model you will have post the restructuring, what is most leverageable that you’d be bringing to add value in a combination?
And then, if I can slip in an additional question, just with RESTASIS, can you confirm if there have been any other purported notices from generics or when was the last time you were able to confirm with FDA that no one had been accepted for a filing? Thanks.
I think at the very high level, I’ve given you a lot of characteristics on potential acquisition targets. I think probably the greatest value we could bring is our knowledge of how to run a specialized business. And as I remarked earlier, whatever move we would make in a new therapeutic area or areas, we would see as a platform for further development, both on the internal side as well as through licensing.
And I think you’ve heard me say many times over that, if you look at our pillars in recent years, it is clear that people with technology in areas such as ophthalmic pharmaceuticals, medical aesthetics, medical dermatology, neurology, urology come to us. I would take the view whatever would be added to the portfolio, the same would occur. And on RESTASIS, no new news, everything is as we saw and commented three months ago.
We would like to thank you for your participation today. If you have any further questions, Joann Bradley, David Nakasone and I will be available immediately following the call. Joann will now take five minutes to give you market share data.
Thanks, Jim. The following market share data we are providing is Allergan's good faith estimate based upon the best available sources for data, such as IMS as well as Allergan's internal estimates. The market size, share and growth rate information is a moving annual total or trailing 12 months as of the end of March 2014, except where noted as year-to-date through March of 2014.
The market for ophthalmics is approximately $21.4 billion, growing at a rate of 13%. Allergan's market share is 16%. Year-to-date, the market is growing 12% and year-to-date Allergan's share is 16%. The market for glaucoma approximates $5.5 billion, growing at a rate of 6%. Allergan's market share approximates 28%. Year-to-date, that market is growing 9% and year-to-date, Allergan's share is 29%.
The market for ocular allergy approximates $1.5 billion, growing at a rate of 3%. Allergan's market share approximates 4%. Year-to-date, that market is declining 1% and year-to-date, Allergan's share is 3%. The plain ocular anti-infective market is roughly $1.4 billion, that market is flat and Allergan's share is 5%. Year-to-date that market is declining 2% and year-to-date Allergan market share is 4%.
The market for ophthalmic non-steroidal anti-inflammatories is about $550 million, growing at a rate of 6%. Allergan's market share is 6%. Year-to-date, that market is growing 8% and year-to-date Allergan's share is 7%.
The artificial tears market, inclusive of ointments, is approximately $1.8 billion, growing at a rate of 9%.
Allergan's share is 20%. Year-to-date, that market is growing 11% and year-to-date, Allergan's share is 20%.
The U.S. topical market for acne is roughly $2.4 billion. The annual growth rate is 14%. Allergan's market share is roughly 14%. Year-to-date, that market is growing 4% and year-to-date, Allergan's share is 15%. The top 10 markets for neuromodulators are roughly $2.2 billion, growing at a rate of around 13%.
And BOTOX has approximately an 83% market share. Year-to-date, that market is growing 12% and year-to-date, BOTOX share is 83%. The worldwide market for neuromodulators is roughly $2.8 billion, growing at a rate of around 11%. And BOTOX has approximately a 76% market share. Year-to-date, that market is growing 10% and year-to-date, BOTOX market share is 75%.
The worldwide market for dermal facial fillers is roughly $1.3 billion, growing at a rate of around 16%.
And Allergan has approximately a 40% market share. Year-to-date, that market is growing 12% and year-to-date, Allergan's share is 46%.
The worldwide breast aesthetics market for both aesthetic and reconstructive is roughly $960 million, growing at a rate of around 6%. Allergan has approximately a 40% market share. Year-to-date, that market is growing 8%; and year-to-date, Allergan's share is 41%.
That concludes our call for today. Thank you very much.
That does conclude today's conference. Thank you for participating. You may disconnect at this time.
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