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Executives

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

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

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

David Pyott - Chairman, Chief Executive Officer and Chief Administrative Officer

Joann Bradley - IR

Analysts

Ken Cacciatore - Cowen and Company, LLC

David Risinger

Corey Davis - Jefferies & Company, Inc.

David Buck - Buckingham Research

Ronny Gal - Bernstein Research

Gregory Gilbert - BofA Merrill Lynch

Randall Stanicky - Goldman Sachs Group Inc.

Marc Goodman - UBS Investment Bank

Allergan (AGN) Q3 2010 Earnings Call November 1, 2010 11:00 AM ET

Operator

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

James Hindman

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

Before we move ahead, I would like to remind you that certain statements that we will make in this presentation are forward-looking statements. These forward-looking statements reflect Allergan's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting Allergan's businesses. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements we made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our third quarter 2010 earnings release, which was furnished to the SEC today on Form 8-K, as well as our filings with the SEC referenced in that disclaimer.

We will follow up the question-and-answer session of this call with a short listen-only segment, where we will provide additional miscellaneous information that relates to our business. Under Regulation FD, in order to be able to discuss this information freely during the quarter, we must be sure that it is in the public domain. This conference call and accompanying webcast are being simultaneously broadcast over the Internet, with replays available for one week. You can access this information on our website at www.allergan.com. At this point, I'd like to turn the call over to David Pyott.

David Pyott

Great. Thank you, Jim. Good morning, ladies and gentlemen. With a series of important R&D approvals in 2010 both by the FDA and regulatory agencies around the world, a gradual recovery of most major economies favorably impacting our cash-pay Aesthetics businesses and the worst of the impact of generics on our U.S. Ophthalmology business behind us, we're well-positioned for driving strong growth for several years ahead. This puts us in a unique position in our industry to address the impact of incremental full year costs of U.S. healthcare reform and European price cuts and/or increased rebates, which we commented earlier in the year and now estimate at approximately an incremental $100 million for 2011. We're working diligently to absorb these costs. However, this pressure should be carefully considered when considering the earnings power of our business.

Now reviewing the results of the third quarter. Sales increased versus the third quarter of 2009 by 6.3% in local currencies, by 5.7% in U.S. dollars. Our more economically sensitive cash-pay businesses continued on the same track of growth as earlier in the year. Around the world we have not observed any negative growth trends across the quarter even in the U.K. or in the challenged major economies of the eurozone, and we continued to enjoy strong upswings in Latin America and Asia.

Operating performance was strong, with non-GAAP earnings per share of $0.78, marking an 11.4% increase versus the third quarter of last year and exceeding our expectations provided in early August. Since then, we announced our settlement with the Department of Justice and also an impairment charge regarding the SANCTURA assets, which led to a GAAP loss of $670.5 million for the quarter. We're glad that we reached a resolution with the government, have this matter behind us and have entered into a five-year corporate integrity agreement.

The strong non-GAAP earnings growth was driven by good sales growth across the diversified range of products, as well as by a continued gross margin expansion in both the Medical Device and Pharmaceutical lines, and consciously offset by a large increase for R&D of 6.3% year-over-year on a non-GAAP basis as we build the strength of our pipeline for the long term. In Q3, we spent less for direct-to-consumer advertising than in the prior year, but they're about the same level of investment year-to-date as in the prior year.

Since the last earnings call, we have secured some very important regulatory approvals, notably, BOTOX for the prophylaxis of chronic migraine by the U.S. FDA, following the earlier approvals in the U.K., as well as in Estonia and Slovakia. FDA approved LUMIGAN .01% as the first line glaucoma therapy. Health Canada approved RESTASIS, so now our efforts are next directed to making this unique product for therapeutic dry eye available also in Europe. FDA granted the second indication for OZURDEX namely for uveitis.

On October 27, the Japanese MHLW approved BOTOX for upper and lower limb spasticity. Furthermore, we earned licensed worldwide rights for an ophthalmic allergy product, Vlastikast [ph] [7:44] from VISTAKON, a division of Johnson & Johnson, which is approved by FDA at the end of July. This will enable us to firstly, to reenter the U.S. allergy market just before we expect the arrival of generics of ELESTAT and effectively maintain a competitive position in the significant allergy segment of the worldwide ophthalmics market. Vlastikast [ph] [8:08] as a highly competitive label, indicated QD [ph] for the prevention of itch with a rapid onset of action and program to last all through the day up to 16 hours.

Considering the rapidly expanding retina market, we are clearly focusing all our efforts on OZURDEX and hence took the decision not to commercialize TRIVARIS and have written off the manufacturing asset for $10.6 million.

Concerning our cooperation with Serenity with their there Nocturnal En [Enurensis] product, Ser-120, the Phase III trials have been completed. The conclusion is that these trials are not sufficient for successful registration. Allergan and Serenity and the process of reviewing the complete trial data to determine what additional trials are indicated to support the development of the program.

Regarding LAP-BAND, we're preparing for U.S. FDA panel in early December regarding a lower body mass index indication. Given the poor track record of weight-loss drugs, we're anxious to receive approval to extend LAP-BAND to a broader patient population, given the obesity epidemic.

Finally, we are pleased that we have filed BOTOX for neurogenic detrusor overactivity resulting from overactive bladder or sometimes known as spastic bladder with the FDA. We are confident that urology should be the next major BOTOX franchise.

Regarding BOTOX for chronic migraine, our task is not to extend approvals around the world. We have filed with the European Medicines Agency through the mutual recognition procedure and have also submitted dossiers in Canada, Australia, New Zealand, Switzerland, Brazil and a few other Latin American countries.

Turning to the performance of the individual businesses, I'll commence with Ophthalmic Pharmaceuticals, which showed a continuing good pattern of growth, increasing 7.1% in local currencies and 6.3% in dollars versus the third quarter of 2009.

This Q3 growth number for Allergan, although lower than the 11% worldwide market growth number, reported by IMS Global for Q2, the last quarter for which data is available, is in line with global market growth, excluding the Retina segment. The weak sales are in the U.S. where we are impacted by the authorized generic of off a gun .15% and generics of ACULAR.

Outside the U.S., all operating regions are growing double-digit, with particularly impressive growth in Asia and Europe. Our focused brands grew strongly thanks, to local currencies. RESTASIS which is mainly U.S. continued very strong put of 23.6%. The LUMIGAN franchise, including GANFORT grew by 19.1%. The ALPHAGAN franchise declined by 4.1% due to the impact of generics in the U.S. and to some extent, Europe, offset by great growth by COMBIGAN. In the U.S., the overall branded market has been affected by generics with STI, [ph] reporting only 1.6% growth in acquisition dollars year-to-date August.

On the other hand, generics are growing 1.3% in acquisition dollars.

At Allergan, we're prepared well for the arrival of generics. With the rapid growth of ALPHAGAN P 0.1% and COMBIGAN, we have maintained consistently more than 70% of the trailing prescriptions of all bermonadine-containing products [ph]. With the launch of ZYMAXID, we have already converted 43% of the trailing prescriptions in just over four months, and regarding ketorolac, we have kept about 20% of the trailing prescriptions with ACUVAIL. In latter's case [ph], the time between launch of an improved product and multiple generics was too short to save higher share, given inadequate reimbursement. Building on a recent acceleration of LUMIGAN strips, we're excited that we we're able to launch LUMIGAN 0.01% just before the American Academy of Ophthalmology. This product, with comparable efficacy to the original LUMIGAN, but with dramatically lower hyperemia and discontinuation rates, is already enjoying great share gains in Europe and Canada.

Regarding managed-care reimbursement for the LUMIGAN products, we expect similar tiers and coverage in 2011 as in 2010. For RESTASIS, we have plotted a new TV commercial, which is scoring highly with patients regarding awareness and consideration of RESTASIS. In Canada, we started shipping RESTASIS at the end of September and assess this as a major opportunity. LUMIGAN 0.01% with recent additions to provincial formulas in Canada is now reimbursed for 84% of public lines. In Europe, we are enjoying very strong sales growth due to the launch of LUMIGAN 0.01%, which is now available in Germany, the U.K., Sweden, France and Spain, with prescriptions being additive to the original LUMIGAN.

Generics of Xalatan are now available in Italy and Spain. GANFORT is also enjoying rapid expansion and was recently launched in Turkey. OZURDEX is off to a fast start in Germany and is now also available in the U.K., Ireland, Sweden and Denmark. Overall European sales are furthermore being boosted by the direct sales in Turkey and Poland.

In Latin America, strong growth is being driven by COMBIGAN, GANFORT, Relestat and OPTIVE. We recently launched a high-potential local product in Brazil, Zypred, a fix combo of ZYMAR and prednisolone. In Asia, high growth is being driven in the rapidly expanding markets in India and Korea, as well as markets in Southeast Asia. In Australia, ALPHAGAN P is now on the national reimburse list called PBS.

Moving on to BOTOX. I will first comment the significance of the FDA chronic migraine approval before commenting performance. Obviously, we're both delighted by the final approval after a long development process and also by the timing of the approval shortly before the American Headache Society meeting at the middle of November. In terms of sales force deployment, the timing is also ideal as we just finished our five-year commitment to GlaxoSmithKline in late September for a co-promoting Amerge and Imitrex STATdose to neurologists. This salesforce capacity has been transitioned to detail BOTOX for chronic migraine to a customer base who we've already been visiting specifically for GSK.

Once again, Allergan is poised to address and create a new market, given the substantial burden of this condition affecting 3.2 million Americans. We'll be alone in this task, as BOTOX is the only focal solution for the prophylaxis of chronic migraine and the only prophylactic solution being actively promoted after the generizisation of TOPAMAX. As has always been the experience with BOTOX therapeutic indications, injector training and product adoption takes time, speeded or slowed by reimbursement conditions.

Given our estimated small existing sales base of BOTOX, either to offer cure with migraine, there's some limited reimbursement by private payers. Just over 10% of private lines and of course, the company with substantial step added, now securing reimbursement and establishing injective fee payment schedules is our next priority in parallel with injector training.

Moving on to comment the BOTOX performance in the quarter. Q3 sales increased versus the same period in 2009 by 4.5% to local currencies and by 4.2% in dollars. Overall, BOTOX Cosmetic and therapeutic combined sales were flat in the U.S., with therapeutic growth being offset by modest sales declines in Aesthetics with Medicis establishing a presence in the market with Dysport and [indiscernible] with Dysport for cervical dystonia. The latter with minimal market share gains.

Outside the U.S., BOTOX is enjoying double-digit growth, precisely in those markets where we are successfully competing with multiple competitors. On a global basis, we estimate in Q2, the last few days for which we have market data, that BOTOX enjoyed 80% market share in a market that grew 10% year-over-year. In the U.S., the gradual pickup of upper limbs spasticity is in accordance with our expectations, as new injectors are trained and referral pathways are established. Regarding the U.S. aesthetics market, we estimate that the market in Q3 is growing double-digit in procedures and that Dysport share appears to be very flat since April with an estimated market share of 16% to procedures in September.

As Dysport is sold at a discount, then it's also something heavily, we estimate that BOTOX still enjoyed a 91% value of share in Q2. Our print campaign for BOTOX called, There's only one BOTOX has been running since May. In Europe, we're pleased that we're only marginally losing market share in a strongly expanding market as Galderma enters the market with Azzalure, and Merz with Xeomin and [indiscernible].

Markets In Latin America and Asia are blend, and BOTOX is performing strongly. Regarding facial aesthetics, sales continued to grow very strongly at 28.1% in local currencies and at 27.6% in dollars, with Allergan growing at 20% or higher in all operating regions and gaining large amounts of share in all regions of the world. Only in those Asian countries where we do not yet have product approvals such as China and Japan are we lagging behind. We have clearly established the JUVÉDERM family as the number one global brand and are further building on its premium value proposition lidocaine-containing products and VOLUMA accounting for an increased part of the mix.

In the facial aesthetics market, Allergan has the ability to act as the locomotive as we can build upon our physician presence with BOTOX to expand our physician customer's procedural offerings through physician training and education to full facial concept. In addition, the recent innovations of lidocaine in volumizing, as well as hydrating formulations have further expanded the attraction of these products to both doctors and their patients. We've invested in JUVÉDERM-branded campaigns in the U.S., Canada, the U.K., France and Germany, as well as in integrated PR campaigns.

Regarding skin care, with most sales being in the U.S., Q3 sales decreased 2.4% in dollars year-over-year. But this sales of $21.7 million were 2.9% lower than in the third quarter of 2009, with inventory builds in a rapidly growing base of prescribers boosting sales in the prior year. Sales were also sequentially lower than the $23.9 million in Q2, although this may be due to summer seasonality which we still cannot accurately assess as we're only two years into the product introduction.

In Canada, we have fulfilled all regulatory requirements and are launching LATISSE for the next few weeks. As our market research shows, high levels of product satisfaction with the product and high levels of patient retention with various to first-time adoption, given cheaper OTC alternatives. For this reason, we're investing in major customer sampling activities in Q4. Obviously, samples affect short-term sales, which is one reason why we have guided to the lower end of our previous full-year range for sales.

One of the most significant campaigns running from early October to mid-December is a $100 rebate in cash for LATISSE after receiving a BOTOX Cosmetic or JUVÉDERM treatment. Regarding x factory sales of the medical dermatology product within this segment, ACZONE decreased marginally and TAZORAC increased marginally. This was caused by inventory changes, rebates and patient coupons. The more reliable measure would be a market acquisition dollars reported by FDI Bonin [ph]. ACZONE sales increased year-over-year in Q3 by 22.9%, with ACZONE hitting a new market share high in August and TAZORAC growing by 15.7%.

For breast aesthetics, Q3 sales increased 10.3% in local currencies and 8.6% in dollars. We enjoyed a strong rebound in the U.S., offset by a weak x factory sales overseas. This was a factor of inventory adjustments with distributors in the current year, while market disruptions in markets such as Australia, Mexico and Korea caused in the prior year in advance of changing from a distributor to direct sales model and also changing sourcing to Costa Rica. Hence, the weak overseas sales growth does not reflect any weakness in end market demand. we believe that we have gained some market share in the quarter, both in the U.S., in the augmentation and tissue expansion [ph] categories and internationally. The U.S. and Canadian markets are continuing to adopt the higher cost silicon gel products. We're also continuing to innovate, with the worldwide launch of resterilizable sizers as well as the MAGNA-FINDER device for our tissue expander line. We estimate that the worldwide breast aesthetics market grew 9% in Q2 year-over-year.

Commenting urology, Q3 sales increased 17.6%, a catch-up from the weak Q2 x factory sales with year-to-date sales declining 3.9%. Looking through minor changes in inventory and rebates, acquisition dollars sales increased year-to-date 2.1% with original SANCTURA sales declining 17.1% after the somewhat earlier-than-expected launch of trospium chloride generics at the beginning of September and growth of 6.5% for SANCTURA XR.

Due to lack of performance, primarily in the general practitioner channel, we've terminated our co-promotion agreement with NovaQuest [ph]. Consequently, we have reduced our outlook for sales in the remainder of the year. Now we're awaiting the approval of BOTOX for neurogenic detrusor overactivity towards the end of 2011 to build this business.

Finally, regarding the Obesity Intervention segment, sales declined 8.2% to local currencies and 8.1% in dollars. The decline in U.S. sales was offset by an increase in sales in foreign markets. In the U.S., given high out-of-pocket costs for non-reimbursed LAP-BAND procedures and also high co-pays for reimbursed surgeries, it appears that the bariatric market was correlated with the level of unemployment. Our cash-pay market has continued to decline rapidly during the course of 2010 and now only accounts for about 10% of the brand. Year-to-date for the Reimbursed segment, we estimate that the overall bariatric market declined 7%, with the band market declining 4%. With an estimated 71% share of the band market for the LAP-BAND, we're now at the point where our year-over-year change in share should be minimal going forward, given a stable market share situation in 2010. Outside the U.S., we have had good growth of LAP-BAND and Albara [ph] sales in most markets in Europe, as well as in Canada and parts of Latin America. We recently launched a rapid port supplier, which has eliminated are the sole weakness of our product offering relative to competition. I would now like to pass over to Jeff Edwards, who will provide detailed comments on our financial performance.

Jeffrey Edwards

Thanks, David, and good morning, to all of you on the call. During the third quarter of 2010, Allergan generated strong operating results as we experienced good performance across each of our geographic regions. Allergan was again able to overachieve our sales and earnings per share expectation, despite headwinds relating to Europe, pricing pressures, U.S. healthcare reform and the ongoing generic impact to our ALPHAGAN P 0.15% in ACULAR brands.

Allergan's strong competitive positions across the globe within each of our specialty areas of concentration, along with the quality of and the breadth of our product portfolio, have enabled the company to generate non-GAAP diluted earnings per share for the third quarter of $0.78, coming in above the top end of our range of expectations and marking an 11.4% increase over 2009 results for the same quarter. Consistent with prior periods, while producing this quality performance, the company continues to invest into the current and future growth drivers of the business. A reconciliation of all of the adjustments to GAAP earnings is set out in our earnings release.

Excluding the effects of non-GAAP adjustments and amortization of acquired intangibles, Allergan's Q3 2010 gross margin of 85.1% increased 170 basis points when compared to Q3 2009, and Allergan saw a sequential improvement in both its Pharmaceutical and Medical Device margins. This continuing positive gross margin trend has been driven primarily by improved year-over-year standard costs, with the biggest contribution coming from our breast product line, given our recent change over to a lower-cost manufacturing base in Costa Rica, favorable volume-based manufacturing variances, lower year-over-year inventory provisions and lower royalty expense. The non-GAAP selling, general and administrative expenses to product net sales ratio for the third quarter was 39.5%, totaling $470 million. The comparable ratio and expense value for the same period in 2009 were 41.7% and $470 million, respectively. We continue to work diligently to offset the cost of healthcare reforms and impact of rising rebate structure in the U.S., as well as pricing reductions in Europe and therefore, managing Allergan's cost structure in a very thoughtful manner and considering other potential structural changes to our business model. Likewise, consistent with our plan and comments to the investment community, we are recognizing the benefits of leverage in many of our businesses. Our ongoing focus is to direct our investments to the highest yielding products, which have been appropriately risk-adjusted for economic risks and traditional market and execution risks.

Non-GAAP research and development expenses were 16.3% of product net sales for the quarter, totaling $194 million, an increase in spend of approximately $27 million over the third quarter of 2009 and sequentially above the level of spend in the second quarter of 2010 as we continue to fund new projects and invest in our productive and promising Pharmaceutical and Medical Device pipelines.

Excluding the effects of non-GAAP adjustments, Allergan's third quarter operating income ratio increased by 250 basis points when compared to the third quarter of 2009. The company's disciplined and selective approach centered on maximizing return while maintaining appropriate future-focused investments has enabled the company to generate this improvement to operating margin performance.

With respect to our balance sheet, consolidated Allergan days sales outstanding was 45 days, while consolidated Allergan inventory days on hand was 113 days. Allergan continued to maintain exceptional cash flow generation capabilities in the third quarter with operating cash flow after CapEx of approximately $289 million.

On a year-to-date basis, operating cash flow after CapEx totaled approximately $771 million, which compares to $741 million generated in the same period in 2009. At the end of the third quarter, Allergan's cash and short-term investments and cash and short-term investments net of debt positions totaled approximately $3.1 billion and $902 million, respectively. In addition to the contribution of this cash balance from the company's strong cash flow produced during the quarter, Allergan's liquidity position was further strengthened by our issuance of a 10-year note in the amount of $650 million, with the coupon of 3.375 and effective rate of 3.41%. This note was issued to address the potential retiring of our convertible debt, which is puttable and callable in April of 2011. Although, this financing will result in a duplicate interest expense of approximately $5.5 million in our fourth quarter, we believe that the market conditions were ideal and chose to pursue it, realizing that it was the right long-term action and that the company would have to cover the additional cost of this interest expense. It is also worth noting that following the close of the quarter, the company made payments to the DOJ totaling approximately $590 million.

For the fourth quarter of 2010, Allergan estimates product net sales in the range of $1,220,000,000 to $1,270,000,000 and non-GAAP diluted earnings per share to be in the range of $0.86 to $0.88. As a reminder, these expectations assume that the U.S. R&D tax credit will be renewed in the fourth quarter of 2010, with full year retroactive benefit impacting Q4 2010 results. We assume that the renewal of this R&D tax credit has a value of approximately $0.05 of earnings per share. Regarding full year expectations for 2010, we are adjusting our full-year sales expectation to between $4,750,000,000 and $4,800,000,000 and our full year non-GAAP diluted earnings per share to between $3.14 and $3.16, which represents growth of between 13% and 14%. For your information, expectations for other lines of the income statement and specific product sales expectations are included in our earnings release.

Our solid results during the third quarter demonstrate the depth and breadth of Allergan's diversified lines of business. Allergan very much prides itself on the disciplined approach taken with respect to how our dollars are spent and what kind of investment returns are required to justify this spending. We will continue to strive towards building on our momentum and effectively executing against our business strategies, further strengthening Allergan as a leader in our selected specialty markets. So with that, operator, I'd like now to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Ronny Gal, Sanford Bernstein.

Ronny Gal - Bernstein Research

My first question, David, is a global one. We spoke earlier this year. You've mentioned that you want to wait towards the end of the year before you kind of think about renewing your commitment to a three-year growth rate. We are now past the contracting season on the Eyecare business. You have now approval for BOTOX headache and obviously, seen the data on the BOTOX overactive bladder. Are we still looking for the next two or three years at a kind of like 15% to 19% earning growth rate? Or are we looking at a slightly lower rate given the global pressures? And I've got a follow on.

David Pyott

Well, first of all, as unfortunately, you're well aware, we never give long-term bottom line earnings growth rates. In my opening remarks, all that I attempted to point out was, when you're doing your models, don't forget that there are considerable pressures in terms of taxes, rebates and price decreases. Of course, I was trying to put that in the context of otherwise, a very favorable position in which we find ourselves. I think another thing that I'd ask you to think about is also our long-term commitment to R&D. I've been very clear over the years that Allergan's performance is all about the long term. And of course, in our case, we're rather pleased that our historic investments in R&D have really well paid off, and just look at the enormous number of approvals. When Scott Whitcup and I talk about this, of course, we're very pleased in all that's been achieved. And of course, it's our job now, if you'd like, to reload the canon, because we're, speaking of Head of R&D and the CEO, we're asking ourselves, what are the products that we're going to be talking about that are going to hopefully just prior to filing, call it 2014, 2015. And that's just the cycle in which we operate in pharmaceuticals. Maybe just bringing it back, obviously, we understand that we're a well-positioned company, and therefore, we do want superior return for our shareholder base.

Ronny Gal - Bernstein Research

And a follow-on, a little bit about the International business. Can you just tell us a little a bit about, first, obviously, you've got a plan of buying some of your distributors internationally, roughly how much you will spend to date buying those franchises? And roughly, what are you thinking you'll have to spend for the next two or three years to build yourself somewhat of a global franchise here? And second, a little bit about the distribution of SG&A, how will it change over the next two or three years between the U.S. and o U.S.? Where do you see yourself in terms of how you spend your money on SG&A kind of like three to five years out?

David Pyott

Well, first of all, in terms of, if you like, acquiring distributors, the sums have been pretty modest. In our prior 10-Qs, we laid out what we spent in Korea. That was of the order of $20 million and the exact numbers are there. And of course, in our press release, we set out how much we expended for Turkey. Happily, most of our contracts of more recent vintage are very carefully awarded, so that we have the ability to reacquire distribution rights effectively free of charge with an appropriate notice period. And that indeed was the case for Poland, where we absolutely spent zero. And our partner there has done a great job for us. And in fact, they are now representative beyond Poland, in places like the Ukraine, most of the ex, I'll call them Soviet Republic, using historical term, and even parts of Southern Europe. So they are kind of master distributor arrangement. So net-net, what does that all mean? It means going forward, there should be very little money spent on any of the markets, where we choose to go direct, where we see sufficient economies of scale. Now answering your second question on SG&A, clearly, there is an increasing emphasis on spend x U.S. because in almost all of our businesses, we see higher growth rates outside the United States. I think a reflection upon the state of affairs in this country, and really a reflection of a lot of the squeezing that is going on due to healthcare reform.

Ronny Gal - Bernstein Research

As your bigger piece of your revenue comes from overseas. I'd like to consider in 2011, beginning to give us some numbers on international versus U.S. revenue and buy products. Are we really going to go blind here in terms how to model some of those products?

David Pyott

As you know, we gave you some indications when you listen to my script. I go to great lengths to see if I can give you an appropriate and balanced view of what's going on. And of course, you can back into some of the numbers, when you think carefully about what I've said. Maybe a last comment on SG&A, we've said for some time now, we expect this to gradually trend down into the mid-30s. As a company, we've historically been very high. And of course, that's also due to the need historically to trade large salesforce structures. By and large, barring these new geographies that we're adding, that is by in large, being completed.

Operator

Ken Cacciatore of Cowen and Company.

Ken Cacciatore - Cowen and Company, LLC

Just a question on the migraine rollout educational effort and reimbursement, can you just give us a sense of the timing kind of internal thoughts about how long it's going to take to get the covered lives up so maybe some of the early discussions you're having, clearly, the label wouldn't indicate the need for step edits, or just was trying to understand some of the initial discussions there. And then also on overactive bladder, just timing of the data release and in what form you release it?

David Pyott

First of all, I'll take the ones on chronic migraine. In my opening remarks, I tried to set out what is the starting position, and of course, this has always been the case of BOTOX, where physicians are just ahead of us, it takes us years to catch up on what they are establishing in reality. With an off-label indication. And then of course, our job is to get the product approved on label. I also would like to reemphasize once again, that we assiduously avoid any off-label promotion. That's why I set out the fact that there is a small base that exists and about low teens kind of percentage for project insurers covering BOTOX for really severe migraines. Clearly, Managed Care is going to look at con-combatant use of medications, which will be approved to show that, indeed, patients really do have 15 or more migraine days as a baseline to be considered for the use of this product as a prophylaxis. If we look at timing, there's really two parallel tracks. One is the training of physicians because despite sometimes a lot of enthusiasm by various lectures on BOTOX, there aren't that number of doctors who actually use the product. It is a very much concentrated base of people who are the avant-garde. But we have to go through the normal cycle that we know very well from every single therapeutic indication going all the way back cervical dystonia, and that typically takes 6-plus months in terms of assessing people's interest, getting them to attend training courses, and then the real moment of truth is actually putting their thumb on the syringe and injecting on real life appropriate patients. On the other side, we have reimbursement and that will take a minimum of six months, really more 12 months plus when we look at getting final j codes [ph]. That takes a long, long time and indeed, I'm sure will be operating with temporary J. codes [ph] in interim period. Finally, another major step is just getting established what will be injector fees. So obviously, the cost of our product is well known. You know the cost per vial. The FDA has made life simple for all of us by coming yup with a fixed dose, 155 units. And of course, we're assuming it will just be over close to four treatment sessions per year, just because the label says three months, but we know from practice, as everybody absolutely as regular clock work through the day, well of course not, there's always scheduling problems. So cost of drug is very well known. And now we've got to get very well established with both private insurers and Medicare carriers what should the injection fee be.

Ken Cacciatore - Cowen and Company, LLC

David, would you be willing to give us a sense of how many clinicians currently use migraine and what your goal will be 12 months forward, and may 24 months forward?

David Pyott

Unfortunately, not. There's really not for competitive reasons, but I think those are things that are very, very proprietary to the company.

Scott Whitcup

Ken, this is Scott. We planned [indiscernible] federal released data either in the form of publication or meeting abstracts for the neurogenic detrusor overactivity. We plan to have to submit it as abstract and presented in the first half of all '11. There are a couple of major neurology meetings once we finalized when and where, Jim and the group, we'll let everybody know.

Operator

Corey Davis of Jefferies & Company.

Corey Davis - Jefferies & Company, Inc.

I'm not sure if you already touched on this a little bit about your efforts in higher growth emerging markets, the areas that you mentioned like Poland and Brazil and some other areas of Asia. But do you have enough infrastructure on the ground already in those regions to grow organically? Or is this something where you'd like to grow a little bit more quickly through outright acquisitions of companies and/or products?

David Pyott

Well, if I answered it from a very high level. One of the great fortunes we have at Allergan is the fact that we have this very large backbone business called Ophthalmology. And because of our history in Ophthalmology, we've been present in the majority of these markets for a very, very long period of time. I would say, the most recent adds have been the ones we've talked about earlier, i.e. parts of Eastern Europe, Turkey and parts of Asia as well. In fact, like in China, we've kind of been forced to strategically take a pause when we spun off AMO, but now we're back. And we're obviously, we're going to bring back, answering your question, there's really very few companies or products available in these markets. It's much more a case of deciding when it's appropriate for us to take distributor markets direct. And there we're very careful not to divert or defocus our efforts in small markets where we have some really good distributors doing a very fine job for us. So there's no, if you like, cookie-cutter approach that one size fits all, very thoughtful in terms of where can we add value. And that really goes back to answering one of the prior question, which is really to make our expansions in these markets. We will spend very little balance sheet money, and I think it's much more a case of the model such as lastikaft [ph], here we are in licensing an allergy drug from VISTAKON J&J worldwide. And then as always, our job is then to register this product in allergy markets that are of sufficient size, scale and attractiveness. And then just the normal rollout that typically our products are available in AT or so markets around the world.

Corey Davis - Jefferies & Company, Inc.

Last question for Scott, you the want to offer probability that the neurogenic OAB indication for BOTOX fits the criteria for priority review?

Scott Whitcup

Corey, we never sort of predict that. Clearly, we always have that priority review. There's a relatively small and special patient population, so we've obviously asked for it. But I really couldn't comment on the probability success.

Operator

Gregg Gilbert of Bank of America Merrill Lynch.

Gregory Gilbert - BofA Merrill Lynch

I was hoping you could frame the market opportunity for BOTOX OAB and the specific indication that you filed for. And I'd always try to ask you for the PDUFA date under a six or 10-month scenario.

David Pyott

Well, I think we'll try and answer a different way just to say that the filing of NOAB [neurogenic overactive bladder] was off to the quarter. So that then gives you kind of the coordinates to, if you like, do you own predictions prior to review or not. Is it 10 months, is it 12 months? You kind of know the drill by now. In terms of scaling the opportunity, I think we've spoken of about a baseline for the U.S. of roughly 100,000 patients. I think, as always, we want to start in a place that we understand and then if the product really works, as we've normally seen markets tend to expand based on performance and also thanks to appropriate investment in training and education.

Gregory Gilbert - BofA Merrill Lynch

David, another global question in light of increasing interest in international M&A, are you considering any business development deals, where geographic diversification is more important than therapeutic focus? And maybe another way to ask that is, would you consider going outside of your current therapeutic focus areas to get some more diverse business in light of some of the taxes, price cuts and things you alluded to early on in the call?

David Pyott

Well, first of all, as much as we would love to buy businesses overseas, it's quite difficult. There are not so many assets available, I don't know whether this is good or bad, you can take it both ways. Fortunately, the U.S. market is the one that is most transparent, where most technology is available and where markets are transparent, i.e., there are assets that won't comprise and can actually become available. Finding such things in Europe is quite difficult. I think it's due to the history of European companies being really forced into nonspecialist markets. You can think of lots of examples of that, which makes those companies somewhat uninteresting to a company like Allergan. So we will scour the earth, so to speak, whether it be the early-stage assets, you've seen us enter into both purchases, licenses, partnerships or earlier stage assets, and I'm sure we will continue to do that. In terms of therapeutic areas, obviously, we like the areas we're in. But we do look across all over the garden fence to say could there be an adjacent area where, by definition, it has to be specialist. If it's not a limited number of physicians, then we're really not interested because then, our model of very close connectivity with our customer base would no longer apply. Obviously, to the degree there could be some synergies back to our existing products would make it even more interesting. And next answer, if we do go over the fence, it'll be in a very limited way. I can't imagine if we'll ever end up having a dozen specialty areas. That just gets too complicated.

Gregory Gilbert - BofA Merrill Lynch

Lastly for Scott, any update on LATISSE scalp studies? Anything you can offer anecdotally or otherwise?

David Pyott

None of us are really helpful.

Scott Whitcup

No specific data to share other than, clearly, we're investing in the program. And if you sort of watch indications, you'll see we'll start moving into the clinic and start to say, end of next year will be the first time you'll sort of see some indication on how things are going.

Operator

David Buck, Buckingham Research Group.

David Buck - Buckingham Research

First, a couple of questions for Jeff, can you talk a little bit about the -- it doesn't seem like there's an impact for the September quarter, but can you talk a little bit about what you think the full-year impact of European pricing might be, as well as healthcare reform in the U.S.? And can you also talk about just what the incremental healthcare reform hit might be for 2011 from the U.S. and then just on the tax rate, what gives the confidence that you'll actually have that rate reenacted on a retroactive basis?

Jeffrey Edwards

So for next year, when we think about European pricing and healthcare reform, we've provided on guidance on healthcare reform 2011 of 50% to 70%. Closer to 70% probably, when you look at total numbers, and that includes the 2010 overlap. And then if you look at European pricing in the range of $30 million, we plan on European pricing adjustments every year. It's happened for as long as we can remember it. We got hit with a little bump this year, but we've managed through it. What was your second question?

David Buck - Buckingham Research

Just on the R&D tax credit being renewed, what gives you the -- do you have any read on that?

Jeffrey Edwards

Well, I wish had a crystal ball that would be that predictive. They have a history of waiting until the fourth quarter to go back a few years, David. They waited until the end of the year. We assume, in our guidance that it's approved, and we've provided you with an estimate of about $0.05 of EPS in terms of what it's worth, if you include the retroactive period as well as the fourth quarter. So we're counting on our politicians doing the right thing, we'll see.

David Buck - Buckingham Research

And one more big-picture question, I guess, for David. You talked a little bit about going to SG&A levels of sort of 35% over time, anything structurally that you're planning for next year? You've , in the past, made moves in the Urology business, but any changes that you have sort of in the plans for 2011 on cost cuts?

David Pyott

I think this will be more a case of evolution versus revolution. We're always looking to see where we can sharpen the pencil, where we can drive better performance. I think all of you were quite pleased with us going back when the recession hit. We showed that, when, if you like, the car deals [ph] are done, we can really control costs pretty quickly, and I think that's due to our very good knowledge of our business right down to the screws., which may not exist in larger companies. So for us, it's really how do we offset all these new higher taxes and rebates by increased efficiency so that's something that is a real major focus of our management meetings. And frankly, I look for inspiration from outside the industry, where we can have good ideas, where we don't cut corners, we don't want to reduce our quality of service or offering, but how can we just do it on a cheaper basis? And this will be in gradual pieces. And after that, I think, the real big driver is that we basically built out most of our sales force infrastructure and so the odds are now pretty modest to hit the margin.

Operator

Marc Goodman of UBS.

Marc Goodman - UBS Investment Bank

First, on the breast implant market, you said that the U.S. business had rebounded. Can you give us the flavor of what kind of rebound the market's doing and what share we have now with silicone for that market? Second, on gross margin, besides product mix, Jeff, can you give us any flavor for any expected changes in the gross margin over the next couple of years? Just any other push pulls we should be thinking about? And then third, Scott, can you tell us besides OAB, what's the next big pipeline product we should be keeping an eye on?

David Pyott

Marc, I'll start. If I look at the breast aesthetics market, globally, we would estimate that maybe year-to-date, Q2, that the market has grown certainly low double digits, which is obviously recovering from a weak position in the prior year. And within that, based on the tracking data, we, we look at as well as our own account analysis, it would seem that we're gaining share at the margin, particularly at the augmentation side and more recently a little bit on reconstructive side as well. So good market conditions. I also tried to point out in my prepared remarks that in the quarter. Our international sales were probably masked a little bit due to things going on with channel that really have nothing to do with real end market demand. So obviously , where I'm sitting, I'm always looking if there's a crack in the wall with consumer spending downturns. And basically, when I look right through our businesses, I don't see it. Jeff?

Jeffrey Edwards

Yes, on the gross margin question you had, you asked about significant push pulls, I'd say, there's nothing significant. We gain modestly in royalties. We see some improvements that our volume-based improvement. So in other words, leverage in our plants, where we have nice cost structures in place. But more or less, we don't see any dramatic moves. We'll provide more specific guidance at the end of January, Marc.

Marc Goodman - UBS Investment Bank

Just as far as you had mentioned earlier on the call that the cost of the breast implants have come down because of the Costa Rica plant change. I was just wondering if there any other planned changes that we should be thinking to drive that costs more?

Jeffrey Edwards

Yes, you're seeing the real benefit. You began seeing it last year with respect to the Breast business, and you're seeing the real benefits push through this year as predicted. So there's my significant push pulls that you would ask about. I don't see anything dramatic next year. It's going to be mostly volume-based absorption-based improvements.

Scott Whitcup

On the pipeline I would say, the next things that we're focusing on, one is glaucoma, sort of a number of compounds in the clinic. We also are making a big investment in the sustained release, which would be a paradigm shift. Number two is the retina pipeline. It's clearly, a growing area within ophthalmology, our key space still. And so OZURDEX for diabetic microedema which is really the big OZURDEX indication is in finishing up Phase III. And I and the team spent a lot of time looking at what other retina products we can slate in. Third on the Allergan medical side, we have a couple of things. One, VOLUMA for the U.S. It's done great elsewhere in the world, and through our Serica acquisition, we're getting some studies lined up to be able to effectively launch that product. And then finally, through our business development, we have a couple of partnerships. And so, for example, on the urology space, apaziquone for bladder cancer in Phase III would be something eventually, when the data are out, we'll start talking about it a little bit more.

Operator

Randall Stanicky of Goldman Sachs.

Randall Stanicky - Goldman Sachs Group Inc.

Just a couple of very brief follow-ups on BOTOX for migraine. David, can you just remind us how much you have built in for your 2010 numbers, if anything? And then how important is a permanent jay code [ph] to uptake? And I guess, the asset question separately, is there any other color or comfort you can give us as we think about the uptake curve for migraine over 2011?

David Pyott

Well, of course, if we project forward, to probably February when we give you guidance for 2011, that's always our cycle. To be a little bit of a Rubik cube for you, because the data points you'll have will be, what was the growth of cosmetic and therapeutic worldwide 2010 versus 2009. And then when we give you a global number for BOTOX, all of you will be trying to work out how much of that came from migraine versus other things. And I suppose, if I were in your shoes, I would be trying to model out what is market doing where we give you a lot of data, what's going on with share so that you can really fairly accurately model what is the base, and therefore, what is the Delta to the total number that we will be giving you. That'll be the way I'd approach it.

Randall Stanicky - Goldman Sachs Group Inc.

Is there anything built in for 2010? I think, this prior year, you had said there was something modest built in for this year?

David Pyott

Well, again, obviously, I have an idea of what the base is, and beyond the existing base, the increase will be extremely small, given what I stated in terms of now we got to train people, typically call it six months just to get people from new thumbs onto new syringes. And then the whole issue of the rather slow cycle of increased reimbursement.

Operator

That will come from David Risinger, Morgan Stanley.

David Risinger

First, can you explain your expectations for payor coverage with respect to how physicians will be reimbursed? I know that the FDA approved the 155 unit dozing for migraine, but it's unclear to me whether physicians will be reimbursed for 2 vials for 200 units or whether they will be reimbursed for 155. And then second, could you please comment on the topical toxins from Revans [ph]? I'm assuming that you have assessed that product and just wanted to get your thoughts on it.

David Pyott

Okay, first of all, in terms of coverage, if one looks at both public and private payers, they have always allowed for certain amounts of wastage. And so the answer is, I can't think of any real exception, very clear, that payers will pay for two vials, i.e. 200 units, even though the indicated dose is 155. Maybe I'll cover the one on Revans [ph]. This is a product, obviously, we followed for years now. I think the pathway to approval probably is more difficult than most people perceive. Just getting, if you like, basic toxin manufacturing facilities approved, is anything but trivial. And then when one looks at performance, basically, it's kind of almost like an abrasion approach, that it takes a lot of time to get the toxin actually to pass the dermis and do what it's required to do. So as much as there are lots of people who don't like injections, we understand that. The inconvenience of this product due to the time it takes, I'm not sure that it really will do that much even if it's approved one day. And I think to some degree, would address the different segment of the market. So I don't really see it as something that would necessarily, if you like, be a take-away from the existing market. I think it would be a new niche that would, if you like, be grafted on to the existing marketplace.

James Hindman

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

Joann Bradley

Thank you, Jim. The following market share data we are providing is Allergan's good-faith estimates based upon the best available sources of data so is as well as Allergan's internal estimates. The size, share and gross rate information is a moving annual total for trailing 12 months as of the end of June 2010 except to were noted as year-to-date through June of 2010. The market for ophthalmics is approximately $15 billion, growing at a rate of 12%. Allergan's market share is 16%. Year-to-date, market growth is 10% and year-to-date Allergan market share, 15%. The market for glaucoma approximates $5.4 billion, growing at a rate of 7%. Allergan's market share approximates 19%. The year-to-date market growth is 6% and year-to-date, Allergan market share is 19%.

The market for ocular allergy approximates $1.3 billion, growing at a rate of 2%. Allergan's market share approximates 4%. Year-to-date, market is declining 3% and year-to-date Allergan's market share is 4%. The plain ocular anti-infective market is roughly $1.2 billion, growing at a rate of 12%. Allergan's share is 11%, year-to-date, the market growth is 12% and year-to-date, Allergan's share is also 11%. The market for ophthalmic nonsteroidal anti-inflammatories is about $460 million, growing at a rate of 6%, Allergan's market share is 25%. Year-to-date, the market is declining 5% and Allergan's share is 17%.

The Artificial Tears market, inclusive of ointments, is approximately $1.4 billion, growing at a rate of 9%, Allergan share is 21%. Year-to-date, the market growth is 8% and year-to-date, Allergan's share is 21%.

The U.S. topical market for acne and psoriasis is roughly $2.1 billion, the annual growth rate is 13%. Allergan's share is roughly 8%. Year-to-date, the market growth is 10% and year-to-date, Allergan's share is 8%. The top 10 markets for neuromodulators are roughly $1.4 billion, growing at a rate of roughly 7%, and BOTOX has about an 87% market share. Year-to-date, the market growth is 14% and year-to-date, BOTOX share is 87%. The worldwide market for neuromodulators is roughly $1.8 billion, growing at a rate of roughly 11%. BOTOX has approximately a 79% market share. Year-to-date, the market growth is roughly 12%, and year-to-date, BOTOX shares is 80%. The worldwide market for dermal facial fillers is roughly $730 million, growing at a rate of 13%. Allergan has approximately a 35% market share. Year-to-date, the market growth is roughly 24%, and year-to-date, Allergan's share is about 35%. The worldwide breast aesthetics market for aesthetic and reconstructive is roughly $820 million, growing at a rate of roughly 8%. Allergan has approximately a 38% market share. Year-to-date, the market growth is about 14%, and year-to-date, Allergan's share is about 38%.

The worldwide bariatric surgery market for the Band and Balloon segments only is roughly $360 million, declining at a rate of roughly 3%. Allergan has approximately a 68% market share. Year-to-date, market growth is roughly 1%, and year-to-date, Allergan's share is about 67%. And that concludes our call. Thank you.

Operator

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

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