Allergan Management Discusses Q2 2011 Results - Earnings Call Transcript

 |  About: Allergan plc (AGN)
by: SA Transcripts


Hello, and welcome to the Allergan Second Quarter 2011 Earnings Call. [Operator Instructions] At the request of the company, today's conference is being recorded. [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

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

Before we move ahead, I would like to remind you that certain statements that we will make in this presentation are forward-looking statements. These forward-looking statements reflect Allergan's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting Allergan's businesses. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our second quarter 2011 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'll 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 1 week. You can access this information on our website at

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

David Pyott

Great. Thank you, Jim. Good morning, ladies and gentlemen. Allergan continues to enjoy double-digit earnings and sales growth, driven by a wide range of products and franchises and across many countries around the world.

Growth outside the U.S. was particularly impressive with year-over-year growth of 29% in dollars in international markets, with Asia-Pacific growing 36%, Europe, Africa and Middle East by 30% and Latin America by 28%.

For the first time since the spin-off of AMO a decade ago, sales outside the U.S. accounted for greater than 40% of total sales. Despite general concerns over economic growth, our cash pay markets around the world appear to be on continuing upswing, presumably as our products cater to those segments with a population who are more economically resistant.

Furthermore, our reimbursed pharmaceutical product lines are benefiting from the many regulatory approvals secured in 2010. The only minor headwinds that we're experiencing is a higher-than-normal incidence of price cuts in Europe, given government austerity programs. The 2011 impact of which has increased from $30 million that we estimated at the start of this year to a now approximately $40 million.

Reviewing the results for the second quarter, sales increased versus the second quarter of 2010 by 13.7% fluctuated[ph] by the weak U.S. dollar versus most currencies, but still at the strong 9.6% in local currencies. Operating performance continues to be strong with non-GAAP diluted earnings per share of $0.96, marking an increase of 12.9% versus the second quarter of 2010 and above the range of expectations provided at the time of the last earnings call. Year-to-date, non-GAAP diluted EPS has grown 15.3% versus the first half of 2010, supported by strong gross margin trends and even as we continue to invest in expansion overseas and in launching our new products on BOTOX indications.

In the first half of the year, we have maintained an SG&A ratio just about 40% of sales. Now commenting the performance of the individual businesses, BOTOX enjoyed good sequential growth from the first quarter and is growing at an accelerated pace as we benefit from the approvals for chronic migraine and upper limb spasticity in the U.S. as well as market growth in the U.S. aesthetic business well into double digits. Second quarter year-over-year growth came in at 16.1% growth in dollars and 11.8% in local currencies with good growth stemming from both the therapeutics and aesthetic businesses.

The French Regulatory Agency, AFSSAPS, made France the first country to -- European country to issue a Positive Opinion for BOTOX for urinary incontinence associated with neurogenic detrusor overactivity with a license to be issued in due course.

We await FDA regulatory action for this indication later this year. Demonstrating our scientific leadership in the field of neurotoxins, both FDA and Health Canada have approved the breakthrough cell-based assay that will permit the dramatic reduction in the use of animal based testing. We filed for approval in many countries outside the U.S. and expect the regulatory agencies in Europe and elsewhere will also shortly approve this assay.

Since the last earnings report, BOTOX for chronic migraine has been approved in the additional countries of New Zealand, India, Turkey and Poland. The U.S. launch of the BOTOX indication for chronic migraine continues well. There's considerable physician interest in the neurology community and almost 3,500 physicians have been trained since approval, both through web-based and live injection training. About 3/4 of commercial lines now have policy coverage and here their commercial market accounts for about 2/3 of migraine prescription.

Actual number of units used by physicians has been continually trending up and is approaching the FDA indicated dose of 155 units, given access to reimbursement and given that 155 units is evidence based medicines.

Patient awareness for this condition and new use of BOTOX remains relatively low, which points to the opportunity for the use of DTC as a later stage of the chronic migraine launch.

Regarding upper limb spasticity in the U.S., we continue to experience double-digit year-over-year growth in focused accounts in academic medical centers. In the U.S. therapeutic market, Dysport and Xeomin remain at very low market shares. Regarding BOTOX Cosmetic, we're pleased that we've been able to contain Dysport share at about 17% procedure share since April of 2010 and should now benefit from the expanding market, which we estimate to be well into double digits.

In late July, Merz announced the FDA approval for Xeomin cosmetic and that the product will be available nationwide by the spring of 2012. Based on market intelligence, it has been reported that there may be manufacturing difficulties contributing to these delays. As we do not fully understand what these are given that Xeomin is available for therapeutic use in the United States, we're fully ready for Xeomin cosmetic launch and have a full package of countermeasures for deployment at the appropriate moment.

In Europe, it seems that the market despite, economic challenges, is growing low double digits, with BOTOX losing some market share to new entrants, especially in Italy and Spain, both countries where we historically enjoy extremely high market shares.

Market conditions in Latin America and Asia-Pacific remain buoyant. With the aforementioned limited market share losses, we estimate that BOTOX worldwide shares in Q1 was approximately 76%.

Turning to ophthalmic pharmaceuticals, Q2 sales increased to a gratifying 13.8% in dollars and 9.7% in local currencies, and have grown year-to-date 14.7% in dollars and 12.0% in local currencies versus 2010.

Year-to-date, growth in Latin America, Asia-Pacific and Europe, Africa and Middle East in dollars has been well above 20%, the latter being both boosted by direct selling operations in Turkey and Poland.

According to IMS, the worldwide ophthalmic market in Q1, the last period for which data is available, grew an impressive 15%, thanks, in part, to the growth of retinal therapeutics.

In the U.S., our business is recovering from the effect of the generic of ALPHAGAN 0.15% and genericization of ACULAR, posting year-to-date acquisition dollar growth per SDI Health of 7.7% year-to-date in June and the branded ophthalmic market increased 5.7%. This is due to strong performance of LUMIGAN 0.01%, where already 38% of new prescriptions have transitioned to the new product, given its superior performance characteristics, as well as strong growth with COMBIGAN and RESTASIS.

Since the genericization of Xalatan, the LUMIGAN franchise has only been marginally affected in volume, given low copays in this market, physician concerns about the varying quality of generics and strong formula provisions for LUMIGAN. In Q2, RESTASIS became the #1 product in value in the U.S. prescription ophthalmic market.

In Canada, thanks to the strong launch of RESTASIS with private payers, as well as the strong trajectory for LUMIGAN 0.01%, Allergan has grown in market year-to-date, May at 23%.

OZURDEX was launched in Canada in June, as well as recently in Argentina and Colombia. In Brazil, in June, per IMS, we just surpassed Alcon to become market leader in value share for the first time in our history. In Europe, for OZURDEX, the European Medicines Agency granted a Marketing Authorization for the additional indication of uveitis.

OZURDEX is performing strongly, especially in the important markets of Germany and France. In Italy, we received reimbursement and will introduce the product shortly.

In the U.K., the National Institute for Clinical Excellence known as NICE recommended OZURDEX for the treatment of macular edema due to the retinal vein occlusion. In Europe, Allergan is strongly gaining share in the glaucoma market due to LUMIGAN .01%, as well as GANFORT and COMBIGAN. In Asia, we're benefiting from strong growth across most of the Asian markets. In July, OPTIVE was launched in Singapore, Malaysia and Thailand. In Japan, ALPHAGAN 0.2% was filed with PMDA by our partner Senju.

Regarding facial aesthetics, Q2 sales grew very strongly at 26.9% in dollars and 20.0% in local currencies. Year-to-date, sales have increased 36.5% in dollars and 31.9% in local currencies.

As indicated in the last earnings call, Q1 sales in the U.S. were boosted by the sell-in of the consumer directed rebate promotion, combining JUVÉDERM and BOTOX, which partly sold through in Q2.

Around the world, we're observing very strong market growth as new consumers enter the market and existing consumers use greater volumes of products. Year-to-date, our sales in market outside the U.S. have experienced even higher growth than domestically. JUVÉDERM XC containing lidocaine was launched in Taiwan and Malaysia. Our skin care franchise enjoyed strong Q2 year-over-year growth of 10.1% in dollars and 9.6% in local currencies. LATISSE sales in Q2 declined 8.1% in dollars, but has grown year-to-date 10.5% in dollars and 9.7% in local currency. LATISSE was recently filed for approval at the European Medicines Agency.

As advised in the last earnings call, we executed in the U.S., in Q1, a promotional offer to physicians as well as a bonus program to consumers, which, of course, needed to be sold through, and therefore, affected Q2 results. We've just initiated a new DTC campaign focusing on the effects of aging on women's lashes. Based on scientific data and observations among women ages 30 plus that their lashes become thinner, shorter and lighter as they grow older. The campaign underscores that LATISSE is the only FDA product clinically proven to increase fullness, lightness, length, and darkness and is suitable for women 30 plus experiencing this effect of aging.

This further emphasize the relevance of LATISSE to women who are looking for rejuvenation therapies and the differentiation from lash conditioners that appeal to younger, more price-sensitive consumers. In support of all of this, we're also conducting a national consumer and media campaign titled LATISSE Wishes, with 35 -year-old actress and beauty trendsetter, Christina Hendricks.

Foreign markets also made initial modest contributions to sales, with good initial uptake in Canada, Brazil, Mexico, Singapore and Hong Kong.

Regarding medical dermatology, we've experienced strong growth in the U.S. at approximate 13%. In market, we are pleased that in acquisition dollar growth, we have recorded first-half growth of 42% for ACZONE and 15% for TAZORAC. Two recent events have significantly strengthened our medical dermatology franchise. Firstly, we recently announced the acquisition of Vicept Therapeutics, which gives us an exciting program for rosacea, which will move into Phase IIb clinical development. As demonstrated by Galderma, rosacea represents a significant area of market opportunity. Secondly, FDA recently posted guidance regarding requirements for clinical bioequivalence for generic of tazarotene.

Separately, for both psoriasis and acne, our interpretation is that this will require generics to conduct a clinical trial for both indications at risks to create the required data package. To-date, based on our review, no tazarotene bioequivalence study has been posted on This potentially provides a major delay to generics after the May, June 2011 expiry of the TAZORAC patent.

Now moving on to breast aesthetics, this business enjoyed a strong quarter with 17.0% growth in dollars and 11.9% in local currencies. Year-to-date, we have recorded growth of 12.6% in dollars and 9.5% in local currency. In the U.S., we benefited from a continuing trend of market preference for higher-priced silicone gel implants, as well as good sales for our latest range of tissue expanders. Overseas, we have grown substantially in both Latin America and Asia-Pacific. At the end of August, the FDA will hold an advisory panel regarding post-marketing studies of silicone gel breast implants to discuss innovative methodological approaches to these studies, as well as the monitoring of long-term safety issues.

Due to vigorous action, we're pleased that at the end of year one, post full enrollment of our patients, we have a 60% compliance rate for the Allergan breast implant follow-up study and plan to drive this number higher.

Regarding the obesity intervention line, Q2 sales decreased 12.1% in dollars and 15.3% in local currency. On the same trend that the year-to-date sales decline of 13.5% in dollars and 15.7% in local currency. Commenting on the situation in the U.S, which accounts for the bulk of global sales, year-to-date May, the overall number of bariatric procedures was down 8%, although, May year-over-year was slightly better at a 4% rate of decline.

Within the band market, LAP-BAND increased its share in May to 82% from 74% in May of 2010. However, within the overall bariatric market, sleeve gastrectomy increased its procedure share from 8% in May, 2010 to 20% in May, 2011, taking the majority of this business from bypass, but also 3 share points from bands.

Building on the recent FDA approval of LAP-BAND for lower body mass index patients with at least one co-morbidity and recently published health economics data for the LAP-BAND, we're embarking on vigorous programs to improve reimbursement access for patients. Sales in the quarter were weak both in Australia and Canada, offset by strong sales growth in Latin America.

Finally, commenting on urology, sales decreased 10.3% in dollars, which is attributable to the impact of the genericization of the original SANCTURA product. Year-to-date, sales have declined 6.8% for the same reason, but offset by 35% growth of the new-generation SANCTURA XR product. Clearly, the next catalyst for this franchise is the anticipated FDA and the European approval to BOTOX for incontinence due to detrusor overactivity associated with the neurological condition.

I'll now pass over to Jeff Edwards for his commentary of our financial performance.

Jeffrey Edwards

Thank you, David, and good morning to all of you on the call. During the second quarter of 2011, Allergan continued its strong performance trend and generated solid operating results as we produce double-digit sales growth in both our pharmaceutical and medical device businesses. These quality results were achieved in the face of costs related to U.S. Health Care Reform and ongoing Europe pricing pressures. Non-GAAP diluted earnings per share for the second quarter was $0.96, marking a 12.9% increase over 2010 results for the same quarter. Allergan was able to deliver the strong second quarter earnings performance even as we maintained our commitment to progressive investing in the current and future growth drivers of the business across the commercial portfolio and our research and development pipeline. 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 Q2 2011 gross margin of 86.1% increased 160 basis points when compared to Q2 2010. This increase in gross margin was driven primarily by improved year-over-year standard costs, favorable product mix and better net royalty dynamics. The non-GAAP selling, general and administrative expenses to product net sales ratio for the second quarter was 40.2%, totaling $563 million. The comparable ratio and expense value for the same period in 2010 were 40.1% and $495 million, respectively. We continue to implement targeted investments to further support our current and future growth and support the launch of the many products approved in 2010. Likewise, we are continuing to invest in the planned expansion into the emerging markets.

Non-GAAP research and development expenses were 15.2% of product net sales for the quarter, totaling $212 million, an increase of spent of approximately $15 million over the first quarter of 2011 and nearly $25 million over the second quarter of 2010.

With respect to R&D investment in 2011, Allergan continues to make substantial commitments to spending across both our medical device and pharmaceutical technology portfolios.

With respect to our balance sheet, consolidated Allergan days sales outstanding was 48 sales while consolidated Allergan inventory days on hand was 113 days. In the second quarter, operating cash flow after CapEx was approximately $214 million. Please note that this result was affected by the $45 million upfront payment to Molecular Partners, relating to the license agreement for the DARPin anti-VEGF technology.

At the end of the second quarter, Allergan's cash and short-term investments in cash and short term investments and net-of-debt positions total approximately $2.2 billion and $570 million, respectively. As a reminder, we called our convertible note, which resulted in the use of approximately $809 million of our cash during the second quarter of 2011.

For the third quarter of 2011, Allergan estimates product net sales in the range of $1,265,000,000 to $1,340,000,000 and non-GAAP diluted earnings per share to be in the range of $0.88 to $0.90.

Regarding full year expectations for 2011, Allergan estimates product net sales in the range of $5,220,000,000 and $5,370,000,000 and our full year non-GAAP diluted earnings per share between $3.59 to $3.63, which represents growth of between 14% and 15%.

Regarding 2011 cash flow, we still expect to generate operating cash flow after CapEx of approximately $900 million, excluding upfront payments for deals signed throughout 2011.

For your information, expectations for other lines of income statement and specific product sales expectations are included in our earnings release.

So with that, operator, we'd now like to open the call for questions.

Question-and-Answer Session


[Operator Instructions] Your first question comes from David Risinger, Morgan Stanley.

David Risinger - Morgan Stanley

My question is on BOTOX for neurogenic bladder. Given that you announced that you had filed for approval, on your -- I think, it was in November 2 or 3 earnings call, my assumption is that you had filed in October and so the PDUFA would be in August. And I just wanted to get a sense for your preparation for launch and your conviction in an on-time approval?

David Pyott

Okay, given there is a commercial question in there as well, I think, I'll just dive in and answer both parts. So clearly, if you look at, first of all, timing, we normally assume this to be safe that FDA usually takes a couple of months longer than the PDUFA date, which is why we've been pointing to an approval later in this year. In terms of preparation, a lot has been published already. I think, the urology community is extremely excited about this indication, both in United States as well as Europe and indeed other markets, because we're already approved in places like Brazil. In terms of the U.S. preparation, of course, we have the sales force available already, given our presence for SANCTURA. And just as in the case we had for chronic migraine that the margin will be adding a couple of dozens of people. But from a cost perspective, this really doesn't change anything at all, when you think about global SG&A spend. So I hope that addressed all your questions.


Your next question comes from Ken Cacciatore, Cowen and Company.

Ken Cacciatore - Cowen and Company, LLC

Just a question on BOTOX migraine and DTC. David, can you give us a sense of when the timing of this may occur? And could you also give us a sense of how broad it will be or how targeted it would be? Clearly, I'm sure you're working on it now, so can you give us a little bit of a sense of how you'd roll this out?

David Pyott

Right. Well, I've always pointed to this being towards end of this year or beginning of next. Basically, clearly, we've got to get distribution in place. And so in our world, that is really 2 factors. One is making sure that reimbursement is available. And as I read in my opening remarks, we've made great progress in terms of policy coverage. Also, when we look behind policy and look at the volume of insurance claims being submitted, there's very good trends for people actually getting patient coverage. And I'll say the one issue that remains, which is very normal and very actionable, is let's say less than stellar preparation of documentation in all cases, but we have reimbursement specialists who can help physicians in a very appropriate manner, with collection of documents and getting a process together. The other side, of course, is training, and I think there, you can tell also from the number I mentioned, almost 3,500 physicians, lots of interest, lots of good progress, and where we're putting all our emphasis is behind live injector training because this is the normal drill that we see in every single indication for the last 20 years. It's different area of the body, but principles remain the same. Finally, answering, specifically, DTC, as I've often mentioned, the first move will be to have an unbranded TV campaign, which is -- the purpose of which is to increase disease awareness. And I think work continuous, the work we're doing all looks very promising.


Your next question comes from the line of Shibani Malhotra, RBC Capital.

Shibani Malhotra - RBC Capital Markets, LLC

Just a follow-up on the BOTOX of chronic migraine indication. David, can you comment on the feedback you're getting from physicians and potentially patients as well in terms of how this product is actually working in real life and whether or not you're seeing patients come back for the second doses, or are proportions dropping off?

David Pyott

Right. Based on all the research we've done and also research we've read, conducted by third parties, it's quite clear that there's a very high interest amongst physicians. Over time, I would say, the trends are improving. More and more physicians that haven't yet undergone training expressed an interest in doing so. Obviously, for return visits of patients, it's still relatively early days, given we're talking a roughly 4-month cycle. But in terms of again patient feedback, very positive. I think in summary, everything I'm looking at is I call it green lights as this plane takes off to gain higher and higher altitude. There's really no real big watch-outs that we can see at all.


Your next question comes from the line of Corey Davis, Jefferies.

Corey Davis - Jefferies & Company, Inc.

I want to ask about your Vicept acquisition and the acne rosacea product that's been a hard indication to find a good drug out there. So could you elaborate a little bit more about what you've seen in the data, given that it's only presumed Phase IIa data, but there must have been something very encouraging there, and why that might be predictive of success? But also, what does that mean about the size, scope and time lines for an NDA filing post-Phase III?

Scott Whitcup

Cory, it's Scott here. We've been following this opportunity for a fair bit of time. Rosacea is a troublesome disease. It bothers a vast number of patients. There are some treatments out there that have an anti-inflammatory effect. But there's persistent redness that's very bothersome to the patients, and so we looked at their proof of concept data and saw few things. One that the Vicept compound was good at decreasing the redness, so that decrease in redness was of cosmetic value to patients, and lasted a fair bit. FDA wants the treatment effect to last throughout the day. So we see an unmet need in terms of the redness. We've actually already interacted with the FDA once the deal was announced. We want to make sure we get the dosing right, concentration right, et cetera, so we have ultimate success in Phase III, which is why our plan is to do a Phase IIb, but in linking with the commercial [indiscernible], I see this is a -- still one of our big opportunities in medical dermatology.

David Pyott

When we look to the market from a commercial viewpoint, Galderma has made great progress with their product. In fact, it's, if not the largest single product they have, one of the largest. And like everything, we believe there's more space in the market than just for 1 product, and very encouraging. This is probably the best asset we've come across in probably 5 years in all the work we do.


Your next question comes from the line of John Boris, Citigroup.

John Boris - Citigroup Inc

Question has to do with emerging markets. You've decided to establish direct operations in South Africa after having a distributor relationship there for 13 years. What are the criteria, David that you used to make the decision to go to low-end and emerging markets? And then I couldn't help but hear the commentary about your plant expansion in emerging markets. Can you give any color commentary on whether you've optimized your supply chain throughout emerging markets?

David Pyott

Well, South Africa is actually a great example of the way we think, because I was responsible for turning South Africa from an Allergan direct market into a subsidiary market in 1998, because I wasn't satisfied with the profit. And I think it was really connected with critical mass. And now that we not only have a much greater critical mass in ophthalmic pharmaceuticals, but we have the benefit of BOTOX Cosmetic, BOTOX Therapeutics, the facial line, the breast line and so on. You can imagine we have a really nice broad range of products that all add up to good share positions, good critical mass and therefore, good earnings power. So I was joking with some of our new South African colleagues, it was a little bit of the return of the prodigal son. Welcome back into the family. We've gone direct recently in Turkey, Poland and here too we created a joint venture in South Korea with our long-term partner, as well as taking all the aesthetics and breast businesses direct. Another market that we're working very hard and we'll be doing pretty soon is Russia. And really, then in our strategic planning, we're looking at the cadence of markets where we still have an opportunity to fill in the wide spaces. And there are still a couple of markets in Eastern Europe where the substantial populations of the same with some markets where we're not yet direct. In East Asia, another one we added recently incidentally is the Philippines. So it's all about economics. Answering your question on supply chain, that's pretty easy for us because we have such a concentrated plant distribution at work on logistics partners, that to really plug in another country is relatively simple. We usually have good relationships with our distributors. We even have many times called us so that we can very harmoniously thank them with notice and go direct. And really, probably the biggest short-term strain is for my accounting colleagues just to get them on to ASAP and bring them into our accounting systems. But we've done much more difficult things than that over the years.


Your next question comes from the line of Ben Andrew, William Blair.

Ben Andrew - William Blair & Company L.L.C.

Could you talk a little bit about -- more about BOTOX aesthetics, it's strong growth there and maybe give us a little bit of flavor on volume versus pricing trends in the quarter? And then you talked about a little bit less economic sensitivity in your patient targets, do you believe that is durable as we go through what looks to be a little bit of a worsening economy this year?

David Pyott

Yes. Well, when I look at say, the U.S., I've talked for several quarters now, about the market that looks as if it's growing around the mid-teens. Fillers is also incredibly strong and I gave you the caveats of why ex-factory Q1 was artificially boosted, and I knew that was go to happen, hence, why, I kind of gave you the heads up last time. Although, we still won't -- and the fact that we decided the great year to do gain growth. Even Europe looks as if it's progressing quite well. So when I ask myself, what on the earth is going on, and hopefully this isn't a rerun of what we saw at the end of 2008. But it appears that our patient groups are much more skewed to, let's say, the higher income brackets, therefore, they have more resistance to absorb increased cost of food, increased cost of gasoline, increased cost of clothing, that has been going on at least in the last 6 to 12 months. So that's the way I kind of do my observations. And I look very carefully both -- not only to the U.S., but all the other markets around the world. Can I detect signs of weakness? And really, when I look through it, beyond the odd countries, I mentioned Italy and Spain. So I'm not even sure there it's an issue of economic weakness. It's when you have incredibly high market share, you can't hang on to 90% plus. That's just not possible. And frankly, it's all about market growth versus market share.


Your next question comes from the line of Marc Goodman, UBS.

Marc Goodman - UBS Investment Bank

David, clearly, the top line was beaten pretty significantly and I know you will use that opportunity to spend on additional programs and then drop some to the bottom line. Can you talk about what was the additional spend this quarter that really only allowed $0.01 to drop, kind of, as far as a beat, as far as investors are concerned?

David Pyott

Yes. Well, I think, first of all, there's a much bigger picture. Then I'll try and zero in on what's happened so far this year. Many times, investors have asked me, what is the long-term aspiration for earnings growth. And I pretty consistently, post-recession, said it's mid to high teens earnings per share growth. I think the first order of commitment is investments in R&D. And you've seen very clear signs this year that in addition to the programs that Scott's had in the portfolio for quite a long time, we've also added to that portfolio through Molecular Partners, the most recent example being Vicept. Then going to sales and marketing expenditure, clearly, we have very good models for checking whether we see return for investment commitments. And Jeff Edwards appropriately likes to give me a hard time over that because that's his job as CFO. So we called it the lie-detection program between what was committed and what was delivered. And fortunately for us, we have great opportunities. We talked about emerging markets earlier, that explains the fair bit of our year-over-year increase. DTC, you'll be happy to know, as I often commented, year-to-date, has remained pretty much flat. So there, I see a leverage opportunity from existing programs. And then it's all about other things in the margin. And happily for us, it's not a zero sum gain. It will be terrible if we we're in really low growth markets, where we were pouring money and trying to move the market. Here, we have good growth markets, and also, we think growth first and then share. But we've also done well in terms of market share.


Your next question comes from the line of David Buck, Buckingham Research Group.

David Buck - Buckingham Research Group, Inc.

If we look, David, at the 2 therapeutic indications for BOTOX, migraine and OAB, can you talk about where you are in terms of sales force needs to expand? And you mentioned that migraine starting in DTC late this year, early next, can you also talk about spending plans or promotional plans for OEB and whether we should be expecting either sales force additions for DTC?

David Pyott

Right. Well, first of all, on the U.S. side, for chronic migraine, we basically built the sales force for the neurology specialty, so that's done. As I answered one of the earlier questions, at the margin, we will add a couple of dozen people for neurology indication. Obviously, in Europe, once -- Europe is always is a 2-stage process. One, you got to get the license, but then B, you got to be smart enough and we know that. What is the delay between approval and reimbursement? So you go on a very well known clock that you know as well, in terms of Germany and the U.K., they're always the first, then typically France, and then Spain, Italy and the other smaller European countries follow in order. So clearly, we have at the margin again, some sales force adds to conduct in 2012, both for chronic migraine and then the same for urology in Europe, but you've seen from reading our Qs and our commentary on sales force, where you've already got round numbers, 2,500 salespeople. Adding a couple of dozen here and there isn't going to change the course of P&L history. This is very much at the margin.

David Buck - Buckingham Research Group, Inc.

Okay. And just in terms of promotion for DTC in the U.S., you think it's -- DTC might be appropriate or what can you say at this point?

David Pyott

Right. Well, I think, I've already answered that question. Clearly, for chronic migraine, there's an opportunity for DTC to increase awareness and therefore, the market.

James Hindman

[Operator Instructions]


Your next question comes from the line of Larry Biegelsen, Wells Fargo.

Larry Biegelsen - Wells Fargo Securities, LLC

I wanted to focus on bimatoprost for male and female pattern baldness. You recently started 2 large Phase II studies, one in men, one in women. Scott, can you talk about what you learned in the Phase I study when we might see that Phase II data, the regulatory pathway, 2 Phase III 12-month studies, and just your level of enthusiasm, given that we all know LATISSE is very effective for growing hair.

Scott Whitcup

Larry, clearly, this is a program that we've optimally resourced, given the huge market potential. So the Phase I was just testing the overall formulation, making sure that it was stable, making sure that it was tolerated. So we probably have some of the Phase I data at R&D Day. But it's really the Phase II data that will be proof of concept. That depending on enrollment and feedback probably won't be available till end of sort of, I'd say, latter part of next year. Clearly, we'll be monitoring this and as we start getting any positive feedback, we'll gear up, so that once we get the proof of concept data, we could go to Phase III right away. The good news is that the FDA regulatory pathway is well delineated as there are other products that have been approved. The negative is it's not quick. You've got to go through all of the steps that FDA requires and that will be 2 Phase III trials following a proof of concept study. And as you pointed out, we see a potential market, not only for male-pattern baldness which is a huge market, but the animal data suggests that for female hair thinning, that could be a very beneficial product as well.


Your next question comes from the line of Gregg Gilbert, Bank of America Merrill Lynch.

Gregory Gilbert - BofA Merrill Lynch

This one's for you, Scott. Given the lack of systemic exposure associated with RESTASIS, is an over-the-counter version in the works or feasible? And will we find out what RESTASIS X is at the March R&D Day?

Scott Whitcup

Well, in terms of your first question for OTC, I mean, we actually have not considered that, given that the product is so successful as an RX. Dry eye tends to be for the level of severity that we're treating one that is oftentimes managed with people needing an eye exam. But down the line, for all successful products, given that RESTASIS is so well-tolerated, something that we consider for all of our products. In terms of RESTASIS X for competitive reasons, we may not discuss it much at R&D Day. We've got a number of things in the pipeline around RESTASIS. But we haven't committed to saying yes or no whether we'd show any of them.


Your next question comes from the line of Ronny Gal, Bernstein Research.

Ronny Gal - Sanford C. Bernstein & Co., Inc.

Scott, can you help us understand a little bit the distinction between end product growth in the outside United States versus you acquiring a subsidiary that if you kind of look in the last couple of years, what percentage of growth o U.S. is represented by product growth, versus, essentially, bringing products in -- the franchises in?

David Pyott

I had a little difficulty with the audio there. But I understood that the question was how much of the growth x U.S. is effectively converting a market from -- through distributor to direct, because clearly there's a pick up there and how much is growth on incrementally. So I would say, you see both of those things hard at work. Clearly, on order of magnitude, you have the capture of probably the order of 30% higher when you go direct, because of distributor margin in the middle. But then also, we see really good growth inside the markets. And there, we have the benefit of applying let's call it the formula of what we know is successful marketing through our own people versus through a third-party. Did that address your question, Ronny?

Ronny Gal - Sanford C. Bernstein & Co., Inc.

Yes. Any idea about in terms of excess of growth o U.S. in terms of end user demand, versus the U.S.? So it's actually, is the growth in the end user the same U.S. and o-U.S.? And if not, how much more is end demand growth in o U.S.?

David Pyott

Well, I think, in many of the markets, we see currently higher growth rates than in the United States. And I think that's the case of many companies when I read reports. So once we're obviously a very much U.S. domestic company by history and we see good growth, given all the approvals we've had and ones that are on the horizon, I think, the next couple of years, we'll see even stronger continuation of growth x U.S. And for me, very encouragingly, we even see good growth in Western Europe. It's not only the other parts of Europe that's been driving the strong numbers that I quoted.



Your next question comes from the line of David Maris, CLSA.

David Maris - Credit Agricole Securities (USA) Inc.

On BOTOX, your guidance last year indicated growth of about 8%, but in the second quarter, you grew 16% and in the first half, you grew 13%. So it looks like there is an acceleration in growth consistent with BOTOX, migraine kicking in and the economy getting better. So your implied guidance -- or your guidance implies the second half growth of 5% to 11%, which would be a slow down, sequentially. Can you talk about -- I mean, why would there be a slowdown and maybe are the numbers significantly too low?

David Pyott

Well, I think, the one note of caution that we have to keep in mind is will we actually see Xeomin cosmetic launched in the United States or not. So clearly, we have sort of 2 things going on. We have the continuing take-off of migraine, given the comments on timing of neurogenic overactive bladder that's almost too late to change anything. We all understand how that works, you only pick up a little bit of sales right at the beginning. And then we have to just be careful about Xeomin. Usually, a product that launches has lots of sampling, that's has to come from somewhere, and usually a lot of it comes from the market leader.


Your next question comes from the line of Frank Pinkerton, SunTrust.

Frank Pinkerton - SunTrust Robinson Humphrey, Inc.

You had mentioned European pricing a couple of times in your opening comments, and yesterday, when the President gave his address, his first place to cut was Medicare. So can you speak, broadly, not in 2011, but from a longer-term, how would austerity measures in the U.S. and Europe affecting Allergan? And ultimately when you sit around and plan with the Board, what are you doing to combat that over the longer-term?

David Pyott

Right. Well, first of all, Europe, I suppose, as we all read the news, the cuts and price reductions have been even worse than normal. And I suppose that kind of unfortunately makes sense given the squeeze that a lot of those governments find themselves in. Happily, for us, innovation and product flow always beats general economic conditions. So I'm rather pleased that I was able to quote in my opening remarks that Europe, Africa and Middle East grew by 30% in Q2, notwithstanding all the price cuts going on. If we don't look at the U.S., obviously, the same comment about products, along innovation and differentiated products very much applies. So I'm really pleased that we're in a good spot. These are relatively low exposure to Medicare. Really, when you kind of peel right through it, the only major franchise that is very Medicare-oriented is glaucoma, where, clearly, we have major position, and a growing position. But that's 11% of the mix in Medicare of worldwide sales. So it's relative. And I think the next thing that is favorable to us is the relatively low co-pays in the ophthalmology, meaning ophthalmic pharmaceutical markets that typically around the $30 mark, and hence, why, I think, beyond physician skepticism about the quality of different generics, when one thinks about relative value of $30 out of pocket per month, it's still money. But if the physician thinks that is the real product for the patient, usually, the patient will go along with that.


Your next question comes from the line of Seamus Fernandez, Leerink Swann.

Seamus Fernandez - Leerink Swann LLC

My question is actually on Japan. When we look at some of the kind of commentary from other pharmaceutical companies and specialty pharma companies, we may be seeing some strong growth in Japan on a countercyclical basis. Can you just update us on your strategy in Japan and potential new product opportunities there?

David Pyott

Well, we have still a rather limited presence in Japan relative to other countries. But I can say, on the BOTOX therapeutic side that our partner GlaxoSmithKline is making great progress, some very, very strong growth. We recently took back the rights in full agreement with GSK for BOTOX Cosmetics, known as BOTOX Vista and that is also in early days, but showing really good traction. And then indirectly, for ophthalmology, our key partner there Senju, which is the #2 company in Japan. And they've done a really nice job on LUMIGAN. And as I remarked, they just filed ALPHAGAN. And the benefits of that show up on the other income line, which -- there's various things in there. But that's one of the drivers of increasing other income. It's the LUMIGAN royalties, as well as in the royalties from GSK.


Your next question comes from the line of Annabel Samimy, Stifel, Nicolaus.

Annabel Samimy - Stifel, Nicolaus & Co., Inc.

You characterized, your cosmetic market for BOTOX and as well as facial aesthetics as being relatively strong and having spectacular growth both this quarter and last quarter. But in light of increasingly negative sentiment for the consumer side, is this -- are you shifting more of your dependence on international expansion for the continued growth of these segments? Or can you say that you're still feeling comfortable about the growth in the U.S. as well as expansion into emerging markets to capture that growth?

David Pyott

Yes. Well, I think, in the short-term, my view is we just ride out whatever is going on in markets. And in recent memory, even at the bottom of the recession, the recessionary year for BOTOX, we only had a decline worldwide for BOTOX Cosmetic of 4%. So that showed how resilient it was. What we saw a much greater variability on was dermal fillers, which I recollect, decreased about 15% in 2009 versus 2008. But when I think about that, I believe again, the power of the new products, not just ours, but other companies' products, is what's really propelling market growth. And so once again, you see the power of innovation overwhelming any economic factors. And again, I think, whenever I pour through all the ex-factory data, consumer data, I think it's just one of these global mega trends that people want to look good and look younger, and we address that. And clearly, these people have choices about where they do spend, they wish to spend their discretionary income, and it appears this is a very high index of need.


Your next question comes from the line of Gary Nachman, Susquehanna.

Gary Nachman - Susquehanna Financial Group, LLLP

Scott, what's the status of BOTOX OAB for the idiopathic indication? How are those trials going and the time line there? And do you think, FDA would be concerned about approving just a neurogenic indication the back half of this year? Would that cause them to restrict the use of the product in any way?

Scott Whitcup

Yes, Gary, the idiopathic 2 Phase IIIs are fully enrolled, so those are ongoing. We expect the data out probably around mid-next year. I think, the FDA, typically our approach has been to go to the high unmet need for his. I think, FDA's aware that -- clearly, aware that we have an idiopathic indication. I don't think that that's going to impact what -- how the label will be. The label will be focused on the data and indication for which we first submit. So I think whether we have the idiopathic trial going or not, will not change what the FDA does for neurogenic detrusor overactivity license.


Your next question comes from the line of Amit Hazan, Gleacher & Company.

Amit Hazan - Gleacher & Company, Inc.

Just one quick follow-up on the SG&A guidance. I wondered if you -- just to be very clear on it, if you can explain what the key changes are for you in terms of the higher expense from the last time you gave guidance to now.

David Pyott

Yes. Well, I think, given the breadth of our product line, also the breadth of our geography, you should just consider that we're always very careful about when we approve incremental spend, that we're determined that there's good ROI for those investments. I think, clearly, I've answered the question to say at the margin here and there, we're adding sales people. I commented about migraine. I commented about urology, and then potentially, those new markets that will come on stream. And as I answered one of the other questions, of course, we're then moving people who indirectly work for us but are not on the payroll on to the payroll with increased expense, but then a much higher capture of margin.


That will come from the line of David Amsellem, Piper Jaffray.

David Amsellem - Piper Jaffray Companies

Any update on the progress of RESTASIS in Europe, when we could see any data and potential filing with European regulators?

Scott Whitcup

We continue to work with regulatory agencies in Europe and conduct clinical trials. But we haven't really given any specific timing on when that could be approved, given the challenge.

James Hindman

Thank you. We'd 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 5 minutes to give you market share data.

Joann Bradley

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 for trailing 12 months as of the end of March 2011, except where noted as year-to-date through March 2011.

The market for ophthalmics is approximately $17.2 billion, growing at the rate of 12%. Allergan's market share is 15%. Year-to-date, market growth is 15% and year-to-date Allergan share is 15%.

The market for glaucoma approximates $5.8 billion, growing at a rate of 5%. Allergan's market share approximates 19%. Year-to-date market growth is 5% and year-to-date, Allergan market share is 19%. The market for ocular allergy approximates $1.5 billion, growing at a rate of 12%. Allergan's market share approximates 4%. Year-to-date, the market growth is 27%. Year-to-date, Allergan market share is 3%.

The plain ocular anti-infective market is roughly $1.4 billion, growing at a rate of 7%. Allergan's share is 10%. Year-to-date, that market growth is 9% and year-to-date Allergan's share is 7%. The market for ophthalmic non-steroidal anti-inflammatory is around $470 million, declining at a rate of roughly 3%. Allergan's share is 12%. Year-to-date that market is growing at 5% and year-to-date, Allergan's share is 10%. The artificial tears market, inclusive of ointments, is approximately $1.6 billion, growing at a rate of 7%. Allergan's share is 21%. Year-to-date, that market growth is 8% and year-to-date, Allergan market share is 21%. The U.S. topical market for acne and psoriasis is roughly $2.2 billion, with an annual growth rate of 7% and Allergan's market share is roughly 9%. Year-to-date, that market is growing 8% and year-to-date, Allergan's share is 9%.

The top 10 markets for neuromodulators our roughly $1.5 billion, growing at a rate of around 12% and BOTOX has approximately an 85% market share. Year-to-date, market growth is 12% and year-to-date BOTOX market share is 85%. The worldwide market for neuromodulators is roughly $1.9 billion, growing at a rate of around 9%, BOTOX has approximately a 78% market share, and year-to-date, that market is growing at about 11% and year-to-date, BOTOX market share is 76%. The worldwide market for dermal facial fillers is roughly $860 million, growing at a rate of about 19% and Allergan has approximately a 36% market share. Year-to-date that market is growing at roughly 37% and year-to-date Allergan's share is around 36%. The worldwide breast aesthetics market for both aesthetic and reconstructive is roughly $830 million, growing at a rate of around 5%. Allergan has approximately a 40% market share. Year-to-date, that market is growing roughly 3% and year-to-date, Allergan's share is around 42%. The worldwide bariatric surgery market for the Band and Balloon segments only is roughly $340 million declining at a rate of roughly 14% and Allergan has approximately a 57% market share. Year-to-date, that market is declining 20% and year-to-date, Allergan's share is around 68%.

And that concludes our call. Thank you.


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

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