Allergan Management Discusses Q4 2011 Results - Earnings Call Transcript

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


Hello, and welcome to the Allergan Fourth Quarter 2011 Earnings Call. [Operator Instructions] At the request of the company, today's conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Jim Hindman, Senior Vice President, Treasury Risk and Investor Relations. Sir, you may begin.

James M. Hindman

Thank you, Mary Ann. Good morning. With me for today's conference call is David Pyott, Chairman of the Board, President 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'll 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 fourth quarter and year-end 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 one 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 E.I. Pyott

Thanks, Jim. Good morning, ladies and gentlemen. During the fourth quarter, Allergan sales grew versus the fourth quarter of 2010 by 7.2% and due to the strength of the U.S. dollar relative to most world currencies by a higher 8.2% in local currencies. We enjoyed double-digit growth in many operating regions. That is, in the U.S., pharmaceutical business, thanks to the acceleration of the Botox therapeutic franchise, in Latin America and in Asia Pacific, while business and economic conditions in Europe were more challenging than earlier in the year.

For the full year of 2011, Allergan grew year-over-year by 10.9% in dollars and 9.2% in local currencies with double digit growth in all of our overseas operating regions: Europe, Africa, Middle East, Latin America and Asia Pacific.

Regarding operating performance, we continued on a strong trajectory, with fourth quarter non-GAAP diluted earnings per share at $1 even, marking an increase of 13.6% over the fourth quarter of 2010 and above the range provided on the last earnings call.

Gross margin in the quarter was a direct core tie of 86.8% of sales, which Jeff Edwards will comment shortly. For the full year of 2011, Allergan generated on the same basis, earnings per share of $3.65, an increase of 15.5% over 2010. For reconciliation to GAAP numbers kindly consult our press release.

With this strong result, we are pleased that we delivered on our midterm aspiration of mid-teens earnings per share growth. The strong earnings were achieved after we absorbed estimated total cost of U.S. healthcare reform and overseas price cuts of just over $130 million on a pre-tax equivalent basis. The split is just over $90 million for U.S. healthcare reform and approximately $40 million for overseas price reductions.

At the start of the year, we have estimated the cost of $100 million for the year. These costs increased as the year progressed as we were hit with waves of mandated price reductions in Europe as well as in South Korea, and in Q4, by an increase in our accrual for the so-called doughnut toll for Medicare Part D by an additional amount in excess of $10 million.

Of the $130 million-plus, approximately $100 million was reflected as a reduction to net sales. We continue to invest vigorously into our future, increasing our investment into R&D by 12.6% to $858 million on a non-GAAP basis.

For 2012, we plan to execute off the large number of regulatory approvals that we secured from agencies around the world in 2010 and 2011. It is to be noted that in the guidance given for 2012, that R&D is substantially higher than the models of many sell-side analysts.

During 2011, we maintained a high level of investment in SG&A at just over 40.3% of sales in line with 2010. Regarding the investment in DTC, we spent $177 million in 2011, just over the $171 million expensed in 2010. As we added a new branded, unbranded campaign for chronic migraine, it is evident that spend in other brands was leveraged, as we transition from the creation of brand awareness to maintaining consumer awareness.

Now turning to the performance of the individual businesses. Regarding ophthalmic pharmaceuticals. After an outlier quarter of weak growth in Q3, fourth quarter growth returned to double-digit in local currencies of 10.7% and 9.2% in dollars. This is very much in line with full year 2011 growth over 2010 at 9.9% in local currencies and 11.4% in dollars and matching up with the year-to-date September growth numbers of 10% reported by IMS Global.

Of course, you'll note, we're always one quarter in arrears given market research. In the U.S., we're picking up in growth, as we have worked our way past the genericization of ACULAR and ELESTAT and have stabilized the base ALPHAGAN product, after licensing remonidine 0.15% to Alcon.

Even after the genericization of Zylotan, LUMIGAN continues to grow strongly and is poised to overtake Travatan in terms of prescriptions in the coming weeks. Given the lower rates of hyperemia for LUMIGAN 0.01% and physician perception of the efficacy of LUMIGAN, the percentage of new prescriptions written for LUMIGAN 0.01%, as a proportion of all LUMIGAN prescriptions, has passed the 50% mark.

In 2012, LUMIGAN enjoys the best formulary position ever. COMBIGAN and RESTASIS also continued to grow strongly in the United States. All of our overseas regions enjoy double-digit growth in the fourth quarter. In Europe, strong performance is being driven by LUMIGAN, GANFORT, OPTIVE and OZURDEX. In Latin America, we are the fastest-growing multinational ophthalmic company, with a wide range of countries enjoying strong advances, driven by LUMIGAN 0.01%, GANFORT, our tears products, as well as RELESTAT and Zypred.

In Asia, we are growing very strongly across Southeast Asia, as well as in China, although off a small base. In addition, we are growing share in our large businesses in India and Korea. LUMIGAN 0.01% was recently launched in India.

For 2012, we are pleased that we have just launched in the U.S. a new OPTIVE product, OPTIVE Advanced, a triple-action formula that works on all layers of the tear film. In Europe, the same product has just been launched as OPTIVE Plus.

Regarding of ALPHAGAN, our partner in Japan, Senju, just secured approval and will mark the product -- will market the product as AIPHAGAN. In Russia, we commenced selling ALPHAGAN P and GANFORT in January and will launch other products shortly. OZURDEX, since the last earnings call, has been approved either for retinal vein occlusion or retinal vein occlusion and uveitis in several countries, namely Canada, Israel, Switzerland, Singapore, Mexico, Chile and Sri Lanka.

Regarding BOTOX, sales increased versus the fourth quarter of 2010 by 8.3% in local currencies and by 7.5% in dollars. The full year 2011, sales grew by 10.4% in local currencies and 12.4% in dollars.

Concerning the full year of 2011, we estimate that sales of BOTOX for therapeutic indications, and separately, cosmetic use, both grew 12% versus prior year.

Commenting for fourth quarter performance. Sales in the U.S. therapeutic business continued to grow at a mid-teens rate. This is driven, not only by chronic migraine, which is increasing steadily well in excess of this rate, but also by our movement disorders franchise, boosted by the upper limb spasticity indication. With the U.S. neurogenic bladder launch in November, sales in Q4 from this indication were only limited.

The U.S. chronic migraine launch is progressing very well and better than planned. We have now trained about 4,600 individual physicians, either via the Web or live injector training sessions, with most of the trainings in the last quarter being in the more productive live format. In total, almost 5,600 trainings have been conducted since approval.

Reimbursement access continues to improve, with 88% of all commercial lives having policy coverage at year end. The volume of insurance verifications continues to increase and the number of denials to prior authorizations falls. As physicians become convinced that there is reimbursement available, the average number of units injected moves closer to the FDA indicated dose of 155 units.

Monitoring the effectiveness of our unbranded DTC campaign, which commenced at the end of September, we have clear number -- metrics of number of website hits and visits to the find-a-doctor page. From this month onwards, we are placing branded advertisements in women's magazines. Our surveys indicate high levels of patient satisfaction.

Regarding competition, therapeutic market share for movement disorders for Dysport and Xeomin combined is stagnating around 5%. BOTOX therapeutic sales in Europe suffered from government austerity measures, as well as the impact of mandated price reductions. Sales in our Asia Pacific markets and largest countries in Latin America continue to grow double-digit. Sales from our partner, GlaxoSmithKline in Japan, were also on a strong growth trend.

Please note that we book royalty income for Japan, not sales. Since the last earnings call, we received additional country approvals for chronic migraine in a host of countries: Canada, Sweden, Spain, Vietnam, Bangladesh and Peru; for neurogenic detrusor overactivity approvals in Canada, Spain, Austria, the Czech Republic, Portugal, Estonia and Peru. We've also received a positive opinion from France for the cell-based BOTOX release assay and an approval in the Czech Republic. In Japan, our partner, GlaxoSmithKline, filed BOTOX for the treatment of axillary hyperhidrosis.

I'll now move on to give further color regarding aesthetics category sales. First of all, U.S. market conditions remain good and appeared to have strengthened since the summer. We estimate that in the fourth quarter, the markets grew year-over-year as follows. Consumer demand for aesthetic neuromodulators in the low-double digits, fillers in the upper teens and breast procedures in the high-single digit. Given the impact of our consumer promotions, there may be short timing differences between consumer demand and x factory shipments.

Regarding market share in the U.S., aesthetic neuromodulator category, it seems that Dysport share is stagnating in the high teens. The most recent survey for December shows Dysport at 17% and Xeomin with 8%, the latter driven by very heavy sampling with roughly a quarter of Xeomin's gain stemming from Dysport.

Sales in Europe were challenging, given economic conditions and some market share loss, as Bocouture and Azzalure enter new markets. Sales in the quarter continued to grow in the double digits in Asia Pacific and our main markets in Latin America. We are pleased that we commenced our direct sales operations for Allergan Medical in Russia this week.

Regarding worldwide market share for all users of neuromodulators in Q3 2011, the last periods for which we have data available, we estimate that BOTOX enjoyed about 78.5% market share, actually gaining about 180 basis points from the year earlier, as we regained some share in the aesthetic space, despite the entry of new competition.

From the sales expectations contained in our press release, you will note that we had foresee double-digit BOTOX sales growth in 2011 (sic) [2012], led by the newly approved therapeutic indications. Commencing facial aesthetics, meaning thermal fillers, sales in the fourth quarter increased by 13.5% in local currencies and 12.4% in dollars. The full year sales grew by 24.9% in local currencies and by 27.8% in dollars.

Regarding the fourth quarter, sales growth was more moderate relative to earlier quarters in the year, principally due to the timing of our promotion in the U.S. called Duet Dividends, that provided incentives to physicians to place combination orders for BOTOX and JUVÉDERM.

The sell-in of this promotion, which was highly successful, ended in the 3rd week of September. Analyzing the data, this clearly boosted sales in Q3, as was commented on the last call, and then tempered x factory sales in Q4, especially in October.

As stated earlier, we estimate that consumer demand in the U.S. filler market is growing in the upper teens, and JUVÉDERM actually gained some share year-over-year in Q4. In all the other operating regions, including Europe and Canada, we continue to enjoy volume growth.

In Brazil, we have successfully supported JUVÉDERM with DTC advertising.

Coming back to the U.S. This week, we started taking orders for JUVÉDERM presentation, which contains 25% more clinically relevant hyaluronic acid in a new 1 mL syringe. Sold at the same price as the 0.8 mL syringe, this is yet another way that Allergan is providing value for our customers.

Breast aesthetics. Breast aesthetic sales increased in the fourth quarter by 2.5% in local currencies and 2.0% in dollars. For the full year, sales grew 7.2% in local currencies and 9.5% in dollars. As commented earlier, we estimate the U.S. market in the fourth quarter grew in procedures in the high-single digit, better than we'd expected at the time of the last earnings call.

Given steady long-term share gains, as Allergan can offer a full line of market leading products, Mentor has responded with price reductions in certain selected accounts. We maintained price discipline and we're willing to walk away from certain low-priced accounts. As a result, we may have lost some marginal share at year end.

Throughout the year, U.S. sales have benefited from market preference for higher-priced silicone implants and new tissue expander products. In the fourth quarter, from some initial sales of our Vectra XT imaging system.

In Europe, sales continued to grow modestly, even in most southern European markets. Given the scandal around the French PIP company, implant company, since mid-December, and media attention, we're monitoring the situation carefully, especially in France, the U.K., Germany and Italy, where most of the PIP implants result. So far, we have not suffered any noticeable impact on our sales, although it is quite possible that surgeons may be moving away from lower-priced competitors to our higher-priced quality products.

Sales growth in Latin America and Asia was lower than in prior quarters due to differences in timing of shipments to distributors in Q4 of 2011 versus Q4 of 2010. Our skin care franchise grew in the fourth quarter year-over-year by a strong 19.8% in dollars and virtually the same at 19.9% to local currencies, given that this is mostly U.S. business.

Full year sales growth was just over 13% in dollars and local currencies. The fourth quarter result was driven by a jump of 41% in LATISSE sales, as we sold in a special offer to physicians in dispensing states in Q4 2011, coupled with an aggressive sampling campaign in Q4 2010, i.e. the prior year, which dampened the prior year sales.

Since the repositioning of the product as part of a woman's 8 anti-aging portfolio of products, we have seen an improvement in product perception in our consumer and attitude surveys. In addition to the U.S., contributions to sales growth came from Canada, Mexico, where we can support the product with DTC advertising, Brazil, Hong Kong and other markets in Southeast and East Asia.

ACZONE sales benefiting from a dedicated medical dermatology sales force and increased deployment, jumped more than 50%, with TAZORAC x factory sales declining modestly, although we see in-market acquisition dollars growing 8% year-over-year in Q4. More detailed attention is being devoted to TAZORAC since Q3.

Regarding the obesity intervention line, sales in the fourth quarter continued on a disappointing trend, declining 23.0% in dollars and 22.7% in local currencies. Year-to-date sales declined 16.5% in dollars and 18.1% local currencies.

On a positive note, we're able to increase our sales of ORBERA Balloon, driven by a strong performance in Latin America. LAP-BAND sales in the U.S. are being impacted both by high unemployment rates, as well as reimbursement barriers and increasing co-pays, as employers shift cost to their employees. Sales in Australia also declined for similar reasons. In the overall, U.S. bariatric market, which we estimate declined 6% year-to-date in November, bands declined in procedure share to 40% in November from 52% a year earlier, whilst bypass held steady at 34% and sleeve gastrectomy doubled from 11% to 22%.

Based on overseas experience, we believe that sleeve will reach a plateau. The only bright share data point is that LAP-BAND increased its share of the band market to 83%. In light of these market dynamics, we have made a major change in our resource allocation, to access to reimbursement, expanding both the teams dedicated to LAP-BAND, as well as harnessing the full strength of our full managed markets team. This is the same team that has produced great results for BOTOX and our ophthalmic products.

We do have convincing health economics data to influence policy changes, both with managed care organizations, as well as large corporate and government employers. Regarding LAP-BAND for use in adolescents, we are conducting a study at the suggestion of the FDA who wish to receive clinical data. We will, however, not be pursuing a label extension to adolescents. And I'll now pass over to Jeff Edwards, who will comment on our financials.

Jeffrey L. Edwards

Thanks, David, and good morning to all of you on the call. During the fourth quarter of 2011, Allergan generated high-quality operating results despite increasing headwinds relating to U.S. Health Care Reform and Europe pricing pressures. Allergan continues to successfully manage and perform through this type of pressure due to our diversified base of business, strong product platform and thoughtfully directed approach to investing into the businesses. This portfolio-based approach has once again enabled the company to deliver non-GAAP diluted earnings per share results above the top end of our earnings per share guidance for the quarter.

Non-GAAP diluted earnings per share for the fourth quarter were $1, marking a 13.6% increase over 2010 results for the same quarter. Excluding the effects of the fourth quarter 2010 R&D tax catch-up, non-GAAP diluted EPS growth for the fourth quarter was approximately 19%. As a reminder, the fourth quarter earnings per share for 2010 was positively impacted by approximately $0.04 due to the retroactive benefit caused by the renewal of the U.S. R&D tax credit in 2010. A reconciliation of all of the adjustments to GAAP earnings is set out in our earnings release.

For the full year of 2011, Allergan delivered non-GAAP diluted earnings per share of $3.65, despite the increasing cost related to U.S. Health Care Reform and Europe pricing and economic pressures mentioned by David. The strong full year EPS result was above the high end of our range of expectations provided in February 2011 of $3.54 to $3.60.

Our commitment to the long-term future of our company and to our shareholders is evident in this result as we were able to both invest strongly into our growth drivers of the business and pass stronger earnings performance onto our shareholders in the form of greater EPS performance.

Excluding the effects of non-GAAP adjustments, Allergan's Q4 2011 gross margin of 86.8% increased 100 basis points when compared to Q4 2010. And Allergan once again saw sequential quarterly 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, positive manufacturing variances, lower year-over-year inventory provisions, lower royalty expenses and in the fourth quarter, favorable geographic and product mix. Favorable margins were partially offset by the continuing pricing pressures we are experiencing around the world on reimbursed products. The non-GAAP selling, general and administrative expenses to product net sales ratio for the fourth quarter was 39%, totaling 550 -- I'm sorry, $540 million.

The comparable ratio and expense value for the same period in 2010 were 40% and $517 million, respectively. We continue to recognize the benefits of leveraging many of our businesses while continuing to have the flexibility to make meaningful, focused investments on projects that we believe will yield the greatest financial returns.

Allergan will continue to seek out these thoughtful value-driving investments during 2012. However, expectations are that there will be -- that we will be in the position to produce some SG&A spending leverage versus 2011 non-GAAP full year results.

Non-GAAP research and development expenses were 16.4% of product net sales for the quarter, totaling $226 million, an increase in spend of approximately $26 million over the fourth quarter of 2010, when the ratio of R&D spend to product net sales was 15.5%.

It is worth noting that the R&D spend during the fourth quarter was sequentially above the level of spend for the third quarter of 2011, and represented the third consecutive quarter of sequential quarterly R&D spend increase, excluding the effects of non-GAAP adjustments, as we continue to fund new projects and increase funding of projects, which we're advancing through the pipeline. We will address the R&D pipeline in more detail at our upcoming R&D day, in late March of this year.

Excluding the effects of non-GAAP adjustments, Allergan's fourth quarter operating income ratio increased by 110 basis points when compared to the fourth quarter of 2010. Solid top line growth, as well as continuing strengthening of the gross margins and enhanced leverage within the SG&A category are the primary drivers of this improvement.

With respect to our balance sheet, consolidated Allergan days sales outstanding was 48 days, while consolidated Allergan inventory days on hand was 125 days. Allergan generated operating cash flow after CapEx of approximately $339 million in the quarter and $965 million for the full year of 2010. This compares to $955 million generated for the full year of 2010 after excluding the impact of the fourth quarter 2010 payments to the Department of Justice of approximately $594 million.

At the end of the fourth quarter, Allergan's cash and short-term investments -- and cash and short-term investments net of debt positions totaled approximately $2.6 billion and $987 million respectively. For the first quarter of 2010, Allergan estimates product net sales in the range of $1,340,000,000 to $1,390,000,000 and non-GAAP diluted earnings per share to be in the range of $0.84 to $0.86. Regarding full year expectations for 2012, Allergan estimates product net sales in the range of $5,650,000,000 to $5,850,000,000. Our 2012 expectations, assumes incremental pricing pressures outside of the U.S. of approximately $40 million and a negative currency impact of between 2% and 3% on sales growth.

Allergan estimates full year non-GAAP diluted earnings per share between $4.13 and $4.19, which represents growth of between 13% and 15%. This expectation assumes that the R&D -- the U.S. R&D tax credit will be renewed in the fourth quarter of 2012 with the full year retroactive benefit impacting Q4 results. This would generate a higher effective tax rate in the first 3 quarters of 2012, thus, a lower EPS result, while benefiting both the Q4 effective tax rate reported Q4 EPS.

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

With respect to 2012 capital expenditures, we project a CapEx of approximately $200 million for the full year. Regarding 2012 cash flow, we expect to generate operating cash flow, after CapEx, in excess of $1 billion. We have assumed moderate levels of share repurchase activity of approximately 6 million shares in 2012, with our repurchase objectives limited to only match expected employee stock option-based compensation programs.

Despite some of the challenges I’ve made reference to earlier in my text, 2011 was a very successful year and a good year. We are a company with very sound, balanced and positioning and more importantly, are in a good place with respect to our future. We will make every effort to further build on our momentum and strengths while effectively executing against our strategies. Further strengthening Allergan's position as a leader within each of our selected specialty markets is an important success factor that we continuously aim to build upon. We look forward to the new opportunities emerging for Allergan in 2012. So with that, operator, I'd now like to open the call up to questions.

Question-and-Answer Session


[Operator Instructions] Our first question comes from Corey Davis of Jefferies.

Corey B. Davis - Jefferies & Company, Inc., Research Division

I want to ask about operating margin. And if my numbers, historically, are correct, I had a 24.2% in '07, and using your guidance, I'm up at 32.2% in 2012. So the question is, what are the chances that in another 5 years your operating margin is up another 8 percentage points? Or do you get to a point where expansion just hits a ceiling?

David E.I. Pyott

Yes, well. This is David here. I think, clearly, one area of leverage that we have is SG&A, where we're still pretty high. And so I think the real difficulty or the challenge for you on the sell side is trying to forecast what is the rates of our sales growth to then match up with our aspiration of meeting mid-teens EPS growth. And I think another, to the background comment I'd make is very clear intent here to continue driving productivity and efficiency. Because clearly, we live in an industry that is more under price pressure than it's ever been before. And if you just reflect on all the numbers I read for last year, it's pretty clear we did pretty well even after we've absorbed $130 million of costs in terms of U.S. healthcare reform and overseas price cuts. So that's the way I think about it. One other thing I should just quickly correct from my opening remarks, when I talked about outlook for BOTOX growth in 2012, I talked about double-digit and I misread it as 2011. I think it was clearly, a non sequitur, but I just wanted to straighten that out. Maybe the next question then.


Our next question is from Steve Willoughby of Cleveland Research.

Steve Willoughby - Cleveland Research Company

I was wondering if you can just comment on your expectations for the aesthetic business in Europe in 2012, as compared to 2011?

David E.I. Pyott

Well, Europe, as you can sort of gather from all my remarks has done astoundingly well. When I read the press and the economic reports particularly in Southern Europe, one would think life would only be bad. However, we even have a double-digit growth in some of the categories in those markets. So I look at it the other way around, and say if things improve, how good could life be? Clearly, lots of opportunity. I think having lived, particularly in Spain, and knowing those cultures a little bit, of course, it's also a market or markets where there are people with money and then, unfortunately, people with not much money. And we probably are more skewed to the people who have economic purchasing power. And that in turn to me explains why our performance has held up. That being said, I think, when I push all the papers away and say, what do I have to pay attention to in 2012? Clearly, it's monitoring Europe carefully.


Our next question is from David Risinger, Morgan Stanley.

David Risinger - Morgan Stanley, Research Division

My question relates to global migraine. It appears that the therapeutic portion is growing at about the same rate as the cosmetic portion of the business. And I believe that they're both about 50% of the BOTOX franchise sales. I guess my question is, beyond European price cuts, why isn't the therapeutic side growing faster? And how should we think about migraine? Obviously, your comments have been optimistic, but at least relative to our model, BOTOX sales were a little bit below what we were looking for, and it seems to be on the therapeutic side. So just wondering if you could provide a little bit more color on whether we should be expecting therapeutic to accelerate as advertising drives more U.S. sales and/or as x U.S. sales grow as the rollout continues?

David E.I. Pyott

Yes, okay. First of all, confirming your facts. Absolutely. If you look at 2011 growth versus 2010, cosmetic and therapeutic grew roughly the same. And roughly, it's 50-50. Now, for 2012, based on my comments on our operating plan, clearly, therapeutic will start lifting away from cosmetic, not because we're forecasting poor cosmetic sales, it's just we're going to start really seeing the ramp setting in. Because one of the great things with BOTOX is, once the muscle groups, and the doctors are sometimes different, in theory, it's the same -- it's just another sport that is similar. It's another racket sport, so to speak. Because we know that all the therapeutic launches are very long ramp. I’ve often used the analogy, this isn't a fighter jet taking off, this is a 747 headed for the other side of the world. A long, long climb. And you'll start really seeing this climb setting in 2012 and indeed beyond that. So -- and then I spoke the other side, on the cosmetic, I have to say, well, caution with economy. And secondly, of course, we do have some new competition that we plan to deal with vigorously. But we're logical about the way we do our numbers. You have to lose some share when new people show up.


Our next question comes from Shibani Malhotra of RBC Capital.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Just back to Corey's question I guess on operating margins. You've talked about bringing your SG&A down to 35% over the last couple of years. But understand why you are spending as much as you did in terms of SG&A, but are you still thinking of taking the SG&A amount down to 35%? And what do you mean by medium-term and near-term because it's been 4 years now you've been saying that. How should we be thinking about it?

David E.I. Pyott

Well, clearly, we’ve stated over the years that gradually, the SG&A rates will come down into the mid-30s. And this isn't because we'll be actually reducing SG&A. SG&A in raw dollars will increase. It's just at a much lower rate than sales. And I think people who have watched us over the years know that a gradual decline in that percent probably is a good thing. Although you've also seen the beginning of 2009 when the world was getting into a very rocky place, we were able to shut down spending very quickly because we, as appropriately at the time for everybody running a company, were acting with caution.


Our next question comes from Gregg Gilbert of Bank of America.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

I have a question for Jeff on gross margin. It looks like it hit an all-time high in the quarter. Correct me if I'm wrong on that. You mentioned regional mix and product mix. Are there any other positive factors that might be durable that helped the margin versus prior periods?

Jeffrey L. Edwards

Yes. There's a few things. So in the fourth quarter, if you look at last year 2010 and then the fourth quarter of 2011, you'll note that there is a bit of a blip in a favorable sense to gross margin in both years. Some of that or a lot of that is attributable to geographic mix. So a stronger U.S. component. And then if you look at the product mix, stronger both ophthalmology and BOTOX components within that. So that always drives some very nice performance for us. And some of that is attributable to the timing of the year and reimbursement. So if you look at sustainability, we've seen royalty expense decline. And our expectations are, as a percent, that should continue being the case. So that is sustainable. If you look at plant performance, our standard costs continued to improve. We had some very favorable variances this year. You could see that if we continue to perform above our expectations, you'll see positive variances as well. So the offset, of course, got to mention it, is there's ongoing pricing pressure in certain parts of the world. So we got to keep that in mind and we look at it in a basket. So I would say, generally strong manufacturing performance, strong standard cost performance, strong plant efficiencies, lower royalty expense, all very, very sustainable.


Our next question is from Ronny Gal of Sanford Bernstein.

Aaron Gal - Sanford C. Bernstein & Co., LLC., Research Division

Guys, would you mind breaking for us the share of revenue coming from emerging market, Europe and the United States? And as you look in 2012 and 2013, what percentage of growth will come from each one of the 3 geographies?

David E.I. Pyott

We've never broken that out. I think I would give you a lot of pieces of the puzzle. And I know you read my transcripts very carefully, and I think that enables you to tease out a lot of the information you're looking for.

Aaron Gal - Sanford C. Bernstein & Co., LLC., Research Division

So let me try something else. Around Japan, you're obviously launching now your 2 largest glaucoma products. Can you size for us or give us an idea about the size of the market that is -- you can target with your new product launches?

David E.I. Pyott

Well, first of all, we book no sales, we just book royalties and those show up on the other income line, which you've seen is growing rapidly. I'll talk about that line and then answer your question. And the other day, when I was sort of reflecting upon that, it's very interesting that when I came here, over a decade ago, we were a major spender of royalties, net. Whereas, gradually that balance is changing, where we still pay royalties to third parties, but we now have a rapidly growing royalty income line. And that's just what it takes, decades, for really, the results of a dramatically expanded R&D effort, which has converted into products. So going back to Japan, we're very pleased that our partner, Senju, is the second largest Japanese-owned company, great relationships, and they're making really good progress in terms of LUMIGAN which is on a very similar launch trajectory to what it was when we, Allergan, launched the product a decade ago in the United States. So a first-class job done by them. We also note from ALPHAGAN that it's a product with great popularity in East Asia. And I think it's the view of use of adjunctive therapy and also both Japanese and Chinese populations are very conscious about side effects. And ALPHAGAN has done very, very well indeed.


Our next question is from Marc Goodman of UBS.

Marc Goodman - UBS Investment Bank, Research Division

Can you talk about new product launches for 2012 and 2013, please?

David E.I. Pyott

Well, I think in terms of the major ones I think about -- and, of course, there's lots of continuations of the approvals that have emanated in the U.S. or Europe, continuing on around the world, clearly, in terms of the big ones, it's -- the more regular, the larger overactive bladder indication for 2013. Also, another one I'm very excited about, which will be later this year, might be just tailing into the beginning of next, is the launch of VOLUMA, which is a really fantastic product, as we've known from its performance in Europe, Canada, Australia, other places. And then, of course, we have LATISSE. We should get approved some time later this year in the European Union. So those will be kind of my short-term ones and there's lots of sub-details.


Our next question is from Catherine Arnold of Crédit Suisse.

Catherine J. Arnold - Crédit Suisse AG, Research Division

I wanted to go get some elaboration, if you could, on your comment about migraine being better than planned. If you could give us some granularity given the poor visibility from our end in terms of your primary research. Maybe just sequentially what you're seeing in the quarter as far as prescribing base or patient penetration? Any kind of statistics that you might have from your primary research that could help or support what you just said?

David E.I. Pyott

Yes, well, obviously, I have a whole databank which I don't get to share with you. The way I monitor it is, first of all, through the number of physicians trained. And the reason that we sometimes have different numbers regarding trainings and physicians is some people choose to be trained more than once. Clearly, insurance access is the other one, and that process is pretty much coming to an end. Once you're in the 90s, in terms of commercial lives, where the product has policy availability, we're in good shape. So then it comes down to vials out of the door, and that's one of the beauties of our model that we ship virtually everything direct. And of course, we then know, with great specificity, what is deep in use by individual doctors. When it gets to hospitals, fractionally more complicated because there we're shipping to hospital pharmacy, and then, of course, we have to try and allocate. Is that going into movement disorders because we have a long-term historical base there, or is it the new injectors for, say, migraine or now it's just starting up for neurogenic overactive bladder. So you can go to the pharmacy and ask. And people understand why we're doing that. Of course, the other thing I look at is, not only surveys but anecdotes of patient satisfaction and we do consumer use and attitude surveys and to us, it's very apparent that the level of satisfaction with this product is very high relative to other pharmaceutical products that have been launched for, I'll use the broader term, headaches, in the last decade.


Our next question is from Ken Cacciatore of Cowen and Company.

Ken Cacciatore - Cowen and Company, LLC, Research Division

Just following up on that question, maybe more specific on DTC for migraine. As you choose to move to print now, am I going to assume that you can get more specific about actually talking about BOTOX as opposed to being a bit vague on the TV commercials? So can you give us a sense of what your internal work tells you about patient awareness for this treatment, so we can try to understand how much the DTC program will help drive utilization?

David E.I. Pyott

Well, clearly, and first of all, the unbranded campaign has worked because we know how many people have gone to our website. And the fact that they then click through to look for a doctor is -- we know the click through rates, all very positive. That being said, when we do surveys on what is patient awareness for the use of BOTOX, still very low. And I think that will change now that we will actually have our brand in the advertisement versus just educating consumers, patients, about the availability of the new treatments, which not all people will link up that actually it's BOTOX, as we’d have expected. So now we're entering a new phase. And clearly, given the skewing, unfortunately, of chronic migraines to female population, the use of magazines, women's magazines, is a particularly good vehicle and cost efficient.


Our next question is from Annabel Samimy of Stifel, Nicolaus.

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

I just wanted to go back on the aesthetics issue for a minute. From your comments, it seems like things are going quite well in terms of the growth that you're seeing. But maybe consensus estimates were a bit too high but it seems they fell short on various factors. So I'm just curious to know if the things that affected aesthetics this quarter will be probably more in currencies or potentially in international growth, given the European pressures, given that your estimate seems to be holding up and what could we think about the 2012 guidance going forward. From your comments before, is Europe still going to be a stressed area or do you assume there's going to be gradual improvement over there?

David E.I. Pyott

Yes. Well, first of all, clearly, currency was a factor of the margin. For most of the year, at the beginning, that was the tailwind, now it's turned into a headwind. If one looks at the U.S., good conditions. One of the things that sometimes, I don't wish to be subtle, I'm trying to be very forthright. When I sat back and looked at all our numbers, clearly, that was the comment about our promotions. If you look at U.S. dividends, we sold that in, and physicians, clearly, were motivated to buy, and we can check that because we ship everything direct. So what I was saying is, that probably Q3, in terms of what was consumed, i.e. what was injected into patients, was slightly overstated and Q4, understated. Because, clearly, the physicians’ stock’s up, buying on the offer, if you like, and then for not a very long period, but a couple of weeks, that inventory has to be run down before they reorder. And so that's where I was really trying to put a spotlight on that. And when I look at all our numbers, I can see that in the U.S. medical business, at the margin for BOTOX and even more dramatically for fillers, which explains a lot of why the filler growth, Q3 year-over-year, is much higher than Q4 year-over-year. And otherwise, going back to Europe, fillers doing great. BOTOX, a little bit less, but there's also new competition. And if there's one thing I keep on reiterating, that we're watching very carefully is what's going on with the European economy. I'm not afraid of it. We're just watching it and making sure that we continue to deliver the results that we've laid out for ourselves and for you, our stockholders and analysts.


Our next question is from Larry Biegelsen of Wells Fargo.

Larry Biegelsen - Wells Fargo Securities, LLC, Research Division

I just wanted to focus on the Xeomin launch in the U.S. David, the 17% for Dysport and the 8% for Xeomin, that was procedure share, I assume. I was a little surprised at the 8%, given when Xeomin launched the 8% share, what's the trend and what's your expectation for that product? And that's it for me.

David E.I. Pyott

Sure. Well, first of all, there's always the risk of small numbers, where I, too, look at things. And I think the first data point was 1% or something. So at that moment, I was kind of feeling really good. And then 8%, you kind of go, wow, that's a bit higher than I'd expected, maybe. But, of course, one thing we've got to be very sanguine about is giving things away is much easier than actually selling product. And there's a massive amount of sampling going on. And if I were a physician, a, I would have intellectual curiosity. I’d want to try it. And then secondly, if it's all free, I'm even more motivated to try it because, of course, I'm sure I'd be charging my patients, i.e., I've done something great for my personal bank account, right? So I think the next phase where Merz has stated that they will have national availability in March, which to me says they'll actually start selling versus giving away, that will become much more interesting. And we have a very robust series of measures to welcome them to our nice friendly market.


Our next question is from Seamus Fernandez of Leerink Swann.

Seamus Fernandez - Leerink Swann LLC, Research Division

So maybe, David, can you talk us through how we should think about the neurogenic OAB injectors, the training, timing of rolling that forward? And since, I believe the injections are actually quite similar, how strong of a base of trained injectors would you expect just to establish, should the FDA ultimately approve the idiopathic indication?

David E.I. Pyott

Yes, well. First of all, as I've stated, it follows the normal launch pattern, where the first goal is getting injectors trained. The second one is getting reimbursements in place. And right now, there's only temporary injection codes being utilized so that's always more challenging. We won't get a permanent code until 2013 because it takes a year until the system catches up. So everything is going well. There's a lot of enthusiasm. But of course, I have to kind of temper everybody's enthusiasm by saying, the numbers are interesting, but in 2012, still modest. You'll see a much bigger pickup in 2013, once reimbursement is permanent. And secondly, once we get into the bigger category of idiopathic, and I think where you are going is to say, if you’ve started as a neurologist with neurogenic, it will not be a massive learning process to then go to the next indication once it's on label because it's the same principle.


Our next question comes from David Buck of Buckingham Research Group.

David G. Buck - Buckingham Research Group, Inc.

David, the question is really on Europe and the outlook. Jeff had given the, I believe, $40 million in additional cost cuts for 2012. Can you talk about how you see Europe either quantitatively or qualitatively for, especially pharma business versus aesthetics in terms of growth? And what can you do to protect profitability in that region?

David E.I. Pyott

Yes, well, unfortunately, if one looks deep back into history, there's always price cuts. It’s just since, naturally, it's logical since the recession has got much worse because it's very easy for politicians to go and basically extract money out of the pharmaceutical industry, it's tougher to extract it out of hospitals or physician salaries. And then of course, in Europe most doctors are employees of the government versus being independent owner-operators, so to speak, as in the United States. So we're just being sanguine about it, but we don't know where these price cuts will be, but they will probably come. And it's always safer to be -- it's better to be safe than sorry. I think given that background, I can certainly assure you that the profitability of our European, meaning, greater European operations continues to increase well. So we're not just sitting there saying we have a laggard region. The reason that my European colleagues can do this is they, too, have had a huge number of new approvals. And of course, approvals, innovation drive growth. And in between that, of course, just like we've done in North America, there is some leveraging of our SG&A structures. So despite these headwinds, Europe actually had, for the full year last year, across-the-board, double-digit local currency growth. And also, managed a very nice, even in excess of the sales number bottom line growth, as measured on a management basis. So good job done. And I think it goes to a bit to the quality of everybody of this company and all the way from the cost of goods that are -- that the products that are manufactured, where we brought down the cost of goods all the way through to good performance in the field.


Our next question is from John Boris of Citi.

John T. Boris - Citigroup Inc, Research Division

I think, historically, David, you've given us some commentary around the number of physicians that have been trained, somewhere around 3,800 to 5,000 docs that you were targeting. And I think you've also mentioned that once they've been trained, creating the habit of injecting was a very important part of the process of getting uptake with BOTOX in the treatment of chronic migraine. Can you possibly give an update on number of physicians trained? And how you're monitoring whether that habit is leading to a lot of prescribing from the physician base after they're trained?

David E.I. Pyott

Yes, well, the latest number I gave you probably 45 minutes ago was we're now up to 4,600 individual physicians. The trainings are higher than that because some people choose to be trained more than once. And frankly, we're happy to keep training them until we make it, this part of their product armamentarium that they use. We also know from 20 years’ experience, the best injectors are ones that will finally have a clinic, typically, as a minimum, a full morning or a full afternoon. And as I've been out and about in the field, of course, there's already physicians that have multiple mornings and afternoons dedicated to BOTOX. And then I know the habit has really taken root. Now how do we monitor this? Well, all the trainings, I have a monthly dashboard, and what is also great is because of our direct shipments, we know whether Doctor X really is using the product. And if they're not, then that's the job of our representative to say, what other support would you need? Do you want to go on a proctorship? Do you want your colleagues to come and visit you? Do you want to go and visit your colleague? Whatever works, we’ll make it happen so that this treatment is then readily available to needy patients.


Our next question is from Douglas Tsao of Barclays Capital.

Douglas D. Tsao - Barclays Capital, Research Division

I was just hoping, David, you could provide some perspective in terms of the growth in migraine. Is it from the addition of new doctors using this? Or is it a function of the trained docs or the existing user base is using it more frequently? And then also if you have any perspective on the repeat treatment rates that you're seeing right now.

David E.I. Pyott

Right. Well, first of all, there was the -- pre-launch, there was a small existing user base. And clearly, with reimbursement available and then awareness through the DTCs that I commented, we've seen growth there. Then the next vector of growth is the next cohorts arriving brand-new. Let's call them the newly trained injectors. And as I've often pointed out, there is probably somewhere between 6 and 12 months’ lag between people saying, okay, I've trained and now I’m starting and then really injecting patients in volume. So we have all these different curves of growth. And then, the final one you addressed was repeat. And what I both heard verbatim when I've interviewed doctors, as well as the surveys I've read, I think the vast majority of neurologists will inject patients for as long as 3 injection cycles, even if they may be skeptical about the efficacy of the drug in that individual patient. Also, from everything I can see, it would suggest very high levels of both physician, as well as patient satisfaction. And I think it's in excess of 80%, where people believe that BOTOX is providing incremental benefit to that individual patient and relative to other drugs, that is a very, very high rate of satisfaction. And of course, we monitor it really carefully so that we understand how the product is really coming through all these phases of adoption. And everything is very positive.

James M. Hindman

Mary Ann, we'll take one more question.


Our final question comes from Gary Nachman of Susquehanna Financial Group.

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

David, the Lat-Am guidance is pretty conservative and we know this market's been a struggle. Seems like you're still very committed to this business and investing even more behind it. Is it something you think you can turn around by 2013? Or will it take even longer than that to return it to growth?

David E.I. Pyott

Well, I'm glad that you asked the question of time because clearly, the biggest thing we've got to change and correct and improve is reimbursement. And that means changing insurance policies and typically, they get rewritten once a year. It’s the kind of the formulary process for all products. So from where I sit, I'll be looking for, what I call, vital signs or if we were driving a supertanker, I want to see the bow starting to swing, even though it's marginal. I'll be able to spot that and, of course, once the tanker starts swinging, you know that thing’s going to swing real hard. So I'm glad that you tempered expectation because I think this will take probably up to 18 months before you’ll be able to see that really material progress has been made. In the meantime, investment, a lot of it is fixed already. If I look at our managed care team, this is the same group, 100-plus people that have done a great job in LUMIGAN, Access, great job on BOTOX. And now their #1 task is getting LAP-BAND sorted out. And I'm very clear about what I want. And I know that they've heard the message loud and clear and it's in their MBO's. And I hope they make good bonuses in 2012.

Jeffrey L. Edwards

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

Thank you, Jim. The following market share data we are providing is Allergan's good faith estimate based upon the best available sources for data such as IMS, as well as Allergan's internal estimates. The market size, share and growth rate information is in moving annual total or trailing 12 months as of the end of September 2011, except where noted as year-to-date through September of 2011. The market for ophthalmics is approximately $18.1 billion, growing at a rate of 10%, Allergan's market share is 15%. Year-to-date, that market growth is 10% and year-to-date, Allergan’s share is 15%. The market for glaucoma approximately $5.8 billion, that market is flat and Allergan's share approximately is 20%. On a year-to-date basis, that market is declining at 2%, and Allergan's share is 21%. The market for ocular allergy approximates $1.6 billion, growing at a rate of 13%. Allergan's share approximates 3%. Year-to-date, that market growth is 14%, and year-to-date, Allergan’s share is 3%. The plain ocular anti-infective market is roughly $1.5 billion, growing at a rate of 7%. Allergan's share is 9%. Year-to-date, that market is growing 6%, and year-to-date, Allergan market share is 8%. The market for ophthalmic nonsteroidal anti-inflammatories is about $480 million, growing at a rate of 1% and Allergan’s share is 10%. Year-to-date, that market is growing 2% and Allergan's share is 10%. The artificial tears market, inclusive of ointments, is approximately $1.7 billion, growing at a rate of 8%. Allergan's share is 21%. Year-to-date, that market is growing 8%; Allergan’s share is also 21%. The U.S. topical market for acne and psoriasis is roughly $2.2 billion, with an annual growth rate of 6% and Allergan's share is roughly 9%. Year-to-date, that market is growing 7%, and year-to-date, Allergan's share is also 9%. The top 10 markets for neuromodulators are roughly $1.6 billion, growing at a rate of roughly 14%, and BOTOX has approximately an 84% market share. On a year-to-date basis, that market is growing 18% and year-to-date, BOTOX has a share of 84%. The worldwide market for neuromodulators is roughly $2.1 billion, growing at a rate of 16% and BOTOX has approximately a 78% market share. Year-to-date market growth is roughly 18% and year-to-date BOTOX market share is 77%. The worldwide market for dermal facial fillers is roughly $950 million, growing at a rate of roughly 24%. And Allergan has approximately a 37% market share. Year-to-date, that market is growing roughly 29%, and year-to-date, Allergan's share is about 37%. The worldwide breast aesthetics market, including aesthetic and reconstructive, is roughly $820 million, growing at a rate of roughly 4%, and Allergan has approximately a 42% market share. Year-to-date, that market is also growing 4%, and year-to-date, Allergan's share is also 42%. The worldwide bariatric surgery market for band and balloon segments only is roughly $290 million, declining at a rate of roughly 20%, and Allergan has approximately a 70% market share. Year-to-date, that market is declining roughly 22%. And year-to-date, Allergan's share is about 72%. And that concludes our call today. Thanks.


That does conclude today's conference call. You may disconnect your phones at this time.

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