Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Alcon Incorporated (ACL)

Q3 2007 Earnings Call

October 25, 2007, 8:30 AM ET

Executives

Doug MacHatton - VP of IR and Strategic Communications

Cary Rayment - Chairman, President and CFO

Richard Croarkin - CFO, Sr. VP

Gerald D. Cagle - Sr. VP, Research and Development and Chief Scientific Officer

Kevin J. Buehler - Sr. VP, United States and Chief Marketing Officer

Analysts

Peter Bye - Jefferies & Co

Mark Goodman - Credit Suisse

Kim - JP Morgan

Larry Biegelsen - Wachovia

David Buck - Buckingham Research Group

Lawrence Keusch - Goldman Sachs

Frank Pinkerton - Banc Of America Securities

Gerard Hart - Bear Stearns

Lewis Chen - Morgan Stanley

Presentation

Operator

Ladies and gentlemen thank you for standing by, welcome to the Alcon Incorporation earnings conference call for the third quarter of 2007. During the presentation all participants are in a listen only mode. Afterwards you will be invited to participate in the question-and-answer session. [Operator Instructions]

As a reminder this conference is being recorded and will be available for replay from 11 a.m. from October 25th through 11:59 p.m. on November 1st, 2007.

I would now like to turn the conference over to Mr. Doug MacHatton, Vice President of Investor Relations and Strategic Communications. Please go ahead sir.

Doug MacHatton – Vice President of Investor Relations and Strategic Communications

Thank you very much, good morning and welcome everyone. With us today are of course Cary Rayment, Chairman, President and Chief Executive Officer. Rich Croarkin, Senior Vice President and Chief Financial Officer, Kevin Buehler

Senior Vice President, Global Markets and Chief Marketing Officer and Jerry Kiegel, Senior Vice President, Research and Development and Chief Scientific Officer.

Before we move ahead I’d like to remind all of you that certain statements we will make in this presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. And you should not place undue reliance on these forward-looking statements. For a more thorough discussion on the risks and uncertainties related to these forward looking statements, in this webcast we refer you to our folded final regarding these statements, which is included in our third quarter earnings press release issued yesterday and our Form 20F filed on March 19th, 2007 with the SEC.

This conference call and the company webcast are being simultaneously broadcast over the internet with replays available for one week. You can access this information on our website at www.alcon.com in the investor relations section and with that I’ll now turn the call over to Cary Rayment.

Cary Rayment – Chairman, President and Chief Financial Officer

Thanks Doug and good morning to you all. I’m very pleased to report the Alcon financial results for the third quarter reflected another solid performance. We experienced steady sales growth across all three of our major product categories and in most of our main geographic areas.

The ophthalmic market continues to have tracky dynamics in global demographic trends I think bowls well for continued market growth. Our record of the seating industry growth is attributable to our ability to capitalize on our global market reach and leadership position. Broad and differentiated products of the highest quality and of course long relationships with customers, which will help grow our global market shares and benefit from growing markets around the world.

These shared gains are coming from all of our major product categories. As you can see global sales for the third quarter of 2007 came in at $1.34 billion, an increase of 11% or 7.9% excluding change, compared to last year’s third quarter. Now adjusted net earnings were $418.7 million reflecting an increase of 29.2%, compared to adjusted earnings for the third quarter of 2006. On earnings per base, per share basis this translates to a $1.39 per diluted share, which is an increase of 31.1% compared to adjusted earnings per share for the third quarter of FY06.

Our 2007 numbers include a $3.4 million or $0.01 per share and after tax expenses related to a work force reduction in our refractive business related to our impending WaveLight acquisition. Our third quarter 2006 results included an after tax impairment charge of $92 million or $0.30 per share related to selective assets of our refractive business. Including these charges reported GAAP third quarter net earnings increased 78.9% and earnings per diluted share rose 81.6% compared to last year’s third quarter.

Now on a year-to-date basis sales were $4.13 billion, which is an increase of 12.5% over last year or 9.9% in constant currency. On a year-to-date basis net earnings rose 21.8% to a $1.21 billion, while earnings per share rose 24.6% to $4.

Year-to-date adjusted net earnings were $1.23 billion reflecting again an increase of 24.9% compared to the adjusted net earnings for the same period of 2006. While adjusted year-to-date earnings per share rose 27.9%, to $4.08 compared to the adjusted earnings per share for the first 9 months of 2006. The adjusted numbers for 2006, exclude the previously mentioned third quarter 2006 refractive impairment charge and $97.5 million positive impact in net earnings or $0.31 per diluted share, related to the settlement of our patent litigation with AMO.

Adjusted numbers for the fi9rst 9 months of FY07 exclude the third quarter expenses for the work force reduction and an after tax charge of $20.8 million or $0.07 per diluted share, related top the impairment of additional refractive assets in the first quarter.

Now one of the hallmarks of Alcon is the balance nature of our topline growth. Over the years we’ve seen strengths and weaknesses in various geographic and product sectors, but they have almost always balanced out and resulted in a steady and stable sales growth trend.

So far this year we’ve seen significant contributions from our international markets, led by continuing strong performance by our developed international markets, which posted sales growth of 17%. Although currency was part of the story here, constant currency sales growth in these markets of 11.2% is particularly strong compared to historic levels. This performance is occurring because the new product cycles or products like Patanol, Vigamox, TRAVATAN, and the same peers that drove U.S. sales growth in the past few years; plus the introduction of DuoTrav are significant growth drivers in our other large non U.S. markets.

In addition the conversion to higher technology surgical products, specifically in the area of violo [ph] cataract equipment and smaller gates of ecarecmy [ph] packs represent value and increased share opportunity outside the U.S.

In emerging markets we continue to both post sales growth rate almost twice that of our developed market, with the results so far this year coming in at 19.7%. Even excluding currency factors, we still posted nearly a 16% rise in sales in developing countries, and they now account for about 15.5% of Alcon’s total sales. As I’ve indicated past, we are committed to investing more dollars in people to further support the development and evolution of this market and expand access to use of the most advanced technology.

Emerging markets will be one of the most important drivers of ophthalmic market in the coming years, and we believe our leadership position in these markets positions us to benefit most from their faster growth.

Now in the U.S. we continue top make excellent progress with brand development across our product line. We have game share in contact lens care with OPTI-FREE, and glaucoma with TRAVATAN and Azopt and in fact with Vigamox; an allergy with Patanol and Pataday and of course in our intraocular lens area, viscoelastics and our cataract equipment.

However in the U.S. pharmaceutical business line we have experienced forward category growth in both the allergy and otic segments, related to less severe season as compared to last year. In addition wholesaler inventory reductions and manage care rebase primarily for Medicare part D increased utilization as combined to moderate total year-to-date U.S. sales growth to 7.4%.

Looking forward we expect our seasonal categories to revert to more normalized growth level, and we believe the trends in Medicare part D will begin to moderate in 2008, based on relatively stable year-over-year enrollment and utilization levels. However, Medicare part D another manage care program will continue to beat factors that we, and other pharmaceutical companies will have to deal with in the future. Fortunately we are experiencing strong goals outside the U.S. and also in our surgical and consumer categories, which mitigates the impact.

I think that this slide reflects the fundamentally strong performance that our U.S. Pharma organizations are posting do far this year. You can see that other than allergy and otic all of the categories are growing at healthy rate. I think more importantly Alcon is growing quite a bit faster than the markets are. You can also see here the flat market for Allergy and the decline for Otic, with both these markets falling off more late n the summer than in the full year.

Now looking more closely at the product levels, pharmaceutical sales were $547.3 million in the third quarter. That’s an increase of 10.2% over the prior year or 7.5% on constant currency basis. I would note again the importance of our geographic balance as our non U.S. pharmaceutical sales rose almost 19% in the third quarter.

Year-to-date pharmaceutical sales growth 13.3% to 11.1% in constant currency to $1.74 billion. This performance is a result of our success and developing our major brand to gain share around the world and grow our, at above market rates in virtually all of our pharmaceutical product line.

One of the key highlights for the quarter was continued strong growth of our glaucoma franchise in this largest segment of the ophthalmic market. Total glaucoma sales grew 19% as we continued to gain share in the U.S. with TRAVATAN®Z and we launched DuoTrav in more European markets and gained share and previously launched market. We also continue to succeed in our clinical differentiation of Azopt as a prostaglandin junk in medication.

I’m also pleased to report that we began shipping TRAVATAN®Z in Japan last week. Our sales organization there has been very active the last several months. And it’s reported about 60% of our chartered accounts have already placed pipeline orders. Factory recently hosted a symposium for more than 225 Japanese doctors and the feedback was very positive. A strong interest in TRAVATAN®Z and its unique formulation. Further more we are, we were happy to receive a reimbursement price in Japan that represents a 2.2% premium over ZALATA in that tic market.

After a relatively weak spring allergy season in U.S. we saw a rebound in U.S. sales of Patanol and Pataday in the third quarter. Our sales in this category grew 14.3% with most of that growth coming from U.S. sales of these 2 products. After being in the market for only 6 months Pataday accounted for 27% of U.S. allergy sales in the third quarter and has helped our U.S. allergy franchise gain 3.4 share points so far this year in the U.S. With the two leading products in the anti-infective, anti-inflammatory markets, Vigamox and TobraDex we continue to experience stable growth in this category, which grew at 9.2% for the quarter.

We have been very successful with the continued evolution of Vigamox, which grew in the mid teens on a global basis as we have demonstrated in product introductions outside the U.S. while expanding our leader’s leading share position in the U.S.

As we had discussed earlier the Otic season was very weak in the U.S. this summer. Although we don’t have script data yet for September, in the selling month of June, July and August the otic market was down 9.4% in the U.S. compared to the same month of FY06. Because of our continued ability, gained share was Sipradex [ph] in this segment we did better than the market. Declining only 7.1% during that period while other manufacturers’’ otic product declined 10.7%. We believe the market weakness was transitory and expect our market share gains will contribute to continued growth in this category in the future.

In terms of our near research pipeline we filed our U.S. NDA on TobraDex SD, and submitted an amended NDA for PATANASE(R). we will of course work with the FDA for the role of writing them with all of the information they need, take actions on these products as soon as possible. We are currently targeting action on them in the first half of 2008. Certainly PATANASE(R) with TRAVATAN®Z in Japan will both store our pharmaceutical sales growth in the next couple of years.

Also the recent deal we did with Lantibio is an exciting step in our near term dry eye pipeline. This developmental prescription dry eye product is in Phase III clinical and we hope they will be successful in this challenging area. Assuming these successes we hope to bring a product to market in the next 2 to 3 years in this important category.

Now turning to surgical, our surgical products sales rose in the third quarter to $585.9 million, an increase of 10.8% or 7.5% in constant currency. Year-to-date sales were $1.8 billion, an increase of 11% or 8.1$ in constant currency. I’m very pleased with out share gains across the entire spectrum of products, which include hyalure, DisCoVisc(R) and equipment. Our continued ability to gain share from our current position demonstrates the differentiation of our entire product line in this area.

The quarter e was again solidly supported by a growth of our AcrySof(R), vialow [ph] family. Lead by increases in AcrySof(R) IQ and strong growth of our premium lenses AcrySof(R) ReSTOR(R) and AcrySof(R) Toric. In fact our premium lenses grew 35% compared to last year’s third quarter accelerating adoption of the Toric lens during the worldwide introduction and sequential quarter growth from ReSTOR(R).

It is important to note that the Toric lens is expanding the number of doctors who are implanting premium lenses; positioning many of them to eventually I think adopt presbyopia correcting lenses as become more comfortable with the interaction that is required to educate patients on their cataract options.

Our continued growth in the premium category has resulted in a premium high or low unit penetration rate for Alcon ILO sales of about 8% with the trend curves still on outward flow. Also initial surgeon feedback on the clinical results from the ReSTOR(R) Aspheric lens has been very positive and we have seen increased usage as surgeons evaluate the overall vision benefits of the Aspheric design, combined with the [inaudible] refractive optics of the ReSTOR(R) platform.

We continue to believe that the ReSTOR(R) Aspheric lens will enhance patient satisfaction and increase surgeon confidence in the ReSTOR(R) platform over time. Also as you can expect we are continuing to move ahead in are development plans for the ReSTOR(R) platform and in that regard we have seen mark the three diopter [ph] ad limbs in Europe and commenced our clinical for this lens in the U.S. we are targeting our commercialization efforts of this lens in the second half of 2008 and believe it will be an important component of the ReSTOR(R) platform in the future.

The rest of our cataract business also performed very well as our in stall base of our cataract equipment continued to grow as we. I think the appreciation for the performance of our Infiniti(R) with OZil(TM) torsional hand piece gained steam in the quarter.

Unit sales of Infiniti(R) rose over 16%, mostly by converting older systems, but also by winning competitive versions. On a combined basis our other products used in cataract and vitreoretinal surgeries grew in excess of 10%. Led by particularly strong growth in the viscoelastic sales, which increased almost 15% in the quarter.

We have steadily gained shares in the past years in this important category where we are approaching 60% in the U.S., and globally we have seen almost 12% growth, year-to-date. Although it is a smaller portion of our surgical business, we had another excellent quarter for vitreoretinal sales. Bulk of this business is for vitreoretinal disposables, which rose 20% in the quarter due to share gains and physician’s conversions, to higher value 23 and 25 gauge instruments.

Now turning to our refractive business, we again had a weak result due to the problems we have had with the LadarVision 6000 [ph]. However I am excited about the outcome of our tender offer for WaveLight, and the prospects for the A.G. laser in the future. As you knew over 77% of the shares of WaveLight have been contracted or tendered to Alcon and we have started the planning of the integration process.

I know I’ve personally spoken with many doctors in Laser centers and have universally heard that they have a high interest in the A.G. Laser, because of its aberration speed, reliability and precision. Our refractive organization along with WaveLight CEO, Max Rendell and his team, all have the same objective; and that is to create a significant share position in the laser refractive market. And also to maximize Alcon’s ILO penetration with the refractive cataract surgeon channel in the future.

Now coming back from a month minute to our global surgical performance, this slide that you see demonstrates I think the great job our sales and marketing people are doing around the world. You can see here that units across all categories are growing at high single digits, while dollars are growing even faster in the low to mid-teens. These results come from significant market share gains in the introduction of higher value products that meet the evolving needs of the ophthalmic surgeon. This performance also comes in the global market environment that we estimate is growing in the range of 5% to 6% in units.

Now turning to consumer, sales of consumer products rose 13.5% to $202.5 million in the third quarter to 10.4% in constant currency. Also for the first nine months sales were $595.3 million representing 14.7% growth over the same period in FY06 or 12.3% excluding exchange. This strong quarterly and year-to-date performance is due to significant market share gains we have achieved, since the global recall of Amose [ph] complete moisture plus in the second quarter of 2007 as well as Bausch and Lomb recall of Renew Moisture Lock in quarter 2006.

Although the impact of these recalls was immediately felt in the U.S. we are seeing a day trend of growth and important markets outside the U.S. and expect to continue to gain share in those markets in the coming quarters. In the U.S. our market share gains have been quite durable based on our product performance and differentiation with our OPTI-FREE (R) expressed and replenished products. And I think effective promotional activities to the professional audience.

Again our marking research continues to show that somewhere between 65% and 70% of U.S. optometrists continue to recommend an opt pre product to their patient. I was also pleased by our performance in the dry eye segment which continues to post double digit growth overall. The sustained peer franchise, the key driver of this performance for Alcon as it grew almost 24% in the quarter and year-to-date; with much of this growth reflecting global launches ad share gain.

Coming up I’m very happy with our overall financial performance in the third quarter and I believe we’re well on our way to a solid full year in 2007. We have the global infrastructure and competitive position to achieve steady growth, in our long term range of 8% to 10%. And we believe that as we continue to leverage this growth, the faster EPS growth through improving gross margins, management of our SG&A and a lower effective tax rate.

So now I’ll turn the call over to Rich who will review these financial metrics in greater detail.

Richard Croarkin – Chief Financial Officer, Senior Vice President

Thanks Carey. Before I go through the details of our financial results for the third quarter, I just want to take a moment to express my excitement in the opportunity to join Alcon.

In my first few months I’ve had the opportunity to work closely with the senior members of management team, as well with my staff and co-workers in other areas of the company. I’ve enjoyed the opportunity to see the talent, knowledge and dedication that exists at all levels within Alcon. Clearly that’s what makes Alcon the high performing world-class organization that it is. I’ve also had the opportunity to meet many of our investors and analysts who follow Alcon and I look forward to meeting more of you in the future.

My first slide, presents the reported results for the third quarter of this year, compared to the reported results for the third quarter of 2006. on a reported basis, net earnings were $15 million for the quarter, an increase of 79% over the reported results through the third quarter of 2006. Results for the third quarter of 2007 include $3.4 million of charges related to the reduction of our refractive work force. These reductions were announced simultaneously with the announcement of our planned acquisition of WaveLight and were the first step in the rationalization and integration of the two refractive operations.

In addition results for the third quarter of 2006 included a $92 million after tax impairment charge related to the refractive business. In order to get a better feel for the performance of our cooperation, we provided a comparison to the Non-GAAP adjusted results for the third quarter of 2007 and 2006 in the next slide.

These, there are slides at the back this presentation as well as tables and their earnings release issued last night that walk you through the reconciliation, of the reported results, to Non-GAAP adjusted results for both Q3 2006 and Q3 2007.

All for all, a 11% sales growth for this quarter. Adjusted growth profit increased to $1.14 billion. The adjusted growth profit margin went down by 60 basis points to 75.9%, compared to 76.5% in the adjusted results for the same quarter of the previous year. There are a number of contributing factors to this declining gross margin for the quarter, including a change in the geographic mix sale.

Carey just reviewed the strong growth we saw in our international business this quarter. International products, especially pharmaceuticals tend to have lower gross margins due to government reimbursement schemes. About half of the Q3 gross margin decline was due to Q2 geographic mix. The remainder being a lot of small items. In the U.S. we actually saw an increase in the gross margin led by strong growths in IOLs; specifically premium IOLs.

As we’ve indicated in the past, the best way to look at gross margin improvement over periods is over periods longer than just a quarter. So when I get the year-to-date results you will see that gross profit margin has improved 20 basis points year-to-date on an adjusted basis.

Adjusted operating profits increased 16.2% to $471 million. The adjusted operating profit margin improved a 160 basis points to 35.3% of sales from 33.7% in 2006. behind this improvement was a slight increase in the SG&A expense as a percentage of sales and decreases in R&D expense and intangible expenses as a percentage of sales.

The increase in SG&A as a percentage of sales is due primarily to increases in direct selling expenses. This is driven by additions to our sales forces in Japan, LeCar [ph] and Café regions to support new product launches, to drive market share gains and key brands and to continue to extend our presence in emerging markets. In addition, higher distribution costs also contributed to the increase in SG&A expenses, as a percentage of sales.

Adjusted R&D expense, as a percentage of sales declined this quarter to 9.6% compared to 11.1% in the same quarter last year. You may recall that in Q3 2006 we paid $10 million to Nobel Bay related to a licensing agreement. So expenses in that quarter were higher than normal.

The decline in third quarter R&D expense was also attributable to timing of project spending. So we anticipate to return to higher R&D spending in Q4. Adjusted intangible amortization declined by $10 million, due to the smaller amount of intangible assets after the impairment charges taken in the third quarter of 2006 and the first quarter of 2007.

Other income declined slightly, which is a function of reduced income due to lower cash balances. We also had lower balances on our debt facilities, so interest expense also declined despites rates that were higher than a year ago.

The effective tax rate in the quarter declined, which was a result of global tax restructures related to audit settlements in several international jurisdictions and advanced pricing agreement negotiations between the U.S. and Switzerland. Offsetting these improvements was a withholding tax on an inter company dividend. The net effects of these items was to lower our income tax expense by approximately $17 million. I’ll spend more time discussing income taxes in a few minutes.

As a result of these items adjusted net earnings improved 29.2% to $418.7 million, from adjusted net earnings of $324 million in the third quarter of 2006. adjusted diluted earnings per share improved to $1.39 from adjusted results of a $1.06 in 2006. as increase of 31%, a faster growth rate than the net earnings due to the reduced number of shares as a result of share repurchase activity.

I’ll now move to our performance year-to-date. This slide presents the reported results, which show our net earnings growth of 21% compared to underlying year-to-date sales growth of 12.5%. I won’t spend much more time on this slide as it makes more sense to look at adjusted results on the next slide.

This slide reflects the Non-GAAP adjusted results for the first 3 quarters on 2007 and 2006. Adjustments in 2007 are related to the impairment charges related to our refractive assets taken in the first quarter this year and the charges associated with refractive work force reduction taken in the third quarter. Results in 2006 are also adjusted for an impairment charge, which was taken in the third quarter and for litigation reserve production that resulted from the settlement of patent lawsuits with the competitor.

Once again the Non-GAAP adjustments are reconciled to reported results in this slide at the end of this presentation, which has been filed with the. With these adjustments net earnings increased 24.9% to a $1.234 billion or $4.08 per share. The leverage in the income statement is provided at a number of points. As I mentioned before the adjusted gross profit margin has improved by 20 basis points to 75.8% of sales. This was a result of the migration to higher value technologies, especially in our surgical products and gains in our manufacturing efficiency.

Adjusted SG&A expenses as a percentage of sales improved by 50 basis points to 30.3% as promotional and marketing expenses grew at 11.4%; and G&A expenses only grew at 6.8%. both left in the underlying sales growth. Adjusted R&D expenses were 9.7% of sales down from 10.3% the prior year. This is due primarily to the licensing agreement that I referred to previously, and the timing of project spending.

As we look to the fourth quarter we would expect our R&D expenses to increase as a percentage of sales, bringing the full year spending to around the 10% of sales level that we spoke, that we’ve spoken to in the past. Adjusted income taxes have also provided a benefit with a decline in our tax rate year-to-date. We presented this slide in the last several earnings calls. It shows our core base effective tax rate and then provides you the impact of the non-structural items that serve to get a move our reported effective tax rate, either higher or lower than the base rates.

As you can see in this slide, the base effective tax rate is 18%. This compares to a 21% base rate for the full year of 2006, which indicates the 300 basis point improvement in the base rate, which is consistent with the guidance that we’ve communicated.

In 2007, especially in the third quarter you saw several non-structural items, which served to move our effective tax rate below the base rate. Our long term guidance for our effective tax rate does not include these non-structural items.

This next slide provides a highlight of the balance sheet changes. As I mentioned before our borrowing are down approximately a $130 million due to strong cash flow, especially in the U.S. You can also see the shift from cash and cash equivalents to short-term investments, which we talked about lat quarter.

Because of our strong cash flow we’ve been able to maintain the strong financial position and increased cash returned to share holders through a rising dividend and additional share repurchases. While the rise in receivables and inventories seems high, these numbers come into line when the currency impact in removed. Receivables increased 9.6% on a constant currency basis. Inventories increased 2.8% on a constant currency basis.

The next slide shows the evolution of funds returned to shareholders. As we’ve continued to generate strong cash flows from operations, we have been able to reinvest them in the business, as well as provide healthy distribution to investors. In the form of an increase in our dividend and the dollar amount of share purchased. Sop far in 2007, we’ve spent $876 million under repurchase of 6.8 million shares as of September 30. Have the, and have the authorization from our board to purchase, repurchase up to another 3.6 million shares. In total we’ve returned the other 1.5 billion to our shareholders so far this year.

My final slide goes through the full year guidance for 2007 that was put forth in the earnings release last night. With only one quarter remaining we are tightening up our guidance for sales to a range of $5.51 billion to $5.54 billion. In essence we’re raising the lower end of our previous guidance by $35 million and pulling in the upper end by $10 million.

From an earnings stand point, we’ve raised our guidance on adjusted earnings per share to a range of $5.30 $5.35 per share. Compared to our last forecast this reflects, a $0.10 increase in the bottom end and a $0.05 increase in the top end.

It is important to know that this guidance anticipates a significant increase in R&D expenses, as the project timing that I spoke about earlier reverses itself. The expected increase in R&D in Q4 also includes the Lantibio deal that we’ve already executed. Also I’ll remind you that these guidance numbers are for the adjusted results, which exclude the impairment charges, the acquisition of WaveLight and integration of rationalization expenses associated with the combination of WaveLight operations with our existing refractive operations.

With that I’ll turn it back over to the operator to start the Q&A session.

Question and Answer

Operator

Thank you. [Operator Instruction] please stand by for your first question.

Your first question will be from the line of Peter Bye of Jefferies & Co.

Peter Bye – Jefferies & Co

Thanks and good morning. I apologize if you’ve already covered this that jumped on way but, you sort of take the mid point of your guidance or even the range for Q4, it’s a pretty heavy sequential ramp in the growth rate. 13% to 15% on the topline. Is there something specific that you see in this quarter? I know you’re talking about Medicare Part D; in a way does that weigh in Q4? Or maybe just give it a little bit more color and if you already have I apologize.

Richard Croarkin – Chief Financial Officer, Senior Vice President

Well Peter I think we did cover some of the underlying factors that go into our fourth quarter that then accumulate into our total guidance that we’ve highlighted. Clearly as we’ve indicated throughout our conference call, we feel good about the underlying brand growth and development. We’ve seen significant strong growth in international. We don’t see anything that’s going to slow that down as we go forward. We certainly believe that there will be some rebalance in our U.S. pharmaceutical sale. So a combination of all those factors have really led us to the guidance that we presented today.

Peter Bye – Jefferies & Co

And then just, maybe if Carey’s there, I’m talking about maybe any update on retain for glaucoma, when we might see some data and where they stand from maybe organizing the page 3 tibidal [ph] on that front?

Cary Rayment – Chairman, President and Chief Financial Officer

Jerry steer in, Jerry go ahead.

Gerald D. Cagle - Senior Vice President, Research and Development and Chief Scientific Officer

Alright, good morning Peter and Anna Corte Vacitae [ph] Glaucoma as we’ve come to call the project, is one of our top priorities. We’ve reported to you the results of our initial those dose studies, and what we’ve seen in those dose response studies is as we continue to march up the concentration line, we still continue to see increased effectiveness of the higher doses over the lowers. And so what that means is that we’re still looking for the right dose and we’re still looking for the right duration. And your timing of the question is just very good, because this weekend we will have our investigators meeting to actually kick off the next set of studies that you’re talking about. The page 3 studies that will continue to explore, the concentration of Anna Corte for glaucoma, the volume of it and the gyration over which it lasts. So we’re hot on that.

As you know all of the things that are part and parcel of an FDA study, take time in getting the investigators lined up, the IND amendments filed, the ROB s done; we’ve got that pretty well in place now. And so the next time we talk, we will be talking patients enrolled and how we’re marching along to get things done on Anna Corte. But what I’ve said to you by way of summary is that we’ve got the preparatory work done and we’re getting ready to start rolling and it’s just this weekend.

Peter Bye – Jefferies & Co

Alright, only one last follow up; did I hear you correct me on, for the gross margin for in that when your portfolio results will see a 20 basis point improvement year-over-year. If backing in it sort of seems about a 60 to 80 basis point improvement in gross margin year-over-year in Q4? Is that correct?

Richard Croarkin – Chief Financial Officer, Senior Vice President

The full year guidance would be something in the order of magnitude of 30 basis points, on an adjusted basis. So, yes the math is right for the fourth quarter.

Peter Bye – Jefferies & Co

Thank, I’ll jump back in queue.

Operator

Your next question will be from the line of Mark Goodman of Credit Suisse.

Mark Goodman – Credit Suisse

Couple of questions. First of all on this new dry eye product, can you give us a little more flavor for the product Jerry? What you like about it? What the end points are for Phase III? Second of all can you talk about about ReSTOR in Japan where is that product have you got reimbursement yet? And third can you just talk about your strategy now for the laser market now that you are going to have a new product and what you are going to do to kind of take share in that business?

Cary Rayment – Chairman, President and Chief Financial Officer

Sure Jerry why don’t you go ahead.

Gerald D. Cagle - Senior Vice President, Research and Development and Chief Scientific Officer

Alright, good morning mark and as Kerry said we see the lentil bio opportunity as an exciting one you know if you look at what dry eye is we believe that it is not a single set of conditions that define or characterize dye eye. The single product that’s available for dry eye therapy today is one that increase tear volume and this is not the effect the lentil bio product candidate instead it is what we call a [inaudible] protective and so tear secretor gongs [inaudible] protective and then we would include a few other categories in the over all umbrella of how dry eye products could work make up the constellation of what may be tomorrows dry eye [inaudible] but we have seen the initial results that the company that we have licensed this compound from have obtained they are in the midst of conducting the second study right now and as Kerry said we hope that within a coupe or three years we will have a very competitive product it could be sooner it could also be later and our practice is always been to be Candid with you it could be sooner if the second study replicates the first

Mark Goodman – Credit Suisse

When the first study is done you have seen the data when will we see it.

Gerald D. Cagle - Senior Vice President, Research and Development and Chief Scientific Officer

You will see it before the second study is done.

Mark Goodman – Credit Suisse

And the end point.

Gerald D. Cagle - Senior Vice President, Research and Development and Chief Scientific Officer

The end points will be, I am not going to go into the specific ones because while we would share that information with you certainly there are some others that may be online that would be a competitive advantage to share that kind of information with. Suppressive to say thought we would follow the FDA guide lines that have been laid out for dry eye products and that is that we show a one sign improvement in one of the signs and that we show a one unit I should have said unit a moment ago we show a one unit improvement in the sign and a one unit improvement in a symptom so it will be the same kind of requirements for any [inaudible] products before the FDA.

Cary Rayment – Chairman, President and Chief Financial Officer

Okay thanks Jerry ill answer the next question which was AcrySof in Japan what I would say is first of all we are pleased to have approval there clearly in the Japanese market I think we have to view that it is a conservative surgeon based and consumer related to new technology. We're obviously working with key opinion leaders in Japan to get clinical experience with restore and I think it’s consistent with the experience and results that we've had world wide at this point. That said, I think what’s important is to work to get the appropriate reimbursement in Japan as it is in other markets around the world markets.

Its not easy, we would like to have reimbursement scheme that would be similar to what we have in the U.S. We're patient to have the ability to pay the additional costs associated with the higher technology and physicians to be able to appreciate and gain something from the additional work required to provide presbyopic correcting surgery that said the reimbursement is not set yet, it’s a difficult process, that process continues and we’ll see how that ends up. So in the interim, I think we’ll be continuing to work on our private paid basis like we do in a lot of other international markets and so this is going to be a longer-term development in Japan but I think again for Alcon and for the industry it’s a good opportunity long-term. That’s sort of the situation in Japan as we speak as it relates to a WaveLight I’m very excited obviously in terms of the progress we've made. We as we've indicated have over 77% of the shares at this point. We're waiting now for the final cartel approval and so we expect to have that in the coming weeks. beyond that we will start to and I’ve started to at least begin the integration process working with the WaveLight management team. Looking at the global opportunities. But clearly based upon that product technology and the 800 I think the fact that they have 800 lazors placed throughout the world certainly gives a good basis for us to build on. The technology is well received and we then expect to be in a position to work with our global infrastructure and focus on that cataract refractive channel and then also to determine how we then position WaveLight technology along with our other refractive technologies going forward. So overall we're pleased. It’s going to take us some time to make this happen but we’ll be working diligently on this in the coming months.

Mark Goodman – Credit Suisse

I guess. Just an extension to the question before refractive was small. We never got the sense that it was a major focus for the company maybe it was and just a perception but I guess I was wondering what this new technology will this now be a major focus you are going to get more aggressive or…

Cary Rayment – Chairman, President and Chief Financial Officer

Well clearly surgical has always been a major focus we do see the opportunity in this cataract refractive channel as you know we are working on a number of refractive IOLs which include ReSTOR and our AcrySof Toric. We are working on I think a very innovative and I believe will be affective [inaudible] in the future. So these are all technologies that certainly fit with having a solid effective refractive laser to work with. So we will integrate this then and we will continue to build on that platform.

Operator

Your next question will be from Michael Weinstein of J.P. Morgan.

Kim – JP Morgan

Oh hi everybody its Kim here for Mike.

Just turning back to the U.S Pharma business for a second, can you talk a little bit more about what gets this business going forward and assuming that we do have some sustained pressure in U.S Pharma how does it impact your growth margin picture over say the next three to four quarters.

Cary Rayment – Chairman, President and Chief Financial Officer

Kim, I let Kevin Buehler will address that question in more detail.

Kevin Buelher - Senior Vice President, Alcon United States and Chief Marketing Officer Trade Activity

Thanks Kim let me give you a perspective of we look at the pharmaceutical business. In the first place that we start is obviously breaking down international and U.S and when you look at our international business year-to-date our constant currency growth is 16% so obviously what we are seeing is brand development happening across most of our promoted products starting with the glaucoma area and we are seeing TRAVATAN, DuoTrav, Azopt leading the brand development outside of the US and obviously with the product introductions that we have in place in terms of Japan plus the TRAVATAN that Cary announced we would expect that international trend to continue.

Then you move to the US and obviously we have talked about the slower growth that we have seen in the Q3 time period but I would take you back to the chart that Cary showed in terms of RX performance and the underlying performance of our brand and the fact that we growing at a faster rate than the market across almost all of our segments and we are seeing significant market share growth in TRAVATAN(R) Z and TRAVATAN combined we have had an excellent year as it relates to Patanol we are seeing all the franchise grow and we are seeing Vigamox grow.

So you can see that we are growing faster than the market and continuing to take market share. So then you come back to why did we see the Q3 results that we did and I would tell you its three primary factors that influenced that? The first one is in the Q3 time period obviously we have alluded to the Otic growth if we look at this year in the Otic segment what we have seen is a decline of almost 4% year to date versus last year it was more or less flat down 0.6%. And on a year to date basis if we look at allergy we are seeing a similar situation where we are flat this year and last year we saw 5.5% increase so across both of these segments that are seasonal related we are seeing weakness this year going up against the comps that we had last year.

The second factor is we have continued to see inventory reductions in the wholesaler chain and we also saw one supply chain change from a direct basis to a whole seller basis that occurred over the Q2, Q3 time period. Obviously the inventory adjustments that we are seeing have taken us to the low end of the range that we normally see in the two to four weeks and over time the demand that we see on our Pharmaceutical products need to be meet with factory shipments so the inventory reductions cannot continue for ever.

And last is we did talk about the impact from Medicare part D. We are seeing a trend where a greater percentage of our pharmaceuticals units are under some form of managed care contract which carries a rebate and that’s primarily influenced by Medicare part D. But the other dynamic that’s going on is the fact that if Medicare part D started, you saw both increase in enrollment and increasing utilization and you were going in 2007 against those comps in 2006 when in fact the rebate levels that were paid out as this Medicare part D started to gain critical mass we are dealing with a comp issue.

So if I take those three factors and I come back and I look at them in the context of are they relatively short term or relatively long term in terms of effect. I don’t think we have seen Otic and allergy seasonal weakness over time. Typically you may see one of those categories be some what weak but typically you do not see the weakness that we have seen in 2007. I think we have already referenced the inventory adjustments are on the low end and as long as we got brand dynamics adjusting growth I think the inventory adjustments are going to have to correct them selves and reflect what our underlying demand is.

And while I think Medicare part D will be something that we continue to manage over time and its our responsibility in the sales and marketing and manage care areas to develop affective and good paybacks on our time tracking activities with Medicare part D for both access and market share we are not going to see these comp issues continue as the Medicare part D volume ramped up. I hope that helps.

Richard Croarkin – Chief Financial Officer, Senior Vice President

Kim this is Rick responding to the second part of your question our long term guidance has been poor continued margin evolution we are thinking that could be in the range of gross margin evolution. We are talking about in the range of 30BPs a year could be a higher or lower in an individual year but that’s kind of where we see things evolving and more specifically if you look at this last quarter where we had the impacts that Kevin just described in Pharma we still managed to grow margin in the U.S. by some amount so we still feel that we can grow gross margin as we communicated in the past.

Kim – JP Morgan

Okay and just one follow up to Kevin comments. So in your 4Q guidance are you assuming that some of these inventory issues do start to bounce back in the fourth quarter? And then one quick follow up for Rick which is on the tax rate, what are you recommending we model then for the fourth quarter and should we still stick with the initial 13.5% to 14.5 % tax rate guidance for 2008? Thanks.

Kevin Buelher - Senior Vice President, Alcon United States and Chief Marketing Officer Trade Activity

Yes Kim this is Kevin again I would tell you that we are forecasting that some part of that inventory adjustment corrects itself in the fourth quarter. I think the one account that we referenced in terms of the supply chain from direct to wholesaler will not have an impact in Q4. And I think we are also assuming that we will follow normal trends where inventory levels do inch up in the fourth quarter.

Richard Croarkin – Chief Financial Officer, Senior Vice President

Kim this is Rick. For the second part of your question for the Q4 tax rate guidance I would assume something in the range of 17% to 18%. And with regard to the effective tax rate guidance for next year there’s been no change in our view at this point since the last communication which was 15.5% to14.5%.

Kim – JP Morgan

Okay thanks everyone.

Operator

Your next question will come from the line of Larry Biegelsen, of Wachovia.

Larry Biegelsen - Wachovia

Thanks and good morning.

Cary Rayment – Chairman, President and Chief Financial Officer

Good morning Larry.

Larry Biegelsen - Wachovia

Hi. The wholesaler inventory reductions and the supplier change. Kevin, could you quantify, in the quarter, could you quantify that for us please?

Kevin J. Buehler - Senior Vice President, United States and Chief Marketing Officer

Yes it looks to be in the range of $10 million.

Larry Biegelsen - Wachovia

Thank you. And Jerry on the Anna Corte acetate for glaucoma it sounds like you are going into phase three without knowing the optimal duration and dose. Is that correct and is that a risky strategy and I have one more R&D question after that?

Gerald D. Cagle - Senior Vice President, Research and Development and Chief Scientific Officer

Well, Larry, whenever we started the dose response initially we took three concentrations and three concentrations is not a bad number to conduct a dose response study over and we have talked about what those concentrations were.

What we are doing with the next study is looking at significantly higher concentrations of the drug in a constant volume in order to nail down the questions and do I think that it is a risky proposition? The answer is no, because we have already evaluated the concentrations that we will be able to deliver and the next study will have those integrated into that study. I could have just said we will be at the pharmaceutical logistical top end of what we can deliver with this next study and that’s why we have this back stock that provides us with the level of assurance that’s at the basis of your question.

Larry Biegelsen - Wachovia

Okay and glen tibio [ph] so it sounds is the second phase three study, or is the second study you referred to is it identical to the first one that from your comments appeared to be successful?

Gerald D. Cagle - Senior Vice President, Research and Development and Chief Scientific Officer

Well you threw me off there a little bit Larry with glen tibio, but we say anti-bio but the answer it is a study of the same design but let me talk just for a moment because your question has more associated with it for people who are also on the line. And we recognize that there are levels of uncertainty that are associated with dry eye. I have talked about these before the patient population varies, you cannot always get people who have the ideology of dry eye and the successive studies, environmental factors contribute to the severity and modulation of the disease so do hormonal issues and so on and so on and we recognize all of this. We feel like we have a reasonably good chance of replicating in the second study the end points that are in the first one. But we have seen our competitors say the same thing and peg strike after strike.

Some of the companies have stepped up to the point multiple times as you know Larry and not been able to replicate on the first end points that they had put forward as ones that they had high levels of confidence in. So I’m not going to say to you today we see this as a slam dunk. We know ophthalmology and we know that this is a difficult area but non the less it is one in which patients who suffer from dry eye deserve the opportunity to have a multiple of therapies they can address the signs and symptoms that they have and this clearly is the second mechanism of action and that’s why we continue to pursue it.

Larry Biegelsen - Wachovia

And Jerry, did you say when you expect to see the results from the second Phase III study?

Gerald D. Cagle - Senior Vice President, Research and Development and Chief Scientific Officer

I didn’t and its not because I don’t know but its simply because relative to the question that I got from maybe Peter or Mark, I don’t remember who that we are going to wait until we see what those results are before we say anything about the results of the first study. So we’re going to get the first and second study results. We will roll them up and then we will be talking about them with all of you all.

Larry Biegelsen - Wachovia

I’m sorry, I just meant the timing of the second phase three study in terms of what year you would be expect that to be completed.

Gerald D. Cagle - Senior Vice President, Research and Development and Chief Scientific Officer

Oh, I will tell you that would be in 2008.

Larry Biegelsen - Wachovia

Thank you, no problem.

Richard Croarkin – Chief Financial Officer, Senior Vice President

This is Rick. I just want to make one follow up comment on something I said earlier. I think its self evident but all the guidance that we’re giving in terms of longer term all exclude the impact of WaveLight. WaveLight is an independent company now due to the fact that they have their own shareholders the amount of information they’ve been able to share with us is limited. so When we talk about things like effective tax rate going forward WaveLight will have an impact. I just do not have enough information at this time to be including that in any of the guidance I’m giving you.

Operator

Your next question will be from the line of David Buck [ph] of Buckingham Research Group.

David Buck – Buckingham Research Group

Hi guys, thanks for taking the question. A couple of quick ones, first either for Kerry or Kevin. Can you characterize what you see as the opportunity for PATADAY, sorry, for PATANASE in the U.S. and how you plan to position that. Also can you give a reminder on TRAVATAN(R)Z what the market dynamic you’d expect is in terms of the up take of launch. I think you mentioned the pricing reimbursement was successful. And finally for Rick can you give a sense of the level of R&D spending? I know you mentioned fourth quarter will be higher but can you give some parameters for 2008 - 2009 in terms of percent of sales target? Thanks.

Kevin J. Buehler - Senior Vice President, United States and Chief Marketing Officer

David. This is Kevin. Let me give you a sense for how we see PATANASE. Clearly that category is defined today primarily as a steroid market and there’s one other product Asthalin in that market that would be in the antihistamine segment and today that represents more or less in the range of 10% of the total Rx volume being non steroid. Thus the advantage that we have is that PATANASE is obviously a derivative from Patanol and I think both in terms of ophthalmology but also in primary care there is a general awareness of the efficacy associated with Patanol and the expectation of that efficacy would carry over into the nasal treatment. One of the advantages obviously is the onset of action and that would be one of the areas that we would look to exploit as an alternative to the longer acting steroid segment we also have some direct product advantages to Asthalin so we see it as a very opportunistic product launch for us in a channel primarily in the U.S. where we already have sales and marketing capability.

If I think about TRAVATANZ and I think you were referring to Japan. Obviously today there are two products in the prostaglandin segment with Xalatan and then Rescular [ph] so we see an advantage in the fact that we will be the third product in but really in a situation where we can go head to head with Xalatan we believe we got a much better efficacy profile compared to Rescular [ph] and then if we also start up with the advantage in terms of formulation where in fact we are using the TRAVATAN(R)Z formulation without BAK which does give us an advantage in terms of corneal safety for a chronic drug so we have both our efficacy profile that we bring forward plus an advantage on day one with our formulation without BAK so we are very encouraged with the opportunity in Japan and obviously we are adding to our sales force capability so that we can have the share of voice we need to go directly head to head with Xalatan.

David Buck – Buckingham Research Group

And can you remind what the dollar level of sales is for the prostaglandin category currently?

Kevin J. Buehler - Senior Vice President, United States and Chief Marketing Officer

Yes the total market is about $600 million and about half of it is prostaglandin. And that’s the fastest growing segment within glaucoma in Japan as it is in other markets around the world.

Richard Croarkin – Chief Financial Officer, Senior Vice President

This is Rick. David, for the second part of your question we would like to increase the level of R&D spending and be in the range of 10% to 11% over next few years. That would include impacts for licensing deals like land to buy which would be included in those figures.

David Buck – Buckingham Research Group

Okay thank you.

Operator

Your next question will be from the line of Lawrence Keusch of Goldman Sachs.

Lawrence Keusch - Goldman Sachs

Hi, good morning.

Unidentified Company Representative

Good morning.

Lawrence Keusch - Goldman Sachs

Couple of questions guys. I will just rattle off. First just coming back to the gross margin and try not beat a dead horse here, obviously understand some of the inventory stocking issues that you mentioned which would hopefully begin to reverse in the fourth quarter or normalize I should say but just so I understand what other factors drive that GM pick up in Q4? That’s question one. Question two is J&J recently talked about a contact lens that will deliver a OTC allergy drug. I just wanted to get your thought on how you think about that relative to your allergy franchise and then lastly just any thoughts on the timing of your new line for contact lens manufacturing if things supposed to be coming up right around this time frame?

Richard Croarkin – Chief Financial Officer, Senior Vice President

Okay, Lawrence this is Rick, I will pick up the first part of that on gross margin. You recall we said in the quarter half of the decline in gross margin was due to geographic mix and then I said there was a lot of small things and I mean it there was a lot of small things. We had scrap increase mostly related to our refractive business we had product mix in Japan which impacted gross margin there. We had New York state join a multi state buying program which increased our rebates so I could go on but there were just a lot small items. I don’t think any one in particular is all that consequential.

Kevin Buelher - Senior Vice President, Alcon United States and Chief Marketing Officer Trade Activity

Larry, this is Kevin. In terms of the J&J product I think as a general rule we don’t comment on other people’s pipeline. Obviously we saw the same report that you are referencing. Obviously delivering a drug through a contact lens brand in a drug delivery approach obviously has its own complexities that they will have to deal with and the other issue is the formulation and efficacy of whatever that allergy molecule is. I can just tell you that we are very comfortable with the Patanol and PATADAY franchise in terms of the efficacy that we deliver and now with the. convenience of once a day from PATADAY, I think we cover that space quite well.

I know the issues around the field sea line has been really related to our capacity. Our capacity issues are starting to get better and they get better each quarter as we get additional capacity in terms of our manufacturing but at the same time as we rationalized our product line reducing our commitment in terms of private label and focusing on branded products but right now we are meeting that need.

I can just say when I look at the market share data in the U.S. and I look at the unit sales outside of the U.S. we had a very strong Q3 time period in both OUS and the U.S. performance and we are meeting that need both at retail as well as the ability to continue to deliver starter kits at the doctors office. So we are in a better place,

Lawrence Keusch - Goldman Sachs

Okay, just Rick, just to circle back. You mentioned all these small events but are those small events, are you suggesting that there’s a sort of, even though they are all small, that they are sort of one timers that do ease in the fourth quarter again I’m just wrestling with what may make this go up in the fourth quarter.

Unidentified Company Representative

Yes I, Lawrence, its always difficult to extrapolate from one quarter. I would focus on the year to date, the year to date gross margin is improving 20 BPs and I think that’s the real story. I think to go and over analyze you know geographic and scrap and other things that can happen in any individual quarter can lead us in unproductive directions.

Lawrence Keusch - Goldman Sachs

Okay, great, thanks guys.

Operator

Your next question will be from the line of Frank Pinkerton, of Banc Of America Securities.

Frank Pinkerton - Banc Of America Securities

Great, thanks for taking the question. First maybe I missed it can you outline the economics behind the dry eye drug announced this quarter and if not the economics at least what the ultimate contribution could be from a margin in royalties standpoint if that were approved?

Unidentified Company Representative

Well we don’t go into great detail in terms of our forecasts for these types of products. What I would say overall that clearly the dry eye Rx market opportunity is significant. You know there is one competitive product in the market today as Gerry outlined there are plenty of opportunity for multiple products to treat the sings and symptoms of dry eye and so we think that we have an opportunity here with this in licensing to participate long term and to benefit.

Unidentified Company Representative

If I could just add we think that we have an opportunity here with this in licensing to participate long term and to benefit.

Unidentified Company Representative

If I could just add to that I think we all see this as an unfulfilled market. There is one Rx product. I think most of you know that the directions for use require that it be home therapy to the patient for a substantial period of time before benefit is observed and we are looking for something that will not be a necessarily a direct competitor to this compound because our products will have a different mechanism of action. But it’s a growing market and I think the market in dry eye is going to continue to grow based upon the people living longer, based upon environmental factors and I include here change in climate as well as environmental pollution, and maybe some other things so I think that the dynamic that you ought to look at is that this is a large and growing market and it is not a market that is filled with a lot of Rx competitors today.

Kevin Buelher - Senior Vice President, Alcon United States and Chief Marketing Officer Trade Activity

Frank this is Kevin and I would echo what Jerry is saying. If you look at the U.S. market you are looking at our act as approaching $2 million and a growth rate of almost 15%. So clearly we have got a segment here that is where there’s only one product. Alcon’s opportunity to enter this phase clearly represents not only a revenue opportunity but a growth opportunity in the pharmaceutical area at a very premium price so this is simply an entry into that segment.

Frank Pinkerton - Banc Of America Securities

Okay, great and then just changing gears for a second. I know there has been a lot of focus on the gross margin in the quarter but one comment you made was on the premium IOL lines in the U.S. driving higher gross margins in the quarter. Can you speak to, you know, the percentage of those IOLs or if you have the ability to between base kind of cataract surgeries or presbiopia procedures and what kind of penetration do you see in some of those markets? I know that overall if you look at it cataracts is a very small percent but do we still have a lot of room to grow for restoring some of these other premium IOL lines? Thank you.

Unidentified Company Representative

Frank. The encouraging part of the premium IOLs is that the product portfolio is expanding and I think there has been history over the last year and a half that the presbioptic correcting IOL of which ReSTOR would be one of those the penetration rate of total cataract procedures is in the 4% to 5 % range but as Alcon continues to broaden that product line we are seeing two trends that we think are very encouraging. The first trend is that we are getting trial and we are getting acceptance of the ReSTOR Aspheric and we are seeing volume increases for example in the U.S. we have seen sequential quarter over quarter growth Q1 to Q2 to Q3 and clearly the ReSTOR Aspheric which is addressing this distance issue around Wax [ph] Vision we are getting reports back that are very encouraging and we would hope that that trial and usage continues that I believe will have an influence on the penetration rate considering that we are the market leading product.

The second encouraging trend is that we have introduced Toric which obviously is a little bit different in terms of the segment that we are going after but its also a up charge or a premium priced IOL where the doctor is asking the patient to pay in the U.S. Two parts. One is we are getting extremely good clinical results based on the performance of the Toric product and as a result we’re seeing position acceptance.

The second benefit is its allowing us to introduce a technology with very controlled clinical results that delivers confidence to the position to offer the technology to the patients and when I look at both ReSTOR and Toric we are starting to see penetration rates in the 7% or 8% range which suggests that when you deliver the right technology the opportunity to penetrate and to gain usage against that large cataract base it can be done and we can up charge at a premium selling price and the patient can benefit from the new technology so those are two encouraging trends.

Frank Pinkerton - Banc Of America Securities

Thank you.

Operator

Your next question will be from the line of Gerrard Hart [ph] of Bear Stearns.

Gerard Hart – Bear Stearns

Thanks very much. The first question is on the refractive business, was just wondering, am hearing from this conflicting reports whether WaveLight is or is not charging for the customer on a per procedure fee basis. What are your plans there that could be a pretty good opportunity and in dry eye was wondering whether the first phase three for that trial contains U.S. or European data and are there any up front milestones you are going to have to pay for the licensing?

Unidentified Company Representative

Why don’t you take the refractive? You know at this point, Gerrard [ph], we as we have said do not, we are not actually even close on the tender offer so I don’t really see Alcon in a position to confirm what the per procedure fee is. I think what I would refer you to is how we currently practice in the refractive area primarily in the U.S. and our approach is one that says that we want to expand our installed base so we will create very favorable economic programs that would allow us to gain install base and to realize incremental revenue from the per procedure approach and I would anticipate as we go down the road that we would want to stay consistent with that approach.

Unidentified Company Representative

And Gerry, this Jerry. About the anti bio arrangement it is a pretty standard one I think I would say to you by way of response. We do have upfront payments and depending upon anti bio meeting additional milestones along the way we will have additional payments and we will have a continuing royalty to the company based upon successful approval of the product. Now you ask about U.S. and European patients. The product is sold in Europe in some countries and the studies that are being conducted here and the jurisdictions for which we have license that are primarily the U.S. and I think we called that out in some of the communications that we have made so for the NDA the patients who are in it will be predominantly, exclusively is what I’m looking for, U.S. patrons

Gerard Hart – Bear Stearns

Okay great and then just on the gross margins again just very quickly. Do you expect the negative impact or the geographic mix to continue or in other words why would that stop going forward? Thanks a lot.

Richard Croarkin – Chief Financial Officer, Senior Vice President

Yes Gerard, this is Rick. I think the long term guidance that we have given we are still comfortable with in terms of positive evolving gross margin.

You know the example as Kevin just highlighted was the growing penetration trend of our premium IOLs would be one of those factors that go into obviously the gross margin evolution and given our performance there and our expectations going forward it would one of the positive contributors to positive gross margin evolution. That’s just an example.

Gerard Hart – Bear Stearns

Okay thanks a lot.

Unidentified Company Representative

Operator, we have time for one more question. I think there is another call that some of the analysts probably going to want to hop on here as soon as we finish this next question.

Operator

Okay and so in that final question will be from the line of Lewis Chen of Morgan Stanley.

Lewis Chen – Morgan Stanley

Hi just two questions first just on PATANASE. Recently you filed some in term data for that NDA and I was just curious you know when the final finally will be complete. And you know what it means to file the in term data and secondly with respect to your refractive business would you ever think of acting, just adding a second laser to that product line?

Unidentified Company Representative

I’ll take the second one first. Clearly we are a player in the surgical business. We continue to look at a variety of technologies but what I would say is that there is nothing imminent at this point in time.

Gerald D. Cagle - Senior Vice President, Research and Development and Chief Scientific Officer

And let me pick up on your question about PATANASE. We have filed our six month data and I think we have talked about this before. Its part of our ongoing commitment to FDA to address some outstanding questions from our initial filing. We will have a follow own set of data that will be provided to FDA again this year and then we will work closely with the agency to facilitate an approval as early next year as possible so that’s the things that are going to occur on PATANASE that are yet before us and then I’ve given you the timeline that we would see for the approval of the product going in to 2008.

Lewis Chen – Morgan Stanley

All right, thank you.

Cary Rayment – Chairman, President and Chief Financial Officer

Thanks Jerry and I would like to say thanks for all of you for listening and for your excellent questions today. I am optimistic about our position in the ophthalmic march today and the potential for growth in all of our product categories and geographic regions. At Alcon we are committed to managing our business to deliver solid sustainable growth and the demographic trends of markets we compete in along with our global capabilities clearly provide an excellent base to grow from here so we look forward to meeting with you in our next conference call. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Alcon Incorporated Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts