Hello, and welcome to the Allergan Second Quarter 2012 Earnings Call. [Operator Instructions] At the request of the company, today's conference is being recorded. If anyone has any objections, you may disconnect at this time.
I would like to introduce today's conference host, Mr. Jim Hindman, Senior Vice President, Treasury, Risk and Investor Relations. Sir, you may begin.
James M. Hindman
Thank you, Terri. 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 second quarter 2012 earnings release, which was furnished to the SEC today on Form 8-K, as well as our filings with the SEC referenced in that disclaimer.
We will follow up the question-and-answer session of this call with a short listen-only segment, where we will provide additional miscellaneous information that relates to our business. Under Regulation FD, in order to be able to discuss this information freely during the quarter, we must be sure that it is in the public domain. This conference call and accompanying webcast are being simultaneously broadcast over the Internet, with replays available for one week. You can access this information on our website at www.allergan.com.
At this point, I would like to turn the call to David Pyott.
David E. I. Pyott
Great. Thank you, Jim. Good morning, ladies and gentlemen. In the second quarter, Allergan sales grew versus the second quarter 2011 by 8.7% to local currencies. And due to the strength of the U.S. dollar relative to virtually all of the world's currencies by 4.8% in dollars.
Year-to-date, we've been able to grow Allergan's total sales by 9.5% year-over-year in local currencies, despite challenges in the global economy. Benefiting from our global footprint, our international sales in the first half grew double digits in many businesses namely: Ophthalmic pharmaceuticals, BOTOX, dermal fillers and breast aesthetics. In fact, all of our consumer-facing businesses performed rather well so far this year.
Regarding operating performance we generated in Q2, non-GAAP diluted earnings per share of $1.07, marking an increase of 11.5% over the prior year and $0.01 over the top end of the range of expectations provided at our last earnings call.
Year-to-date, non-GAAP diluted EPS has increased 11.6% versus 2011. In the first half of the year, we have also continued to invest in the long-term success of Allergan, investing $457 million or 11.4% more on R&D on a non-GAAP basis. For a reconciliation to GAAP numbers, please consult our press release.
Now commenting on the performance of the individual businesses. Ophthalmic pharmaceutical sales increased in Q2 versus the prior year at a slightly lower rate than normal, at 6.5% in local currencies and 1.9% in dollars, and with year-to-date growth at 9.1% to local currencies and 5.9% in dollars.
The year-to-date growth in local currencies is more in line with the historical performance for this business. The Q2 growth rate was dampened by the U.S., which I'll comment further, while international sales grew in local currencies year-over-year, 11.0%, and year-to-date, 12.2%, with double-digit growth in all the 3 -- in all the x U.S. operating regions: Europe, Africa, Middle East, Latin America, Asia-Pacific and Canada.
The IMS Global report for the first quarter of 2012, the last period for which data is available, shows Allergan growing in-market at 8% and outperforming Alcon, Novartis when one excludes the retina segment. Compared to the first quarter of 2011, the IMS reports shows Allergan gaining share strongly in glaucoma and in retina on a small base, as well as an uptick in share in artificial tears, driven by the recent launches of OPTIVE Advanced marketed as OPTIVE Plus outside the U.S.
In the U.S., Q2 ex-factory sales growth was limited at 3.3% with year-to-date growth versus prior year at 6.9%. Per IMS, U.S. acquisition dollar sales growth year-to-date June was 11.8%. RESTASIS growth versus prior year per IMS continued on the strong trend, with quarter-to-date June growth of 16.1% and year-to-date growth at 14.1%, as more and more physicians recognize the value of treating dry eye symptoms early in the progression of this disease.
LUMIGAN franchise performance merits closer commentary with a decline of 3.2% in Q2 in local currencies and year-to-date growth in local currencies at 1.8%.
Ex-U.S., Q2 performance was strong, with LUMIGAN and GANFORT continuing to gain market share in all key markets and a decline in the U.S. due to increased commercial and Part D rebates, as well as a reduction in trade inventory.
Per IMS year-to-date, June, U.S. LUMIGAN sales increased year-over-year 16.2% in acquisition dollars and 3.5% in trailing prescriptions for retail and mail order. An analysis of the updated outlook for the LUMIGAN franchise for the second half of the year will demonstrate that we foresee renewed growth in the LUMIGAN franchise due primarily to the benefits of price increases in the U.S.
Regarding the status of our 2013 contracts with CVS Caremark, I wish to provide a fact-based analysis. We lost our preferred status only on the commercial formulary, which is less important than the Part D formulary. A branded competitor offered a rebate structure, which did not make any financial sense for us. Plus, we do not like losing any account. This only amounts to less than a handful of share of overall LUMIGAN prescriptions in the United States and has been partially offset by another formulary win.
In summary, we believe that our overall formulary positions in 2013 will be broadly similar to those in 2012. Due to the excellent acceptance of LUMIGAN 0.01%, which accounts now for 61% to trailing prescriptions and is based on a superior profile relative to the original LUMIGAN, we announced this week that we plan to no longer manufacture LUMIGAN 0.03% by the end of 2012 for the United States market.
In our outlook, we have factored in further U.S. LUMIGAN 0.03% inventory reduction between now and year end. Given the availability of generics of brimonidine, we're glad that the ALPHAGAN and COMBIGAN franchise continues to enjoy growth, both in the U.S. and worldwide.
Rounding out my commentary on Ophthalmics, our Canadian business is growing strongly, driven by a strong uptick of RESTASIS, paid for by private insurance, as well as completion of the successful conversion of the LUMIGAN franchise to 0.01%, marketed as LUMIGAN RC in Canada.
Successful launches in Mexico of LUMIGAN RC and Zypred have driven very strong growth this year. OZURDEX is performing particularly strongly in Europe. In June, the Scottish Medicines Consortium issued a positive coverage review. During the quarter, OZURDEX was launched in Mexico, Argentina, Singapore and Turkey.
LASTACAFT is off to a strong start in Brazil. OPTIVE was launched in Venezuela and OPTIVE Plus in the U.K., Switzerland, Austria, Poland, the Czech Republic and Slovenia. The Spanish government has dereimbursed TEARS from August 1, which on the one hand, will introduce turbulence into the marketplace. On the other hand, based on other similar experiences in other markets, will give us opportunities as the clear market leader in Spain to position and price products on a premium.
Regarding BOTOX, we enjoyed a continuing ramp-up in sales. In Q2, the franchise grew 13.6% in local currencies and 10.2% in dollars, with double-digit local currency performance of both the cosmetic and therapeutic franchises.
The therapeutic franchise is clearly benefiting from the recently approved indications of Chronic Migraine, neurogenic overactive bladder, and in the U.S., upper limb spasticity. Since the last earnings call, we have received additional country approvals for Chronic Migraine in the Czech Republic, Denmark, Costa Rica, Bahrain, Kuwait and Jordan. NICE in the U.K. issued its final guidance recommending use in the National Health Service for patients who have not responded to 3 prior preventative treatments and whose condition is appropriately managed for medication overuse. This means that the Primary Care Trusts in England and Wales have until the end of September to make funding and resources available for this patient group.
Regarding neurogenic bladder, we received additional approvals in Switzerland, Hungary, Slovakia, Serbia, Panama, Egypt, Jordan and The Philippines. In Canada, we received a positive recommendation in the common drug review with action now to be taken by the individual provinces. Additionally, we filed an application to help Canada for approval of the idiopathic overactive bladder indication.
BOTOX therapeutic growth was particularly strong in the United States, Latin America and Asia Pacific. In Europe, we are impacted by government-mandated price cuts and low tender prices offered by some competitors, which have the effect of converting reasonable unit growth into low market growth and value.
In the U.S., BOTOX therapeutic market share remains very high at over 93%, with the remaining 7% being shared by Dysport, Myobloc and Xeomin in descending order. The ramp in U.S. Chronic Migraine treatments continues on a strong trajectory. We have now trained approximately 5,800 individual physicians and have started to train pain specialists and a very targeted number of general practitioners with high indices, both migraine patients.
Regarding access, 92% of all lives and commercial managed care plans now have some level of policy coverage. The volume of insurance verifications continues to rise and the number of denials to prior authorizations is on a declining trend.
In a recent patient survey, over 60% of all patients reported being satisfied with their overall treatment regimen and over 90% stated that they would continue with BOTOX.
In the core movement disorders area in the U.S., which includes the upper limb spasticity indication, we're growing in the low-double digits. Regarding the progress of the neurogenic overactive bladder launch, we have trained approximately 1,800 individual physicians since launch. At the American Urology Association, there were many lectures in BOTOX and we received a considerable degree of interest.
Regarding insurance access, 88% of commercial lives have some level of policy access: 93% of Medicare lives; and over 90% of Medicaid lives. Age and profile of spinal cord patients and multiple sclerosis patients are quite different from one another.
Trends in insurance verifications and denial rates are following the same pattern as in the commensurate time frame of the Chronic Migraine launch.
Now moving over to the cosmetic side of the business. The U.S. return to growth in Q2 subsequent to Merz ceasing to ship product. Additionally, sales were boosted by both the BOTOX 10-year anniversary campaign as well as the Duet Dividends promotion, incentivizing consumers to use both JUVÉDERM and BOTOX Cosmetic.
Based on our survey, we estimate that BOTOX had over 80% share in the quarter, moving up from a low point of 75% in the January to February time frame. In June, Xeomin still had a reported residual share of 2% as inventory has drained.
In Q2, we estimate that the U.S. market grew double digit in volume. Outside the U.S., we benefited in Q2 from strong growth across a wide range of countries: in Latin America; Asia; and emerging markets in Europe, Africa, Middle East.
Even some European countries performed well, offset by some market share loss in Southern Europe, where competition is still in their launch phases.
Facial aesthetics. Sales rebounded from the weak ex-factory shipments in Q1, with Q2 sales increasing year-over-year by 23.5% in local currencies and 18.0% in dollars. Further to our commentary on the last earnings call, this was due to the timing of our Duet Dividends promotion in the U.S., which took place in Q2 in 2012 versus Q1 in 2011. Year-to-date sales increased 10.5% in local currencies and 6.9% in dollars.
In the U.S., we estimate that we had over 37% share, gaining over 100 basis points relative to Q2 of 2011. Year-to-date, overseas, we have enjoyed strong growth in many markets across Asia Pacific, Latin America and Europe, Africa, Middle East.
Even in Western Europe, we have recorded gratifying sales increases. This is explicable by the strong position acceptance of our new VOLUMA Plus lidocaine in a 1 mL syringe, which, in turn, has driven market share increases in Europe and also other markets where it is available. This category-leading product was also launched in Q2 in Australia and Korea.
Breast aesthetics had another strong quarter, with Q2 sales increasing over Q2 of 2011 by 10.2% in local currencies, by 6.0% in dollars. Year-to-date growth was 14.0% in local currencies and 11.1% in dollars. All of our overseas regions, namely Europe, Africa, Middle East, Asia Pacific and Latin America recorded very strong growth.
In the wake of the PIP scandal in Europe, it is evident that many surgeons and their patients chose Allergan's implants for revision surgery, given that we are the clear market leader in Europe. While the rate of our sales increases have somewhat attenuated, we still have some great growth rates in many of the European countries, and surprisingly, robust sales in Southern Europe.
In the U.S., we've seen good growth, not only in volume, but also we benefited from improvement in product mix, with higher price silicone gel products and tissue expanders. So far, the new competitor, Sientra, has only picked up limited share. In Korea, we received approval for the 410 shaped silicone gel implant range and we'll be commercializing this shortly.
Our skin care franchise grew in Q2 9.8% year-over-year in local currencies and 9.3% in dollars. Year-to-date, 18.8% in local currencies and 18.5% in dollars over the prior year. ACZONE sales continued to increase rapidly, with acquisition dollar sales per IMS VONA increasing year-to-date 49%. ACZONE, even prior to the genericization of Duac, have become the clear market leader in the anti-inflammatory acne category.
TAZORAC acquisition dollar sales increased year-to-date by 3%, with market share starting to pick up a little, given greater sales force attention. LATISSE Q2 sales increased year-over-year by 19.9% in local currencies and by 18.7% in dollars, benefiting particularly from a promotion in Q2 in the U.S.
In the U.S., we received a summary judgment from the U.S. District Court in Orange County pursuant to an action for unfair competition that Athena's RevitaLash advanced eyelash conditioner is a drug and not a cosmetic. We're currently waiting for this federal judge's ruling regarding terms of an injunction.
In response to the court's action, Athena has suspended domestic sales of this product. From a market analysis, we estimate that Athena had the highest share of the LATISSE knockoffs. Continuing our process of innovation, we, today, introduced a 5 mL pack of LATISSE to the U.S. market, which should offer consumers greater convenience relative to the current 3 mL pack for achieving their goal of longer, darker and thicker lashes. We also launched LATISSE in Q2 in Taiwan and Russia.
Sales of LATISSE continue to progress well in Canada, Mexico and Brazil. The SANCTURA urology franchise declined 31.4% in Q2 year-over-year and 19.0% year-to-date. In terms of in-market acquisition dollars, SANCTURA has declined 5.3% year-to-date. Since the district court finds our SANCTURA XR patents to be invalid, we have moved all commercial efforts in our urology team to the launch of BOTOX for neurogenic bladder.
The obesity intervention line declined in Q2 year-over-year at 21.5% in local currencies, 24.1% in dollars, broadly in line with the past trend in constant currency. Year-to-date, the line declined 18.3% in local currencies and 19.9% in dollars. It is encouraging that the decline in the overall U.S. bariatric market is flattening, with the rate of decline in the last 3 months to May estimated at 2% compared to a 6% decline throughout the year 2011.
On the negative side, the share of banding has dropped from the low 40% in 2011 to 33% in May, with bands losing to gains in sleeve gastrectomy, which had garnered a 31% share in May.
Within bands, LAP-BAND enjoys a roughly 90% share. As commented for the last 6 months or so, we have directed considerable effort to improving reimbursement, with results expected in the new insurance policy year of 2013.
So far, we've succeeded in improving bariatric policy in 41 million commercial lives. Clearly, in a time of high unemployment, high-patient co-pays are a barrier to even those patients who have insurance coverage.
I'll now pass over to Jeff Edwards, who will comment our financial performance and outlook.
Jeffrey L. Edwards
Thanks, David, and good morning to all of you on the call. During the second quarter of 2012, Allergan generated good operating results despite costs related to U.S. health care reform, ongoing overseas pricing pressures, somewhat choppy European economic environment and the challenges that accompany a stronger U.S. dollar environment.
Despite each of these challenges, the debt and breadth of our business and continued focus on rational expense management and thoughtfully directing investments allowed the company to achieve non-GAAP diluted earnings per share above the top end of our EPS guidance for the quarter.
Non-GAAP diluted earnings per share for the second quarter was $1.07, marking an 11.5% increase over 2011 results for the same quarter. A reconciliation of all of the adjustments to GAAP earnings is set out in our earnings release.
Excluding the effects of non-GAAP adjustments and amortization of acquired intangibles, Allergan's Q2 2012 gross margin of 86.3% increased 20 basis points when compared to Q2 2011. This year-over-year improvement in gross margin is a continuation of favorable product mix on both a year-over-year basis and a sequential quarter basis.
The non-GAAP selling, general and administrative expenses to product net sales ratio to the second quarter was 39%, totaling $572 million. The comparable ratio and expense value for the same period in 2011 were 40.2% and $563 million, respectively. This decrease in percentage of SG&A reflects our commitment to continuing to develop our leverageable and scalable business model as we undertake thoughtful evaluation to our structure and investments to ensure that they continue to generate positive financial returns while simultaneously maintaining a certain level of financial flexibility, which can be adjusted, if necessary, in response to changing circumstances.
We continue to believe the Allergan's non-GAAP SG&A expense to product net sales ratio will be further leveraged in the second half of this year. Non-GAAP research and development expenses were 15.8% of product net sales for the quarter, totaling $232 million, an increase in spend of approximately $7 million over the first quarter of 2012 and nearly $20 million over the second quarter of 2011.
With respect to our balance sheet, consolidated Allergan days sales outstanding was 54 days, a 3-day reduction from the first quarter result, while consolidated Allergan inventory days on hand was 117 days, a 5-day reduction from the first quarter result.
In the second quarter, Allergan's operating cash flow after CapEx was approximately $395 million. At the end of the second quarter, Allergan's cash and equivalents in short-term investments and cash and equivalents in short-term investments net of debt positions totaled approximately $2.7 billion and $1.1 billion, respectively.
With respect to stock repurchased, the company executed against the 10b5-1 plan involving approximately 6 million shares in the first half of 2012. This program has been extended into the second half of 2012 and we expect to repurchase an additional 4 million shares with a continued focus of offsetting the dilutive effect of share-based employee compensation plans.
With respect to our expectations, what we've provided today with our earnings release accounts for Allergan's current perspective on the state of the global economic environment and foreign currency markets for the remainder of 2012.
While Allergan has produced good results during the first half of 2012, there are still a number of variables that may influence performance during the second half of the year, including potential movements within the macroeconomic environment and continued volatility of foreign exchange rates. Like many multinational companies, Allergan regularly monitors and measures the impact of foreign currency movements on our financial results. Although we have seen a meaningful strengthening of the U.S. dollar versus most major foreign currencies in the recent past, we have a clear understanding of the value of this currency movement, and today, are comfortable with our ability to continue managing its impact.
As a reminder, Allergan does maintain a hedging program that combines the natural hedges and offsets we have in place as a consequence of our structure, as well as the use of vanilla options to further limit our exposure to foreign currency movements.
For the third quarter of 2012, Allergan estimates product net sales in the range of $1,370,000,000 to $1,445,000,000 and non-GAAP diluted earnings per share to be in the range of $1.02 to $1.04. Regarding full year expectations for 2012, Allergan estimates product net sales in the range of $5,650,000,000 and $5,800,000,000, and our full year non-GAAP diluted earnings per share to be between $4.15 and $4.19, which represents growth of between 14% and 15%.
Our product net sales expectations reflect a reduction of $50 million from the top end of the range provided within our previous expectations. This decision is attributable to a significant negative currency movement, both incurred and projected. We currently estimate a negative currency impact of approximately 3% to 4% on sales growth across the year. Also, we are reducing the top end of LUMIGAN franchise product net sales expectations by $30 million.
This action is due primarily to currency headwinds, the previously discussed plan to discontinue LUMIGAN 0.03% in the U.S. and the related channel inventory reduction that will result from it and increased commercial and Part D rebates.
Lastly, we are reducing the top end of the facial filler product net sales expectation by $30 million due to both currency headwinds and more modest market growth than was originally expected. Note, we estimate the U.S. filler market growth to be in the high-single-digit range in 2012.
Consistent with our May 2012 expectations, we continue to expect full year pretax equivalent impact of approximately $110 million related to U.S. health care reform and $40 million in incremental overseas pricing pressure.
In addition, as previously communicated, our 2012 expectations assume that the U.S. R&D tax credit will be renewed in the fourth quarter of 2012, with full year retroactive benefit impacting Q4 results.
For your information, expectations for other lines of the income statement and specific product sales expectations are included in our earnings release. So with that, operator, I would like now to open the call to questions.
[Operator Instructions] Your first question comes from Shibani Malhotra, RBC Capital.
Shibani Malhotra - RBC Capital Markets, LLC, Research Division
David and Jeff, I guess this is a question for you. In light of the global macro concerns...
David E. I. Pyott
We can't hear you.
Shibani Malhotra - RBC Capital Markets, LLC, Research Division
Sorry. I was going to say, in light of the global macro concerns that have been impacting the market, and also, with your competitors, can you talk about Allergan's mid-teens earnings aspirations over the next few years?
James M. Hindman
Terry, operator, we're having problems with that.
Your next question will come from Catherine Arnold, Crédit Suisse.
Catherine J. Arnold - Crédit Suisse AG, Research Division
The glaucoma market outside of the U.S. is, obviously, a very important driver for you. And I wondered if you could kind of give us a perspective on where we are in terms of penetrating eligible patients in some of the bigger markets that are more important to you? And how that business sort of breaks out in terms of cash versus government pay?
David E. I. Pyott
Well, the biggest difference overseas, of course, is availability of GANFORT, the combination of LUMIGAN and timolol, which, in most markets where it's available, is perceived as maximal medical therapy. And that is, of course, because in most markets, LUMIGAN, as single agent, is perceived as the most potent drug. And then of course, having the convenience of adding in timolol is great for simplicity and compliance. How many drops do you, as a patient, have to take per day. In terms of your question on government reimbursement or effectively out-of-pocket, of course, it basically comes down to -- if you look overseas, Canada, Australia, Europe, government programs so effectively paid for by somebody else. Whereas once you go to markets like, say, Brazil or India, in the final analysis, although you receive a prescription from a doctor, with the rare exceptions of those with private insurance, you then go to the pharmacy and then you get money out of your pocket to fill the prescription, either for yourself or members of the extended family. I think Scott Whitcup has something to add.
Scott M. Whitcup
Yes, just in terms of Europe specifically, there's been a focus of some of the ophthalmologists on wanting preservative free formulations. And so at our R&D day, this past March, we announced that we will have a unit dose of both GANFORT and LUMIGAN hopefully approved in 2013, which, again, just adds to a strong glaucoma portfolio in Europe.
Comes from David Risinger, Morgan Stanley.
David Risinger - Morgan Stanley, Research Division
My question is for Scott. Scott, I'm hoping that you can comment on the timing for LATISSE for hair loss. On clinicaltrials.gov, it indicates that the 2 Phase III trials in men and women are supposed to be completing in September. So that's next month. Just wondering, specifically, what investors should expect in terms of communication i.e., would you issue a press release before you present data at a medical conference? Do you not plan to disclose that data at all? How should we think about being informed about those Phase II results later this year?
Scott M. Whitcup
Sure. So like you stated, we have 2 programs: one in typical male pattern baldness; and 1 in female hair thinning. Both of those trials are fully recruited. Our plan will be to present those data at medical conferences, and those should be next year. We won't have the data until just before that, especially for our Phase II program. We wouldn't plan to issue a press release, but are always committed to try to get those out into medical conferences as soon as we can.
Your next question will come from Shibani Malhotra, RBC Capital.
Shibani Malhotra - RBC Capital Markets, LLC, Research Division
So just very quickly, I think this question's for David and Jeff. In terms of the global macro environment and the concerns around the cosmetic business that a lot of investors have been talking about recently, how do you feel about your aspirational and if earnings growth over the next years of mid-single -- sorry, mid-teens year-on-year?
David E. I. Pyott
Okay, I'll take that. I think if you listen to all of the facts I gave you regarding all those franchises, I think we can say the consumer is alive and well. If you think of, say, the U.S. market first, I gave data saying we believe that the neuromodulator market for aesthetic use is going double digit currently. Jeff, in his remarks, stated that we believe, for the full year 2012, the market will be growing high-single digits. And when you think about the remarks I made about Europe, and clearly, that's the place that we do look very carefully, we have there some fabulous growth rates, even in the so-called old Europe, let alone, the new Europe or Russia or the Middle East and so on. And I think, really, what it's driven by is multiple factors. One is, if you look at the breast aesthetics market, which, we've often felt was a leading indicator for consumer behavior, given hopefully, it's a onetime decision or a decision for a long time, market very, very robust. And I think this is us as market leader benefiting from the problems of lack of quality of PIP, and clearly, we are, by far, the market leader. We believe we have just over 50% market share in Western Europe in breast implants. Then when I look through BOTOX Cosmetic or VISTABEL, those markets look healthy. And fillers, clearly, the market's good and we're picking up share due to innovation, which is really driven by VOLUMA, and most recently, the introduction of the new smaller-sized product, which is really appreciated not only by the doctors for ease of injection, but also speed and comfort by the patients. So when I look across the world, obviously, I'm looking very carefully for cracks in the wall, but things are pretty darn good and it's difficult to forecast years and years into the future. Otherwise, I should be working for the Federal Reserve or the Bank of England or somebody. But assuming things continue in this kind of mode, we would certainly like to reiterate our aspiration of mid-teens earnings per share growth.
Your next question comes from Greg Gilbert, Merrill Lynch.
Gregory B. Gilbert - BofA Merrill Lynch, Research Division
David, I think your current job's better than those. But -- as you look at your current business and geographic mix and where the existing pipeline might take that, are you content with where that's heading at a high level or you thinking any differently these days about M&A strategy? Europe's in a good financial position, and this isn't just a question about which pillar is next, but are you thinking about M&A any differently at a high level, I guess, given what you've observed in the marketplaces in the last year or two?
David E. I. Pyott
Great. Well, first of all, clearly, we're benefiting from the wave of approvals we had in 2009 and '10, and now our job is to internationalize those approvals, which, when you just think about the long list of countries I give you, clearly, is occurring. Clearly, we have a commitment to pushing out the edges of the world to the few white spaces or the weaker spaces that we have. We're really pleased that Russia is off to a great start, our most recent venture. Also, we're very pleased that China really is beginning to hit its stride, both in medical aesthetics, but also ophthalmology. So all that's going pretty well and we continue to think about what could be the next markets we might add, really, probably, when you look at sort of the east of Europe and then headed out into Asia. Going back to the bigger question of M&A, clearly, we want to put our free cash flow to work. I think in our largest businesses, ophthalmology and medical aesthetics, a lot of opportunities come to us because clearly, anybody who wants an asset that might want to sell it or share it or partner it would think of us, and it's not altruism because in theory, we should be able to pay more for that asset than somebody else, given our strengths and our regional -- and our worldwide distribution. Where we're putting more effort the other way is really looking at neurosciences and urology, and one of the great things with our mix is that we can be fairly agnostic. It could be a drug, it could be a drug delivered in a device, or it might even be a device. So very clearly, we're pleased with our internal growth motors, but we'd like to supplement them using, frankly, our balance sheet and to intelligently acquire new sources of growth, where, we believe, we can add value in a meaningful way to the businesses we would license or acquire.
Your next question comes from Ronny Gal, Bernstein.
Aaron Gal - Sanford C. Bernstein & Co., LLC., Research Division
I agree with Greg that I think you got a better job right now, David. Questions about BOTOX. So you keep on being surprised about how strong the product is, and to some extent, we're having a hard time disaggregating the units versus the price. Can you just help us understand, is the growth of BOTOX driven in any way by price or essentially, are units offsetting some price decline elsewhere? And similarly, are we seeing BOTOX growing because essentially it's entering into new markets or are we seeing a still very significant unit growth in the established markets?
David E. I. Pyott
Okay. Well, I'd say the very high level units and price are very similar. Maybe a little bit of price pressure in Europe. We always have to pay attention where governments have mandated on the therapeutic side price declines. We have to keep an eye what is the differential between that and VISTABEL i.e. the aesthetic side because I think you're all very aware that -- I mean the same happens in United States with diversion. But in Europe, there's lots of parallel trading from lower-priced markets to higher-priced. So net-net, you can tell very healthy unit volume growth, which is reflected in my remarks because I did say in local currencies in Q2, both therapeutic as well as aesthetic, both grew double digits. Then in terms of new markets, the only one that's sort of been, I would say, a good filler this year has been Russia, given that we had a lower base in the prior year through a distributor. And clearly, prior to taking over the business, we wanted to make sure we controlled deliveries because otherwise, we all know when you take over businesses, often, people will have filled up the channel nicely for you, and we were able to tap down supply so that we, at least, didn't end up walking into an overstocked position when we start at the beginning of the year. So net-net, a very healthy unit growth. One last thought, many of you on the sales side, conduct surveys, and of course, I read them carefully. And I think in terms of same-store sales, maybe your surveys are accurate. But of course, what you can't measure is all the new people wanting to come into the marketplace because of course, many physicians are trying to escape the pressures of managed care and they'd much rather be in a nice business where the patients basically pay cash or credit card.
Your next question comes from Frank Pinkerton, SunTrust.
Frank H. Pinkerton - SunTrust Robinson Humphrey, Inc., Research Division
And Jeff, I guess this is a question for you, and it's one I've asked in the past, but just want to harp on again. I mean, $2.7 billion-ish sitting on the balance sheet, are you guys properly aligned there? I know Greg asked earlier about M&A, but when you think about putting that capital to use, is that really the best place for it to sit there, earning today's rates? And just to remind you, I'm sure someone from the Wall Street Journal is listening, and your CFO position on that poll is at risk with your answer.
Jeffrey L. Edwards
Yes, that was a low blow. So you threw me on a loop there, Frank. I've got to gain my composure. So yes, we talk about it a lot, and as we noted in my commentary, we're buying additional 4 million shares in the second half of the year. So we are focused on capital deployment. We bought 6 million in the first half of the year. I will tell you the free cash we generated in the first half of the year, we used almost all of it. So we are very much focused on capital deployment. David commented M&A and what we're focused on, and it goes beyond M&A. It's also product and technology access, whether it be through acquisitions or licensing or partnering. I talked a lot about this at the conferences I present at. So we understand your point of view and we agree that given the right opportunity, we'll be there and we're very much focused on deploying that capital in the right ways, looking for ways to further leverage that P&L we've got and take advantage of the nice liquidity position we have and access to capital that we have. So no disagreement there. I will remind you the $2.7 billion doesn't buy you much in our world, but we'll continue to look for those good opportunities. And we can talk about it further the next time we get together.
Your next question comes from the line of David Amsellem, Piper Jaffray.
Rebecca M. Forest - Piper Jaffray Companies, Research Division
This is Rebecca Forest for David Amsellem. Could you please talk about your level of confidence that potential generic filers on RESTASIS will have to do full trial for approval. And any color on the progress of your next-generation RESTASIS program?
Scott M. Whitcup
So this is Scott. Yes, we get a lot of questions. Currently, if you look at FDA regulation, a clinical trial is required to get an A-, B-rated product to RESTASIS. If you look at how RESTASIS was approved, and we've had discussions with the agency, the trial to get an A-, B-rated RESTASIS approved is quite large with a very low profitability of success. And we monitor it, and today, we don't know if anyone would go that route, so it's something that we watch very closely. Clearly, our next-generation RESTASIS, that we refer to as RESTASIS X, will have even more novel technology and be much more difficult on top of RESTASIS to copy in a generic world. And we don't talk much about that program for competitive reasons, but at the appropriate time, once we have more clinical data and are ready to, those will be presented at clinical conferences as well.
David E. I. Pyott
And of course, what you can see is various companies trying to come up with branded competitors, which, of course, is completely legitimate. Yes, at some point, we're not going to be the only game in town for therapeutic dry eye. But even for that, of course, there have been many very difficult situations where those products haven't succeeded in the United States. So not really outside the United States either. So obviously, we track all those companies and products to see where they are and what their data is.
Your next question comes from the line of Ken Cacciatore, Cowen and Company.
Ken Cacciatore - Cowen and Company, LLC, Research Division
David, I just want to follow up on some of your BOTOX commentary. As I look at the guidance and try to look at it on a constant-currency basis, it looks like in H2, you could be growing, actually, accelerating your growth year-over-year from H1. So I was just wondering if you could put that into context of the migraine launch, maybe where we stand with the DTC and the success you're seeing here in terms of patient accruals and reorder rates?
David E. I. Pyott
Yes. Well, I very much follow your conclusion. The team internally knows that as successful as we are ramping up growth, we've got to keep at it. And of course, that's why I look at all the leading indicators of not only training, but access, insurance verifications, and things are on a very good track, and that's why I really, sort of very high level, were saying when we look at the neurogenic bladder launch, it's sort of following in its metrics, obviously, completely different conditions. But if you like the launch patterns are very similar, and that's also looking very good. So indeed, we are planning to grow a lot more in the second half. And of course, when you look at Q3 numbers, I think most analysts have correctly deduced that the currency hit probably will be the highest in Q3, if rates stay where they are on world currencies. And of course, as much as we talk about the euro, for us, our -- one of our biggest markets overseas is Brazil. And their currency was really hot for a while, and now it's come down a little bit. And when we translate that back into dollars, that affects us. And -- but as Jeff said, the economic impacts of that, we have extremely buttoned down and planned for.
Your next question comes from line of Seamus Fernandez, Leerink Swann.
Seamus Fernandez - Leerink Swann LLC, Research Division
Just very quickly, David, can you just give us your characterization. It looks like LUMIGAN, actually, in the quarter, tracked a little bit below. Just wondering how much of that was actually destocking that's already started on the 0.03%? And then how should we see that destocking progress through the balance of the year to your expectations? And then the magnitude of the full conversion to LUMIGAN 0.01%?
David E. I. Pyott
Yes, fine. I'd say when you really sort of think about all the comments I made, probably the biggest single item to think about is: a, foreign exchange impact, which, you could say to some degree, isn't real, it's just translating foreign currencies into dollars; secondly is inventory reduction, particularly in Q2. As you alluded, some destocking of LUMIGAN has already occurred because, of course, whether you're a wholesaler or a retailer, you could see how the product was swinging over to 0.01%. And in the back half of the year, we've certainly planned for further reduction, as we basically take it down to 0. And of course, that's a good place to be when the new year starts up in January of '13, so I would say, think about inventory and then also the impact of rebates. Where on the access side, we've done very well, and that's why I wanted to put that whole Caremark commentary into context. It really was in the context of a ball moving up and down the 5-yards line. This was not a big deal. This is the win-lose. You lose some, you win some, and it really didn't change where we'll end up in 2013 in any meaningful way.
Your next question comes from the line of Annabel Samimy, Stifel, Nicolaus.
Annabel Samimy - Stifel, Nicolaus & Co., Inc., Research Division
I want to switch to something a little bit more esoteric. You mentioned the bariatric franchise or bariatric market, rather, was flattening a bit and maybe coming out of the decline in growth. Can you just give us some color about how you think about the market now that you have some obesity drugs that have been approved by the FDA and how that might impact the bariatric market, bariatric surgery, et cetera.
David E. I. Pyott
Yes, fine. Well, I mean, obviously, we're looking for improvement in general meteorological conditions. And if the overall bariatric market is going down a lot, that makes our job of getting LAP-BAND and ORBERA back to growth even more difficult. As I've stated many times, all our emphasis has been on how do we improve reimbursement access. And we have made progress, but of course, as we have always pointed out with most insurance plans following calendar years, it's much more about waiting for the next calendar year to see a real change in policy. Regarding obesity drugs, my view is that sort of Venn diagram, that circle scarcely touches this one. It's a different type of patient in terms of the amount of -- the number of pounds or kilos they want to lose, and I think that well touches much more diet change and exercise. And I know a little bit about that because in my prior life a long time ago, before I joined Allergan, actually, I was the biggest marketer of what would be called in this country, as diet aids and slimming products in Europe, in both pharmacy and grocery. So I have some memories in my head that I'll never forget, and it's quite a difficult market.
Your next question comes from the line of Marc Goodman, UBS Security.
Marc Goodman - UBS Investment Bank, Research Division
When you look at SG&A, I'm just curious if you could give us kind of a behind-the-scenes, just the push-pulls that are going on here? Obviously, there's more spending on emerging markets, but where are you kind of cutting back on spending just to kind of manage the business? And then if you can just give us a flavor for how that -- and how we should think about spending for the next 6 quarters, what will be the push-pulls there? Obviously, we have VOLUMA potentially coming to the stage, you have the overactive bladder, but I wouldn't think you'd have a lot of incremental spending on those. So maybe next year, SG&A is leveraged even more than it was this year.
David E. I. Pyott
Sure. As I've often stated, from a very high level, in periods of dollar weakness, I encourage my colleagues to bring me a wish list. And the wish list has to have metrics on it, i.e. if I'm nice enough to give them $1 million, what will that do to drive both sales and bottom line? So it's almost like lining up with David's fedwindow, though, to stick to those jokes. So I do prefer my job. So -- and obviously, in times of dollar strength, the margin flips the other way. And frankly, we just start maybe tightening the belt a notch or maybe 2 in terms of things like travel and how many people go to medical conventions because, of course, at the very margin, those things may be over a 3- or 4-year, you could argue, have some difference. But in the short term, none at all. So now going to sort of the higher level, where you are saying when we look over the balance of this year and to next and where we'll potentially there could be increased expenditure. Well, on a very high level, not really because if you think about idiopathic overactive bladder, we've already created the BOTOX sales force for urology in the United States. And sadly, one says that we won't make any money on SANCTURA. But now we have soon -- we have more detail capacity, given that we're not spending any more time on SANCTURA. So that opens up space for idiopathic, which, hopefully, will be approved early-ish next year, 2013. In Europe, the margin, of course, as we're getting those approvals and get reimbursement, we're adding people. But it's kind of dozens and certainly, not hundreds. And if I go to your comment about fillers, basically, we have the sales force in place. And now we can just keep on adding products to the bag and move around what is our detail focus, if you like. And whether the sales force have been spending time on JUVÉDERM Ultra or hopefully, next year, VOLUMA doesn't make a lot of difference. You can just move around the capacity. And there is a real source of leverage, not because of need to rein in spend, but it just makes strategic sense. And then as you alluded here and there, there will be emerging market additions. But of course, as I often point out, another 100 salespeople in India don't cost anything like another 100 salespeople in the U.S. or Germany or somewhere like that.
Your next question comes from the line of David Buck, Buckingham Research Group.
David G. Buck - The Buckingham Research Group Incorporated
Jeff, by the -- narrowing the guidance for this year, you talked about how you're managing some of the headwinds and particularly, in the international business in Europe. Can you give some sense of look maybe, David as well, of how you see the health of the reimburse business in Europe and ex-U.S. overall as we go into 2013, what the headwind increase might be and how you plan to match it?
Jeffrey L. Edwards
Well, if you're talking about pricing, every year, we go through this process of trying to determine how governments will impact reimburse markets in Europe. And every year, really, as long as I've been here, we've had pressure, and we've grown accustomed to dealing with that pressure. Over the last 2 or 3 years, as you know, we've seen an increase in that pressure, and we dial that into the budget process and we anticipated going into the new year. So I hate to say we're used to it, but we're used to it. And our expectation is the governments in Europe will continue being prudent with what they do and how deal with it. They're all looking for places to cut. We don't have our heads buried in a pile of sand here. Our expectations are that we're -- what we're seeing this year could very likely be what we see next year as well. So that's what we're planning on. Any additional comments?
David E. I. Pyott
Yes, I mean, when I look at industry data, and obviously, I know a lot of other people in pharmaceuticals and devices, and you can really say our business has held up very strongly compared to the experiences of both large as well as medium-sized companies. So we just watch it very carefully. And I suppose it's the power of innovation and the final instance.
David G. Buck - The Buckingham Research Group Incorporated
I guess, Jeff, just a follow-up. And this is one of the years where you've been calling it out, I think it's $110 million or so in pricing. Should we be expecting that level to stay constant or an incremental $110 million, an incremental $200 million? I mean what sort of delta that we might be expecting?
David E. I. Pyott
Yes, well, we haven't changed that number. And obviously, it's premature for next year.
Will come from Steve Willoughby, Cleveland Research.
Steve Willoughby - Cleveland Research Company
Just a question regarding your comment on the dermal filler market now growing at high-single digits. If you could remind us where that was growing previously? And then your thoughts on what's allowing BOTOX Cosmetic to continue the double-digit growth rates, given that it sounds like dermal fillers are maybe a little bit softer.
David E. I. Pyott
Yes. Well, if one looks back over a year ago, I recollect what I was saying is that dermal fillers probably were going high teens then. I think that was still where we were benefiting from the innovation of lidocaine. And like everything, trees just don't keep growing to the sky, but I still think it's very healthy that the fillers market in the U.S. is growing healthily. And I think when we have the opportunity of introducing VOLUMA, that will create another huge wave of growth. And my closest market to draw the analogy from is Canada, and I've often stated that we believe that the introduction of VOLUMA to Canada probably increased the overall Canadian market. I don't just mean us, although we're, by far, the market leader as company by 40%. Of course, that's absolutely huge. And now that we have the 1 mL format in Europe, when I look through all the markets, you can say this is the power of innovation, despite economic malaise in certain places. I think when one looks at BOTOX Cosmetic, it's interesting that it's growing even faster than filler. In many markets, my theory is that there's an equilibrium where, one day, the neuromodulators and fillers will be somewhere around the 50-50 mark. And then it's based on history, based on approval timings, relative strength of companies and so on. But certainly, very, very encouraging that the U.S. market continues to grow double digit. And that, I'd like to think, is due to the investments we put into training physicians, how to conduct these procedures to enable great results for their patients.
Your next question comes from the line of Douglas Tsao, Barclays.
Douglas D. Tsao - Barclays Capital, Research Division
Just a quick question, David, to follow up on your comments regarding LUMIGAN. Where are you in terms of the contract negotiation process for formulary for 2013? Obviously, you noted that you can -- you've had a win to offset Caremark but -- and you expect 2013 to be consistent. Just curious when that process should be completed?
David E. I. Pyott
Yes, I would say that from a formal point of view, there are a couple of contracts where the ink isn't dry on the sheet of paper yet, but we have a pretty strong indication of where it's going to go. So I would say the lion's share of these contracts are done or almost done. And that's why I made the comments I did about seeing, from everything we know, overall formulary position in 2013 will be very, very similar to 2012.
Your next question comes from the line of Larry Biegelsen, Wells Fargo.
Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division
Scott, you hosted a very positive R&D Day this past March. There's a perception, I think, that there aren't that many catalysts in 2012, the second half, but I think that changes in the first half of 2013. Could you please remind us of the key product launches over the next 12 months and key data releases we should look for? And specifically on bimatoprost for baldness, do you expect that to be at AAD in March?
Scott M. Whitcup
I think, if you're talking about key catalysts, clearly, regulatory approval of BOTOX for idiopathic overactive bladder, as we presented at R&D Day in March, is our biggest opportunity. We've presented some of the data, but more to come. But overall, the findings were very strong, and so, we will continue to roll out data. On the aesthetic side, as David commented, VOLUMA's just a terrifically innovative product wherever we've introduced it in the 1 mL with lidocaine packaging, it's done well. That's sitting at the FDA. It's filed. I think it's a unique product, which is why FDA will look over it carefully, but the data are strong, and so, that could be a very important launch in the United States for '13. As I commented earlier, we've got 2 products: unit dose LUMIGAN; and unit dose GANFORT to help our glaucoma franchise in Europe. So that's another important launch as well. And in terms of earlier-stage data, again, you commented on the bimatoprost for scalp hairloss. We haven't made -- until we have the data, we won't decide which meeting to submit that to. So we'll let you know once the abstracts are submitted. And then Q1, as we look at LATISSE globally, is Europe. So that was already filed, and we're hoping to have approval late this year, early next year. So lots of approvals and launches. And then given my ophthalmology background, a lot of focus as well on our anti-VEGF DARPin program, and so, there should be some data from our Phase II program next year as well. So hopefully, that gives you a little bit of the pipeline, and my guess is that, that will help. And then my colleagues remind we as well that we have another file in on the aesthetic side, which is BOTOX for crow's feet. So again, what that allows us to do is expand physician training on label, which we focus on and also will give us publications and should help the BOTOX Cosmetic franchise, both in the U.S. and globally.
Your next question comes from the line of Gary Nachman, Susquehanna Financial Group.
Gary Nachman - Susquehanna Financial Group, LLLP, Research Division
David, from what you're hearing on BOTOX OEB so far in neurogenic, what's your sense for how much of an impact to idiopathic indication could have next year? And how quick that ramp may be since you're sort of laying the land in that market already this year?
David E. I. Pyott
Well, obviously, all of our representatives and commercial people are extremely tightly schooled in not talking about idiopathic overactive bladder because that's an absolute no-no. But clearly, when you look at it from the physician's point of view. Whether you're injecting 15 times into the bladder or 30 times, from a technical point of view, is not really much different. The one thing, of course, they do read the data carefully on is avoiding retention. Clearly, a big issue. But I would say compared to other launches, once you train the doctor to do neurogenic, broadly speaking, they are set up to go rapidly to idiopathic once it's approved. And then it all comes down to the reimbursement. And of course, as I remind you, we should have a permanent CPT code in place in January. So that will be very helpful.
That will come from the line of Gregory Waterman, Goldman Sachs.
Gregory Waterman - Goldman Sachs Group Inc., Research Division
On BOTOX therapeutic growth versus cosmetic growth, I know you gave a number of data points. I'm looking for just a little clarification. First, I think you mentioned double-digit growth on both aesthetics and therapeutic. Last quarter, you mentioned a higher double-digit for therapeutic versus cosmetic. Is this still the case, and what magnitude? And then, I guess, more generally, if you could characterize the acceleration in year-over-year therapeutic growth second quarter versus first quarter, and also thinking about the second half of the year?
David E. I. Pyott
Yes, no, I think you're very insightful, gatoring my words carefully. If I stick to Q2, both the franchises grew at very similar rates. And that, for me, is encouraging on 2 fronts: one is that as you were stating, and as I answered it in an earlier question, the therapeutic side should continue to accelerate, really, driven off the benefits of the ramp in Chronic Migraine and neurogenic bladder in the U.S. also, some earlier launches overseas; and then, of course, very encouraging is that the BOTOX Cosmetic side of the house, despite everybody's fears about the global consumer, continues to perform very well.
James M. Hindman
We would like to thank you all 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.
Thanks, Jim. The following market share data we are providing is Allergan's good faith estimate based upon the best available sources for data, such as IMS, as well as Allergan's internal estimates. The market size, share and growth rate information is a moving annual total or trailing 12 months as of the end of March 2012, except where noted as year-to-date through March 2012.
The market for ophthalmics is approximately $18 billion, growing at a rate of 6%, and Allergan's market share is 15%. Year-to-date, that market is growing 4%, and year-to-date, Allergan's share is 15%. The market for glaucoma approximates $5.3 billion. The market is declining at a rate of 8%, and Allergan's market share approximates 22%. Year-to-date, that market is declining 11%, and year-to-date, Allergan's share is about 23%. The market for ocular allergy approximates $1.5 billion. That market is flat. Allergan's market share approximates 3%. Year-to-date, that market is declining 11%. And year-to-date, Allergan's share is about 3%. The plain ocular anti-infective market is roughly $1.4 billion, growing at a rate of 3%. Allergan's share is 8%. Year-to-date, that market is growing 2%, and year-to-date, Allergan's share is 9%. The market for ophthalmic nonsteroidal anti-inflammatories is around $490 million, growing at a rate of 3%. Allergan's share is 9%. Year-to-date, that market is growing 8%, and year-to-date, Allergan's share is 8%. The artificial tears market, inclusive of ointments, is approximately $1.7 billion, growing at a rate of 7%. Allergan's share is 21%. Year-to-date, that market is growing 8%, and year-to-date, Allergan's share is 21%. The U.S. topical market for acne and psoriasis is roughly $2.3 billion, with an annual growth rate of 8%. Allergan's market share is roughly 9%. Year-to-date, that market is growing 9%, and year-to-date, Allergan's share is 10%. The top 10 markets for neuromodulators are roughly $1.7 billion, growing at a rate of roughly 14%. BOTOX has approximately an 83% market share. Year-to-date, that market is growing 10%, and year-to-date, Allergan's share is 82%. The worldwide market for neuromodulators is roughly $2.3 billion, growing at a rate of roughly 15%. BOTOX has approximately a 76% market share. Year-to-date, that market is growing 13%, and year-to-date, Allergan market share is 75%. The worldwide market for dermal facial fillers is roughly $990 million, growing at a rate of around 16%. Allergan has approximately a 36% market share. Year-to-date, that market is growing about 1%, and year-to-date, Allergan's share is 35%. The worldwide breast aesthetic-s market for aesthetic and reconstructive is roughly $870 million, growing at a rate of around 8%. Allergan has approximately a 42% market share. Year-to-date, that market's growing about 17%, and year-to-date, Allergan's share is 41%. The worldwide bariatric surgery market for the band and balloon
Segments only is roughly $215 million, declining at a rate of around 24%. Allergan has approximately a 73% market share. Year-to-date, that market is declining 23%, and year-to-date, Allergan's market share is about 74%. That concludes our call for today. Thank you.
Thank you. Once again, that does conclude our conference call for today. Please disconnect all remaining lines.
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