Allergan Inc. Q2 2008 Earnings Call Transcript

| About: Allergan plc (AGN)

Allergan Inc. (NYSE:AGN)

Q2 2008 Earnings Call

July 30, 2008 11:00 am ET


Jim Hindman - SVP, Treasury, Risk and Investor Relations

David Pyott - Chairman of the Board and CEO

Jeff Edwards - EVP, Finance and Business Development

Scott Whitcup - EVP Research and Development

Joann Bradley - IR


Gary Nachman - Leerink Swann

Greg Gilbert - Merrill Lynch

Peter Bye - Jefferies & Company

Ronny Gal - Bernstein Research

Larry Biegelsen - Wachovia

David Buck - Buckingham

Frank Pinkerton - Banc of America

Amit Hazan - Oppenheimer


Hello and welcome to the Allergan second quarter 2008 earnings call. (Operator Instructions).

I would like to introduce today's conference host Mr. Jim Hindman, Senior Vice President, Treasury, Risk and Investor Relations. Sir you may begin.

Jim Hindman

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

Before we move ahead, I'd like to remind you that certain statements that we will make in this presentation are forward-looking statements. These forward-looking statements reflect Allergan's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting Allergan's business.

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 2008 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

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

David Pyott

Thank you, Jim. Good morning, ladies and gentlemen. In spite of some impact from the downturn in consumer spending in the US, Allergan again posted strong sales growth of 20.1% in the second quarter, demonstrating the value of the strength and diversity in our business model and mix, and also saw a strong 15.7% growth in local currencies, even after discounting the benefits of a weak dollar.

In keeping with the trends observed in the first quarter, pharmaceuticals as a segment contributed strongly, with particularly strong performance in ophthalmology with year-to-date growth of 23.7% in dollars, and 19.0% at constant currency over the first half of last year.

Our international businesses once again expanded in Q2 at a superb rate of 27% in dollars. Of note, given concerns about consumer spending outside the US, is that, within our device segment, the cash pay businesses grew even more strongly than the pharmaceutical segment outside the US.

Regarding earnings, adjusted diluted earnings per share were $0.63, marking an increase of 17% over the second quarter of 2007. These results were generated as we continued to invest vigorously into the long-term performance of the company, with a continuation of the massive increase into our promising R&D pipeline, with a 29.5% increase in the quarter year-over-year, and 31% year-to-date.

These numbers are on an adjusted basis with the reconciliations to GAAP numbers being laid out in the press release. Regarding the US Department of Justice Subpoena issued on March 3, the expenses of responding to the DOJ investigation are considerable, as the scope of the subpoena is broad, and the time period covered by the investigation covers the entire time since January 2000.

In the quarter, the expense was approximately $9 million, and we estimate that for the full year these expenses will range from $25 million to $35 million. Since the expenses associated with the DOJ investigation are outside the scope of the company's core business activities, and are also unprecedented, the effect of the expenses is excluded from the calculation of adjusted earnings pursuant to our adjusted earnings policy.

Given the magnitude of the expenses, we believe that the true financial performance of the company would be distorted, and the ability to accurately compare performance overtime would be compromised if they were included in adjusted earnings.

Regarding regulatory activity and R&D performance, we have a lot to report for Q2. We are pleased that we are able to file our NDA with the FDA for bimatoprost eyelash growth several months earlier than planned.

TRIVARIS, our first product for the retina was approved by the FDA. As this was approved earlier than expected, we are still in manufacturing scale-up, and currently anticipate launching the product in early 2009.

In Japan, GlaxoSmithKline filed BOTOX for Juvenile Cerebral Palsy with the Japanese Ministry of Health. In Australia, BOTOX was approved for upper limbs for Juvenile Cerebral Palsy, and the Korean FDA approved BOTOX for upper limb, both post-stroke spasticity as well as hyperhidrosis.

In the US, we plan to submit to BLA for adult spasticity with the FDA in the second half of 2008. As we had already announced during our R&D Day in June. Regarding SG&A; adjusted SG&A in Q2 at 42.9% of sales declined from the 45.3% in Q1, and from 43.9% in Q2 of 2007, very much inline with our plan to leverage spending across the year.

In respect to direct-to-consumer advertising, we continue to invest strongly in our key brands. But as we had forecast to you, spending is moderating as per the norms of advertised consumer brands, and as we lapse the initiation of our newest campaigns a year ago in Q2 of 2007.

Clearly, our incremental investments in new and expanded sales organizations referenced in our first quarter call relating in the US to urologics, facial aesthetics and physician dispensed skin care, as well as to expand Asia, are part of the new basic expenses, but these are being leveraged across the course of 2008, as these sales force expansions also generate increased sales.

Regarding the growth of our cash pay businesses, it is being clear that there has been a slowdown in the US. In the second quarter, we did not see a general trend in slowdown in the international markets, but are carefully watching for any signs of trend changes and are planning our spending accordingly.

Regarding the world market in Q1, 2008, we estimate growth year-over-year at the following rates. Obesity intervention, 40% growth, slowing from the 51% estimated for Q4. Dermal facial fillers, 17%, slowing from the 42% estimated for Q4. Neuromodulators, 12%, slowing from the 17% estimated for Q4. And finally breast aesthetics at 15%, slowing from the 26% estimated for Q4.

Now commenting on the performance of the individual businesses; we are particularly pleased with the very high growth being generated in our largest business, ophthalmic pharmaceuticals. In the quarter, sales increased to robust 25%, aided by the weak dollar, but still increased 20.5% at constant currency, continuing the strong trends seen in the first quarter.

In-market for Q1, IMS showed Allergan to be, by far, the fastest growing global player propelled by share gains in glaucoma , the therapeutic dry eye segment, where RESTASIS is the only player, and artificial tears.

We also enjoyed the highest growth in every geographic region if one excludes the new retina market, in which, we do not yet participate.

Market share in Q1 was 16.4% worldwide, versus 15.9% in Q1 of 2007. In Q2, based on ex-factory sales reports of our major competitors, we would expect to remain the fastest growing global ophthalmic pharmaceutical player.

By inspection of our sales result in Q2 for all the glaucoma products and the broad divergence between dollar growth and local currency performance growth, it is clear that there's been tremendous growth, of all of our glaucoma products, led by the worldwide rollouts of COMBIGAN, subsequently boosted by GANFORT.

In several key markets in Europe as well as Brazil, GANFORT has caught up with Alcon's DuoTrav, although GANFORT was launched several months later.

We're delighted that COMBIGAN'S growth has not been at the expense of bulk base of ALPHAGAN, as the base continues to grow double digit even in local currency, driven by Asia and to a lesser extent the US.

In the US, we are very pleased with the launch trajectory of COMBIGAN reflecting the acceptance of COMBIGAN by ophthalmologist, and progress with establishing COMBIGAN on managed care formularies.

Formulary adoption of COMBIGAN at United Healthcare, for both commercial and Part D lives at the end of the quarter was a landmark listing. Around the world, COMBIGAN occupies unique place in adjunctive therapy, and has made major inroads into Cosopt.

Regarding artificial tears, growth in the quarter was 18% year-over-year, marking further market share gains. Extremely high growth internationally, driven by the success of OPTIVE launches around the world, as well as by the base REFRESH line.

RESTASIS continues on a sharp growth curve, with 55% growth year-over-year in Q2. This growth is fueled, both by increased numbers of prescriptions, as well as prescribers, and as well, as a higher number of units being dispensed in every prescription refill. RESTASIS is now the second largest opthalmic pharmaceutical by value in the United States.

Turning to skincare, sales in Q2 increased by 4.5%, marking a small improvement over year-to-date growth of 2.1%. In-market TAZORAC trend has improved marginally.

Furthermore, sales of our new VIVITÉ physician dispensed-line have improved with increasing distribution, but are offset by declines in our older PREVAGE MD and MD 40 products.

In the urologics area, we booked sales of $11 million, which on the surface looks disappointing after the $23 million of Q1. However, the first quarter also included initial channel shipments to wholesalers and retail pharmacies. We remain encouraged by the appreciation of SANCTURA XR's unique profile as the only quaternary amine in the marketplace, and by uptake of the product; both by the urology specialty and by OB-GYNs.

In fact, looking at the prescription trajectory in terms of months since launch, SANCTURA XR in urology channel has exceeded the performance of ENABLEX and equaled the performance of VESIcare, and is only slightly behind both these products in terms of trailing prescriptions in the OB-GYN channel. In terms of managed care formularies, we now have combined Tier 2 and Tier 3 coverage of 75% of lives in both the commercial and Part D plans.

Regarding Tier 2 coverage, we were aware that this would take time, and are steadily securing adequate coverage. Due to the slow penetration of the product in primary care, we have reallocated much of our sales time to the specialties referenced.

We are also pursuing conversations with several big pharma companies, regarding co-promotion arrangements for primary care, as well as risk agreements with contract sales organizations.

Turning to BOTOX, growth in the second quarter was at 13.1% in dollars, and 9.0% in constant currency, with virtually all of the slowing of growth since Q1 attributable to the United States. The international businesses for both aesthetic and therapeutic continue to grow strongly, with BOTOX maintaining its very high market shares.

In the US, our market research indicates that existing patients have increased their time to re-treatment by almost one month to six and a half months, which in turn, would suggest that we continue to gain large numbers of new consumers.

In Europe, our market research leads us to the conclusion that BOTOX is continuing to gain market share in both the cosmetic and therapeutic segments, relative to Dysport, given our superior product characteristics and commercial deployment. Given Ipsen's recent acquisition activity in the US, it is now clear that they will be commercializing Dysport by themselves, by a small specialist neurology sales force, based on the acquisition of Apokyn indicated for Parkinson's.

In the US, we have recently commenced new consumer focus promotion and education initiatives. Since early July, we have screened our new TV commercial, featuring Virginia Madsen, the well known actress. And consumer education campaigns, led by former Olympic athletes Mark Spitz and Nadia Comaneci.

Moving on to dermal fillers, Q2 sales at $64 million were strong, and enjoyed a rebound in growth with a year-over-year increase of 30% in dollars, and 23% constant currency.

Whilst we believe the growth in the US filler market has slowed considerably since 2007; we are seeing JUVEDERM picking up share, and believe that JUVEDERM is now approximately at the sales level of the overall Restylane and Perlane franchise.

We're pleased with our return on our investments and direct-to-consumer advertising, and are proud of our partnership with US Tennis Association and of the events which we have staged with Tracy Austin and Lindsay Davenport.

In Europe, we continue to have excellent sales of our new JUVEDERM Ultra line, where Lidocaine is incorporated into the product, and this line is now a substantial part of our sales mix.

We are encouraged that Q-Med, reported an increase in Restylane franchise sales outside North America, with their performance in Europe improving from 10% growth in Q1 to 25% growth in Q2 year-over-year. These points to buoyant European market conditions given Allergan's strong growth in that region.

In Canada, we have recently received approval for our JUVEDERM plus Lidocaine product, and plan to launch this promising product shortly. It is planned that we'll file this product in the US before year-end.

Sales of breast aesthetics; these were $88.5 million, picking up sequentially from the first quarter of $78 million in accordance with normal seasonal patterns. Growth at 12% in dollars and 7% at constant currency was in line with the performance in Q1. The international regions enjoyed strong double digit growth at constant currency, which suggests favorable market conditions and also reflects our execution abilities.

In the US, it is pretty clear that the number of augmentation procedures has declined with year-over-year, offset by the pickup in value pursuant to the market evolution from saline to silicon.

At Allergan we have remained disciplined in maintaining pricing levels as we opt to compete in product quality, range of offering and service.

Regarding the breast implant follow up study, we're putting in an extraordinary effort; to both enroll the requisite number of patients, and also to ensure the robust collection of qualitative and quantitative data, that will be collected over the subsequent ten years to further validate the long-term safety of silicon breast implants.

We're pleased with the progress of our recruitment which has been building steadily. Based on market intelligence, we believe that Mentor, could complete their enrollment before us.

However, enrollment is only the first stage of this long-term study, and thus there's little advantage in completing initial enrollment first.

Additionally, the study is not an undue burden, as we provide reasonable and appropriate compensation for physician time for participation, and believe that surgeons generally appreciate the opportunity to participate in an important scientific trial that will add to the great body of evidence on the safety of silicon breast implants.

Regarding the health business, sales grew 11% in dollars and 8% at constant currency. With impact from the weak economy in the US and also from Ethicon, forcing trial of their REALIZE Band.

We estimate that Ethicon has garnered mid-teens market share as we predicted in our modeling of the market dynamics. Internationally, the health business maintains its high growth rate with particularly encouraging expansion of the already well developed market in Australia.

In the US, measurement metrics around our direct-to-consumer advertising and public relations initiatives indicate that our strategy of awareness creation continues to work. With the patient co-pay typically in the range of $2,000 to $4,000, for patients with reimbursement available of $15,000 per cash pay patient, it is evident that the weak economy has had a large impact on market growth.

In summary, we have seen diverging performance in our cash pay businesses between the US and international markets. I'll now pass over to Jeff Edwards, who will comment on our performance from a financial perspective.

Jeff Edwards

Thanks David and good morning to all of those on the call. Allergan sales performance during the second quarter continued to show strong growth trends despite the impact of difficult economic conditions in the domestic market. As I had mentioned on the Q1 2008 earnings call, Allergan's diversification of businesses across therapeutic and consumer oriented segments between cash pay and reimbursed products, and between domestic and international operations continues to be a strategic benefit to the company.

Although we continue to observe some impact of the slowing domestic economy, I'm certain of Allergan's cash pay businesses. I would like to highlight that approximately 20% of Allergan's overall business is influenced by the US economy as it relates to consumer spending.

During the second quarter, our diversified base of business generated robust top line growth and allowed the company to deliver the top end of our earnings per share guidance for the quarter.

For the second quarter, adjusted diluted earnings per share were $0.63, marking a 16.7% increase over 2007 results for the same quarter. Of course, a reconciliation of all of the adjustments to GAAP earnings is set out in our earnings release.

Adjusted selling, general and administrative expenses were 42.9% of product mix sales for the quarter, totaling $496 million, a $73 million increase over Q2, 2007. These significant investments are consistent with our strategy to make meaningful investments in support of the long-term growth of the company.

Additionally, it is important to mention that we constantly undertake thoughtful evaluations of these investments to ensure that they continue to generate favorable financial returns while simultaneously maintaining a certain level of financial flexibility, which can be adjusted as necessary in response to changing business factors.

Excluding the effects of non-GAAP adjustments and amortization of acquired intangibles, Allergan's Q22008 gross margin of 83.4%, increased 90 basis points when compared to prior year.

Both the Allergan pharma, Q2 gross profit margin and the medical device Q2 gross profit margin contributed to this improvement. The gross profit margin of both business increased versus Q2, 2007.

The gross profit margin continued to be positively affected by the increase in the sales mix of newer, higher margin products as well as cost benefits generated from greater manufacturing efficiencies, especially, with our medical device products.

With respect to spending in the R&D area, the company's adjusted R&D investment ratio was 17.3% for the quarter, as Allergan continued to make significant commitments to R&D spending in both the pharma and medical device businesses.

Allergan's adjusted R&D spend for the quarter totaled $199 million, a $45 million increase over the second quarter of 2007.

As mentioned at Allergan's R&D technology Review Day in June, we're continually making progress with many of the development programs in a robust R&D pipeline, which should enhance and support our long-term growth objectives.

With respect to our balance sheet Allergan's consolidated net worth increased to approximately $3.93 billion at the end of June 2008, from approximately $3.74 billion at the end of 2007. Consolidated Allergan day sales outstanding was 49 days, while consolidated Allergan inventory days on hand was 125 days.

In the second quarter, Allergan's cash and cash net of debt positions totaled to approximately $1.09 billion and a negative $505 million, respectively. 2008 operating cash flow after CapEx was approximately $166 million for the quarter.

During the quarter, Allergan utilized approximately $62 million to acquire 1.1 million shares through its open market share repurchase program. Allergan did not acquire any shares through this program during the same period in 2007.

Allergan now anticipates 2008 diluted shares outstanding to be between 306 million and 308 million.

For the third quarter 2008, Allergan estimates product mix sale in the range of $1.09 billion to $1.12 billion, diluted earning per share of $0.64 to $0.65, excluding non-GAAP adjustments.

Regarding full year guidance for 2008, Allergan is narrowing the 2008 adjusted diluted earnings per share guidance range to between $2.57 and $2.59, which represents growth of between 18% and 19%.

As with previous guidance, this assumes that the US R&D tax credit will be renewed in the fourth quarter of 2008, with retroactive application for the full year.

With the renewal of the R&D tax credit, Allergan anticipates a tax rate of approximately 26% for the full year. However, we will not be able to incorporate the impact of the tax credit into our actual effective tax rate until it is renewed. Therefore, you should take this into account when modeling the tax expense by quarter for the remainder of the year.

The estimated EPS impacted the R&D tax credit included in our Q4 and full year guidance is between $0.05 to $0.06. Regarding full year 2008 total sales guidance, Allergan is reconfirming the top end of the range at $4.575 billion while narrowing the range to between $4.465 billion and $4.575 billion. Updated product sales guidance is included in our earnings release.

As mentioned on the first quarter earnings call, Allergan continues to expect full year sales for breast aesthetics and obesity intervention to tread towards the lower end of the guidance ranges provided of $330 million to $350 million and $315 million to $335 million respectively.

Additionally, based on the current sales trends, Allergan expects the full year sales of BOTOX to trend towards the lower end of the guidance range provided of 1.365 billion to 1.395 billion.

Due to the expected approval of LUMIGAN X, moving from Q2 2008 to Q3 2008, Allergan is slightly reducing the LUMIGAN sales guidance range to between $430 million to $450 million.

Our solid earnings during the second quarter is another testament to the value of the depth and breadth of Allergan's diversified lines of business.

Similar to the first quarter, our pharma business continues to produce superb results across both our newer products and our traditional core products. Additionally, the somewhat modest slow down in the medical device business, that has been observed this year has had a limited impact on Allergan's overall financial performance as a function of our broad and diversified base of business.

Allergan prides itself on a disciplined approach towards making targeted investment decisions that have yielded strong results. We believe that these investment strategies will continue to place Allergan in a position of strength within our markets, and enable us to produce favorable outcomes over the long term.

So with that, operator, I would now like to open the call to questions.

Question-and-Answer Session


(Operator Instructions). Our first question comes from Gary Nachman from Leerink Swann.

Gary Nachman - Leerink Swann

Hi, good morning. The first question is on RESTASIS. Was there was any stocking in the quarter for that product and could you update us on the IP front? Do you have new patents that are pending that could be issued sometime soon this year?

David Pyott

Okay, I'll take the question. RESTASIS in terms of inventory level and channel remains at a very healthy level. So, no issues there. And in terms of IP, really, we don't talk about individual patents. There's nothing particularly to report, but as you can well imagine, we continue to work also on improvements to our product and other ideas for therapeutic dry eye.

Jim Hindman

Gary, the other comment I would make is that, as you've seen on the R&D front, just the design and execution of dry eye studies remains a very high hurdle rate. And we believe that a trial to get a generic copy of RESTASIS would be an extremely tough trial to A, design and B, to get positive results. So, in addition to our IP, as David mentioned, there's a just huge barrier to a generic, given the trial issues.

Gary Nachman - Leerink Swann

Okay. And then on LAP-BAND, can you just elaborate a little bit, what do you are seeing in terms of competition with J&J's realized REALIZE Band? I think you said that they already have mid-teen share, and that was in line with your expectations. It seems that they got there pretty quickly. What are you assuming for the rest of the year in terms of what kind of share they are going to take? And then, are you pleased with the collaboration with Covidien and are there any changes that you could make in terms of stepping up the efforts there?

Jim Hindman

Well, I think, as we planned for the arrival of the REALIZE Band long ago, we knew very well that J&J Ethicon has very strong relationships with certain segments, certain groups of surgeons in the market. Secondly, as we had also expected, they engaged in a proctoring program where there was a real incentive for surgeons to participate, so that they could qualify themselves as Realize, if you like, certified and trained surgeons, to then be eligible to feature on Ethicon's website

And as you'd well know from what Allergan has done over the years to find a surgeon or find a doctor, there are a real benefits of being on the website both of our company and indeed of Ethicon.

In terms of looking out across the year, we think their share gain is pursuant to my remarks, and its speed of list will moderate, but of course, we are cautious and prudent in terms of assuming they will continue to gain some market share.

In terms of our partnership with Covidien, we are pleased with that. We have access to a large group of sales people, and we believe that that relationship has enabled us both to protect accounts and also get good referrals for some new ones.

Gary Nachman - Leerink Swann

Okay, thank you.


Our next question comes from Gregg Gilbert from Merrill Lynch.

Greg Gilbert - Merrill Lynch

Thanks. David, did I hear you correctly that you think breast augmentation procedures in the US were down year-over-year? And do you think you gained or lost share in the quarter in the US? And secondly, David, more generally, what are your most pressing external corporate development initiatives at this point?

David Pyott

Okay. Thank you. Well, given my remarks, in terms of very strong businesses internationally, clearly, the place that has been difficult is the US. Obviously, we too read a lot of the surveys conducted by yourself and some of your colleagues. I think directionally they appear to be accurate. Of course, we will take a good look at the numbers that Mentor posts later this week.

However, our assumption pre-seeing their numbers is that their share is relatively stable, this quarter between the two companies in the US. And then finally, in terms of your question regarding business development, I think on many occasions I've stated this, and I think we've stated it again at the R&D Day. We are very pleased about the strength of our internal R&D pipeline, but we are always looking to supplement it with external assets when they make sense.

And we have a very rigorous process instituted long ago by Jeff, when he was running corporate development, and his team reporting to him, the corporate development group is always looking at lot of things, and you've seen us both by products, the most recent one being Axon which will be launched later this year, and then we also look at what I call R&D assets, programs that we could either buy or participate in for product launches in the next decade, because really, when I look through the company's future, this year, its an irritation that the economy isn't as strong as we would like, but all things turn around, and then really I'm looking to five years and beyond, what will the product be that we'll be launching from internal resources but then supplemented by external moves.

Greg Gilbert - Merrill Lynch



Our next question comes from Peter Bye from Jefferies & Company.

Peter Bye - Jefferies & Company

Hey guys, thanks for taking the question. Just on a couple of things, and I know, I'll preface it, because you guys aren't always very conservative on your outlook. But, when I look at the optopharma business, and I know you've got strength overseas, but it seems that the delta between your revenue growth rate and IMS script trends has widened from what it has been historically on that front.

Obviously you are going to get a little bit faster growth overseas, and with price and stuff. And then when I look at your back half guidance, RESTASIS and ALPHAGAN and what it implies, you have always put up bigger revenues in those product lines in the back half of the year than you have in the first half of the year. If I annualize your first half numbers, it beat the top end of your guidance range. Can you talk to us what is going on or just what your assumptions are on the eye care in terms of your guidance?

David Pyott

Well, obviously we pour over all the IMS and Verispan numbers not only as fast as we can but very, very carefully. One divergence is IMS, we have known for a while, under reports the growth of the market for artificial tears in the US because they don't track what I call new channels.

These are the channels like Sam's club, Wal-Mart., Costco, would be kind of good examples of that. So that changes the number upwards and particularly for us, because as you know, OPTIVE has done rather well everywhere that it's available. But I think then answering your question in terms of second half, obviously, we look at those numbers carefully and hopefully our guidance is on the conservative end, and that's a better place to be than the inverse.

Greg Gilbert - Merrill Lynch

Okay, that's fair. When you look at competitive products next year, I guess in Botulinum Toxin, if and when it does come and comparing it to trialing on the bariatric side, what are your expectations of companies wanting to or doctors wanting to be on the Medicis website to do same thing and trialing of what will happen with that product when and if it comes in, and how that may or may not affect your Botulinum Toxin shares in North America?

David Pyott

Well, I think a couple of things there. Obviously, you know that the bariatric surgeon community is a fairly small group of people of the order of even when one takes it in its broader sense of general surgeons that have learned bariatric surgery. You are still looking at roughly 2,000 practitioners.

Whereas when one looks at doctors involved in facial aesthetic, this is a huge group. So therefore the value of being on the website I would say is much less. Secondly, I think in terms of distribution, it's clear that's one of our strength and we showed that with a very robust trajectory of Juvederm.

Now I have often said, I believe that Juvederm is an excellent product, and I mean even the current one marketed in North America and, of course, once we get lidocaine, we have another real product differentiation too.

Another reason that I often state what's going on in Europe is that's more than just a laboratory where we get to watch what happens. This isn't target practice. This is real normal conduct of business, and it's interesting, but we continue to just inch up our market share despite the other side obviously is giving it their product its best effort.

So I think in summary, when I look at 2009, again when we draw up our plans, we take prudent assumptions versus just puffing out our chests and assuming that we can retain some ridiculously high market share. That being said, I think we have very potent plans to prepare for competition and not only just in Botulinum and Toxin directly, but of course our position in dermal filler is very important as well given these products are used side-by-side.

Greg Gilbert - Merrill Lynch

All right, great. I appreciate the color. I'll jump back in queue.


(Operator Instructions) Our next question comes from Ronny Gal from Bernstein Research.

Ronny Gal - Bernstein Research

Good morning and thank you for taking my call. First, Scott, any update on your discussion with the FDA on accelerating the OAB trial, and as long as you are with it, if you can give me last PDUFA date?

Jim Hindman

Well, on the first question, since the R&D days, there isn't much of a further update. The urologics division realizes the unmet need. We've updated them on our proposals, what they wanted us to do was come back to them closer to the end of this year. They did signal to us that they'd be willing to look at us filing earlier with less treatment cycles, which as you know, the issue with overactive bladder is we have many patients where the treatment lasts a year or longer.

And if you are wedded to three cycles it makes the Phase III trial extremely long. So, they've realized that that's a hurdle that they might want to compromise on. But we won't probably have enough data on ultimate trial design until the end of the year.

Your second question on the PDUFA date for bimatoprost trial, we don't have the exact PDUFA date yet. We expect to hear back from the agency by the end of this quarter with the exact date.

Ronny Gal - Bernstein Research

And David, I'm really impressed with your performance this quarter, and one question comes to mind is, does that involve essentially broadening the market? Is that primarily from going down marketing to groups of physicians who are currently not using fillers or is it more on a head-to-head competition with competitors in that market?

And in addition to that is the question of Restylane plus lidocaine. There was some discussion that that formulation will not work. I was wondering if you have any updates for us, whether you guys think that, a very competitive product can be formulated with lidocaine.

David Pyott

Okay. I think in terms of dermal fillers, as I really prefaced almost a year ago, we knew that the per capita use of fillers in the US was much lower than that of Europe. And, we, therefore more than instinctively, we had really good models and reason to believe that the market would be very responsive to stimulation.

Now, I think when one looks at the very top end of the market in terms of the top quintiles, I dare say that Medicis's Restylane has higher market shares, because that's where physicians were probably the earlier adopters of the product, built up loyalty, built up a habit of use with Restylane and indeed patients as well.

And so I think a large part of the expansion has been our ability to basically bring Juvederm to almost all of our BOTOX injectors, and so, of course if we can suggest to the physicians and then their patients to use both products side-by-side, there's a real opportunity for improving facial aesthetics results.

In terms of Juvederm plus lidocaine, obviously, we are very pleased with that, and we always just monitor what's going on with competition, and we know that Q-Med had equivalent of R&D Day, I recollect in May in Sweden, and at least of that meeting, there was no report of Restylane plus lidocaine product. Now, whether they have one, who knows. You ought to go and ask them.

Ronny Gal - Bernstein Research

Great, thank you. I'll get back in queue.


Our next question comes from Larry Biegelsen from Wachovia.

Larry Biegelsen - Wachovia

Thank you for taking my question. Just a couple of quick ones. LUMIGAN- X, why the delay? Could you also give us an update on the status of the BOTOX label negotiations? When do you expect a change? And lastly, why are the Department of Justice expenses so high, and for how long do you expect this to continue? Thanks.

David Pyott

I think these are all pretty kind of short and easy answers. I think regarding LUMIGAN X, our remarked that, we are very pleased with the quality of our data package, and of course, frequently, the FDA has just backed up. And so that's why we have extended the date. Jeff remarked in his comments we've moved out our assumption from Q2 unfortunately into Q3.

Regarding BOTOX label level labor discussions, really we can't say anything there definitively, we have submitted an enormous amount of data to the agency which they are reviewing, and presumably they will come back in due course with their comments to our recommendations.

I think regarding the DOJ, the best way to think about this is both the time, and also you can imagine the word BOTOX features in many documents in this company, because it is our largest product, and of course BOTOX is used in many different areas, both on label and of course whilst we are assiduous in avoiding off label promotion, there's nevertheless internal documents that talk about future plans as we've been talking about on this call. Things like spasticity etcetera, and of course, it has broad use as backed up by Compendia.

Larry Biegelsen - Wachovia

Thank you. Any idea how long it will continue, David?

David Pyott

I think its early days. It would be really nothing but wild speculations. But, of course, one knows looking at other cases, these things can take years.

Larry Biegelsen - Wachovia

Thank you.


Our next question comes from David Buck from Buckingham Research.

David Buck - Buckingham

Yes, thanks for taking the question. The first one is either for David or Scott. Can you give us a sense of your confidence level into the data for headache BOTOX headache? So, David, can you talk a little bit about why you think the cash pay business so far has been holding up ex-US?

And secondly, what do you think led to, over the last couple of quarters, you starting to see more of a consumer impact on your cash pay businesses? And what role do you think safety concerns and headlines may have had on BOTOX in particular? Thanks.

Scott Whitcup

Hi, David, this is Scott. I'll take the BOTOX headache. What we've said previously and everyone knows that migraine is a tough area. That said, we think learning from the phase, the multiple phase programs, we've designed the best study to show an effect in the right patient population.

So, the studies have gone well. They've been conducted well. We remain confident in the design, and as we said at our R&D technology review, we will have through our press release, the data from the Phase III program by the end of September.

Jim Hindman

Let me see if I can do a good job of answering your question on cash paid in terms of strong performance ex-US. One part of the answer I think is, levels of maturity of various markets. So, if we take BOTOX, clearly in many parts of the world there's much lower penetration, much lower per capita usage, which for me as a marketer, just tells me opportunity. That's my job then to attract more patients and to get them to come back to re-treatment more frequently. So I think we see that element.

One in my prepared remarks that I was very encourage by was, the buoyancy of the filler markets in Europe. I was pleasantly surprised when I looked at the Q2 results of Q-Med with them showing 25% growth year-over-year with Restylane, and that despite clearly very, very strong sales on our part. So, that's kind of a good signal for market conditions.

I think the second part of your question related to, how does one think about the trajectory of sales in terms of economic effect versus certain issues raised by headlines in the media regarding safety. Parsing through mountains of data, and given the fact that this PR went worldwide, it would be totally incorrect to just assume that it stayed in our friendly shores in the US. This when everywhere in, 24 to 48 hours depending how long it took to translate English into some other language.

And so therefore, the fact that the foreign markets continue to grow very strongly I find very encouraging. And when I look through everything, I would say there is extremely high correlation to BOTOX growth related to economy. And I could only really see at the very margin some impact from safety considerations.

And as you could well imagine, we not only look at our sales data, but we look at a lot of consumer market research to see how patients are feeling about our product over the whole battery of questions.

David Buck - Buckingham

That's helpful. Thank you.


Our next question comes from Frank Pinkerton from Banc of America.

Frank Pinkerton - Banc of America

Hi. Great. Thanks for taking the question. First Scott, can you just give us an update on POSURDEX? Where that stands at the FDA and potentially a timeline there?

Scott Whitcup

Okay. So, on POSURDEX, we are in the process of rolling NDA. The trials and data are on schedule and we said that we expect approval first half of next year.

Frank Pinkerton - Banc of America

Okay. Great. And then just shifting over, I think there's been a couple of questions asked about LAP-BAND versus REALIZE, but when I think about the Gastric Banding segment versus other procedures that are out and the possibilities, just given some of the recent data both Scott and David, how do you think of the banding versus the other surgical procedures ability to grow that? Is that a marketing effort or a scientific effort, where you have to show better efficacy on the banding side, and how do you go about converting that over the next several years? Thanks.

Scott Whitcup

I can give you an update on data collection. The key difference clearly is reversibility of the LAP-BAND, shorter procedure time, and for those patients who are looking for their first surgical treatment option for obesity, clearly the LAP-BAND is a less involved procedure. You get back to work quicker. The surgical time is less. And so we feel from a complication rate and ease-of-use point of view, it's really a great value proposition to the patient.

We've got two major clinical programs underway. One is in adolescence. So these are really, morbidly, really obese teenagers, where at an NIH consensus meeting, it was thought that the banding procedure may be the treatment of choice for those patients. Those trials concluded ahead of schedule. We expect to have data potentially, end of this year, early next year and then the file the PMA to expand the label.

We also have a clinical trial in patients with lower body mass indices, because we believe that the health benefit of lower obese patients. So, that will also expand the data expand the label. And then finally, diabetes is a huge opportunity. There was a study in JAMA showing that LAP-BAND patients had regression of their of type 2 diabetes in about three quarters of the patients, much higher than extreme diet and exercise. And we are looking at ways to gather additional for reimbursement and potentially to expand the label.

David Pyott

I think also when you look at the penetration of band versus bypass in the US; it's very low by international standards. So, to me that points to opportunity for market expansion. Both we and Ethicon will benefit from that.


Our next question comes from Amit Hazan from Oppenheimer.

Amit Hazan - Oppenheimer

Thanks. Hi. Good morning guys. First question, more broadly, I'm wondering we've heard from a number of consumer related companies, in recent weeks especially, I think it kind of turned worse in the month of June, particularly here in the US,. I'm wondering if you could comment on June and July trends at least just anecdotally compare to the previous few months, and maybe also comment on Europe, as it relates to that because we've seen the same impact from companies reporting.

David Pyott

I think one of the dangers always of looking at very short time periods, is that you can read all sorts of things into a very limited number of dots. Also in our case, which we've purported consistently for years, is that, our incentives for our representatives paid in the middle month of the quarter. And so, the month after that, there's always a fair bit of chop in the numbers in terms of how much have they sold in, and therefore how long does it take for, let's call it return to normal ordering patterns.

So, I'm very loathed to kind of read too much into numbers. Also, when I look at the foreign markets, I remarked that, in the quarter, we didn't see a particular change in trend in our sales trajectory. That being said, of course, we too read the newspapers. We too listen and we're watching very carefully to see could that change as the year rolls on. And I think you can see from the guidance we've given for the year, we always try to remain on the prudent and cautious side. I'd rather be sitting here three months from now telling you things were better versus the inverse.

Amit Hazan - Oppenheimer

Okay. That's very helpful and just one follow up on LAP-BAND. In terms of your guidance for 2008, it assumes, if I'm calculating correct that the second half of the year is going to grow faster in the quarter that you just put up, even if I go to the low-end of that guidance, and this is despite tougher year-over-year comps in the second half of the year for that product line. And I'm wondering if you can specifically give us a sense of what is it you're expecting? Is it a return from market share gains that you have lost or is it the overall market growing faster and rebounding? What exactly is it that's implied in that guidance?

David Pyott

Well, let's just look at the numbers, because, in the quarter in dollars, we did 11% growth, and if we look into the second half, you can calculate, that's 12% to 26% right? Right, that's the range. And we've also commented that, Jeff in his remarks,, remarked that, when you look at our guidance range, you should look at the lower end. And so, 11% for the quarter in Q2, lower end of the range, the low end was 12. So you can think 12 plus. So there isn't a huge divergence in either of those numbers.


Our next question comes from Gregg Gilbert from Merrill Lynch.

Gregg Gilbert - Merrill Lynch

Hi, just want to follow up on the eyelash product growth. I am not looking for any trade secrets here, but can you offer any initial context around pricing and am I right to assume that LUMIGAN costs around $70 a month, and you would not likely, for obvious reasons, want to go lower than that? Maybe some data points would be helpful at this stage. Thanks.

David Pyott

I think it would be premature to talk about pricing. Obviously, a large group of my colleagues are already bewaring away at this. I haven't even seen the presentation yet personally. Although I've heard a few remarks, and I'll just say, as a company we are not known as the bargain basement discounter of the world. Christina, I think we have time for one more question.


Our last question comes from Ronny Gal from Bernstein.

Ronny Gal - Bernstein

Hi. Two follow ups if you don't mind regarding the commercial side. First, on the eye care business. David, I'm wondering if you can just somehow disaggregate for us the volume impact versus the pricing impact this past quarter. I know you've taken some price hikes during the first half of the year.

And a quick follow-on. You typically, I noticed, try to beat by a penny or two consensus impact, and this time Allergan exactly matched consensus. And I was just wondering if you had to pull back for some reason sharply on your current cost components, do you actually have the freedom to do that?

That is, if something happened and the quarter goes the wrong way, would you be able to meet guidance or meet even your own expectation that you set for us by pulling back on the cost funds?

David Pyott

Right. So first of all on eye care. Of course, there are lots of different moving pieces here because what you see is, some price increases in the United States. However, then from a mix point of view, a much faster growing international business at lower price, and then of course, overall, within the mix, you see our newest products, the ALPHAGAN family, COMBIGAN, LUMIGAN, GANFORT, OPTIVE, those products growing much faster than some of our old ones.

And of course, as Jeff remarked, those things are very positive both, in terms, the newer products tend to have a higher price point, and they also tend to have a better gross margin. So, lots and lots of different things going on there. I'll let Jeff talk about guidance and Q2, Q3, Q4 things.

Clearly as a company, given that we have a very high SG&A ratio, we look very carefully at contingencies. And so I don't want to say we can turn our boat on a dime, but we can move it pretty quickly and we are always looking very carefully at trends.

We go through a very in-depth forecasting process, four times a year, and then we even do overlays in between time. And so, I'm just looking at our planner here whose ears have now grown about six inches high to see what I will say. But he is all over this, and that's why we are able to deliver results.

Jeff Edwards

So, Ronny, in terms of contingencies, we maintain a process here, and when the word contingency is used, it's used in both the positive and a negative sense. We look for both investment opportunities on a contingency basis, and cost savings opportunities on a contingency basis. So it's something that is a perpetual process here at Allergan. So that's just to add on to David's comments.

In terms of guidance, if you go back over the course of ten years, our objective is always to meet or exceed, and in this case, for the record, we hit the top end of our guidance. So we haven't always exceeded by a penny or two. We look at the state of the nation if you will, the opportunities that exist, the issues that may exist, and we try to moderate our actions here at the company as a consequence of that analytical process.

So the good news is, we again hit the top end of our range, and from our point of view when we consider what the objectives are, it's not what are we going to do the next quarter or the next year, it's how are we going to respond over the next five or ten years. So that is the process we undertake here as well. We look at next year. We look at the following year. We try to consider what our strategic plan is.

So, we are really quite pleased with our performance this quarter in light some of the issues you all have been raising, and I think meeting or exceeding that will continually be our objective, and in this case we hit the top end of our range.

Jim Hindman

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

Joann Bradley

Thank you, Jim. The following market share data we are providing is Allergan's base estimate based upon the best available resources for data from IMS, as well as Allergan's internal estimates. The market share and growth rate information is a moving annual total for trailing 12 months as of the end of March 2008.

The market for ophthalmics is approximately $12 billion growing at a rate of 10% and Allergan's market share is 16%. The market for glaucoma approximates $4.8 billion, growing at a rate of 8% and Allergan's market share approximates 18%. The market for ocular allergy approximates $1.1 billion, growing at a rate of 2% and Allergan's market share approximates 5%.

The plain ocular anti-infective market is roughly $1 billion, growing at a rate of 4%, and Allergan's share is 13%. The market for ophthalmic non-steroidal anti-inflammatory is about $370 million, growing at a rate of 13%, and Allergan's market share is 36%.

The artificial tears market inclusive of ointments is approximately $1.1 billion, growing at a rate of 10% and Allergan's share is 21%. The US topical market to for acne and psoriasis is roughly $1.7 billion, with an annual growth rate of 4% and Allergan's market share is 6%.

The top ten markets for neuromodulators are roughly $1.2 billion, growing at a rate of roughly 17% and BOTOX has approximately 91% market share. The worldwide market for neuromodulators is roughly $1.5 billion, growing at a rate of around 23% and BOTOX has approximately an 84% market share.

The worldwide market for facial filler, substance aesthetics products is roughly $700 million, growing at a rate of about 35%, and Allergan Medical has approximately a 30% market share. The US market for facial filler substance aesthetics product is roughly $330 million.

The worldwide breast aesthetics market including both aesthetics and reconstructive is roughly $790 million, growing at a rate of around 20%, and Allergan has approximately a 38% market share.

The US breast aesthetics market is roughly $380 million and Allergan has around 45% market share, and the worldwide bariatric surgery market, including the band and balloon segments only is roughly $340 million, growing at a rate of between 45% and 50%, and Allergan has approximately an 80% to 85% market share.

And that concluded our call. Thank you.

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