Allergan Management Discusses Q3 2012 Results - Earnings Call Transcript

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


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

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

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

David E. I. Pyott

All right, good morning, ladies and gentlemen. Before we start, we wish to express our concerns and also our regrets for all of you in the eastern states who have been suffering through the superstorm Sandy. We're so sorry that millions of people have lost their power, and we sincerely hope that conditions will normalize as soon as possible.

After careful deliberation, we decided to go ahead with this call as scheduled to avoid the pile-up of earnings that will almost certainly occur later this week after the market reopens.

So getting down to the business. In the third quarter, Allergan sales grew versus the third quarter of 2011 by 9.4% to local currencies, and due to the strength of the U.S. dollar relative to most of the world's currencies, by 6.1% in dollars. With current foreign exchange rates, the difference between local currency and dollar sales growth rates should be less in Q4. Year-to-date, Allergan's total sales have grown by 9.5% in local currencies and by 6.6% in dollars in spite of the challenges in the global economy. In the European region, we're very pleased that our consumer-facing businesses performed strongly in the quarter.

In our press release, we commented that we are exploring strategic options for the obesity intervention business as the sales dynamics do not fit the profile of a high-growth company like Allergan. Rigorous management of our portfolio of businesses has always been integral to our strategy.

Regarding operating performance. We generated in Q3 non-GAAP diluted earnings per share of $1.06, marking an increase of 15.2%, even with strong currency pressure, and $0.02 over the top end of the range of expectations provided at the time of our last earnings call. Year-to-date, non-GAAP diluted EPS has increased 13.3%.

During the year, we pursued our long-term strategy of strengthening our R&D pipeline, an example of which is the broadening of our licensing agreement with Molecular Partners in Zürich for a potential dual anti-VEGF/PDGF-B DARPin. Year-to-date, we have invested $688 million in R&D on a non-GAAP basis, marking an increase of 8.9%.

For a reconciliation to GAAP numbers, please consult our press release.

We plan to invest over $1 billion in R&D in 2013. And we opened a new R&D center for clinical development and biostatistics in Bridgewater, New Jersey.

Now commenting the performance of the individual businesses. BOTOX sales in Q3 increased 11.5% in local currencies and 8.8% in dollars, with year-to-date growth of 11.9% in local currencies and 9.5% in dollars. Both the aesthetic and therapeutic businesses grew double digit in Q3 in local currencies.

In Q2, the last quarter for which we have global market data available, we estimate that the world market for neuromodulators grew 12% year-over-year and the global BOTOX share was stable, with share gains in the therapeutic segment being offset by share losses in aesthetics.

The U.S. therapeutic business continued on a strong growth trajectory, driven by chronic migraine, neurogenic bladder and upper limb spasticity. BOTOX sales in Europe have been affected by a broad array of government measures to reduce health care expenses, such as mandated price reductions, tenders to squeeze prices as well as measures to restrict patient access. In fact, the therapeutic side has been a greater challenge in Europe than the issues we have with consumer spending on medical aesthetics procedures.

Since the last earnings call, we have additional country approvals for chronic migraine in Serbia, the Philippines, Sri Lanka, Egypt and Oman; and for neurogenic overactive bladder in the U.K., the Netherlands, Malta, Turkey, Poland, Korea, Vietnam, Qatar and New Zealand. BOTOX therapeutic growth was particularly strong in the United States, Latin America and Asia Pacific. In the U.S., the REMS for chronic migraine, upper limb spasticity and neurogenic bladder continue on strong trajectories. All the metrics for long-term establishment to the chronic migraine franchise are positive. Access is virtually complete, with 93% of all commercial lines enjoying policy coverage.

Patients without access are at a very low level and on the -- on a declining trend. Since the last earnings report, we have trained 200 more individual physicians. Focus is now on deepening the level of training in local live sessions and preceptorships rather than just training de novo injectors, as well as the goal of increasing injector productivity. Our investments in both branded and non-branded DTC campaigns for BOTOX for chronic migraine are driving patients to our websites for information about the condition and also where to find a headache specialist. In terms of patient satisfaction, only 19% of treated patients feel that their headaches are very severe or extremely severe after BOTOX treatment. We are pleased that, in the recent physician survey, Allergan is now perceived as the #1 company in migraine management by physicians.

Overall, BOTOX U.S. therapeutic market share continues to rise, given the strong growth in the new indications where BOTOX is the sole approved product. In July, U.S. share was close to 95%, with the remaining 5% being shared by Dysport, Xeomin and Myobloc, in descending order. In the cervical dystonia submarket where we have 2 licensed competitors, BOTOX has also been gaining share in the course of the last 12 months, and we estimate that BOTOX in July held 86% of this market.

Regarding the neurogenic overactive bladder launch, we're also making excellent progress. Regarding access, we're at -- now at a very favorable level. Some level of policy coverage exists in 88% of commercial lines and for 100% of all Medicare carriers and almost 100% of Medicaid lives.

Agent profile of spinal cord patients and multiple sclerosis patients are quite different. The number of patients without access is on a declining trend. Since launch, we have trained over 2,000 individual physicians. At the October meeting of the American Urogynecological Society, there was positive data presented on a study conducted by NIH on the use of BOTOX and anticholinergics and neurogenic bladder. Results of this study were published in the New England Journal of Medicine. Both for chronic migraine and injection into the bladder, we're awaiting action by CMS for their 2013 payment schedules for specific treatment codes.

On the aesthetics side of the business, we enjoyed strong growth in all operating regions of the world. In the U.S., we estimate that the market in Q3 grew double digits in volume. Based on our survey data, we estimate that BOTOX in Q3 increased its share to 82% at the expense of both Dysport and Xeomin, the latter of which still have the residual 2% share. In fact, BOTOX have the same share as in Q3 2011 before Xeomin came onto the market.

As commented in our press release, the injunction prohibiting Merz from commercializing Xeomin remains in place for aesthetics until Jan 9, 2013.

In Europe, we estimate that the aesthetic neuromodulator market was flat in Western Europe and that we have halted our market share losses as a result of launches of Bocouture and Azzalure in new markets. Overall, double-digit growth in the Europe, Africa, Middle East region was driven by Eastern Europe and emerging markets.

From the fourth quarter, we are monitoring the effect of new taxes. In France, the government has imposed a 20% VAT on medical aesthetics procedures, and in Spain, the rate was increased from 8% to 21%. In Asia Pacific, we're recording strong growth across virtually all markets, with exceptional performance in China and Japan. In Australia, we're dealing with the launch of Azzalure by Galderma, which is heavily discounting their product, and in Korea with several local competitive neuromodulators.

Facial aesthetics sales grew 5.0% in local currencies versus Q3 of 2011 and 0.8% in dollars. This was caused by a double-digit decline in U.S x factory sales, offset by massive growth in Europe, Asia Pacific and Canada. The U.S. decline is due to the timing of a Duet Dividend promotion in Q3 2011 as well as the benefits of the ongoing transition at that time to JUVÉDERM with lidocaine. In fact, the U.S. in Q3 2011 had over a 40% growth versus Q3 of 2010, hence the comps that I mentioned. x U.S., we're benefiting from the launch of the VOLUMA, which has stimulated growth in the overall market, and, additionally from good growth from base JUVÉDERM. In the U.S., we estimate that the market in Q3 grew low single digits in volume.

In terms of market share, we estimate that JUVÉDERM, as market leader, enjoyed 36% share in Q3, down 1 share point from Q3 2011, due to the launch of Belotero by Merz, which has garnered 8% share in Q3. Most of Belotero's gain came at the expense of the Restylane franchise, which we gauge to be at 31%. From October, VOLUMA in a new 1-mL package is now available in Brazil and Colombia.

Year-to-date, facial aesthetics sales have increased 8.7% in local currencies. We estimate that the world market in Q2, the last period for which we have data available, increased about 6% year-over-year. The market in the European Union also grew about 6%, which is positive, given the economic situation. Almost all of this growth in the EU was driven by JUVÉDERM and VOLUMA, even with a very large number of competitive products being available.

Breast aesthetics sales increased 7.1% in local currencies and 3.4% in dollars. Growth was strong in the U.S. and Latin America. The Q3 growth rate was slightly lower than in the first 2 quarters, due to the attenuation of growth in Europe as the market share benefits off the aftermath of the PIP scandal wear-off.

Q3 x factory growth was dampened by the timing of sales to certain distributors in Latin America and Asia. In Europe, based on industry data, Q2 growth in implant procedures in the top 5 markets was over 7%, with substantial share gains for Allergan. For Q2, the last data for which -- the last period for which data is available, we estimate worldwide market growth in value at about 4%, which points to our share gains. The shaped anatomical 410 line was approved in Korea and was recently launched with good acceptance by surgeons.

Our Natrelle round silicone gel implants and tissue expanders were approved in Japan and will be launched in early 2013. We are the sole manufacturer with the Japanese Ministry approval. In the U.S., we've been able to hold unit market share, in spite of unit -- the entry of Sientra into the markets and price discounting by Mentor, and have been able to migrate products to higher-value silicone gel and tissue expanders.

Ophthalmic pharmaceutical sales in Q3 were strong, increasing 12.5% in local currencies versus Q3 of 2011 and 8.4% in dollars. Year-to-date, sales x factory increased year-over-year 10.2% in local currencies, with both U.S. and international growth at just over 10%. This growth rate correlates with the end market growth reported by IMS Global for the 6 months up to June, also at 10%. The IMS Q2 report, the last period for which data was -- is available, lays out the world market growing by 7%, boosted by retinal therapeutics and dampened by latanoprost generics. In this data of Q2, Allergan grows by 10%.

Allergan is gaining share with RESTASIS in glaucoma, retina and artificial tears. RESTASIS is now the #2 ophthalmic product worldwide by value after LUCENTIS. In the U.S., we are pleased to report RESTASIS growing in Q3, year-over-year, 19.7% in local currencies.

Since the end of Q2, there's been an acceleration in the growth trend line, with volume growth being reported by IMS at over 10%. We ascribe this to the effectiveness of our TV campaign, growing medical awareness that dry eyes is a progressive disease, deepening patient education that chronic dry eye is a disease and enthusiasm for the product by optometrists.

RESTASIS is also the fastest-growing ophthalmic product in Canada. The LUMIGAN franchise rebounded with 8.2% growth in Q3 in local currency after the weak x factory sales in Q2. In the U.S., acquisition dollar growth for LUMIGAN in Q3 year-over-year, as reported by IMS, was 18%, with most of this attributable to price with only a small gain in volume. LUMIGAN is holding up better than competitive products from the impact of latanoprost generics due to its differentiated profile and perception as the most potent of the broad class. However, the impact of latanoprost generics is greater than we had originally anticipated.

After our August announcement that we will discontinue the manufacture of LUMIGAN 0.03% for the U.S. market by the end of 2012, we are pleased that already over 70% of new prescriptions are being written for the improved 0.01% product. Obviously, this decision reduced sales, x factory, in 2013 (sic)

as we are now reducing overall trade inventory of LUMIGAN before year end.

Regarding 2013 formulary coverage where almost all contract negotiations have been concluded, LUMIGAN will enjoy similar status to the 2012 contracts, with losses being broadly offset by gains.

In Europe, LUMIGAN is widening its share leadership versus the Travatan franchise. In the U.K., Allergan is, for the first time, the #1 company in glaucoma. In Spain, we have launched Optava as a reimbursed pharmaceutical tear, which will mitigate the impact that all other reimbursed tears have been de-reimbursed by the Spanish government.

In France, OZURDEX received a positive reimbursement assessment for uveitis. In Asia, we're enjoying strong growth in India and China, both due to overall market growth as well as the introduction of both international as well as local Allergan products.

Our skin care franchise grew 11.7% in local currencies and 11.4% in dollars versus Q3 of 2011. ACZONE sales continue to grow rapidly, with acquisition dollar sales per IMS VONA increasing year-over-year in the quarter at 57% and year-to-date at 52%. In September, ACZONE enjoy 31.7% share in the dermatology channel and a widening absolute leadership position in the anti-inflammatory acne category. TAZORAC sales per IMS VONA declined by 4% year-over-year in the quarter and were flat year-to-date.

LATISSE sales in the quarter grew 7.9% in local currencies and 7.2% in dollars, with good performance in the U.S., thanks to favorable physician and patient response to our new 5 mL packaging presentation and pricing.

Our press release comments the status of unfair competition action against Athena and its product, RevitaLash Advanced Eyelash Conditioner. We have information that Athena may be resuming shipments of RevitaLash to all states, with the exception of California and Tennessee. We're evaluating our options for further legal action against Athena and a few other companies who are marketing unapproved eyelash growth products.

In Europe, we withdrew our LATISSE Marketing Authorization Application from a decentralized procedure. We plan to submit the application in individual EU countries to optimize the product label.

I'll now pass over to Jeff Edwards, who will comment on our financial performance and outlook.

Jeffrey L. Edwards

Thanks, David, and good morning to all of you on the call. We appreciate that you guys have made the effort to join us and hope all is well.

During the third quarter of 2012, Allergan generated solid operating results despite the increasing costs related to U.S. healthcare reform, ongoing overseas pricing pressure and uncertain European economic environment and the challenges that accompany a stronger U.S. dollar environment. As in the past, we benefited from our natural hedges with overseas manufacturing and also foreign exchange option contracts. Despite these challenges, the company achieved non-GAAP diluted earnings per share $0.02 above the top end of our EPS guidance for the quarter. Non-GAAP diluted earnings per share for the third quarter was $1.06, marking a 15.2% 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 Q3 2012 gross margin of 86.4% increased 70 basis points when compared to Q3 2011. This increase in gross margin was driven primarily by favorable product and geographic mix despite continuing pricing pressures we're experiencing around the world.

The non-GAAP selling, general and administration expenses-to-product net sales ratio for the third quarter was 38.6%, totaling $537 million. The comparable ratio and expense value for the same period in 2011 were 39.4% and $517 million, respectively.

As we continue to diligently work to offset the increasing costs of the U.S. healthcare reform and overseas pricing pressures, consistent with our planning comments to the investment community, we are recognizing the benefit of leverage and scale in many of our markets. Our ongoing focus to direct our investments to high-yielding projects, which have been appropriately risk adjusted for economic risks, and traditional market and execution risks. Consistent with our historic trends, you should anticipate a further reduction in non-GAAP SG&A expense-to-net sales ratio in the fourth quarter of 2012.

Non-GAAP research and development expenses were 16.6% of product net sales for the quarter, totaling $231 million, an increasing spend of approximately $10 million over the third quarter of 2011.

With respect to our balance sheet, consolidated Allergan days sales outstanding was 57 days while consolidated Allergan inventory days on hand was 128 days. End-of-quarter DSO levels were slightly higher than our Q2 2012 levels, due primarily to the timing of the quarter end and our efforts to accommodate specific distributor requests.

End-of-quarter DOH levels were slightly higher than prior quarter, primarily due to preparation for various product launches around the world as well as a shift in shipping methods from air to ocean in -- for certain emerging markets.

In the third quarter, operating cash flow after CapEx was approximately $421 million. On a year-to-date basis, operating cash flow after CapEx was approximately $1 billion. At the end of the third quarter, Allergan's cash and equivalents and short-term investments in cash and equivalents in short term investments net of debt positions totaled $2.9 billion and $1.4 billion, respectively.

We currently project capital expenditures of between $150 million and $200 million for the full year of 2012.

For the fourth quarter of 2012, Allergan estimates product net sales in the range of $1,470,000,000 to $1,545,000,000 and non-GAAP diluted earnings per share to be in the range of $1.18 to $1.20.

Regarding full year expectations for 2012. Allergan estimates product net sales ranges of $5,695,000,000 and $5,770,000,000 and our full year non-GAAP diluted earnings per share of between $4.17 and $4.19, which represents growth of between 14% and 15%.

Our product net sales expectations reflects a reduction of $30 million from the top end of this range provided with our previous expectations. This is primarily attributable to the external events such as increasing U.S. healthcare reform, overseas pricing pressure and fourth quarter generic impact of SANCTURA XR. We currently estimate an increase in U.S. healthcare reform of approximately $10 million, primarily due to an increase in our coverage gap or donut hole exposure. Increasing European austerity measures are expected to lead to an addition of approximately $5 million in overseas pricing pressure. And the genericization of SANCTURA XR in the fourth quarter is expected to have an approximate $10 million impact. As a reminder, SANCTURA XR profitability is negligible.

As previously communicated, our 2012 expectations assume that U.S. R&D tax credit will be renewed in the fourth quarter of 2012, with the full year retroactive benefit impacting Q4 results. Our current estimate of the full year earnings per share impact is between $0.05 and $0.06.

One of our key drivers of Allergan's long-term success has been the continuous evaluation of our portfolio of businesses to ensure that they are delivering high growth. During the past few years, the entire obesity intervention market has faced challenges as the result of economic conditions and reimbursement limitations. Earlier in the year, we committed to improving the reimbursement conditions for LAP-BAND. We've been able to reduce the wait time for surgery by reducing time patients must undergo medically managed weight loss. Now 63% of commercial lives or 120 million patients have this benefit in their policies, an increase of 22 million lives just this year.

While we are confident in the long-term prospects of the business, we also must consider the best potential for future development and clinical advancement may exist outside of the company. Moreover, Allergan's business model strategy emphasizes the importance of leverage and scalability. It is clear to us today that Allergan will have the same ability to achieve this strategic business -- it is not clear today that Allergan will have the same ability to achieve this strategic objective with this business. Therefore, we're exploring strategic options, including, among other things, a potential sale of the business unit.

For your information, expectation for other lines of the income statement and specific product sales expectations are included in our earnings release. So with that, operator, I'd now like now to open the call to questions.

David E. I. Pyott

One comment I'll just make, David, here is I misspoke when I was remarking about the reduction of inventory for LUMIGAN in the United States following our decision to discontinue 0.03%. Clearly, that's occurring this year 2012 and not 2013, as I stated. So I just wanted to get that straight.

And now I'll pass over to the operator for questions. Thank you.

Question-and-Answer Session


Today's conference call is scheduled to conclude at 9:00 a.m. Pacific time. [Operator Instructions] Our first question comes from Seamus Fernandez of Leerink Swann.

Seamus Fernandez - Leerink Swann LLC, Research Division

So just very quickly. This question will be for Scott. Can you just update us on the -- what we should be anticipating in the first half of next year with regard to bimatoprost for hair growth?

Scott M. Whitcup

Sure. So as we stated before, the -- we have 2 Phase II trials, both with comparing doses of bimatoprost to minoxidil. We'll finish -- we believe we'll finish all of our analyses of the data as they come in by sort of early next year, and then we would submit that to a major medical meeting for a presentation. So a little bit of when the data will be public will depend on which meeting timing allows and the group feels is the best place to present the data. So it may not be first half of the year. It might be late first half of the year, early second half of the year. Depends on which conference that's presented at.


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

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

Just to carry on the particular catalysts for remainder of the first half -- I mean, for the first half, we've got ninapris [ph]. I believe that you've got some DARPin coming up. Can you just give us a better sense of what we should expect in the first half in terms of the catalysts for the R&D division?

Scott M. Whitcup

So in terms of major approvals, probably the biggest one from the commercial side would be approval of BOTOX for idiopathic overactive bladder. So we announced that we have filed both in the U.S. and in Europe at R&D Day, and that's probably the biggest opportunity for us as a company. And we expect approval, at least in the U.S., by FDA early 2013. Another major catalyst will be VOLUMA, so that's under review. We expect that, that will go to panel, although that decision is clearly up to FDA. So that would be a catalyst. Once -- if there's a panel, then clearly, there'll be data presented there. And then a number of people have followed the DARPin. So that's in Phase IIb. Those data, we expect some time next year. And again, similar to bimatoprost, once we get those data, we would get that submitted to a major meeting, which I would expect would be not first half of the year but probably second half, just based on the timing to submit. And usually that occurs at least half a year before the actual meeting. So hopefully, that helps.


Our next question is from Marc Goodman of UBS.

Marc Goodman - UBS Investment Bank, Research Division

Given the changes going on over with Medicis, and they're in transition, I was wondering if you've seen any major changes out there in marketing promotion by them and any market share movements.

David E. I. Pyott

Okay, I'll take that one, Marc. I would actually say that we saw a more gradual change before the announcement of the acquisition by Valeant. We could very much feel, in the second half of 2011, Medicis probably moving more of their promotional focus to the medical derm side of their business. I think, then, in the second move, reallocating resources where they have share comparable to us, i.e. Restylane is only so many share points behind JUVÉDERM. And I think where we really felt the difference was the pullback in spend and effort on Dysport. And I think that was a realization that the share was beginning to crest. We always felt that they wouldn't really get much beyond 20%. And based on all the numbers I gave you today, it seems to be settling down in the kind of the mid-teens kind of range. And we'll see, of course, what occurs when Merz comes back onto the market in 2013 and whether -- Medicis/Valeant, what they choose to do in terms of defending the share that they have.


Our next question comes from Greg Waterman of Goldman Sachs.

Gregory Waterman - Goldman Sachs Group Inc., Research Division

On BOTOX therapeutics, it sounds like new pressures are at least partially offsetting the gains in new indications. I was just wondering if you could in any way help us to better quantify these offsetting pressures?

David E. I. Pyott

Well, I think, when I prepare my remarks, I try to give you the frame. And clearly, you know that both sides of the house, both aesthetics as well as therapeutics, both did very well. Clearly, the U.S. is growing very, very strongly indeed. And when you go around the clock and say, "Well, where is the pressure," you are quite right to put your finger on the fact that it's Europe, and it's more on the therapeutic side than the aesthetics side, which seems initially surprising. If you you'd asked me that question 2 years ago, I'd have got it the wrong way around. You think the consumer would be the problem; I don't think that's the case. I was just looking at my numbers for the consumer-facing businesses again, and wow. Southern Europe, fantastic. If we can only get rid of this recession one day, we're going to be having a wonderful time in Southern Europe when they really have money to spend. So really, it's the pressures on the therapeutic side. And I think you can see that in other companies across the medical device industry, anything that's hospital based is really tough in Europe. Governments are literally turning off the lights in the operating rooms earlier in the day when the money is running tight. Luckily, of course, we're not really exposed that much to the hospital. But we are exposed to both national and regional tenders issued in several different countries. So I hope that gives you more color. And I do attempt to try and address it through my remarks.


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

Ken Cacciatore - Cowen and Company, LLC, Research Division

I just had a question on some of the commentary around the BOTOX, I believe, migraine in the U.S. And I maybe took this down wrong, but you talked about a goal of increasing injector productivity and deepening the training. So I just wanted to know if you can give me a little bit even more nuance into -- is there anything that you're seeing that's surprising you about this launch as you go into the next stage? Are we on track with your original plan? And kind of any more nuance around what you're seeing in the migraine market?

David E. I. Pyott

Yes, no, we're very much on track with our plan. And in terms of the way we really move people through the gears of standards of training, I think this is pretty much what we've seen in the last 20 years where people go from the first injections they do all the way through to becoming real expert injectors themselves, where they can then become preceptors to their younger and less well-trained colleagues. And so that's that flywheel we're working on. I think the second part, though, that partially is new for us is we hear from some portion of neurologists that this greatest results and satisfaction they have from using BOTOX is -- they say, "I don't want to be doing" -- I'll exaggerate to make my point -- "BOTOX 5 days a week. And I do other things as a neurologist." And that's where we want to improve the procedures in the office so that they can just move the patients through, in a good way, with quality but faster. And of course, that then applies the learnings we've made in the aesthetics business over the years where you can still have a quality outcome and feeling about the procedure, but you can really move up the number of patients per day. Also what we're seeing is some neurologists, when they reach the limit that they decide that that's the number they want to do, some of them are -- refer to other colleagues in the community. They're the frequently pain specialists that are very procedure-oriented and are willing to take up the slack. So where that kind of partnership opportunity exists, we're very happy to put these 2 physicians because it's always 2 individuals or 2 group practices together.


Our next question is from Steve Willoughby of Cleveland Research.

Steve Willoughby - Cleveland Research Company

I was wondering if you can just provide a little bit more color regarding the LAP-BAND and your comment on the lack of leverage and scalability. What has changed in your thinking now versus the past couple of years?

David E. I. Pyott

Well, if I cast the clock back a couple of years, we have lots of years of really good growth, and this was in the time frame 2006, '07 and '08. And at the time, if I restrict my comment to the U.S., first of all, we didn't realize that a lot of that was not only cash paid, but actually it was credit cards paid. And so of course, with hindsight, that market, which at the peak was about 1/3 of our U.S. sales, has really shriveled down to a very negligible part. So I think the next part of the thinking, then, came -- and that was my commitment over 1 year ago to you on the sell side as well as the investment community on the buy side -- that our job is to improve reimbursement conditions. And as you heard from Jeff's remarks, we have made progress. But then comes the real kind of what I'd call the tough call. Clearly, as a company, we are very committed to high growth and we've been able to do that. So a business like this, which is going the wrong direction, is a drag on that overall growth rate. Now I come to the point about leverageability and scalability. If you think of all of the business areas we're in, ophthalmology and medical aesthetics being very clear, we have a very broad range of products. So we often have multiple scale -- sales forces presenting multiple products, and of course, that gives you the benefits of scale. If we look at the general surgery market where we're present with LAP-BAND, it's basically a one-product entry. And as we've looked at alternatives, that would take us deeper into general surgery, which would be fine. But usually those products are associated with lower gross margin than the ones we have. So really ending the whole stream of thought: It may make better sense, either for another company that one would call a strategic to add LAP-BAND and ORBERA overseas, which is the intragastric balloon, to their portfolio. Or it could make sense for a private equity firm to acquire this business because, of course, it's profitable; it's cash generative; it has a great brand name; it has very good intellectual property. And finally, of course, just to make it clear, we are assessing the sale because everything comes down to numbers at the end of the day. And so as you know, we could always -- if we don't get the numbers we like, choose just to keep this business and run it in a different way.


Our next question is from Larry Biegelsen of Wells Fargo.

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

David, year-to-date, I think you guys have grown about 9.5% constant currency, and the implied Q4 guidance is about that. So when we think about 2013, you have a lot of new product launches, but Xeomin goes back on the market in the U.S. and you have a full year of generic SANCTURA. So recognizing that you're not providing 2013 guidance today, could you talk about the headwinds and the tailwinds to revenue growth in 2013 and how similar or different it may have looked from 2012, if you're willing to say that?

David E. I. Pyott

Yes, okay, Larry. Well, you're quite right because you're pointing to some of the elements in terms of things that will be boosters of growth. I think you can very clearly feel that the migraine launch and the neurogenic bladder launch and upper limb spasticity in U.S. are doing very well. We want to really repeat that experience, particularly in Europe. One quick remark about Europe: Although I'm very dutiful reporting when we get product approvals, the delay between approval date and reimbursement date in many countries can be well over 1 year. And then due to further access impediments governments throw out, it can even spread out maybe another 0.5 year. So Europe, we're looking for some good growth in these new indications in 2013 and '14. Scott Whitcup really talked about the bigger opportunity in neurology which is idiopathic bladder. He talks about VOLUMA. He -- those are probably the big ones in terms of what I'd call short-term horizon approvals. Then on the negative side, clearly, we factored in, when Xeomin comes back on the aesthetics side, we have to lose some share. That's clear. We're sanguine. Obviously, we don't plan to lose much. And then I would say, when you look at SANCTURA, it's a pretty small product and, more importantly, as Jeff remarked, really due to royalty obligations really didn't produce any bottom line worth talking about. One other item, which is -- although your questions were really more directed to sales, just as a reminder, we have to pick up the device tax in 2013. For us as a company, it's not that big. We -- obviously, we're not just a med device company. But that's something we will just suck up, and hopefully, you won't really feel that at all when we come out with our guidance or our outlook, which will be in early February, shortly, at the time of our next earnings call. So I think that takes you through all the parts and pieces. And obviously, when we put out the numbers, we'll walk you through all the bits for -- in whatever great detail you like.


Our next question is from Gary Nachman of Susquehanna Financial Group.

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

David, RESTASIS continues to exceed our expectations. Can you just give a little more on what is contributing to that improved volume growth? Are you expanding the types of patients that use it? Increase compliance with existing patients? And then Scott, just an update on the time line for RESTASIS X.

David E. I. Pyott

Okay, yes. RESTASIS is really exciting. In the last 6 months, we can see a real uptick in trend lines, and it's multifactorial. Optometry, clearly, has really come on board with this product. And it's obvious but let me restate it: There are many more optometrists than there are ophthalmologists, so that gives us a really very large prescriber pool. We've seen the same thing, by the way, in Canada. Then in terms of patients and consumption, more and more patients coming on board. It seems that our advertising has worked really well. And we are fine tuning that and improving it. And finally, we see an ever greater quantity of -- I'll call it vials, i.e., number of units in the package being written per script. And of course, for you as an analyst on the outside, that's very difficult to track. But we have that really nailed down. So lots of good things going on. RESTASIS, doing very well. And we plan to really keep this going right through 2013.

Scott M. Whitcup

So Gary, this is Scott. Just to comment on your question. First, as we've discussed before, there's quite a challenge to try to get an AB-rated product to RESTASIS because of the FDA requirement that you need to not only be non-inferior to RESTASIS in your trial but also to beat a placebo to a similar degree that RESTASIS be a vehicle [ph] in its trial. So this requires a fairly robust difficult clinical trial. We know that dry eye is a tough area. In terms of RESTASIS X, we haven't said much and aren't going to give exact timing, but the thought is really to try to have a product that's -- improves upon RESTASIS and is differentiated. My advice would be just to follow (sic) [], and at an appropriate time, you'll start seeing some trials there. But because of the strong competitive area the dry eye is, you won't hear us comment a lot on specifics.


The next question is from Ronny Gal of Sanford Bernstein.

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

One comment -- one product you've not commented on is LEVADEX. I understand there are some contractual issues there, but could you comment on either your expectation for approval in 2013 and the market potential for this product?

Scott M. Whitcup

So Ronny, this is Scott. Again, since we have a partner here, we don't really give a lot of specifics, other than, clearly, we have interacted on the R&D side, our manufacturing CMC side very closely. We have a very good working relationship and worked hand-in-hand to get the refiling to FDA done. We don't really comment on approvability or what we think you'll have to talk to MAP. In terms of the commercial opportunity, this fits extremely well with BOTOX for chronic migraine where it handles a different patient population. It handles more of the acute episodes, so it partners very well from a commercial standpoint with BOTOX for chronic migraine. Physician feedback has been very positive. The class of drugs has a well-known history of efficacy. But side effects have been limiting and the inhaled delivery really helps address those side effects. And so feedback has been quite good from the data and we're very excited to launch it once FDA approves the product.

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

But in your mind, it's not of the same size as VOLUMA or the idiopathic or any other opportunities?

Scott M. Whitcup

Yes, we're not going to comment on the exact size, but we feel -- and some of the analysts out there have looked at the market opportunity. We feel this is a fairly big market opportunity down the line but haven't gone to specific dollar amount.


Our next question is from David Risinger of Morgan Stanley.

David Risinger - Morgan Stanley, Research Division

Scott, I was hoping to ask you about the bimatoprost new opportunities and specifically was just hoping to get more clarity on the LATISSE for eyelash withdrawal in the EU and the application challenges there. And then with respect to LATISSE for the scalp, my current assumption is that you need to run another Phase IIb in order to optimize the efficacy versus Rogaine. But with respect to your decision for running another Phase IIb or starting Phase III, since you have all the data or you'll have it very soon, should we expect you to make that decision in January of next year? Or how long will it take for you to decide whether to run another Phase IIb or run Phase III with the current formulations? And how do you expect to communicate that?

Scott M. Whitcup

And so let me see if I can take those one at a time. In terms of LATISSE in Europe, as an aesthetics product, the label is critical to our commercial success. And by trying to gain consensus of multiple countries, it's more difficult to optimize the label. And so the current plan is to consider refiling with specific countries, with or without some additional data that we have, to make sure we get a label that gives our commercial sales forces the best chance to make it a commercially successful opportunity. In terms of bimatoprost for scalp hair growth, we'll finish all the analyses hopefully early next year. We've said consistently that we -- to be commercially successful with an Rx product -- need to be better than minoxidil, which is now generic. So we'll look at those data. If we're substantially better, we would consider going to Phase III. If we are not, what I've said is that we can potentially go higher on the dose and we would then consider doing a Phase IIb with a higher dose. Because I think, to be commercially successful, we need to be differentiated from minoxidil. Again, I don't think we would communicate those, other than you'll see the data at a medical meeting. My guess is that will be your first view, as opposed to potentially seeing a Phase IIb in I'm not sure which would occur first. But our decision will be fairly data driven based on those -- the Phase II data.


Our next question is from Shibani Malhotra of RBC Capital.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Just a couple, actually. One very straightforward. David, are you still standing by your 15% earnings growth rate for the next 3 to 5 years? And then on the BOTOX market in the U.S. following the reintroduction of Merz, can you talk about how you expect the dynamics to play out there? We know they took 8% the first time they came in, but they were giving product away free. Given that you have a year of experience without them, I mean, how do -- what do you expect them to take in? And how are you preparing for this?

David E. I. Pyott

Okay. Let me take those -- really, there's 2 parts to that question, I think. First of all, we remain very committed to our aspiration of mid-teens earnings growth. I think you could tell from my opening remarks, we are also very committed to continuing to plow money into R&D. I think that is the real way for the long term that we can field the growth of this company, and I mean the sales growth. And of course, Scott Whitcup and his team have had a very successful track record in terms of bringing through products through the clinical development pipeline. Regarding Xeomin, of course, that's something we're getting really prepared for. And I'm not going to go into any details because, clearly, we like to keep that to ourselves. Hopefully, there will be some good surprises for investors and some bad surprises for our competitor. And that's the way it should be. And of course, we are very much committed to keeping this market growing and that's the real important part here, that we don't get lost in the weeds. It's all about growth, finally, and bringing in patients to the marketplace, and because they're satisfied with their experience, that they repeat and repeat and hopefully use other products from, hopefully, Allergan's portfolio of medical aesthetics products.


Our next question is from Douglas Tsao of Barclays.

Douglas D. Tsao - Barclays Capital, Research Division

David, you've made the comment that you -- the impact from generic Xalatan was below, greater than you expected. I was just curious, from your perspective, on potential impact of Travatan Z on having a generic available next year and how that could affect the LUMIGAN franchise.

David E. I. Pyott

As I understood the question, it was really the longer-term outlook for the glaucoma market. And clearly, we go through scenarios on what could occur. And I think, particularly, it was regarding what might happen to Travatan Z. First of all, we, of course, hope that Alcon and Novartis are successful in upholding their patent estate, so there is no travoprost generic. That would be a good outcome for the market. However, we're also thinking about the other scenario where, if travoprost were to go generic, what kind of data we need to drive the successful growth long term of our franchise? And so we're doing a lot of health economics work right now. I think we're developing good data. And clearly, this is data that is, first and foremost, directed to the peer [ph] community, why they -- it may -- would make sense for them to invest in the best product for their patients.


Our next question is from Chris Schott of JPMorgan.

Jessica Fye - JP Morgan Chase & Co, Research Division

It's Jessica Fye, on for Chris Schott. I just wanted to follow up on some of the comments you made earlier about the obesity business. And I guess, specifically, can you comment at all on the operating margins for that franchise, just to give us a little bit of a sense of what the dilution might be? And then I know you talked about maybe offsetting that. Would that be more likely to come from share repo or more likely from an acquisition?

Jeffrey L. Edwards

Well, we don't comment specifically on the operating margins for any of our businesses, so we're not going to do so here. This is a profitable business. And to the extent we do something that is external in nature with this business, it's our objective to try to address the dilution. And that's a commitment we're going to do our level best with achieving. And that's really all we can say at this juncture in time because we continue with a very in-depth internal assessment process as to how we're going to address that business on a going-forward basis.

David E. I. Pyott

But clearly, when we look at all the levers that we can use, part of it is just operating income growth in the rest of our portfolio and some of it could be share repurchase. But when we get closer to knowing what the numbers might be, then we'll assess that and make all the right trade-offs. So when Shibani asked the question about long-term aspiration, let me repeat again that our aspiration is to generate mid-teens earnings growth.


Our next question is from Louise Chen of Guggenheim Securities.

Louise Alesandra Chen - Guggenheim Partners, LLC

My question is with respect to your capital allocation strategies. Wondering if you could provide an update now especially given your large cash balance and also your decision to potentially divest your obesity franchise.

David E. I. Pyott

Well, I think, as we've said over the years, first and foremost, our goal is to add to the depth and breadth of our portfolio and whether that be through licensing, the Molecular Partners transactions were like that. Although being -- all that being said, of course, in terms of use of capital, with the upfronts aren't enormous relative to our cash flow generation. The second, of course, is we continually look at other products we could buy or even companies that we could buy. And I think you as investors would prefer that we find good-return assets like that versus the very modest levels of return we can get by investing in the capital markets where, obviously, right now, the returns are very, very low indeed. So we remain confident that we know the spaces in which we operate very, very well. We've seen over the years that technology owners tend to come to us. It's not altruism because, of course, in theory we can afford to pay more than others because we have the best worldwide footprint in these businesses.


Our final question comes from Tim Lugo of William Blair.

Tim Lugo - William Blair & Company L.L.C., Research Division

Just one more pipeline question. Regarding your expansion of Molecular Partners, is it safe to say that you're happy with the DARPin VEGF safety to date? And also, when -- how far along is MP260 in the clinic? And will any data from an MP260 influence the initiation of Phase III for DARPin VEGF?

Scott M. Whitcup

So, so far, the collaboration has gone very well. As David commented on his opening remarks, we've actually expanded that collaboration. So the one DARPin in the clinic is an anti-VEGF; that's in a Phase IIb. That clinical trial is going well. It's recruited well. And again, our plan is to have data from that trial first half of next year. And then our aspiration would be, assuming those data are positive, to move into Phase III end of next year, potentially early '14. But our stretch goal is really to get it into Phase III next year. We expanded the collaboration both to get a DARPin that blocks both VEGF and PDGF, and that's clearly still in the preclinical stage. And we also have a research agreement where we can identify novel targets with which we can generate DARPins to fuel our retina pipeline for years to come. So that collaboration is going well. And the lead compound and the anti-VEGF in clinical trials, those trials are going both well. And again, hopefully, we'll get our data first half of next year and then try to get that presented as soon as we can after that. Thank you.

James M. Hindman

We would like to thank you for your participation today. If you have any further questions, Joann Bradley, Dave Nakasone and I will be available immediately following the call. Joann will now take 5 minutes to give you market share data.

Joann Bradley

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 June 2012, except where noted as year-to-date through June 2012.

The market for ophthalmics is approximately $18.1 billion, growing at a rate of 5%. And Allergan's market share is 15%. Year-to-date, the market is growing 6%, and year-to-date, Allergan's share is 15%.

The market for glaucoma approximates $5.2 billion. That market is declining at a rate of 7%; Allergan share approximates 23%. Year-to-date, that market is declining 6%, and year-to-date, Allergan's share is 24%.

The market for ocular allergy approximates $1.5 billion. That market is declining at a rate of 5%, Allergan's market share approximates 3%. Year-to-date, that market is declining 9%, and year-to-date, Allergan market share is 3%.

The plain ocular anti-infective market is roughly $1.4 billion. That market is flat, and Allergan's share is 8%. Year-to-date, that market is also flat, and year-to-date, Allergan's share is also 8%.

The market for ophthalmic nonsteroidal anti-inflammatories is about $500 million, growing at a rate of 6%, and Allergan's market share is 8%. Year-to-date, that market is growing 11%, and year-to-date, Allergan's market share is 7%.

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 market share is 21%.

The U.S. topical market for acne and psoriasis is roughly $2.4 billion, with an annual growth rate of 9%. Allergan's share is roughly 10%. Year-to-date, that market is growing 8%. Year-to-date, Allergan's market share is 10%.

The top 10 markets for neuromodulators are roughly $1.8 billion, growing at a rate of roughly 13%. BOTOX has approximately an 84% market share. Year-to-date, that market is growing 11%, and year-to-date, BOTOX market share is 84%. The worldwide market for neuromodulators is roughly $2.3 billion, growing at a rate of roughly 13%. BOTOX has approximately a 76% market share. Year-to-date, that market is growing 12%, and year-to-date, BOTOX market share is 76%.

The worldwide market for dermal facial fillers is roughly $1 billion, growing at a rate of around 11%. Allergan has approximately a 37% market share. Year-to-date, that market is growing 6%, and year-to-date, Allergan's share is about 40%.

The worldwide breast aesthetics market for aesthetic and reconstructive is roughly $880 million, growing at a rate of around 7%. Allergan has approximately a 42% market share. Year-to-date, that market is growing 10%, and year-to-date, Allergan's share is around 41%.

That concludes our call. Thank you.


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

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