Allergan Management Discusses Q4 2012 Results - Earnings Call Transcript

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Allergan (NYSE:AGN) Q4 2012 Earnings Call February 5, 2013 11:00 AM ET


James M. Hindman - Chief Financial Officer

David E. I. Pyott - Chairman of the Board, Chief Executive Officer and President

Jeffrey L. Edwards - Chief Financial Officer and Executive Vice President of Finance & Business Development

Scott M. Whitcup - Chief Scientific Officer and Executive Vice President of Research & Development

Joann Bradley


Gregory B. Gilbert - BofA Merrill Lynch, Research Division

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

David Risinger - Morgan Stanley, Research Division

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

Ken Cacciatore - Cowen and Company, LLC, Research Division

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

Marc Goodman - UBS Investment Bank, Research Division

Steve Willoughby - Cleveland Research Company

Liav Abraham - Citigroup Inc, Research Division

Jami Rubin - Goldman Sachs Group Inc., Research Division

David G. Buck - The Buckingham Research Group Incorporated


Hello, and welcome to the Allergan Fourth Quarter 2012 Earnings Conference 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 your conference host, Mr. Jim Hindman, Senior Vice President, Treasury, Risk and Investor Relations. Sir, you may begin.

James M. Hindman

Thank you, Dori. 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 fourth quarter and year-end 2012 earnings release, which was furnished to the SEC today on Form 8-K, as well as our filings with the SEC referenced in that disclaimer.

We will follow up the question-and-answer session of this call with a short listen-only segment, where we will provide additional miscellaneous information that relates to our business. Under Regulation FD, in order to be able to discuss this information freely during the quarter, we must be sure that it is in the public domain. This conference call and accompanying webcast are being simultaneously broadcast over the Internet, with replays available for 1 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

Great. Thanks, Jim. Good morning, ladies and gentlemen. In the fourth quarter, Allergan sales grew versus the fourth quarter of 2011 by 8.1% in local currencies, and given some continuing U.S. dollar strength, by 7.4% in dollars.

For the full year, sales increased by 9.1% in local currencies versus 2011 and at 6.8% in U.S. dollars, given the value of the U.S. dollar relative to most of the world's currencies earlier in the year.

We are gratified that Q4 sales grew year-over-year double-digits in local currencies in all of our overseas operating regions namely: Europe, Africa, Middle East, Latin America and Asia-Pacific. We're also pleased that we continue to secure many new regulatory approvals around the world.

Our consumer-facing businesses performed strongly in all regions in the quarter. Regarding operating performance, we generated in Q4 non-GAAP diluted earnings per share of $1.15, excluding the benefit of the R&D tax credit of $0.06, which was signed into law a few days too late on January 2, 2013, for inclusion in the 2012 results.

Excluding this benefit, EPS increased 15.0%. For the full year of 2012, diluted non-GAAP EPS was $4.14, an increase of 13.4%. Adding in the $0.06 that really belong to 2012, the calculation of earnings performance 2012 versus 2011 would be 15.1%, fulfilling our long-term aspiration of mid-teens EPS growth on a non-GAAP basis. We achieved this result while we continue to invest in R&D and strengthen our pipeline.

For the full year, we spent $927 million on R&D, an increase of 8.1% over 2011, all on a non-GAAP basis. You will note from the expectations that we provided for 2013 that we expect to invest over $1 billion in R&D in 2013, marking a notable increase over 2012.

For a reconciliation to GAAP numbers, kindly consult our press release. From all of our announcements, it is evident that we are dynamically managing our portfolio of products and businesses. On February 1, our Board of Directors completed the previously advised review of strategic options for maximizing the value of Allergan's obesity intervention business and is formally committed to a sale of this unit. Accordingly, Allergan is expecting to report obesity intervention as a discontinued business, commencing with the first quarter of 2013. Further details are to be found in today's press release.

As previously stated, Allergan intends to fully offset any potential earnings dilution from this transaction. Using the sales results of 2012 as a guide, disposal of the obesity intervention business adds about 100 basis points to Allergan's worldwide growth rate in 2013.

A key long-term strategy to maintain the strength of Allergan as an enterprise is to regularly and dispassionately reevaluate the contribution of each business to our value creation goals. This was a decade ago, when we spun off the ophthalmic medical business to our stockholders in the form of Advanced Medical Optics.

The recent acquisition of SkinMedica and the recently announced transaction with MAP Pharmaceuticals should be good contributors to our long-term goals of achieving around 10% annual sales growth in local currency.

Following the positive opinion received from the Irish Medicines Board for the approval of BOTOX for a idiopathic overactive bladder, we were very pleased to receive the FDA approval for the same indication.

As we reviewed our urology R&D portfolio, we have determined which products to fund for late-stage development. Given positive Phase III data for SER-120 developed in cooperation with our partner, Serenity, Allergan has decided to fund a confirmatory Phase III trial.

With mixed efficacy data for BOTOX for benign prostatic hyperplasia, we have decided to terminate this program. Furthermore, as regards our partnership with Spectrum Pharmaceuticals for Apaziquone, we have returned the clinical development program and commercialization rights to them. In exchange, Allergan will receive a royalty on any future revenue after regulatory approval.

In Q1 of 2010, we out-licensed AGN-209323, a Phase II-ready, oral small molecule compound for neuropathic pain to Bristol-Myers Squibb. BMS recently advised us that they will not take this compound to the next stage of clinical development.

Now commenting the performance of the individual businesses, let me start with BOTOX. BOTOX sales in Q4 were the highest ever at $475 million, benefiting from the normal high holiday season in aesthetics and an accelerating trend in therapeutics. Sales grew versus the fourth quarter of 2011 by 14.7% in local currencies and 14.3% in dollars. For the full year, BOTOX sales increased 12.7% in local currencies and 10.7% in dollars.

The therapeutic indications grew approximately 13% in dollars and the aesthetic sales grew approximately 8% in dollars, with local currency growth for both franchises being greater in local currencies by approximately 200 basis points.

In 2012, therapeutic indications accounted for approximately 52% of the total businesses, which in future will increase in the mix, given the global approvals for chronic migraine, and now for urological indications.

In Q3, the last period for which we have global market data available, we estimate that the world market for neuromodulators grew 13%, and the global BOTOX market share was 77%, down 1 point with share gain in therapeutics being offset by some share loss in aesthetics. We are, however, encouraged that aesthetic shares have been flat across the last 4 quarters.

Since the last earnings call, we have received additional country approvals for chronic migraine in Russia and Austria, for neurogenic bladder in Russia, Saudi Arabia, Egypt, Kuwait and Argentina.

BOTOX for overactive bladder was approved in Ireland, as a reference member state and also Germany, Austria and Finland and Estonia. Our partner, GlaxoSmithKline, secured the approval of hyperhidrosis in Japan.

The U.S. therapeutic business continued on a strong growth trajectory, driven by chronic migraine, neurogenic bladder and upper limb spasticity. Anticipating the rapidly increasing sales and workloads in the neurology and urology businesses, which at that time with an expected approval of BOTOX for OAB and the potential acquisition of MAP's LEVADEX, we created over the summer of 2012 a dedicated sales team for neuro rehabilitation, covering cervical dystonia and upper limb spasticity.

So all in all, we today deploy 4 focused sales teams: chronic migraine, neuro rehab, urology and finally, a hospital team covering all of the indications.

Regarding chronic migraine, commercial access is virtually complete and patients without access are in practice at a low level. Regarding training, we're investing resources and moving existing injectors from basic to advanced live training sessions. In addition, we're beginning to offer access to pain specialists and other top prescribers of migraine medications who are not board-certified neurologists.

Based on Medicare's permanent CPT injection code effective January 1, we expect that commercial plans will reimburse physicians at around $200. Both branded and unbranded direct-to-consumer advertising is successfully driving patients to our websites to inform themselves about the condition of chronic migraine and to finding a trained headache specialist. Regarding neurogenic bladder, or NDO, we also enjoy excellent insurance coverage with positive policy at all Medicare carriers and 88% of commercial plans. For this stage of the launch, levels of insurance denials are quite low and are on a declining trend. Since the launch of NDO, we have trained approximately 2,200 of the universe of approximately 5,000 urologists on the bladder injection procedure.

Now with the approval of OAB, it will be relatively easy for urologists to adjust their technique to injecting 100 units instead of 200 units. The Medicare CPT code is simple for bladder injection -- sorry, the Medicare CPT code is simply for a bladder injection independent of etiology. In addition, there are varying facility fees depending on the site of care.

Outside the U.S. in Q4, we enjoyed double-digit growth in local currencies in many markets. Canada is driven by strong uptake of chronic migraine and NDO, particularly by private plans, as we are still establishing coverage by public provincial payers.

The Ontario Drug Benefit is covering NDO since the end of 2012. Furthermore, most principal markets in Latin America and Asia-Pacific are experiencing double-digit growth, driven by the core movement to other indications and initial sales of the new indications were approved and reimbursed.

Europe is the only challenging region, affected by government-mandated price cuts and tenders to squeeze prices, as well as long timelines from regulatory approvals for the new indications to actual reimbursement and therefore, patient access.

We are, however, encouraged that our business is in a turnaround since last summer, after we reorganized management, put in tougher disciplines and tender prices and started regaining market share, in part due to sales from the newly approved indications.

In Japan, our partner, GSK, recorded major growth in 2012 across a wide range of movement disorder indications. The benefit to Allergan was a significant increase in royalties received.

Turning to the aesthetic side of the BOTOX business, In Q4, we enjoyed double-digit growth in local currencies in all operating regions, mainly in the U.S., Europe, Africa, Middle East, Latin America and Asia-Pacific except Canada, where we were drawing down inventory after a 10-year anniversary promotion in Q3.

Based on our survey data, we believe that the U.S. aesthetic neuromodulator market is growing close to 10%, and the BOTOX share in November increased to 84%, with Dysport at 14% and still a 1% residual share for Xeomin.

Xeomin has been reintroduced to the U.S. market on Jan 10, and we're carefully monitoring the Merz activity for which we are excellently prepared.

We are pleased that the U.S. FDA in January conducted an advisory action regarding illegal imports and wrote a letter to 350 U.S. physicians who had purchased BOTOX through unauthorized channels or unlicensed distributors. These names are posted on an FDA website.

In Western Europe, it seems that the overall market is picking up in the last few months, and that furthermore, we have halted our market share losses as Azzalure and Bocouture entered new markets. We're monitoring the effects of VAT increases on cosmetic procedures in France and Spain.

Very strong growth continues in China and Japan, as we open up new customers in addition to expanding business in existing accounts. Other outstanding performance was in Hong Kong, Taiwan and Thailand.

Facial aesthetic sales increased 13.3% in local currencies versus Q4 of 2011 and by 12.7% in dollars, with double-digit sales increases in local currencies in all operating regions.

The last few months have been marked with a lot of innovation activity. VOLUMA was approved in Vietnam and the Philippines and was just launched in Russia. At the IMCAS conference in Paris in late January, we launched the first of our new fillers based on our proprietary Vycross technology: VOLBELLA with lidocaine indicated for the lips and the perioral area. Vycross is the same technology inside VOLUMA. VOLBELLA is formulated with an innovative low molecular weight technology, which improves the cross-linking efficiency of hyaluronic or HA chains. This more effective cross-linking allows for a lower concentration of HA to be used, which results in less swelling. VOLIFT, another product providing correction for volume loss in the lower face and nasolabial folds, will be introduced in Europe shortly.

Brazil launched both VOLBELLA and VOLIFT in January. VOLBELLA and VOLIFT were just approved in Australia. Additionally, VOLBELLA was approved in Korea, Turkey and Bulgaria. Now we're waiting the date for an FDA panel for VOLUMA and are hopeful that we'll have approval before year end.

In the U.S. facial aesthetics business, we enjoyed double-digit growth in Q4 year-over-year, and we estimate that the market grew mid-single digits. Given lack of promotional activity in Q4 of 2012, net selling prices released -- realized were higher. And in addition, we gained some market share since Q3.

We estimate the volume growth for the U.S. market for the full year was mid-single digits, but was lower in value, given the impact of promotions discounts and free goods from ourselves, as well as competitors.

In Europe, it is encouraging that we enjoyed year-over-year double-digit growth in Q4, with particularly strong growth in the economically challenged markets of Italy, Spain and France.

Market growth in the European Union was 10% in Q3, the last period for which data is available for syndicated market data. Almost 3/4 of this market growth was attributable to Allergan, being driven by VOLUMA, and to a lesser extent, base JUVÉDERM products. Regarding SkinMedica, we are proceeding to very rapidly integrate the company and to make the topical aesthetics products part of Allergan's broad product and service offering.

LATISSE in the U.S. has been transferred into SkinMedica to create a focused front office sales operation. The existing Allergan facial aesthetics teams are thus entirely focused on injectables and also preparing for upcoming product introductions.

In January, SkinMedica introduced Lytera, a non-hydroquinone skin lightening system that reduces the appearance of skin pigmentation such as sunspots. This is part of a 4 product system that is positioned as an alternative to the hydroquinone-based Obagi Nu-Derm System.

Breast aesthetics. Q4 sales increased 6.6% in local currencies and 5.8% in dollars. Full year 2012 sales increased by 10.5% in local currencies and by 8.0% in dollars. Q4 sales were marked by weak sales in the U.S. and very strong sales growth outside the United States.

In Q3, the last period for which data is available, we estimate that the world market grew 5% in value. In the U.S. in Q4, the continuing trend to higher value gel products in our sales mix and good growth in tissue expanders was insufficient to offset low market volume growth and limited share loss to Sientra, which was not on the market in Q4 2011.

Our share loss has been much lower than Mentor's, with Sientra's market share in November being around about 5% of the augmentation and tissue expander market. Leveraging our distribution and full range strength in Latin America, we enjoyed very strong growth in all of our principal markets.

Strong Asia-Pacific growth was driven by the recent introduction of 410 in Korea, our recent silicone approval in Japan and market share gains in Australia.

Europe, given the economic challenges, also posted good growth, although we experienced weakness in Spain, Italy and France in Q4. For Q3, we have syndicated market data showing continuing strong market growth across the European Union of 8% in units, with Allergan growing almost double this rate.

As clear market leader, we have enjoyed surgeons' confidence in high-quality products in the wake of the PIP scandal.

Ophthalmology. In Q4, ophthalmic pharmaceutical sales increased 8.2% in local currencies and by 7.1% in dollars. In Q4, we enjoyed strong double-digit growth in local currencies in Canada, Latin America, Europe, Africa, Middle East and our major markets in Asia. Korea was held back by the impact of government-mandated price reductions, but as an offset we have strong volume increases for Allergan products.

For the full year of 2012, sales grew by 9.7% in local currencies and by 6.8% in dollars. In the U.S., sales growth in Q4 was at a lower rate than for the full year, given the decision announced in August to discontinue the original LUMIGAN 0.03% formulation, thus reducing overall LUMIGAN trade inventory.

Regarding original LUMIGAN, the Court of Appeals for the Federal Circuit just ruled that our use patent is valid. According to ANDAs filed by generic companies will not be approved until our patent expires in August of 2014.

In market, IMS VONA reports strong LUMIGAN acquisition dollar fourth quarter year-over-year growth at 13.7%. RESTASIS continues to grow robustly in volume at a steady double-digit rate, driven by growing prescriptions, not only in ophthalmology, but also optometry and patient awareness and education delivered through DTC.

RESTASIS growth in Canada is accelerating as access improves. In Europe, we are negatively affected by the de-reimbursement of artificial tears in Spain, where Allergan is the clear market leader, with us holding almost half the market.

Since September 1, the Spanish market declined about 50% in units. Fortunately, we've been able to register a new product, Optava, as a reimbursed pharmaceutical and have secured major price increases for our de-reimbursed artificial tears from February 1.

OZURDEX had major growth in Europe, far exceeding U.S. sales, which are also growing strongly. IMS Global reports for Q3, the last date period for which data is available, shows the world market growing a robust 10%, buoyed by retinal therapeutics and the glaucoma market on the other side, dampened by the impact of latanoprost generics.

For Allergan, IMS reported 12% global growth for Q3 and 11% for year-to-date Q3, with steady share gains in glaucoma, artificial tears, allergy and retina.

Regarding regulatory action, LUMIGAN preservative-free and unit dose was approved in the European Union, opening up the segment of the market that is being prepared by some competitors.

In addition, we received approval for OPTIVE Advanced in Canada and Malaysia, OPTIVE Sensitive in Hong Kong and OZURDEX in Russia, Malaysia, Taiwan, Kuwait, Sri Lanka and South Africa.

Finally, our skin care franchise grew 11.0% in Q4, both in local currencies and in dollars, rounding out to full year growth in 2012 of 14.9% in local currencies and 14.7% in dollars.

The largest contributor to the growth, both in the quarter and the year, was ACZONE, which is the fastest-growing product and #1 brand in the U.S. anti-inflammatory acne market.

TAZORAC has also started to pick up in growth since last summer, due to greater detail focus and less competitive activity. LATISSE growth in Q4 was only 1.2%, as this followed an introductory promotion for our new 5-milliliter package in Q3.

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

Jeffrey L. Edwards

Great, David. Thanks, and good morning to everyone on the call. During the fourth quarter of 2012, Allergan continued to generate solid operating results despite ongoing costs relating to U.S. health care reform and overseas pricing pressures. Allergan continues to successfully manage and perform through these types of pressures due to the design and diversification of our business, our strong product platform and our thoughtfully-directed approach to investing into the business.

Non-GAAP diluted earnings per share for the fourth quarter of 2012 was $1.15 and for the full year, $4.14, despite $114 million in U.S. health care reform pretax equivalent cost and $36 million in overseas pricing pressures.

As a reminder, the 2011 pretax equivalent cost associated with U.S. health care reforms were approximately $90 million, and the costs associated with incremental overseas pricing pressures were approximately $40 million.

The fourth quarter of 2012 excludes the full year 2012 impact of the U.S. R&D tax credit, which was signed into law on January 2, 2013, and retroactively reinstated to January 1, 2012. The estimated impact of the U.S. R&D tax credit on net earnings attributable to Allergan for the full year 2012, which would be reported in Allergan's operating results in the first quarter of 2013 was approximately $0.06 diluted earnings per share.

Full year 2012 non-GAAP diluted earnings per share restated to include the $0.06 benefit of 2012 R&D tax credit would have been $4.20, with growth of 15.1% compared to 2011.

This full year result is $0.01 above the top end of the guidance range provided on our previous earnings call. Likewise, for the fourth quarter of 2012, non-GAAP diluted earnings per share restated to include the $0.06 full year benefit of R&D tax credit would've been $1.21, $0.01 greater than the top of the guidance range provided on our October 30 call. 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 Q4 2012 gross margin of 87.3% increased 50 basis points when compared to Q4 2011. This positive gross margin trend has been driven primarily by our improved year-over-year standard costs, favorable variances, lower royalty expense and favorable product mix. Favorable margins were partially offset by the continuing pricing pressures we are experiencing around the world on reimbursed products.

It is worth noting that our royalty income receipts have grown to a point where they are now at a similar level as our royalty payments for the first time in the history of the company. This is largely a reflection of our interest in and willingness to maximize the value of our technology assets in markets where we believe partner companies are in a better position to succeed.

The non-GAAP selling, general and administrative expenses to product net sales ratio for the fourth quarter was 38%, totaling $565 million. The comparable ratio and expense value for the same period in 2011 were 39% and $540 million, respectively.

Regarding investment in DTC, we spent $162 million in 2012, compared to $177 million in 2011, with a significant increase in spend on BOTOX for chronic migraine, offset by leveraging our spend directed to other products, in particular LATISSE.

Throughout 2012, we continue to recognize the advantages of leveraging many of our businesses while having the flexibility to make meaningful investments on projects that we believe will yield the greatest financial returns.

Allergan will continue to pursue these thoughtful value-driving investments during 2013. However, our expectations are that we will continue to generate SG&A spending leverage for the full year 2013.

Non-GAAP research and development expenses were 16.1% of product net sales for the quarter, totaling $239 million, an increase in spend of approximately $13 million over fourth quarter 2011.

We continue to make substantial commitments to spending across both our medical device and pharmaceutical technology portfolios, while driving cost reductions through efficiency programs and R&D. With respect to our balance sheet, consolidated Allergan days sales outstanding was 47 days, while consolidated Allergan inventory days on hand was 136 days, including the acquisition of SkinMedica.

Excluding the acquisition of SkinMedica, consolidated Allergan inventory days on hand was 125 days. Allergan generated operating cash flow after CapEx of approximately $455 million in the quarter and a record $1,457,000,000 for the full year of 2012. This compares to $963 million generated for the full year of 2011.

At the end of the fourth quarter, Allergan's cash and equivalents and short-term investments and cash and equivalents and short-term investments net of debt positions total approximately $3 billion and $1.4 billion, respectively.

For the first quarter of 2013, Allergan estimates product net sales in the range of $1,375,000,000 to $1,450,000,000 and non-GAAP diluted earnings per share to be in the range of $0.94 to $0.96, which excludes the beneficial impact of the 2012 R&D tax credit that will be reported in Q1 2013 as a non-GAAP adjustment and any dilution impact related to the MAP Pharmaceutical transaction previously disclosed.

Regarding full year expectations for 2013, Allergan estimates product net sales in the range of

$5,900,000,000 to $6,200,000,000 and our full year non-GAAP diluted earnings per share between $4.75 and $4.83, which excludes both the beneficial impact of the 2012 R&D tax credit and the $0.07 estimated dilution impact related to the MAP Pharmaceuticals transaction. This full year EPS expectation represents growth of between 13% and 15% on a restated basis if the R&D tax credit were signed into law in 2012 as oppose to 2013 and the dilutive impact of the MAP Pharmaceutical transaction is excluded from the baseline calculation.

Our 2013 Q1 and full year expectations take into account several key factors and assumptions I would like to highlight and/or repeat for you. EPS expectations exclude the favorable 2012 impact of the R&D tax credit that will be reported in Q1 2013 as a non-GAAP adjustment. It also excludes the $0.07 of earnings per share dilution related to the proposed acquisition of MAP Pharmaceuticals, as previously stated in the January 23, 2013 announcement.

The expectations provided exclude the obesity intervention business. As a reminder, we previously stated our intent to offset any earnings per share dilution relating to this transaction by performance in other businesses.

The expectations include both the pretax equivalent of U.S. health care reform estimated at $125 million and the pretax equivalent of U.S. medical device tax estimated at $10 million. They also include the incremental overseas pricing pressure estimated at $50 million.

As is very typical for Allergan in the SG&A category, you should anticipate both a greater percentage and absolute dollar investment in the first half of the year as compared to the second half of the year. It is important to highlight that we will be absorbing an additional $35 million of costs in 2013 versus 2012 relating to U.S. health care reform, U.S. medical device tax and incremental overseas pricing pressure.

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

With respect to our 2013 capital expenditures, we project CapEx of approximately $250 million for the full year. Regarding 2013 cash flow, we again expect to generate operating cash flow after CapEx in excess of $1 billion.

We have assumed moderate levels of share repurchase activity of approximately 6 million shares in 2013 with our repurchase objectives limited to only match expected employee stock option-based compensation programs. Although not contemplated at this time, it is possible that some limited additional share repurchases above the 6 million shares just mentioned may be pursued to offset potential dilution resulting from the sale of the obesity intervention business.

So with that, operator, I'd now like to open the call for questions.

Question-and-Answer Session


Today's conference call is scheduled to conclude at 9 a.m. Pacific time. [Operator Instructions] Our first question today comes from Greg Gilbert with Bank of America.

Gregory B. Gilbert - BofA Merrill Lynch, Research Division

I have a question on DARPin. I was hoping you could tell us when you will get DARPin data in house. And if we hear from any of you that you've decided to move into Phase III before we see the final data at AAO, what can we assume that you specifically achieved in Phase II?

Scott M. Whitcup

Greg, it's Scott. So we have a fairly robust Phase II program. So what we'll know is safety of that compound and dosing frequency. And clearly, to make the decision to move to Phase III given the investment we would need to make, we need to see product differentiation versus LUCENTIS, which is the comparator. Our prediction based on PK work is that the dosing administration will be less frequent. We might be, in addition, lucky to see differences in efficacy. But those are the 2 things that we would be looking at. We'll have data roughly midyear. What we've said all along is that you'll likely see the data second half. Most likely, conference will be AAO, which is in the fall. I think we have stated that prior to you seeing the day-to-day AAO, we would announce if we've made the decision to move to Phase III, that you'd hear that on an earnings call.


Our next question comes from Shibani Malhotra with RBC Capital Markets.

Shibani Malhotra - RBC Capital Markets, LLC, Research Division

Just a question for Scott and David, I guess, on the ophthalmology franchise. In particular, RESTASIS, what is your current thoughts on generics for the product and a potential follow-on for RESTASIS as well?

Scott M. Whitcup

So in terms of generics, Shibani, that -- what we've stated before is that, given FDA regulation, there would need to be a fairly large study showing non-inferiority of a generic to RESTASIS, but also beating a vehicle control. Because of the non-inferiority margin, this would be a very large study with a fairly big risk that you wouldn't actually achieve the goal. And to our knowledge, no one would go this route and no one has been going this route. We are looking at a follow-on to RESTASIS, the so-called RESTASIS X, we don't comment on it. Probably, the first thing you'll hear will be just watching to get an idea of what that might be.


Our next question comes from David Risinger with Morgan Stanley.

David Risinger - Morgan Stanley, Research Division

My question is for Scott as well. Scott, I was just hoping that you could frame your view on the efficacy and safety profile of LATISSE in hair loss based upon the data that you saw after the Phase IIb studies completed in September of last year. And also, provide an update on your new Phase IIb trials that you could commence in 2013 and when those might complete.

Scott M. Whitcup

So David, as we've stated before with the hair growth program, we had data rolling in, continuing through the end of the year and have stated that we would present those data at a conference in the second half. We haven't really commented on those data per our policy. What we've said is, if there were a dose that had great efficacy and differentiation from minoxidil, we'd go into Phase III. Should we not see that differentiation, but still see a positive signal that it was growing hair, we have the ability to increase the dose fairly substantially in a Phase IIb. So you'll get an indication of where we're at either when you see the data or if you see either a Phase III or a Phase IIb on, but we haven't announced anything further than that.


Our next question comes from Gary Nachman with Susquehanna Financial Group.

Gary Nachman - Susquehanna Financial Group, LLLP, Research Division

David, now that you have the approval of idiopathic OAB and a lot of the docs trained already, how quickly do you think the use of BOTOX in OAB will accelerate this year? And how long will it take to get to the remaining 4,000 urologists, you think? Could it be this year or will it be next year?

David E. I. Pyott

Well, I think, if we compare and contrast to chronic migraine, it was clear to us from the very beginning that urology would move much quicker. Urologists are really procedure-based physicians. They like doing things like this. Obviously, from my remarks, once we have trained urologists how to deploy a cystoscope and use the bladder injections, to go from 200 units for NDO to 100 for idiopathic overactive bladder is pretty simple. Coupled with that, the reimbursement codes is relatively complicated, but it depends on site of care. But I would say not only favorable in our point of view, but also the point of view of the urology practices. I think in terms of training, this will continue to pick up in terms of those that still not -- have not yet been trained. And certainly, we heard prior to the approval of the latest indication, a lot of doctors were already thinking about the patients. If you like, they had in the practice just waiting for approval. And of course, that meant really access to reimbursement. So I think adding all of those factors together, the overactive bladder launch, which by the way still has not formally occurred, this will be right around the corner. It should be pretty quick.


Our next question comes from Larry Biegelsen with Wells Fargo.

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

So David, recently, at an investor conference, you specified 10% top line growth aspiration. As far as I know, that was kind of the first time you've been that explicit. I guess my question is, what are the key underlying assumptions underlying this growth target? Why disclose this target now? And if I do the math, the organic growth rate for your guidance, suggesting [indiscernible], LAP-BAND and SkinMedica, it's about 5% to 11%. So maybe if you could comment on that and how that ties to with the 10% aspirational growth.

David E. I. Pyott

Well, I think, given the large number of approvals we had in 2010 and '11, plus, of course, a pretty busy year coming up in 2012 and, by the way, I would add OAB to that because that formerly falls into 2012 for the U.S. -- sorry, 2013. This is always the problem with a calendar year change. This year is 2013. And also, Europe was right before Christmas. That, I think, gave us a higher degree of confidence than is the norm that we can always see relatively well the next 2, 3, 4 years. After that, in any company, long-term projections start getting much murkier. So if you step back, clearly, BOTOX in its many forms, has lots of growth, both on the therapeutic side, these new approvals, aesthetic market looking healthy. And then, obviously, RESTASIS continues to grow very strongly indeed. Commenting then on the portfolio adjustments. Clearly, I stated it in my opening remarks, shedding LAP-BAND will boost overall growth of the order of magnitude by about 100 basis points. And then SkinMedica adds another little bit of the margin. And even assuming on-time approval of LEVADEX in mid-April, of course, the sales contribution this year, whilst interesting, is modest. Let's be clear about that. That, that is not quite as complicated, I don't think, as training BOTOX. Because there, you've got to train a procedure. This is a prescription. But nevertheless, the real contribution from LEVADEX starts kicking in, in 2014 and beyond. So I hope that kind of covers all the different bases. And I think it was important just to remind the investment community, an aspiration around about that 10% mark. You can see it reflected in this year's guidance. And of course, let me underline local currency because we certainly don't control the level of the dollar to any currencies around the world.


Our next question comes from Ken Cacciatore with Cowen and Company.

Ken Cacciatore - Cowen and Company, LLC, Research Division

David, I wanted to ask about migraine reimbursement, not the covered lives. But we're hearing from many clinicians that in terms of the amount of paperwork and pre-authorization and commitment from some of these practices, in terms of the personnel that they have to employ to secure reimbursement, it's becoming more and more difficult and it sounds like a real issue. First, are you hearing the same? And second, what are you all doing to help simplify the practices or help them out as they try to secure reimbursement?

David E. I. Pyott

Yes, well, I think of the margin, first of all, what you're probably hearing is that some physicians were billing under miscellaneous codes, which actually achieved a higher reimbursement than the rough order of magnitude I gave you a few minutes ago of $200. So some were getting around about $300 in the past. I think the second thing I would say in terms of paperwork, this is all part of the learning experience for a physician and his or her practice. How do you get up to speed? How do you actually become highly efficient at getting basically prior authorizations because we would always recommend a physician to, unless there were some really very regionally specific issues, buy and bill, i.e., acquire the product and then bill both for the product as well as the procedure. And this has been the practice for at least 15 years, when I think of movement disorders. And we have a completely separate group, obviously, for Safe Harbor reasons, well away from the sales force that offer reimbursement services. And so there, we can train the physicians on what is appropriate for various carriers, if it's Medicare, or what's appropriate knowing the full degree of coverage at the commercial plans. So this is the same pattern as always. And if people are still new, beyond having learned how to use the product, you may get some of this feedback. And of course, our job is to make everything smooth and simple for these new practices.


Our next question comes from Corey Davis with Jefferies & Company.

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

I want to ask about LEVADEX and given that MAP's partner looks like recently terminated their manufacturing deal, are you comfortable that you're going to be able to make the product? And any more details on how that's going to happen and obviously, in the context of the upcoming PDUFA date, you must have been pretty comfortable and confident, given your purchase of it.

David E. I. Pyott

Well, of course, if we go back in history, given our cooperation with MAP, we've been kind of standing shoulder to shoulder with them on all of the regulatory matters and getting ready for well over 1 year. And so, given that I'm also a recovering lawyer, the only thing I can really say, given that we don't yet own MAP, is to refer you to the 8-K made by MAP, filed by MAP, and also their comments. And once we actually own the company, then I can say other things.


Our next question comes from Marc Goodman with UBS.

Marc Goodman - UBS Investment Bank, Research Division

David, just give us a little more color on how you're thinking about BOTOX growth in 2013. Obviously, we have the guidance. But I was thinking more of cosmetic versus therapeutic. Are we expecting kind of the same growth? Are you expecting therapeutic to be dramatically more? And if you could talk about geographies. What are your expectations for accelerating growth in '13 versus '12 or decelerating and how you're thinking about Europe? And just take us around maybe the globe and how you're thinking about this.

David E. I. Pyott

So looking at our guidance, the math that you have there is a range of growth. I'm just trying to find the right page here. Here we go. It's in a bracket of, rounding it to the nearest number, 8% to 13% in dollars. If you think back to my remarks on the split for 2012, you've got in dollars about 13% in therapeutic, 8% in aesthetics, and you can add roughly 2 points to that to get to local currency. So if you think local currency, round order of magnitude, you're really looking at kind of 15% and 10% for 2012. Now given the guidance we gave you, I think, clearly, the growth will be higher on the therapeutic side than the aesthetic. And then I think if you both reflect on what I said and maybe carefully pour over the transcript when you get all my comments, you'll see the market for neuromodulators worldwide is pretty healthy, in its entirety about 13%. If we look at the cosmetic side, we think the market in the U.S. is growing pretty close to 10%. The European market is also very healthy. I gave you some very specific numbers on fillers, where it's easier for us to get behind it. The issue we always have with BOTOX Europe is how do we split therapeutic and aesthetic even ourselves because of lots of transshipments that go around from one country to another. And then, of course, trying to do that for our competitors becomes like an even greater divining rod kind of process when we have our own data frailties. But stepping back from all of that, I think you can see pretty healthy consumer-facing market demand. And hence, why we feel pretty good about BOTOX in its entirety for 2013.


Our next question comes from Steve Willoughby with Cleveland Research.

Steve Willoughby - Cleveland Research Company

Kind of continuing on that question a little bit, but more in the U.S. Just wondering if you could talk about how you see the U.S. market given a lot of moving pieces over the last couple of months with Valeant's acquisition of Medicis and now Xeomin coming back out in the market. Have you seen any changes? And how are you guys preparing for the changes that you're seeing from some of your competitors?

David E. I. Pyott

Yes, I think I'll focus my answer along the aesthetic side, because therapeutic, we are really the sole company that drives demand and creates market. So getting back to aesthetics, what we'll see in terms of push and pull, I think in the integration of Medicis into Valeant, there are some opportunities for us to maybe shake some business loose, i.e., pick up market share. On the other side, clearly, we wish to contain the market share gains of Xeomin as they come back. From my observations, when I've been out in the field, and of course, I've read other surveys, both internal, as well as some sell-side research, I think it's more difficult this time for Xeomin to come back. It's no longer brand-new. And I think also, physicians are quite aware of what's written in the label in terms of BOTOX Cosmetic being duration up to 4 months and the concomitant label for Xeomin being up to 3 months. And I think they've actually seen that in many cases in their own clinical practice. And so I think that will be really a key point. So in summary, ability to gain some share probably from Valeant. But then, inevitably, we have to lose some share to Xeomin. Our job is to minimize that. But we should be realistic and sanguine, and we are, and that's embedded in all of the numbers we have given you.


Our next question comes from Liav Abraham with Citi.

Liav Abraham - Citigroup Inc, Research Division

My question pertains to LUMIGAN. David, I'd be interested in your assumptions and thoughts on LUMIGAN sales progression in the medium term, so 2014 and beyond. My understanding from Novartis is that they're working assumption is that Travatan generics will actually enter the market at the end of '14, beginning of '15. What is your base case assumption regarding the longer-term outlook for LUMIGAN? And what strategies are you deploying in order to mitigate headwinds from incremental potential generic competition over the next couple of years?

David E. I. Pyott

Okay. I think I'll bifurcate the answer into 2 sections. First of all, the U.S. and then the rest of the word. Now clearly, the pattern of genericization of any product overseas is much slower just because of different government policies. And the real driver, of course, is there's no absolute pharmacy switch as there is in the United States. So I think, overseas, we can expect greater LUMIGAN growth in volume than in the United States for the next couple of years. And then we also have the booster of GANFORT, which is regarded as maximal medical therapy in the single drug for intraocular pressure lowering. And we'd love to have that product approved in the United States. But even Scott Whitcup can't make it happen that quickly. There's only been 2 fixed combinations ever approved in the last sort of 15-ish years, i.e., Cosopt for Merck and then COMBIGAN from ourselves. So now let's drill back into the United States, where I think is the real question. Now if one looks at volume growth, you can see LUMIGAN currently growing a couple of percent in volume, when you kind of look at weekly and monthly data. And in terms of our preparation, it's better for us to prepare for the worst case, that Travatan might go generic at the end of 2014. And we're in good position because we're already, in fact, kind of exploring long-range formulary contracts. And in addition to our contracting work, we're also doing some very good preparatory work in terms of health economic studies. Because clearly, for a health insurer, if patients are not only compliant, but have really good results in terms of protecting their visual fields, there'll be fewer physician visits, which of course is very expensive to the plan. And when you look at the differential between the cost of the brand and the cost of the generic, factoring in physician visits is a very important part of that economic story. Obviously, we track what Novartis and Alcon are doing. They, too, are working on, to our knowledge, new formulations to protect their franchise. And obviously, we hope that they'll be successful. We'd be quite happy to be not the sole player that's left as a brand in the sea of generics.


Our next question comes from Jami Rubin with Goldman Sachs.

Jami Rubin - Goldman Sachs Group Inc., Research Division

This is for you Scott. Can you remind us of DARPin's preclinical profile with respect to half life and binding affinity relative to competitor drugs? And why does this give you confidence in the ongoing Phase II trial? And secondly, is the DARPin in your ongoing Phase II trial PEGylated? And what are the positives or negatives of this approach, specifically, does this create any hurdles to manufacturing?

Scott M. Whitcup

So I'll try to address a number of questions that you raised. I mean, clearly, duration of effect is based on a number of points: it's binding affinity, it's size of the molecule, it's whether when you give more it aggregates or doesn't aggregate in the eye, as well as half life. We presented some of the data at R&D Day. It's difficult to make comparators to other competitor products because those studies, a lot haven't been done head-to-head. But clearly, we have preclinical models have looked and based on those parameters, we have calculated that we think the duration could be somewhere in the 3- to 4-month range. We also do have some early, albeit, small numbers of patients showing that we are getting duration in that range. Obviously, we will make our decision based on a more robust Phase IIb trial. That's really what we need to focus on. The PK data gave us confidence to invest and to design the trials. But in the end, our dosing regimen will be based on these Phase IIb data. So that's where we'd look to go. We have not commented on whether the compound is PEGylated. But clearly, we are investing a fair bit on the manufacturing side. And to date, that's going well.


Our final question comes from David Buck with Buckingham Research.

David G. Buck - The Buckingham Research Group Incorporated

This one is for Jeff. If I look at 2013 guidance, you're guiding to roughly an 86.5% gross margin. Can you talk about the ability to sustain that beyond 2013? And what type of pricing actions or what type of benefit also from getting rid of the obesity control business, what are the impacts of those on the gross margin, the ability to sustain or grow that?

Jeffrey L. Edwards

Okay. So lots of answers for that question. Obviously, our manufacturing organization has been very successful in creating more efficient processes and taking cost out of the manufacturing process. Likewise, we have the benefit of higher margin products. So a better mix of newer products and greater pricing across some of those newer products. We're also seeing the benefit of volume. So as we increase volume, we have a very efficient plant network. I think that's important to recognize. We haven't commented beyond 2013, but we're reasonably comfortable that based upon our strategic plan assessment that we should be able to maintain and grow that number, albeit in moderation. Lastly, the LAP-BAND business, the health business produced gross margins which are below the corporate average. So with the elimination or the sale of that business, we will be the beneficiary both this year and the following years. I hope that's helpful.

James M. Hindman

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

Joann Bradley

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

The market for ophthalmics is approximately $18.6 billion, growing at a rate of 6%. Allergan's market share is 16%. Year-to-date, the market is growing 7%, and year-to-date, Allergan's share is 16%.

The market for glaucoma approximates $5.3 billion. The market is declining at a rate of about 5%. Allergan's market share approximates 24%. Year-to-date, that market is declining 4%, and year-to-date, Allergan's share is about 24%.

The market for ocular allergy approximates $1.5 billion. That market is declining at a rate of 7%. Allergan's share approximates 3%. Year-to-date, that market is declining 8%, and year-to-date, Allergan's share is 3%.

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

The market for ophthalmic nonsteroidal anti-inflammatories is about $520 million, growing at a rate of 11%. Allergan's share is 7%. Year-to-date, that market is growing 13%. Year-to-date, Allergan's share is 7%.

The artificial tears market, inclusive of ointments, was approximately $1.7 billion, growing at a rate of 7%. Allergan's share is 20%. Year-to-date, that market is also growing 7%. Year-to-date, Allergan's 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%, and year-to-date, Allergan share is 10%.

The top 10 markets for neuromodulators is roughly $1.8 billion, growing at a rate of roughly 14%. BOTOX has approximately an 84% market share. Year-to-date, that market is also growing 14%, and year-to-date, the share is also 84%.

The worldwide market for neuromodulators is roughly $2.4 billion, growing at a rate of roughly 13%. BOTOX has approximately a 76% market share. Again, the year-to-date market growth is also 13%, and year-to-date, the BOTOX market share is also 76%.

The worldwide market for dermal facial fillers is roughly $1 billion, growing at a rate of roughly 7%. Allergan has approximately a 36% market share. Year-to-date, that market is growing 5%, and year-to-date, Allergan's share is 37%.

The worldwide breast aesthetics market for aesthetic and reconstructive is roughly $890 million, growing at a rate of roughly 6%. Allergan has approximately a 42% market share. Year-to-date, that market is growing at about 8%, and year-to-date, Allergan's share is about 41%. And that concludes our call for today. Thanks.


Thank you for joining today's conference. That does conclude the call at this time. All participants may disconnect.

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