Allergan's (AGN) CEO David E. I. Pyott on Q1 2014 Results - Earnings Call Transcript

| About: Allergan plc (AGN)

Allergan (NYSE:AGN)

Q1 2014 Earnings Call

May 07, 2014 11:00 am ET

Executives

James M. Hindman - Chief Financial Officer

David E. I. Pyott - Chairman and Chief Executive Officer

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 -

Analysts

Ken Cacciatore - Cowen and Company, LLC, Research Division

David W. Maris - BMO Capital Markets U.S.

Marc Harold Goodman - UBS Investment Bank, Research Division

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

Seamus Fernandez - Leerink Swann LLC, Research Division

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

Liav Abraham - Citigroup Inc, Research Division

David Risinger - Morgan Stanley, Research Division

Vamil Divan - Crédit Suisse AG, Research Division

Annabel Samimy - Stifel, Nicolaus & Company, Incorporated, Research Division

David G. Buck - The Buckingham Research Group Incorporated

David Michael Steinberg - Jefferies LLC, Research Division

Shibani Malhotra - Sterne Agee & Leach Inc., Research Division

David Amsellem - Piper Jaffray Companies, Research Division

Andrew Finkelstein - Susquehanna Financial Group, LLLP, Research Division

Operator

Hello, and welcome to the Allergan First Quarter 2014 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, Holly. Good morning. With me for today's conference call is David Pyott, Chairman of the Board and Chief Executive Officer; Jeff Edwards, Executive Vice President, 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 first quarter 2014 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 www.allergan.com.

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

David E. I. Pyott

Great, Jim. Thank you. Ladies and gentlemen, from this morning's press release, you'll have noted that we have raised the outlook for 2014 earnings per share growth over 2013 in a range of 18% at the bottom to 20% at the top end of the range whilst we continue to invest into the future of the business. These numbers are non-GAAP as laid out in our earnings releases and investor relations materials. The business is performing strongly, thanks to thoughtful investments made over a long period and thanks to disciplined execution.

Before commenting on our Q1 results, I wish to briefly address the unsolicited proposal to acquire all of the outstanding shares of Allergan for a combination of 0.83 of Valeant common shares and $48.30 in cash per share of common stock of the company.

As you know, on Tuesday, April 22, we received this unsolicited proposal from Valeant after we learned of this matter in the press on Monday, April 21. Prior to becoming aware of the public filings made by Valeant and Pershing Square, Allergan had no discussions with either Valeant or Pershing Square with respect to this matter.

As we previously communicated, our Board of Directors, in consultation with its financial and legal advisors, will carefully review and consider the proposal and pursue the course of action that it believes is in the best interest of the company's stockholders. At this time, stockholders do not need to take any action.

In the interest of time allotted for today's earnings call, I would refer you to the press releases we issued earlier on this subject. As today's call is focused on our Q1 results and operating highlights, we will not be taking any questions on the unsolicited Valeant proposal.

Now coming to the first quarter, sales increased 14.7% in local currencies and excluding the sales of LAP-BAND to Apollo Endosurgery, by 13.9% in local currencies and 12.2% in U.S. dollars, marking the fourth sequential quarter of year-over-year double-digit growth, driven by a large number of regulatory approvals since 2010, both in the U.S. and around the world. Furthermore, the growth of our cash pay markets around the world remained strong.

Regarding operating performance in Q1, we generated non-GAAP diluted earnings per share of $1.18, an increase of 20.4% year-over-year, considerably above the top end of the outlook provided on the last earnings call of $1.09 to $1.12 and exceeding our historical aspiration of midteens earnings per share growth. For a reconciliation of these non-GAAP numbers to U.S. GAAP, kindly consult our press release.

Year-over-year, we enjoyed a good increase in gross margins, which Jeff Edwards will comment in greater detail. The strong increase in earnings was achieved as we continued to invest into the growth of our markets in medical education and in R&D.

Regarding direct-to-consumer advertising, we increased year-over-year company-wide spend by over 50%, with major increases for BOTOX for Chronic Migraine, and for ACZONE and continuing strong support for RESTASIS. All of these campaigns have driven considerable growth in all of these franchises.

In Q2, we have already initiated a new campaign for VOLUMA in the U.S. in print, TV and digital to drive not only VOLUMA, but the entire volumizing category.

Regarding regulatory approvals, we continue to make strong progress. In Japan, we received 2 notable approvals for JUVÉDERM for the first-generation non-lidocaine version, and for LATISSE labeled as GLASH VISTA.

Regarding BOTOX and building on the first European approval in the U.K. for lower limb spasticity associated with stroke, we now received a positive opinion in Ireland, which is the reference member state initiates the process of securing national licenses in 14 European countries.

Regarding VISTABEL, the name for the BOTOX aesthetic indications in most of Europe, we now have approvals for crow's feet lines in all of the European and European economic area countries, with the sole exceptions of Poland, Slovakia and Greece. Of course, we expect these shortly.

Regarding LEVADEX, we believe that we have fulfilled all the requirements identified in the FDA's complete response letter and are now awaiting approval in Q2.

Commencing on the performance of the businesses, I'll commence with ophthalmic pharmaceuticals, which once again posted double-digit performance, with first quarter year-over-year growth at 10.9% in local currencies and 9.2% in dollars. Encouragingly, both North American and x North America sales grew double digits in local currencies.

In the U.S., IMS reported Q1 in-market Allergan growth of 11.5%, driven by very strong growth of RESTASIS, OZURDEX, OPTIVE and also sales of both branded and generic PRED FORTE and FML.

In August 2013, Sandoz took a major price increase on prednisolone acetate due to supply constraints. In December 2013, we followed and increased our prices of generic to parity with Sandoz, as well as increasing price for branded PRED FORTE by 80%.

In addition, we took similar price increases with generic fluorometholone, as well as branded FML. Sales of the 2 products increased slightly over $20 million versus Q1 of 2013.

As we ramp up production and improve distribution of the 2 products, where, historically, we've been a small player, we believe that we could benefit from this kind of sales increase throughout the remainder of 2014.

Regarding U.S. RESTASIS, IMS reports in-market units in Q1 up by 9.5%, which is further boosted by 7% of price increases year-over-year. RESTASIS continues to grow very strongly in both Canada and Turkey, as we educate ophthalmologists on the use of the product.

LUMIGAN and GANFORT sales x U.S. increased 10% year-over-year, offset by a decline in U.S. LUMIGAN sales. We are, however, encouraged that year-to-date, [indiscernible] March in the U.S. increased by 4.6% as reported by IMS, offset by increased rebates, data [ph] managed care to secure favorable formulary [ph] positions.

In Europe, Africa and Middle East, ophthalmic pharmaceuticals are growing double digits, with sales driven by LUMIGAN and GANFORT, most recently further boosted by the launch of unit dose presentations, as well as OZURDEX, OPTIVE and RESTASIS. In the top 5 European markets, OZURDEX enjoys a 12% share of treated patients in the retina market, which augurs well for the expected approval for diabetic macular edema in Europe at the end of 2014.

OPTIVE Fusion, Allergan's first entry into the hyaluronic acid segment, which is about 20% of the European tears market, was launched in the quarter in the U.K., Germany, Austria, Poland and Scandinavia with strong initial sales. Regarding regulatory approvals, OPTIVE Advanced was approved in Australia and Brazil.

OZURDEX was launched in Brazil after receiving reimbursement. In addition, LASTACAFT was launched in Mexico and LUMIGAN preservative-free in unit dose form in Australia.

Regarding the global ophthalmic market per the Q4 IMS report, the last period for which data is available, IMS showed Allergan as the fastest-growing global full-line branded pharmaceutical company in both Q4 and for the full year of 2013. In Q4, in a market growing at the robust rate of 13%, Allergan also grew 13%; whilst Novartis, including Alcon, grew 4%; and Valeant, including Bausch & Lomb, 3%.

Whilst Allergan does not book ophthalmic sales in Japan, with royalty receipts captured in the other revenue line below sales, our partner Senju is rapidly growing ALPHAGAN sales and building a leadership position in the adjunctive glaucoma therapy segment.

For the Q4 IMS Global report, LUMIGAN and GANFORT became the worldwide leader in the glaucoma category, for the first time overtaking the sales of the Travatan and DuoTrav franchise.

Moving on to BOTOX. Q1 sales increased by 11.5% in local currencies and by 9.6% in dollars. Regarding the global market for neuromodulators, we estimate that the market in 2013 grew 12%, with Allergan also growing 12% and retaining share at 76%.

In 2013, the global aesthetic market grew 11% and the therapeutic uses, 13%, with Allergan gaining share in therapeutics, offset by small losses in aesthetics as competitors entered the North American market.

In the first quarter, sales growth of the margin was held back due to no sales being booked to Venezuela due to lack of foreign exchange being released by the Central Bank. We have orders for Q2 and expect to ship them.

We also booked virtually 0 sales of BOTOX Cosmetic in Colombia. In Colombia, the government mandated a price reduction for neuromodulators that initially applied also to aesthetic uses. After we were able to successfully appeal this, a new decree was issued on March 31. Hence, we could only start to invoice in Q2 the goods that we had shipped as consignments in the first quarter. So clearly, there will be a catch-up [ph] for sales in Colombia in Q2.

Regarding regulatory approvals, we're excited that the first new national approvals for lower limb spasticity in the U.K. and Ireland will enable us to expand the market, as well as strengthen our competitive position.

In addition, we received regulatory approval for BOTOX for Chronic Migraine in Colombia and public reimbursement in Australia, as well as for neurogenic bladder in South Africa and Turkey and idiopathic bladder in Italy. In South Africa, we received several new indications: cervical dystonia, post-stroke spasticity and neurogenic bladder.

Furthermore, VISTABEL was approved for crow's feet lines in Bulgaria, an additional country outside the European Union. The European approvals of the crow's feet lines indication gives us new opportunities for physician training.

In the U.S., the therapeutic business continues to grow strongly, both for Chronic Migraine and the 2 bladder indications, driven by good reimbursement coverage. Low levels of denials for prior authorizations, improved physician education regarding patient and practice management, as well as great traffic on our branded and unbranded websites for patients.

Regarding urology, we now have 100% coverage of Medicare managed care accounts and still have some commercial accounts left, where we expect to improve coverage during the remainder of 2014.

In the universe of 13,000 urologists and urogynecologists, within which about 8,000 treat incontinence, we have already established an injector base of about 4,500 physicians, though some training opportunities remain. We're also gratified with the growth in neuro rehabilitation, thanks to our spasticity indication.

In Europe, we are growing BOTOX Therapeutic in market over 10%, driven by good performance in the base movement disorders areas and in addition, also by the recent reimbursed launches of Chronic Migraine and bladder. In the quarter, BOTOX for bladder was launched in Spain and Italy as was Chronic Migraine in the private nonreimbursed market in Poland and Russia.

Turning to the aesthetic side of the business. We estimate, based on survey data, that the market in Q1 grew at about 10% in units. And our sales growth was further aided by the 3% price increase that we posted in January. Obviously, this refers to the U.S.

BOTOX Cosmetics here in the U.S. in Q1 remained high at over 78%. The reduction of 3 share points versus 2013 as Xeomin reentered the market with a 6.6% share, up 3 points. Dysport remains static at 15% share. Encouragingly, Xeomin share has remained stuck in the range of 6% to 7% since November 2013.

In Europe, we estimate that the market is -- in Q1 is growing around 10% and that BOTOX and VISTABEL is maintaining share in the face of strong price competition from Merz and Galderma.

In facial aesthetics, we enjoyed continuing very strong sales growth of 35.6% in local currencies and 33.1% in dollars, as we benefit from the launch of VOLUMA in the U.S. but also the introduction around the world of the other products in the Vycross collection, mainly VOLIFT and VOLBELLA.

In terms of regulatory approvals, VOLBELLA was approved in Russia, Georgia, Lebanon, Philippines, Vietnam and South Africa, with VOLIFT approved in Korea, Turkey and Costa Rica. VOLUMA and JUVÉDERM XC were, in addition, approved in Bangladesh. In the quarter, we commenced direct operations in Indonesia and commenced selling JUVÉDERM and BOTOX Cosmetic.

In the U.S. VOLUMA has attracted enormous interest, and we quickly conducted hands-on training for over 3,000 physicians. Based on market survey, we estimate that the U.S. dermal filler market in Q1 grew over 10% in syringes and even higher in value due to the introduction of our premium-priced product.

In terms of year-over-year market share changes, Allergan now enjoys over 44% market share in Q1, a year-over-year increase of almost 11 share points, with Valeant at 34%, down 7 share points; and Merz at 20%, down 4 share points.

VOLUMA in March enjoyed over 13% share of the total market, with low cannibalization of base JUVÉDERM, with most of the source of business appearing to be from RADIESSE, Sculptra and to a lesser extent, Perlane and Restylane.

In the European Union, the market was growing mid to high teens in Q4, the last period for which data is available. And syndicated data shows Allergan growing roughly twice this rate, given the strong uptick of VOLUMA, VOLBELLA and VOLIFT and their premium pricing relative to earlier generations of products.

On a worldwide basis, we estimate that the dermal filler market in Q4 grew 21% year-over-year, in the main, driven by Allergan's innovation and market building activities.

Breast Aesthetics sales increased by 12.3% in local currencies, 11.0% in dollars, with strong performance being reported in the U.S., Latin America, with our first direct sales being shipped to Mexico and Asia, with initial sales of Natrelle in Japan.

In the U.S., our strategy to emphasize higher-priced gel products, and especially our differentiated Natrelle 410 shaped implant, has paid dividends. We've made the first sales of our new silk-derived biological scaffold, SERI, and have the product being trialed and taken up in hundreds of hospitals. An increased deployment since the end of 2013 in the hospital channel is also benefiting our sales of implants and tissue expanders for reconstruction.

In Europe, with the aftermath of the PIP scandal, the overall market declined in Q4 year-over-year 1.5% in units, with Allergan posting mid-single digit unit growth. Allergan Q1 European sales growth followed the trend from Q4.

Our skin care and other franchise grew in Q1 21.0% in local currencies and 20.7% in dollars. Commenting the important constituent parts, we enjoyed very strong growth in U.S. medical dermatology, with IMS showing Q1 acquisition dollar growth of ACZONE at 50% and TAZORAC at 12%. Our print and TV investments in ACZONE contributed to driving this growth, and we expect ACZONE to be shortly the #1 branded acne product.

Our topical physician dispense line, led by SkinMedica, is growing in excess of 20%, even including declining Allergan legacy products, and all this as we offer the benefits of Allergan's full line to our physician customers. Category market growth in 2013 was 5%. So clearly, we're gaining share, in particular from the market leader, Obagi.

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

Jeffrey L. Edwards

Thank you, David, and good morning to all of you on the call. The first quarter of 2014 represented a very nice start to the year for Allergan as we experienced good performance across each of our product lines and geographic regions, as David commented.

Allergan was able to overachieve sales and EPS expectations due to our broad base of business and leading market share positions within each of our specialty areas. The company's favorable performance trends are a clear reflection of the productivity of our historic investment choices.

As an isolated example, in the first quarter of the year, almost 40% of the increased PSM spend over prior year related to DTC, which we believe contributed to our positive performance and yielded a stronger, short-term payback.

Non-GAAP diluted earnings per share from continuing operations for the first quarter of 2014 was very strong at $1.18, coming in well above the top end of our range of expectations and marking a 20% increase over 2013 results for the same quarter.

A reconciliation of all of the adjustments to GAAP earnings is set out in our earnings release. Including the effects of non-GAAP adjustments, amortization of acquired intangibles and discontinued operations, Allergan's Q1 2014 gross margin of 87.4% increased 70 basis points when compared to Q1 2013, driven by improved standard costs, favorable pricing and favorable region and product line mix.

Non-GAAP selling, general and administrative expenses to product mix sales ratios from continuing operations for the first quarter were 40.4%, totaling $654 million. The comparable ratio and expense value for the same period in 2013 were 41% and $587 million, respectively. Although there was an increase in spend as measured in dollars, consistent with our strategy, the related absolute year-over-year percentage increase of this spend trails the rate of growth of net sales over the same period.

We continue to implement targeted investments to further stimulate the positive growth trends observed within our product lines and geographic regions. As is typically the case, Allergan's non-GAAP SG&A expense to product mix sales ratio will be progressively leveraged in the remaining 3 quarters of this year.

Non-GAAP research and development expenses were 16.8% to product net sales for the quarter, totaling $272 million, an increase in spend of approximately $23 million over the $249 million or 17.4% of product net sales spent in the first quarter of 2013.

With respect to our balance sheet, consolidated Allergan days sales outstanding was 56 days, while consolidated Allergan inventory days on hand was 132 days. It is worth noting that the main driver for the modest increase in DSO for the year end 2013 is largely attributable to the challenges of our Venezuela distribution partner, Merck KGaA, has had them receiving Central Bank approval for dollar payments.

With respect to end of the quarter DOH levels, they are slightly higher than year end 2013 due primarily to the preparation of going direct for the breast aesthetics business in Mexico and the continuing challenges we face in Venezuela.

In the first quarter, operating cash flow after CapEx was approximately $119 million. This compares to approximately $96 million for the same period in 2013. As has been the case historically, operating cash flow after CapEx will accelerate over the remainder of the year.

At the end of the first quarter, Allergan's cash and equivalents and short-term investments net of debt positions totaled approximately $3.6 billion and $1.5 billion, respectively. With respect to stock repurchase, the company's 10b5-1 plan that was in place in February 2014, was terminated in accordance with the terms of the plan documented April 2014, as a result of the Valeant's unsolicited proposal.

As previously mentioned by David Pyott, progressively strengthening business momentum combined with continued vigilant oversight of expenses will result in stronger than anticipated growth to earnings per share and net sales. We presently expect these positive trends to endure over the remainder of the year.

For the second quarter of 2014, Allergan estimates product net sales in the range of $1,725,000,000 to $1,800,000,000 and nondiluted GAAP -- and non-GAAP diluted earnings per share from continuing operations to be in the range of $1.41 to $1.44.

Regarding full year expectation for 2014, Allergan estimates product net sales in the range of $6,775,000,000 to $7 billion and our full year non-GAAP diluted earnings per share from continuing operations to be in the range of $5.64 to $5.73.

As a remainder -- as a reminder, this EPS expectation assumes the U.S. R&D tax credit will be renewed in the fourth quarter of 2014 with full year retroactive benefit impacting Q4 results. This will generate a higher effective tax rate in the first 3 quarters of 2014 and thus lowers EPS results in those quarters while benefiting both Q4 effective tax rate and reported Q4 EPS.

Please note that the product net sales expectations excludes any future anticipated revenue from transition services agreements related to the sale of the obesity intervention business, the product net sales associated with the transition service agreement, primarily related to distribution services outside of the United States and contract manufacturing services. These transition services agreements are expected to have minimal impact to the bottom line for both 2014 and 2015.

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

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Ken Cacciatore from Cowen and Company.

Ken Cacciatore - Cowen and Company, LLC, Research Division

Just had a question. David, I'm assuming, since you've been running your business the same way for quite a long time, that you clearly like your business model. But if you keep running it the way you've been running it, Valeant or maybe someone else may take it from you and you might be vulnerable. So I'm just trying to understand as we go forward, what is the solution here? Do you need to be more aggressive or do you just stay the course?

David E. I. Pyott

Well, obviously, we have a very long track record of success, not only on the R&D front, which, of course, has produced a stream of products over a very long period, which, in turn, has not only given us product approvals, but then the ability to create and shape markets. And we have many examples of that with, say, RESTASIS now the largest single eyedrop product in the U.S. If we take the therapeutic dry eye market, fillers, neuromodulators, creating one indication after the other. So clearly, we've performed. Obviously, we're relooking at our plans, given the situation we're in. And when we're ready, we will report back on how we wish to move forward in terms of our organic outlook for the business.

Operator

The next question comes from David Maris with BMO Capital Markets.

David W. Maris - BMO Capital Markets U.S.

I have a few questions. First, I'd like to make an imaginary tee time for your imaginary golf course, but I'll leave that one alone. The first, you may have -- I may have missed it, but you're share in injectables this past year and in skin care, you're growing faster than the market. Could you talk a little bit about how much of this is due to the disorganization on the side of competitors undergoing consolidation, what you're hearing anecdotally? And then I have a follow-up.

David E. I. Pyott

Okay. So first of all, in terms of market, I think when you refer to injectables, you probably mean both fillers as well as, let's call it, neuromodulators for aesthetic use. So clearly, the market is accelerating, as I said in my remarks. We estimate the worldwide filler market in Q4 grew 21%. Of course, then look at the number we posted for Q1. So clearly, we're not only expanding the market, but we're gaining share rapidly in every major region and market of the world.

In terms of skin care, I think that comes back around to 2 areas. One is medical dermatology where, clearly, ACZONE is really leading the pack, I think, because it's a combined acne detail to the same practitioner. That's why TAZORAC, after years of relatively flat sales, has now also been accelerating in growth. And then your comment about Allergan versus competitors, this is a theme that I've addressed, I think, over the last 12 to 18 months, so nothing new. But let me reiterate it. And let me, first of all, go over to Novartis and Alcon. And please, there's no overly critical remarks here. It's a statement of fact. When you look at the growth rate of Alcon and pharmaceuticals, it is less than half the rate of Allergan. And that's due to just the state of where we are in terms of our ability to grow, and that's because when you have a flow of new products, typically, you get, in classical pharmaceuticals, a growth spurt for 4, 5, 6 years. And then there's exceptions. Just look at RESTASIS, which is still growing double digit, 10-plus years into the rollout, which means that we have consistently applied market-building exercises. But I think on a very broad scale, going closer to home, we can see virtually in every single business we're in, our competitors have gone through some form of reorganization or reownership. And that has actually led to some opportunities for Allergan to pick up share. And we certainly hear from customers that they really appreciate our strong focus on customer service, as well as on innovation.

David W. Maris - BMO Capital Markets U.S.

As my follow-up, and this is for either Jeff or David, the company has seen great operating margin expansion over the last few years and pretty much leverage on every operating line. Can you talk a little bit about the sustainability of -- we all appreciate the guidance for this year. But is there anything that should make us think that 1 year or 2 or 3 from now that, that leverage shouldn't continue if you continue with your discipline on the operating approach.

David E. I. Pyott

Well, I think Rome wasn't built in a day. And if you invest continuously and in the same themes, usually in my experience, whether it's consumer goods, whether it's OTC, whether it's classical pharmaceuticals, we'll -- there will be a benefit from that. And clearly in the past, we've spoken about our ability to leverage our SG&A ratios over time. And then obviously, given the circumstances, that's something we're thinking about very carefully. And once we finish that work, we, of course, will share it with all of the investment community.

James M. Hindman

[Operator Instructions]

Operator

And the next question comes from Marc Goodman with UBS.

Marc Harold Goodman - UBS Investment Bank, Research Division

I guess, my question is the breast aesthetics business was extremely strong. Can you give us some underlying fundamentals of what was going on there? And then just one other question is just on the pipeline. When do you think we're going to have the next R&D day?

David E. I. Pyott

Okay. I'll try and deal with that one. It was sort of 1 question in 2 parts. So we got the abacus out here. So in terms of R&D day, that's something that, we've historically said, takes place every couple of years. So that's definitely premature to talk about that, although I'm sure, later on, someone's going to ask Scott about all the exciting things coming up over this year alone. In terms of breast aesthetics, at the margin, we have the first sales of SERI scaffold in the U.S. But also, we've had really great success in the U.S. with a focus on higher value-added products. And so units and mix are a completely different story, where you have relatively stagnant units but really great value, i.e. dollar pickup, because of putting our emphasis on the hospital channel, on reconstruction, on tissue expanders and on shaped gel implants. Then overseas, of course, we have some, what I call, really high activity phase. As a reminder, I've stated in my remarks, just literally started with the breast implant line, Natrelle, in Japan. Mexico, where we'd had to take a pause button a while because that's normal, where you're in a discussion with a distributor, a distributor who hadn't been doing a poor job, let me state that, but there's a change. And of course, then there's a lack of emphasis, a lack of focus and you go through a period of doldrums before you come back out again. So -- and then new places like Russia with tremendous growth, both the market, but also us entering the market under our own auspices.

Operator

Next question is from Larry Biegelsen with Wells Fargo.

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

David, I wanted to ask about the EPS guidance and your long-term EPS goal. Is it still midteens? And in the past, you said that -- and this is way in the past, that year-over-year stock will get credit for EPS growth above 20%. Do you still believe that to be the case?

David E. I. Pyott

The last statement, I didn't understand, Larry. Could you repeat the last sentence?

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division

Sorry, but I think in the past that you felt that your stock wouldn't get credit for EPS growth above 20%. Do you still believe that to be the case?

David E. I. Pyott

Well, I think that when it comes to stock predictions, all of you on your side of the phone call are the experts in that. Our job is just to produce the results. In terms of outlook, clearly, we've moved up our range for the year. At this time, we are not making a change to our long-term aspirations, let me repeat those, double-digit sales growth in midteens earnings per share growth. But as you can imagine, given our circumstances, we are working through our strategic plan, taking a really good hard look at it. And once we've come to a conclusion, obviously, that has to be vetted by our board, and then it will be shared at the appropriate time with the investment community.

Operator

Next is from Seamus Fernandez with Leerink.

Seamus Fernandez - Leerink Swann LLC, Research Division

So maybe just to follow-up a little bit on Ken's question, I just wanted to get a better sense of -- last year, the stock was relatively weak, but you guys had pretty good visibility on your business trajectory. And I just wanted to get a better sense of what were the limitations, whether or not you would have considered options to lever up, buy back stock. Inversions you've talked about as needing to be obviously strategic. So can you just give us a walk-through of what those -- what may have limited you, if there was anything, from doing that, or if it was just more a philosophical view? And if you could just provide us with your thoughts there.

David E. I. Pyott

Yes, okay. Well, obviously, just addressing the issues that certainly hampered us last year, I think the biggest single one was the uncertainty post August -- or really, post July of what would the potential pathway for generics of cyclosporin be. And that remains still a very open question. Although, a quick reminder, we did issue a very long statement to FDA on that, over 60 pages in length. I think we hear from the scientific and academic community that their view is that the science really is not well established for an assay-based approach. Of course, all of that was quickly eclipsed by the work that we've been doing in secret, in terms of pursuing new intellectual property. And now we have 5 patents issued in the Orange Book. So that -- I don't want to ever say took care something for good, but at least for now, puts us in a strong position. We'll remain vigilant, of course, to any other potential options showing up. And we also have the great news from the court in Texas on LUMIGAN. So that addressed, if you like, operating issues. of course, now, as I alluded to, Scott Whitcup and his team not only have several products to be delivered this year in terms of final product approval, but as in all the earlier earnings calls, we talked about other really important pipeline news coming up in the remainder of 2014. Going back to your second question, which was about potential for stock buybacks where you're addressing the question, "Why didn't we buy back stock, maybe in, whatever, the '90s?" Well, of course, one thing, you never know, because we act with great discretion, is what kind of strategic alternatives we were or might have been exploring at that time. And of course, that's a fine balancing act between retaining firepower to do acquisitions; and then if, for whatever reason, you end up with too much cash because that hasn't occurred, then, obviously, there is the other option of engaging in some form of return of cash to shareholders. So that's the way we think about it. And I think it's very strategic versus, "I'm not a big philosopher, I'm a doer."

Operator

Our next question comes from Ronny Gal with Bernstein.

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

David, I wonder if you can address a few -- couple of the criticisms that are related to the company. One of them is that the majority of the R&D dollars are spent on early-phase research that have not yielded returns, and that way too much money is being spent away from the sales force in SG&A and that amount can be easily cut without damaging the franchises.

David E. I. Pyott

Well, first of all, on R&D, we've stated historically that we spent maybe even less than 10% of the total on early-stage discovery. And of course, I'd like to point out that the lion's share of that relates to neuromodulators. So I think it would be unwise for a company thinking about the long term, not to think about when you can command the world's market of neurotoxins to ask yourself -- and not only ask yourself, but do something about next generation in improvements. So I think -- when you think back on the productivity of R&D, from every survey we've seen -- and this isn't us doing our own surveys. This is others doing surveys. We have always been at the very top quartile of R&D productivity in terms of success rates, as well as dollars spent on products produced. I think also -- moving on to the second point about sales force, this is a quick reminder. We actually have, in terms of salespeople, over 3,500 people on the road today. But when you reflect upon my remarks this morning, just classical share of voice detailing -- I think that's an era of the past. And of course, I don't want to talk about whatever excesses may have existed in the pharmaceutical industry 10 or 15 years ago, but those times are over. If you think about our model, it's so much more sophisticated in terms of reimbursement services, hands-on physician training, direct-to-consumer. In its essence, Allergan is an amalgam of pharmaceuticals, medical devices, as well as consumer goods. And just take BOTOX as an example, the world's most complicated biopharmaceutical in terms of molecular structure and complexity. Yet in terms of how it's used is really more akin to a medical device because we have to teach the physician, once they've learned about the pharmacology, how do they actually inject it to get the maximum benefit for their patient. And then finally, of course, if we stick to BOTOX, then we've not only conducted patient education campaigns for the aesthetic -- I'll then use the word customer because they're not really patients. But then also, for the patient, if you think about our work to build and establish the market for Chronic Migraine. So I would argue that we think very carefully about where we spend our money. And we believe we've had great returns. And I would then ask you just to think about the growth that we have. There are not so many companies that are growing currently. You just look at our numbers, 14% in the quarter based on a broad suite of products. Of course, there are other companies, I acknowledge their tremendous achievements, often driven by 1 or 2 products. Ours is driven by a very, very broad range, which gives you long-term stability and long-term prospects for sustainable growth.

Operator

The next question comes from Liav Abraham with Citi.

Liav Abraham - Citigroup Inc, Research Division

Just following up on the topic of SG&A spend and particularly DTC. You use DTC extensively and to great effect. And Jeff, in your remarks you did mention a positive return on this. Can you quantify this a little bit more for us? What is the historic return that you've seen from your investment in the use of DTC, and how much has this actually contributed to the growth of BOTOX, RESTASIS and ACZONE?

David E. I. Pyott

Yes. Well, of course, there's always a fair bit of art, as well as science. And of course, when you, for instance, invest heavily in BOTOX for Chronic Migraine, you have to be able to dissect your various elements of your marketing mix in terms of what was the value of DTC versus the value of training versus the value of making access possible through reimbursement. But from everything we can see on every single product, I would purport, on a spend last year, which was just under $200 million -- net of all the rebates because obviously, at list you'd have a different price. But we, too, given our scale, get rebates just like our customers, and managed care get rebates from us. So for that, just under $200 million, we would argue that we have less than a 1-year payback on our investments.

Operator

Our next question comes from David Risinger with Morgan Stanley.

David Risinger - Morgan Stanley, Research Division

So it appears, David, that you plan to share or you've suggested that you plan to share a new organic growth outlook near term for investors. But when do you expect to comment on strategic considerations?

David E. I. Pyott

Well, that's kind of fairly difficult to answer today because, clearly, we are considering and evaluating the proposal from Valeant. Once we've completed that work, then I think we're in a better position to talk about, a, what decision have we arrived at, and secondly then, flowing from that decision, what kind of options are on the table. So I apologize, but I just can't give you any concrete answer today.

Operator

And our next question comes from Vamil Divan with Crédit Suisse.

Vamil Divan - Crédit Suisse AG, Research Division

Just more on the guidance here, especially on the sales side. You've obviously bumped up your guidance for the full year. The individual line item guidance for most of your key products are really -- all of them really seem to be really unchanged. So can you just explain that, I guess, which products exactly, do you think, are doing much better than you thought they were 3 months ago? Or is it that many of them are doing a little bit better and that's why the overall guidance is going up with the individual key products, like BOTOX, RESTASIS and all those? Do you think it can just still be in the same line of what you expected last -- a quarter ago?

David E. I. Pyott

Yes. Well, if you look at the way we've historically dealt with this, this early in the year, normally, we don't change the top end of our guidance at all. Because as much as we're obviously really excited and happy about the performance of, say, dermal fillers or RESTASIS, if you change one line item, I could also say there may be other things that the margins are just fractionally lower than we may have thought 3 months ago. But I think the important thing is to see typically what we've done. We brought up the lower end of the guidance. You can all go and do the math for yourself, $125 million. And it's very rare that we do this early in the year, that we raise the top end of the sales guidance and we've done that by $50 million. And of course, we've made a clear signal about our ability to leverage. And some of it is driven by gross margin, which Jeff went through, which, frankly, is better than we had expected in our operating plan. And that's driven both by good manufacturing, but also by richer product mix, skewing us higher up in gross margin.

Operator

Your next question comes from Annabel Samimy with Stifel, Nicolaus.

Annabel Samimy - Stifel, Nicolaus & Company, Incorporated, Research Division

I just wanted to ask you about RESTASIS. You did a great job protecting that franchise from the patents that you had issue. But there are some developments on the branded competitive side. Shire, I guess, is moving forward with the filing of their dry eye product and you've got 11 biotherapeutics that has their own Phase III programs. So can you give us any sense on the timing of some developments on RESTASIS X, when we might be seeing some data there and any other R&D that you might be having in this space, any developments on that side?

David E. I. Pyott

All right. Let me take the marketing question first, and then I'll pass the science question back to the expert sitting opposite me. On the marketing side, first of all, I never take the view -- as much as I like to be the one and only, which I suppose, in clearer terms, means the monopolist. It's kind of nice as long as that lasts but I think it's also unhealthy. Any healthy market, over the long term, should have multiple product offerings. And my experience over 30 years has been new products offer new solutions to different types of patients, i.e. expand the markets. So I always think market expansion, patient solution. And at some point, one of these other programs will make its way through Phase III to eventual product approval. And you can certainly rest assured that we know everything about the science from many of these products; some in the public domain, some that we have looked at historically, where we know a lot more probably than anybody on this call because we make it our job to do such. So now let me go over to Scott because he will talk about not only RESTASIS X, but also many other ideas we have about dry eye in the next several years.

Scott M. Whitcup

So I'd agree with David. There are clearly a number of other products in development, although I'd remind people that there have been many programs before that have gone through trials, and therapeutic dry eye is a tough area and very difficult to get the right trial design and then the results that support approval. You mentioned RESTASIS X. So we are actually in the process of training physicians for the trial and getting ready to kick that off. So you'll get more detail on that probably second half of the year as we roll that trial out. But what's exciting is that we have a couple of new chemical entities, 2 NCEs going into the clinic for dry eye. So one will hit the clinic this year, and then a second one is planned to go into the clinic next year. So we continue to invest a fair bit in an area that we've developed. And so in addition to RESTASIS X, you'll see a couple of NCEs for -- specifically for dry eye.

Operator

Our next question comes from David Buck with Buckingham Research Group.

David G. Buck - The Buckingham Research Group Incorporated

My question, I guess, for David is just in terms of R&D and SG&A spend. I'm curious, number one, whether before the past 3 weeks you've had any pushback from investors about your level of spending for both of those items? And secondly, you've seen in the -- particularly the specialty pharmaceutical group, companies that have decided to curtail or at least modify some of their priorities in spending and -- namely Shire and Forest Labs, and were able to deliver some savings. Has Allergan looked at that in the last 12 months in terms of either financial partners on R&D or more prioritization of spending? I know you've gone the opposite direction short term, but how do you sort of justify the spending levels? And again, had that been a controversy with investors before the last couple of 3 weeks?

David E. I. Pyott

Well, let me start with R&D. I think there's so many examples of how we have had such good turn rates in R&D relative to the rest of the industry. And that, frankly, is what's been driving the growth over the last -- particularly the last 12 months. We're in one of those cyclical upswings but not due to one product. That will be typical in normal biopharmaceutical companies, but on a very, very broad basis. Coming back to SG&A, this is a discussion that we've had not only with investors over a long time because you'll all remember asking us when will you get down into the mid 30s with SG&A, and we have probably been slow to go there because we continue to invest. So let me go to the internal discussion, which is not only at the top management level, but also with our Board of Directors. And we really started that discussion 9 -- well, about 9 months ago, when we reviewed our last strategic plan, where we asked ourselves, "Our markets are so healthy. They're all growing very well and we're doing well within them." Going back to that comment about competition in general weakening around us, which is good for Allergan and Allergan stockholders, but could we do more? And we gave ourselves that challenge. And frankly, I gave that challenge to our new President of the company, Doug Ingram, to say, "You're the new guy. You're relatively unencumbered by the past in this role. And think what more we could do." And we have been working on that and obviously, that's being fed into our deliberations in terms of looking at an updated strategic plan. And as I stated, at some point, that will be appropriate an opportunity to be shared what the output of that plan is with the overall investment community and especially Allergan stockholders.

Operator

The next question is from David Steinberg with Jefferies.

David Michael Steinberg - Jefferies LLC, Research Division

Question on breast aesthetics. This has largely been a 2-player competition for several years. But in the last, say, 12 to 18 months, there's been a new entrant, Sientra, and it appears that they've gained fairly solid share, some surveys showing 10% or even more. Yet at the same time, you posted very strong growth, particularly in the U.S. As they build their business, are you concerned on the margin? Or do you just feel like you're playing in a completely different market segment at this point?

David E. I. Pyott

Right. First of all, I think we've been able to detach ourselves from, let's call it, the share conditions in units because of our focus on value and premium-priced products. And with respect to our competitors, both of them are doing a good job, no issue about that. And I think both Mentor and Sientra have concentrated more of their efforts on the augmentation market in private practice, and that is where most of the price competition is occurring. So we're not immune to that. We have lost some limited share in the augmentation market, but of course, that's normal when a third player comes in. It would be difficult to imagine that you would -- that the first 2 don't lose something. And despite that, as you very ably said, we've been able to have very good sales growth.

Operator

And our next question comes from Shibani Malhotra with Sterne Agee.

Shibani Malhotra - Sterne Agee & Leach Inc., Research Division

So a question for David. There's been a lot of consolidation in the industry. And without getting into the specifics of the Valeant bid for Allergan, can you just talk about the opportunities and risks -- or rather the benefits and risks of actually developing scale in -- by emerging with a company like Valeant in key areas like ophthalmology and aesthetics. I mean, how will you -- what are your considerations when you're looking to evaluate the proposal, I guess?

David E. I. Pyott

Yes. I really can't talk about how they should evaluate the proposal. That's their job. All I can state is who we are. And clearly, when you look at our share positions, we're #2 in ophthalmology, growing considerably faster now than the #1, which is Novartis Alcon. Clearly, we're the leader in aesthetics. And we're creating brand-new markets in neurology and urology and, of course, adding margin in new products such as LEVADEX around them. So we have scale. If somebody else thinks it benefits from even greater scale, that's their job to think about it, not mine.

Operator

And then we have another question from Jami Rubin with Goldman Sachs.

David E. I. Pyott

Next.

Operator

Next question is David Amsellem from Piper Jaffray.

David Amsellem - Piper Jaffray Companies, Research Division

So in the neuromodulator space, one of your potential competitors recently had data on a potential long-acting injectable neuromodulator and they're also developing a topical. And I'm wondering, what are your thoughts on these potential next-generation neuromodulator products and the potential threat to your franchise?

Scott M. Whitcup

This is Scott. We spend -- as David said, the one area that do spend R&D dollars, early-stage and focus on is in the neuromodulators. So we look at not outside, but we have internal programs. I've stated before that we do have a BOTOX X program. And we will probably give some additional details on that program second half of the year. And our goal ourselves is to have a novel molecule with a potential for either higher dose and/or longer duration. So we look internally and continue to look on the outside as well.

Operator

Andrew Finkelstein with Susquehanna.

Andrew Finkelstein - Susquehanna Financial Group, LLLP, Research Division

Maybe you could just finish up with addressing -- you talked about all the product approvals around the world, but maybe sum it up in terms of where you stand in terms of rolling out the portfolio, particularly across the emerging markets. And what more can be done to accelerate that platform to contribute to your growth?

David E. I. Pyott

Well, obviously, when we look at the emerging markets, you look at the biggest ones first. And we know we have a very strong position in India. We're by far the largest ophthalmic pharmaceutical company there. And of course, that gives us a platform for layering in all the other businesses on top of that. China, the other very big market, rapidly growing ophthalmic business, rapidly growing BOTOX business. We're working to get our fillers in there. And then I mentioned, in terms of a huge country in terms of population, Indonesia. We've just set up direct operations there. And then Russia, we're doing extremely well, market's buoyant. And on the aesthetic side, we have a strong position in ophthalmology we kind of started from greenfield. But that's fine because people know the value of our products in terms of Russian ophthalmologists traveling to North America or Western Europe. They're well aware of all the data on our products, as well as the image and performance of the company.

James M. Hindman

We'd 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 review market share data.

Joann Bradley

Thank you, 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 December 2013.

The market for ophthalmics is approximately $20.9 billion, growing at a rate of 12%, and Allergan's market share is 15%. The market for glaucoma approximates $5.3 billion, growing at a rate of 4%, and Allergan's market share approximates 27%.

The market for ocular allergy approximates $1.5 billion, growing at a rate of 5%, and Allergan's market share approximates 4%. The plain ocular anti-infective market is roughly $1.4 billion. That market is flat, and Allergan's share is 6%.

The market for ophthalmic nonsteroidal anti-inflammatories is about $540 million, growing at a rate of 6%, and Allergan's market share is 6%. The artificial tears market, inclusive of ointments, is approximately $1.8 billion, growing at a rate of 7%, and Allergan's share is 20%.

The U.S. topical market for acne is roughly $2.3 billion, the annual growth rate is 16%, and Allergan's market share is roughly 14%.

The top 10 markets for neuromodulators are roughly $2.1 billion, growing at a rate of around 13%, and BOTOX has approximately an 84% market share. The worldwide market for neuromodulators is roughly $2.8 billion, growing at a rate of around 12%, and BOTOX has approximately a 76% market share.

The worldwide market for dermal facial fillers is roughly $1.2 billion, growing at a rate of around 15%, and Allergan has approximately a 39% market share. The worldwide breast aesthetics market for aesthetics and reconstructive is roughly $930 million, growing at a rate of around 1%, and Allergan has approximately a 40% market share.

That concludes our call for today. Thank you very much.

Operator

Thank you. This does conclude the conference. You may disconnect at this time. Have a great day.

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