Allergan Q3 2010 Earnings Call Transcript

Allergan (AGN)

Q3 2010 Earnings Call

November 01, 2010 11:00 am ET

Executives

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

James Hindman - Senior Vice President, Treasury, Risk and Investor Relations

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

David Pyott - Chairman, Chief Executive Officer and Chief Administrative Officer

Joann Bradley - IR

Analysts

Ken Cacciatore - Cowen and Company, LLC

David Risinger

Corey Davis - Jefferies & Company, Inc.

David Buck - Buckingham Research

Ronny Gal - Bernstein Research

Gregory Gilbert - BofA Merrill Lynch

Randall Stanicky - Goldman Sachs Group Inc.

Marc Goodman - UBS Investment Bank

Presentation

Operator

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Previous Statements by AGN
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Hello, and welcome to the Allergan Third Quarter 2010 Earnings Call. [Operator Instructions] I would like to introduce today's conference host, Mr. Jim Hindman, Senior Vice President, Treasury Risk and Investor Relations. Sir, you may begin.

James Hindman

Thank you, Terry. 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, our 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 we made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our third quarter 2010 earnings release, which was furnished to the SEC today on Form 8-K, as well as our filings with the SEC referenced in that disclaimer.

We will follow up the question-and-answer session of this call with a short listen-only segment, where we will provide additional miscellaneous information that relates to our business. Under Regulation FD, in order to be able to discuss this information freely during the quarter, we must be sure that it is in the public domain. This conference call and accompanying webcast are being simultaneously broadcast over the Internet, with replays available for one week. You can access this information on our website at www.allergan.com. At this point, I'd like to turn the call over to David Pyott.

David Pyott

Great. Thank you, Jim. Good morning, ladies and gentlemen. With a series of important R&D approvals in 2010 both by the FDA and regulatory agencies around the world, a gradual recovery of most major economies favorably impacting our cash-pay Aesthetics businesses and the worst of the impact of generics on our U.S. Ophthalmology business behind us, we're well-positioned for driving strong growth for several years ahead. This puts us in a unique position in our industry to address the impact of incremental full year costs of U.S. healthcare reform and European price cuts and/or increased rebates, which we commented earlier in the year and now estimate at approximately an incremental $100 million for 2011. We're working diligently to absorb these costs. However, this pressure should be carefully considered when considering the earnings power of our business.

Now reviewing the results of the third quarter. Sales increased versus the third quarter of 2009 by 6.3% in local currencies, by 5.7% in U.S. dollars. Our more economically sensitive cash-pay businesses continued on the same track of growth as earlier in the year. Around the world we have not observed any negative growth trends across the quarter even in the U.K. or in the challenged major economies of the eurozone, and we continued to enjoy strong upswings in Latin America and Asia.

Operating performance was strong, with non-GAAP earnings per share of $0.78, marking an 11.4% increase versus the third quarter of last year and exceeding our expectations provided in early August. Since then, we announced our settlement with the Department of Justice and also an impairment charge regarding the SANCTURA assets, which led to a GAAP loss of $670.5 million for the quarter. We're glad that we reached a resolution with the government, have this matter behind us and have entered into a five-year corporate integrity agreement.

The strong non-GAAP earnings growth was driven by good sales growth across the diversified range of products, as well as by a continued gross margin expansion in both the Medical Device and Pharmaceutical lines, and consciously offset by a large increase for R&D of 6.3% year-over-year on a non-GAAP basis as we build the strength of our pipeline for the long term. In Q3, we spent less for direct-to-consumer advertising than in the prior year, but they're about the same level of investment year-to-date as in the prior year.

Since the last earnings call, we have secured some very important regulatory approvals, notably, BOTOX for the prophylaxis of chronic migraine by the U.S. FDA, following the earlier approvals in the U.K., as well as in Estonia and Slovakia. FDA approved LUMIGAN .01% as the first line glaucoma therapy. Health Canada approved RESTASIS, so now our efforts are next directed to making this unique product for therapeutic dry eye available also in Europe. FDA granted the second indication for OZURDEX namely for uveitis.

On October 27, the Japanese MHLW approved BOTOX for upper and lower limb spasticity. Furthermore, we earned licensed worldwide rights for an ophthalmic allergy product, Vlastikast [ph] [7:44] from VISTAKON, a division of Johnson & Johnson, which is approved by FDA at the end of July. This will enable us to firstly, to reenter the U.S. allergy market just before we expect the arrival of generics of ELESTAT and effectively maintain a competitive position in the significant allergy segment of the worldwide ophthalmics market. Vlastikast [ph] [8:08] as a highly competitive label, indicated QD [ph] for the prevention of itch with a rapid onset of action and program to last all through the day up to 16 hours.

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