Operator:
Good morning my name is -- and I will be your conference operator today. At this time, I would like to welcome everyone to the <b>Allergan</b> AGN First Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.
If you would like to ask a question during this time simply press star then the number one you telephone keypad. If you would like to redraw your question press the pound key. Thank you I will now turn this call to Lisa DeFrancesco, Vice President, Investor Relations to begin. Please go ahead.
Lisa DeFrancesco:Vice President of Investor Relations:
Thank you and good morning, everyone. I’d like to welcome you to the Allergan first quarter 2016 earnings conference call. Earlier this morning, we issued a press release reporting Allergan earnings from continuing operations for the first quarter ended March 31, 2016. The press release and our slide deck which we’re presenting this morning are available on our corporate website at www.allergan.com. We’re conducting a live webcast of this call, a replay of which will be available on our website after its conclusion. Please note that today’s call is copyrighted material not be rebroadcast without the Company’s express written consent.
Turning to slide 2, I’d also like to remind you that during the course of this call, management will make projections or other forward-looking remarks regarding future events or the future financial performance of the Company. It’s important to note that such statements and events are forward-looking statements and reflects our current perspectives of the business trends and information as of today’s date. Actual results may differ materially from current expectations and projections depending on a number of factors affecting the Allergan business. These factors are detailed in our periodic public filings with the Securities and Exchange Commission. Allergan disclaims any intent or obligation to update these forward-looking statements, except as expressly required by law.
Turning to slide 3 in our agenda this morning with us on today’s call are Brent Saunders, our CEO and President who will provide an overview of our first quarter business highlights; Bill Meury, our Chief Commercial Officer who will provide an overview of our commercial performance in the quarter; David Nicholson, our Chief R&D Officer who will provide highlights from our pipeline achievements in 2016 and upcoming milestones; Rob Stewart, our Chief Operating Officer who will provide a few highlights on our Global Generics business and Teresa Hilado, our Chief Financial Officer with then discuss the Allergan First Quarter continuing operations and results in more detail. Also on the call and available during the Q&A are Paul Bisaro, our Executive Chairman and Bob Bailey, our Chief Legal Officer.
With that, I will turn it over to Brent.
Brent L. Saunders:Chief Executive Officer and President
Thank you Lisa and good morning everyone. Beginning on slide 5, Allergan remains the most dynamic and exciting company in our industry and in my mind that makes us the best pharmaceutical company in the world. You can see that in our results this quarter, you can see it in the way our team has pivoted to focus on our future as a standalone leader in Growth Pharma, you can see it in the operational excellence on display in teams across our company, you can see it in the way we focus on building therapeutic area leadership in the categories where we choose to compete. You can see it in the way we are using open science to build an industry leading R&D pipeline to sustain our leadership in those therapeutic areas, and you can ask our customers about our highly responsive service-oriented approach to customer intimacy. Those were just a few reasons why we are especially excited about our future.
As we considered our options for deploying cash following Teva’s planned $40.5 billion acquisition of our Global Generics business in the second quarter, we realized that there was no better investment than owning our fast growing company. So our Board has authorized the company’s first share repurchase program at a value of up to $10 billion. We’ll start with $4 billion to $5 billion during the rest of 2016 buying as much as prudently possible in the open market. If favorable market conditions persist, we will have additional capacity to consider buying more after satisfying the first part of the program. In addition to the stock repurchase program, we will have the ability to pay down debt to maintain our investment grade credit ratings and preserve significant capacity to invest for growth.
Given the strength of our current business and the opportunities we see ahead, we remain focused on running one of the finest companies in our industry. Teresa will talk more about the share repurchase program in just a few minutes.
Turning to slide 6. Allergan’s first quarter performance reflects our continuing execution on each element of our Growth Pharma strategy. First; top-line growth. In the first quarter, we powered another fine quarter with total revenue up 48% and branded growth up 71% versus prior year. On a proforma basis, branded revenue was up double-digits again this quarter. Second; we maintained leadership positions in our seven core therapeutic areas and with the recent launch of new drugs by Viberzi, Vraylar, and Kybella, we have added to significant muscle and growth potential to our GI, CNS, anesthetic therapeutic areas. Third; our R&D engine continues to produce at record pace. We delivered two new branded FDA approvals and four FDA submissions just in the first quarter. In Europe, we also received a positive opinion ZENPEP named ENZEPI to enhance our cystic fibrosis and pancreatic insufficiency offering.
Our Open Science model is helping us build a still sustainable R&D pipeline by bringing us novel assets like XAF5 for under-eye bags and from -- a portfolio of selective agents for major neurological disorders like Alzheimer’s disease where we are the market leader. Our best in class generics R&D engine continues to perform well and Rob Stewart will highlight this later. Fourth; our focus on operational excellence helped us simplify the operating structure, streamline our IT systems, and drive more than a 500 basis point improvement in our operating margins versus prior year. Our operational excellence also has been on display with the launch of our generic CRESTOR in the US. Our generics team, together with Anda executed flawlessly to get product on the primacy shelves fast in order to take advantage of this first to market opportunity.
Now let me turn to continuing operations business performance in the first quarter on slide 7. Our first quarter net revenue grew 48% on a year-over-year basis to $3.8 billion as a result of the Allergan acquisition and strong global growth within all of our key therapeutic categories. Branded revenue was the key driver, up 71%. Strong sales and key products and operating margin expansion across our business drove a 15% increase in non-GAAP earnings per share to $3.04. Meanwhile, non-GAAP operating income rose to $1.8 billion an increase of 68% versus prior year and cash flow from operations was $1.45 billion excluding R&D asset acquisitions, restructuring, and integration payments. These results illustrate the strong long-term growth profile of Allergan.
Turning to slide 8. Our strategy is based on utilizing all of our Growth Pharma assets together including our best in class commercial engine to bring life changing medicines to patients around the world. As we look at our product portfolio, our branded business continues to thrive in the first quarter with 10% proforma revenue growth excluding the impact of currency and the Namenda IR and divestures. Our top total products which represents more than 75% of total branded revenue grew 13% excluding the impact of currency and Namenda IR with over half those products growing at double-digit rates.
This quarter performance is a true testament to the hard work of our team and the success of our Growth Pharma strategy and mindset.
Moving to slide 9 as we near the conclusion of the generic divestiture, I have been carefully considering how to streamline our management structure to better align our resources as a focused branded Growth Pharma business with many leading global brands. We have announced the streamlined executive team to lead Allergan going forward. In this new leadership structure, all of our commercial businesses will be combined under Bill Meury who has been appointed our Chief Commercial Officer. There will be three major business segments under Bill. The first segment is US Specialized Therapeutics which includes eye care, medical aesthetics, medical dermatology, and Botox Therapeutics. The second segment is US General Medicine which includes, CNS, CV, GI, Women’s Health, and AI, Urology. The third segment is International which includes all of our businesses outside the US organized in multiple regions. Anda, our core segment will continue to report to Rob Stewart. We remain focused on driving growth by building therapeutic area leadership in our seven core therapeutic areas; eye care, aesthetics, and medical dermatology, CNS, GI, Women’s Health, Botox Therapeutics and Anti-infectives. We will continue to be a drug development powerhouse and utilize our Open Science model to invest in innovation and propel future growth in these therapeutic areas. I believe this new commercial structure will further enhance our global focus, speed decision making, and align resources and priorities with our R&D priorities. We are also appointing Rob Stewart to the position of Chief Operating Officer. In this role, Rob will make sure our manufacturing operations run smoothly to meet our sales goal, oversee harmonization of our IT systems and processes and finish previous integration.
With that I will turn the call over to Bill Meury, our new Chief Commercial Officer.
William Meury: EVP & Chief Commercial Officer:
Thanks Brent and good morning everyone. Two hallmarks of Growth Pharma are category leadership and customer intimacy. They are true differentiators for Allergan especially within our commercial team which consists of a worldwide salesforce of more than 7500 strong. I’m looking forward to leading the Allergan commercial organization which has a great portfolio of products as you know, an industry leading team with deep knowledge and expertise of key therapy areas. All the talent we needed for the future organization was here within our four walls and with this new integrated structure, we can begin to leverage resources globally and across product lines in locked step with our R&D organization. We see clearly focused on leadership in each of our therapeutic areas and on having a unique connection with our customers both of which are our competitive advantages.
Turning to slide 11. The fundamentals of our business are strong. Overall basic demand market share growth and sales performance were robust in the first quarter and we are well positioned to sustain the growth for these franchises for the remainder of 2016 and beyond. In all seven of our therapeutics areas our teams delivered high single or double-digit sales growth excluding the impact of FX versus the prior year. In eye care, sales increased by 11% powered by continued strength from Restasis, Combigan and Ozurdex. US sales for Restasis reflects your product increased by 22%. We are preparing for the launch of Restasis MDPF, Multi Dose Preservative Free, in the second half of the year and looking forward to the approval of Oculeve our nasal neurostimulator in early 2017 which will significantly strengthen our product offering for ocular service disease. Behind these two products we have a cortisol analog and --.
We are as you know an eye care company and we look forward to building the deepest and broadest portfolio for our ocular surface disease. In CNS we delivered 21% growth with Botox Migraine Namenda XR, and Vraylar. These were the key growth products in the quarter and are expected to continue driving growth in 2016 and beyond. In aesthetics, sales increased by 7% with Botox, Fillers and Kybella. All three businesses are in an excellent position and we expect to sustain high growth rates in 2016 and beyond too. Sales in aesthetics increased at an impressive rate of 16%, excluding medical dermatology. Medical derm revenue was impacted by a onetime harmonization for allowances in the quarter. However prescription trends were relatively stable and we expect growth in the back half of the year. In GI, Linzess our flagship continues to exceed expectations and posted exceptional growth and the launch of VIBERZI is off to a very strong start. We expect sales for this franchise to increase at a double-digit rate in 2016 and beyond despite a decline in the -- product line. We also see strong growth and continue to be excited about our future in Women’s Health, Urology and Anti-infectives.
On slide 12, we have eight products in launch phase across each of our leading therapeutic areas. This is important as it provides new products for our sales forces, new products to deliver to our customers, and new innovations to solve unmet medical need for patients. Let me talk a little bit about three of our newest launches; Vraylar, Viberzi, and Kybella, all of which have blockbuster potential.
Turning to slide 13, we launched Viberzi our treatment for IBS-C right at the end of 2015 and we are off to a strong start. Based on sales, Viberzi is trending at approximately 80% of Linzess IBS-C during the same time period post launch which is in line with our expectations. More than 8000 physicians have prescribed Viberzi to date and about 65% of the physicians base are VP prescribers and we are seeing nice boost to scripts following the start of our DTC campaign in April. Linzess our treatment for IBS-C continues to experience strong growth four years post launch. We have seen incremental growth following the launch of our long-term care focus detailing program and DTC advertising campaigns. We now have two products that can cover a range of IBS needs to treat these patients.
Turning to slide 14 and Vraylar. Vraylar was launched in mid-March in the United States and is tracking strongly with competitive products including Rexulti and Latuda at the time of their launches exceeding our internal expectations. Vraylar has higher script trends versus Latuda at launch and Vraylar’s volume is similar to Rexulti without a current indication in MDD. The future of this product is very promising. Vraylar could potentially be the only approved treatment with five different indications or claims that would be a significant advantage for the product and would make it a potential blockbuster in the marketplace.
Now turning to slide 15 Kybella our product for sub-dental fat reduction or double chin is off to a strong start since we acquired the product from -- in October 2015. We have accelerated the training of targeted accounts. So far we have trained over 4000 injectors or almost 50% of the potential user base and importantly 3,000 of those trained have already begun ordering. In the back half of the year we plan to launch the DTC campaign for Kybella. The campaign will greatly enhance the current promotional effort which will lay in the ground work in the creation and development as this new market for injectables. We continue to believe this product has a very strong future potential and our R&D team is exploring a number of new indications. We are also continuing to develop and prepare for the launch of the product XUS in various markets including the recent launch in Canada and other international markets later this year and in 2017.
In summary, our commercial business continues to perform well and we plan to continue to focus on our core therapy area leadership and leading the industry with launches notably in double-digit top line growth.
With that I will turn the call over to David.
C. David Nicholson, PhD: EVP, Chief R&D Officer:
Thanks Bill. Good morning, everyone. Let’s move to slide 17. This presents our late phase development pipeline. In Q1 we continued to make very significant progress, 2016 being another extremely busy year for our R&D team. We expect more than a dozen approvals and regulatory submissions and we are on track to achieving these milestones. I am not going to talk about everything on this slide but I would like to talk about a few of the key highlights.
First approvals. We received US approval of ACZONE Gel 7.5% for the treatment of acne providing a new concentration of dapsone for once a today application and we received FDA approval to DALVANCE single dose as an antibiotic for skin and skin structuring affections. The single dose allows the delivery of this IV antibiotic in 30 minutes in the emergency department and infusion centers and will provide selective patients the benefit of receiving a complete course of parenteral treatment which may avoid hospital admissions.
Regarding submissions to regulatory authorities, we submitted an NDA for Oxymetazoline as a treatment for Rosacea. Also, we submitted an sNDA to Linzess low dose 72mcg to the treatment of Chronic Idiopathic Constipation or CIC which provides another important dosing options for physicians and patients and could accelerate the conversion to the OTC market. We also filed an sNDA for a single handed inserter with optimized packaging Liletta, our intra-uterine device. Our partner -- Pharmaceuticals submitted and the FDA has accepted an NDA for SER 120, a potential new treatment for nocturia.
Turning to development programs; earlier this week we announced positive top line results from Venus 1, one of the two Phase 3 clinical trials evaluating the efficacy and safety of Ulipristal Acetate for the treatment of uterine fibroids. In the trial, both 10 milligrams and 5 milligrams treatment met all co-primary and secondary end points of the placebo and there were no treatment related serious adverse events. This is important progress for our Esmya program and for patients. It is estimated that uterine fibroids contribute to more than 200,000 historectomies annually in the US so about one third of all historectomies performed in the United States. Esmya has the potential to offer the first and only non-surgical oral treatment option for women suffering from uterine fibroids in the United States. The results are very exciting and we continue to anticipate the 2017 submission for this product.
In addition in Q1, we initiated Phase 3 trial for Cariprazine in bipolar depression. Two parallel studies will be conducted at approximately 85 sites in the US and Europe. Bipolar depression is one of the most difficult mental illnesses to treat and response rate vary greatly from patient to another. So it’s important to continue to explore new therapies and increase the number of options that are available to help patients manage their symptoms.
Turning to slide 18. As Brent mentioned, Allergan’s R&D pipeline continues to be innovative and productive and it is continuing to grow through our Open Science model. In 2015, we acquired in license or entered into collaborations providing more than ten new pipeline opportunities across our key therapeutic areas. We see registration of four -- in the Unites States. In 2016 we have already added two additional development programs through Open Science. First; our development and commercialization partnership with -- has a broad clinical and pre clinical portfolio off muscarinic M1, M4, and dual M1 M4 agonist including HPL 9936 and HPL 18318 for the treatment of Alzheimer’s disease. These muscarinic agonists have the potential to improve symptoms of this disorder such as cognition and psychosis. Muscarinic agonists have previously been demonstrated to improve cognition in Alzheimer’s but development has been hindered due to off target side effects. We believe that the -- compound have selectivity advantages which should result in maintenance of the beneficial effect without the deleterious side effects. Our acquisition of -- XAS5, a potential first in class treatment for -- our more easily known as under eye bags.
We have had a great start to 2016 in R&D. We have many more milestones ahead for the remainder of the year. Our pipeline continues to validate our approach to R&D innovations through our Open Science model. I thank our more than 2,000 Allergan R&D colleagues around the world for their tremendous work and dedication in driving innovation and achieving these results and for their commitment to the work ahead.
I will now turn the call over to Rob Stewart to briefly discuss the few highlight of the Global generics business. Rob?
Robert Stewart:EVP & Chief Operating Officer:
Thanks David, and good morning. Turning to Slide 20, our generics business remains a best-in-class asset and I could not be more proud of the accomplishments of our entire organization. The R&D team continuous to achieve an incredible number of filings both in the Unites States as well as in key international markets, more impressive than the numbers are the quality of the assets filed including First-to-File applications of generic --- as well generic --.
Out of all the First-to-Files published by FDA in 2016, our generic team holds 50% of those accepted, they have done this year after year and now have a mass over 98 First-to-File application pending at the agency. Outside of the United States we filed over a 1,000 marketing authorizations, so the performance remains strong not only in the U.S. but across the globe. Price erosion is always a headwind in the generic industry in 2016 as no different.
Companies that invested in developing high quality assets and invested in their supply chain capability are able to counter price erosion more effectively with new product launches, strong quality and reliable customer service.
This we have launched 13 new products in the United States including Generic CRESTOR last week. Internationally we launched 62 products including -- we continue to see erosion with in expectations around mid single-digit different from the more commoditized generic models out there.
Moving to slide 21. Our entire organization remains focused on closing the transactions with Teva in June, we are operationally ready to close, once we received the antitrust clearance. We have regulatory approvals in all countries with exception of the U.S. But both teams are working due diligently to complete that process.
In closing our performance remain strong. Our team continues to execute and most of our leadership team and Allergan Generics is continuing with Teva, so we expect to see continued strong performance post close.
I’ll now turn the call over to Tessa to review our first quarter financial results. Tessa?
Tessa Hilado:EVP, Chief Financial Officer:
Thank you Rob, good morning,everyone. Please note this discussion of results reflect continuing operations, which we have bit -- reporting since Q3 2015. Following announcement of the divestiture of our Global Generics business to Teva.
Turning to overall results, for the first quarter of 2016 on slide 23. In the first quarter, we delivered strong year-over-year performance, on a non-GAAP basis consolidated net revenue for the first quarter 2016 was $3.8 billion an increase of 48% versus the first quarter of the 2015, with branded net revenues increasing 71% to $3.4 billion, primarily driven by the Allergan acquisition. Sequentially results ware impacted by lower Anda revenues and the impact of anticipated seasonality on top promoted Branded products.
Non-GAAP gross margin for the quarter was 80.1% an increase of 8.9 percentage point versus first quarter 2015. Which reflects our revenue mix following the acquisition of Allergan and the impact from ANDA. ANDAs revenues has decline versus prior year the last revenue was at the very low margin. Non-GAAP R&D investment for the quarter was $277 million compared to $172 million in the prior year period. Non-GAAP SG&A was relatively flat compared to last quarter of $1.01 billion as a result of continued spending behind our new product launches including Kybella, Viberzi and Vraylar.
SG&A increased from the previous year period as a result of the acquisition of Allergan. Non-GAAP operating income for the quarter was $1.75 billion an increase of 68% versus the prior year driven by higher revenues and higher gross margins across our business segment, nearly as a result of the Allergan acquisition. Non-GAAP earnings per diluted share for the quarter increased 15%, to $3.04, compared to $2.65 per diluted share in the first quarter 2015.
Our non-GAAP tax rate was 9.7% in the quarter. This rate was driven impart by the entire interest expense being included in our continuing operations earnings. Cash-flows from operations for the first quarter was $1.2 billion impacted by recent R&D asset acquisitions and integration expenses. Excluding this items cash-flow from operations was $1.45 billion.
Tuning now to our U.S. brands results on slide 24. The business continued to deliver a strong performance year-over-year. U.S.
Brands revenue was $2.3 billion for the quarter up 27% versus the prior year period driven by the addition of the Allergan business and strong growth across other key branded products offset by a decline Namenda IR with the loss of exclusivity for that product and lower revenue of the Asacol/Delzicol franchise.
Adjusted gross margin within U.S. Brands continued to show improvement with margins of approximately 89% up 0.8 percentage points versus the prior year quarter. SG&A as a percentage of revenue decrease to 21.7% versus 23.8% in the year ago quarter driven by our continued ability the maximize our commercial infrastructure post the Allergan acquisition.
And now turning to slide 25; our U.S. Medical business, first quarter revenues were $450 million there is no significant prior year comparison for U.S. Medical as it was acquired less part of the Allergan acquisition in March of 2015. On a pro forma basis U.S.
Medical business revenue grew 2 percentage versus prior year and 14% excluding medical dermatology growth was driven by key products including Botox of 12%, Fillers up 14% and Kybella. Sequentially revenue was impacted by typical seasonality. Our Med Derm, business net revenue declined versus the prior year on a pro forma basis attributed to a one-time harmonization of allowances versus Q1 2015. Prescription trends for the product was stable and we expect strong full year performance from this business driven by Aczone.
First quarter gross margins continue to be stable at 93.1%. Sequentially SG&A increased slightly as a result of continued Kybella promotional spend and sales force expansion relative to the launch of this product.
Turning to slide 26, in our international brand results. First quarter revenues were $673 million versus a $119 million in the prior year period largely due to the Allergan acquisition. Excluding FX on a pro forma basis International revenues in the first quarter grew16% driven by continued strong growth of Botox Cosmetics, Fillers and Ozurdex. Gross margin were 85.3% in the quarter and segment SG&A increased 2 percentage points to 31.9% versus fourth quarter 2015 due largely to new product launches.
Turning to our ANDA business on slide 27. Revenues decreased 34% to $365 million versus $554 million in the prior year period driven by anticipated low retail business primarily from the CVS acquisition of Target in-store pharmacies. Gross margins increased 2.3 percentage points to 16.9% due to product mix.
Results in all periods include third party revenues and related expenses of generic product manufactured by the company and distributed through ANDA. Slide 28 details our debt capitalization. We ended the first quarter 2016 with total debt of approximately $42.6 billion and equity of $77.5 billion. At quarter end our leverage was 4.43 times debt-to-adjusted EBITDA versus 4.07 times in the prior quarter.
In April we made approximately $1.2 billion in debt payments bringing our adjusted leverage ratio to 4.3 times debt-to-adjusted EBITDA. We remain committed to maintaining our investment grade ratings. Following the close of the divesture of our generics business to Teva, we anticipate sales of the remaining term loan balance of approximately $8 billion which has no pre-payment penalties.
Turning to slide 29. Let me make a few comments on our 2016 guidance which we are operating today. We continue to expect full year net revenues to be approximately $17 billion including branded business revenues of approximately $15 billion reflecting double-digit growth driven by strong sales of key products and more on just in 2016.
Note that revenues will be back half weighted as a result of contributions from being greater in the second half and typical pharmacy seasonality. Our revenue forecast reflects lower year-over-year revenue expectations for ANDA of approximately $500 million due to the CVS acquisition of Target in-store Pharmacy. We continue to expect our gross margins to remain strong with no material change from current levels in each segment. We continue to anticipate SG&A as a percentage of non-GAAP revenue to be approximately 25% of total net revenue.
And we expect the SG&A as a percentage of revenue to trend downwards throughout the year naturally as revenues increase and as we continue to see the impact of our anticipated business simplification activities following the divestiture of our global generics business to Teva. A part of the business simplification plan, we announced a more streamlined senior leadership structure. This new structure will allow us to leverage resources across therapeutic areas and product categories and focus on the key attributes of Growth Pharma including strong topline revenue growth and operational excellence which will result in industry-leading operating margins. R&D spend is expected to be approximately $1.5 billion as a result of the many important late-stage programs advancing in our pipeline including the commencement of Phase 3 programs of -- in the back half of this year.
Our tax rate should begin to gradually toward normalized levels in the range of 14% following the close of Teva. We will provide an updated forecast for 2016 including our expectations for earnings per share following the close of the Teva transaction most likely on our second quarter earnings call in August.
And now starting slide 30 I would like to spend a few minutes on our capital deployment expectations following the close of the Teva transaction. To echo Brent’s comments during his introduction, we have great conviction in our Growth Pharma strategy and in the strong future prospects of our company. Our strategy for capital deployment will involve a three-pronged approach with options that are not mutually exclusive with a goal of providing the best value and returns to our shareholders. On slide 31, the divesture of our global generics business provides us with significant liquidity.
As mentioned by Rob previously, Teva has done a great job working through a very intricate process. Working together with our colleagues at Allergan Teva is ready for successful day one following the close which is on track for June.
Moving to slide 32, as you saw this morning we announced our Board’s authorization for a purchase up to $10 billion of our own stock following the close of the Teva transaction. We realize that there is no better investment than in and own fast growing company. We expect to execute $4 billion to $5 billion over a 4 to 6 months period buying as much as prudently possible in open market purchases subject to favorable market conditions. If favorable market conditions persist, we will have more liquidity to consider buying more after satisfying the first part of the program.
In addition to the stock repurchase program, we are also committed to maintaining our investment grade ratings and will pay down approximately $8 billion of debt following the close of the Teva transaction. This leaves us with significant capacity to invest strategically in the growth of our company.
With that, I’ll turn the call over to Brent for closing remarks.
Brenton L. Saunders:Chief Executive Officer and President:
Thank you, Teresa. Now to finish, let me provide some comments on the overall environment. Over the past six months, we have seen a particularly tough environment for companies rewind on a strategy of high leverage and buying low quality noncore assets significantly raising prices and drastically cutting life-blood investments in R&D and commercial infrastructure.
When the strategy is flawed, the outcome will be bad even if it takes time. What is left will be high quality companies that continue to invest in R&D and knows that come up with new ways to speed introduction of medical innovations. The best of those high quality companies will not rely only on what their teams discover in house but will also have an open mind and use open science to attract innovations from across the entire ecosystem. They will have excellent R&D capabilities to bring those innovations through the rigors of clinical trials and regulatory review around the world and the most dynamic of those companies will have commercial engines that are resilient, persistent, and effective, at driving growth.
Allergan is one of those high quality dynamic growing pharmaceutical companies that is how we are running this company I am proud of our teams doing this great work at every level and honored to be their CEO.
With that let’s open it up for questions. Lisa.
Question & Answer
Lisa DeFrancesco:
Operator will start taking questions. I would like to ask everyone to ask one question only so we can get to everyone on the call this time. Thank you.
Operator:
At this time if you would like to ask an audio question please press star one on your telephone keypad and our first question comes from the line of the David Risinger with Morgan Stanley.
David Risinger:Morgan Stanley:
Yes thanks very much. Congrats on the news today.
I wanted to ask a number of questions but I’ll just keep it to one to start and then I’ll cirlce back into the queue.
Brent Saunders:
Thank you for sending a good tone.
Tessa Hilado:
Thank you David.
David Risinger:
With respect to capital allocation, obviously investors are focused on how you are going to use the proceeds once the Teva transaction closes and so I was hoping that you could talk a little bit more about capital allocation specifically slide 32 says tuck-in deals. So I think that’s what investors are looking for, they are not looking for large deals but if you could provide little bit more color on the M&A that you focused on and also if you could comment on any thoughts on potential dividend? Thank you.
Brent Saunders:
Sure, I’ll take the question David and maybe Tessa, will jump into as well. So look, I think you’re exactly right as you look at the slide 32 that Tessa had up, we are currently looking at three areas for capital allocation. One the share repurchase that we announced today up to $10 billion, paying down debt and maintaining our investments credit ratings and will paid on about $8 billion without penalties immediately ---- proceeds from Teva and then continuing to look at advancing our growth pharma strategy and we believe today that the best way to advanced our growth, our pharma strategy is to bolster our therapeutic areas leadership both with tuck-in product acquisition and with intellectual property R&D assets acquisitions.
And I think we have as David pointed out we did about 10 of those last year. We have done two. 2 in the first quarter and they have been I think highly productive and potentially very successful for us. So we’re going to stick to the ----- of what’s created growth pharma if there was a transformational deal like Allergan where is that which was a bit of one and -- a million type of opportunity right to be a white night to buy once in a like and kind of asset like Allergan certainly we are going stay open minded to that but our core focus is on running the best pharmaceutical company in the world and supporting that growth through this three --- capital deployment strategy.
Tessa Hilado:
On dividends, our long term our capital deployment philosophy actually really on what is in the long-term good for our shareholders from a value perspective and we do believe longer term that dividend with presumably could be part of that strategy.
David Risinger:
Thank you.
Brent Saunders:
Thanks David.
Operator:
Our next question comes from the line of Jami Rubin Goldman Sachs.
Jami Rubin:Goldman Sachs:
Thank you. But on the back of a $10 billion authorized share buyback program obviously very good news from my perspective and I am sure many investors. But why not announce a buyback to ASR such option rather than waiting over a 6 months period to buyback $4 to $5 billion though the open market is there have you are there is there a limitation because of the structure of your business why not accelerate that process and also can you speak to market condition that would prevent you from doing the entire $10 billion buyback. Thanks very much.
Brent Saunders:
Sure I’ll start and maybe Tessa, you can jump in I think the gaming we would have lots have bought in an ASR at the current prices but to be fair restructure in Irish law to make an open market structure of best course of action and if you look at Irish companies, there is now Irish company that has ever done an ASR there are certain reasons for that which, would be probably take the rest of our time and the call through, to walk through.
But Tessa you want to jump in.
Tessa Hilado:
Yes. I mean we also obviously evaluate the for structures on that could file and would look like an ASR but couldn’t either really know couldn’t provide us a benefits so the traditional ASR with our legal or accounting complication. As Brent pointed out there has been no Irish company that has actually executed in ASR. Really largely due to the limitations in Irish law.
Brenton L. Saunders:
I am sorry go ahead Jamie there is something
Jami Rubin:
Yes. The second question was, what can you see to the market conditions that would prevent you from doing the entire $10 billion buyback.
At the end of the day, its really depends on volume on a regular basis because we obviously with a buy prudently and then secondly we look going forward in terms of capital deployment options and how this stock performance that can potentially affect on ours thinking. In reality the reason why we announced 4 billion to 5 billion share buyback programs because we need that the only think we can buy in the next four to six months. That doesn’t mean that we will go up to the $10 billion before we actually end the 5 billion program we will then assess putting in additional can be filed --- to execute up to that 10 billion.
Brenton L. Saunders:
And just to be clear Jim because I think, this question could be out there to reiterate what Tessa said, doing the 45 billion over the next several months in our view is about the maximum we can buy given the volumes of what our stock is historically traded at. If we could buy more we will update you at that time, we would like to execute the full $10 billion but we can only commit to what we can commit at this time and we will keep all of you updated probably on a quarterly call as we go forward but we are our board is very committed to the buyback and that’s whey it was $10 billion and right now we can execute what we can execute for the foreseeable future and we will continue to update you as we go.
Jami Rubin:
Just a quick follow up. Obviously your desire is to do tuck-in deals to help growth pipeline but you know there may not be tuck-in opportunities or tuck-in opportunities present themselves throughout the year throughout the course of the year are you limiting yourself to $10 billion because based on my numbers you could go even higher than a $10 billion buyback. I mean is there something that your constantly balancing and assessing or is $10 as far as you go on a buyback.
Brenton L. Saunders:
Yes no I to be fair, we are constantly evaluating all of the opportunities including debt repayment and maintaining our investment grade rating is incredibly strategic to us so that is at the top our list as well. That being said if we execute the full $10 billion and market conditions continue to work very favorably I would certainly bring to our board with a lot of ---- to continue and our price more. But at this point $10 billion holds us over for the next several months or perhaps more so we’re in a good shape we will be in the open market buying our stock for the foreseeable future and we will keep everybody updated and to be fair if we could have done it through an ASR they were Irish companies we would have done it it’s just not.
Jami Rubin:
Thank you very much and congratulations.
Brenton L. Saunders:
Yes thank you.
Operator:
And Our next question comes from the line of Gregg Gilbert with Deutsche Bank.
Gregg Gilbert:Deutsche Bank:
Thank you so I guess some drawbacks to Irish So Brenton you could spend yours bolstering your positions in those seven therapeutic areas, there is something are all core, is that you intention or what would it take for you to kind of stray from that and within that are you sort of globally or geographically where you want to be within those seven. thanks.
Brenton L. Saunders:
Yes so I think you are right Greg. We could spend years bolstering our positions in those seven therapeutic areas and in fact that R&D day last November, we showed a lot of the white space opportunity in each of those therapeutic areas in those and one of the look at I think that presentation’s still on our website. And you know what, that’s what, that’s the foundation of our strategy Greg is that there is so much opportunities for years to continue to bolster our position and so we will.
We like everyone of the seven therapeutic areas that we’re in. We think there is huge unmet medical need, huge opportunities to help patients with cures and treatments and tremendous scientific advanced so we are going to continue to deploy Open Science and opportunities to bring in selected marketed products to bolster our position and become number one globally in everyone of those therapeutic areas.
With respect to a new therapeutic area I think the bar would be high for us to consider de novo, a new therapeutic area. It would have to be an area with strong growth potential, lot’s of white space and limited competition of assets in that category. There are a few that we evaluate that meet those goals but we are not focused on doing that at this time and I think on terms of global expansion, I think that was a huge opportunity for us in the Pfizer transaction. We talked about that as probably our most compelling revenue synergy and as a standalone Allergan it remains a compelling opportunity for us.
I think as you look at the growth that Paul and the international team put up this quarter and in previous quarters, it’s kind of a strong proof point and our interest in growing appropriately XUS we’re going to on focus on eye care, we are going to focus on aesthetics and dermatology and we are going to focus on GI and Women’s Health. And those are the areas that we are going to stay focused and looking at going into new market. I think Paul we have expanded and taken back some distributor rights, perhaps you just want to comment on what one of two those markets?
Paul M. Bisaro:Executive Chairman:
Yes, so we have expanded in eastern Europe. We went into ten new markets including Romania, Bulgaria, Hungary. We also went directly in Greece and we are not entering or this summer we are going to enter Iran which is a significant for us for the medical aesthetic business so we are considering our expansion internationally.
Operator:
Our next question comes from the line Randall Stanicky with RBC Capital Markets.
Randall Stanicky:RBC Capital Markets:
Great thanks. Brent, Allergan is very big company now. What do you define as a tuck in and then a quick one for Tessa, just like your SG&A in that 25% of revenue after the restructuring post-Teva, as you leave, 2016 what percent of revenue do you think you are going to be at? Thanks.
Brenton L. Saunders:
Yeah, I mean it’s hard to define tuck-in by size Randall I think it’s more of a characteristic of tuck-in so I think about a tuck-in being limited to the seven therapeutic areas we are in that would be a criteria. It would have to be growth asset to support the seven areas we have that only need to add limited additional capabilities to support the product where the R&D assets. And for that I have think of that tuck-in so I think within size obviously it’s going to be anywhere from $50 million to something a few billion dollars but there are exceptions to each one of those rules as well.
Tessa Hilado:
Basically for SG&A as a percentage of as we indicated would be roughly at 25% and as we previously discussed first quarter is really the low revenue quarter for us because of typical seasonality so we would expect coming out of 2016 and the fourth quarter for SG&A as a percentage of revenue to be lower than that. Having said that I think what we need to take into consideration as well as the important launches we have for 2016 and actually the other metric that I would guide you to is probably looking at operating margins as well which as you know we are at the top of the industry. Just looking at the SG&A as a percentage of revenue would be a little be deceiving because it would fluctuate through the quarters because of seasonality but we would trend lower as revenues grow for 2016.
Brenton L. Saunders:
And so Randall may be just to come back to the first part of your question if I could for a second. May be the better way to think about it is that tuck-ins is really stepping stones to growth right so it have to be a kind of a path from our existing position and therapeutic area and stepping stone would be to drive growth or leadership in that therapeutic area.
Randall Stanicky:
And that includes the pipeline as well.
Brenton L. Saunders:
That includes the pipeline absolutely because our growth has to be sustainable and I have always said innovation is our life blood and R&D is a critical element for that.
Randall Stanicky:
Okay that’s great thank you.
Operator:
Our next question comes from the line of Marc Goodman with UBS.
Marc Goodman:UBS:
Yes morning. Just to continue on the expenses conversation what amount of expenses do we need to take out for next year just as a starting point and I guess the context of the question is there has been a lot of consolidation into this company. There was a lot of cost cutting and synergies that was previously and a lot of that kind went away when you are going to be acquired by Pfizer but now we are back so we are kind of curious how much on an absolute basis are we definitely taking out and then how much will just expenses will just trend up but revenues trend up higher such that you get some benefit on the margin.
Brenton L. Saunders:
Let me just start so Marc just to kid you a bit. The synergies we have committed to with respect to our previous integrations never went away, it may have from people who fought for us but internally we have maintained an incredibly rigorous and disciplined process of tracking and executing against those. There were some that we put on the shelf related to both Actavis Allergan integration and somebody went into the Teva divesture and we did that appropriately so.
But they didn’t go away. We have taken them off the shelf and have started to focus on achieving those throughout the remaining part of this year and into next year but all of the work that we have committed to we will deliver.
Tessa Hilado:
Right and then just to remind everyone, we will provide more clarity post the Teva transaction in terms of EPS and more granular results for the back half of 2016 and then in 2017 as we plan to look at 2017 we will provide guidance in the normal course which would in early 2017.
Marc Goodman:
Well I guess if you you don’t answer that maybe we could ask one other question which is Botox was extremely strong in the quarter cost to currency can you just give us a little more color what’s going on there?
Bill Meury:
Yes. You know there is two sides of that business there is therapeutic side and then there is the aesthetics and then of course you can look at it through both the US and international. On the therapeutic side the main drivers continue to be product migraine and overactive bladder we also got a new indication for neural rehab condition lower limb spasticity. Just yesterday at the national urology meeting in San Diego there was the head to head study published that was actually conducted by NIH comparing botox for overactive bladder to -- products which I think the urology community found very, very instructive and so that side of the business is very strong when you turn to the aesthetics side, as you know it’s the leading brand in the world.
It has a world class e-commerce and customer loyalty program which continues to sustain sales levels if you think about the geographically the international business sales for botox were up almost 20%. So this is just a rock solid product. Its got 11 different indications. It’s got a unique injection pattern that users understand. It’s highly economical and of course we have a whole series of new indications in development on both the therapeutic and the aesthetics side. This is a pure demand story.
Operator:
Our next question comes from the line of David Amsellem with Piper Jaffray.
David Amsellem:Piper Jaffray & Company:
Thanks. So I just wanted to ask about the franchise in focus on that business or I guess the question here is are you disappointed with generic this tracking and then secondly what are your thoughts on long-term and in terms of the portion of the -- market that you think you will able to retain. Thanks.
Brenton L. Saunders:
Yes. Good question, I wouldn’t say disappointed with Namzaric, I just think it’s a timing matter. The original indication for Namzaric included patients who were on the essentially the non fixed combination but it didn’t includes patients who are only receiving -- and I think for physicians definitely important indication which we expect to get in the second half of ‘16 it’s clear among neurologists and primary care physicians that Namzaric is superior to anything on the market.
Once we get that indication we will essentially launch it and I think you will see a very different trajectory. Overall though whether it’s eczhar or Namzaric, this is a very stable business and we have heavy promotional efforts we’re the only one in the category that is active neurologists primary care physicians know that. Our formulary coverage in ‘16 and in ‘17 is very-very strong and I believe that we are going to least maintain the business that we have today and the launch of the new indication for Namzaric from new patients could restore growth to this business. So I am very confident about the next 12 to 24 months.
Operator:
Our next question comes from the line of Ken Cacciatore with Cowen.
Ken Cacciatore:Cowen & Company:
Thank you also congratulations on your new role maybe ask about the payer environment in general there has been any meaningful changes or actions in general so if you could just discuss that and maybe with some specificity to Viberzi first vis-a-vis the facts and -- coverage there and the coverage there specific that launches continue that launch. Thank you.
Brenton L. Saunders:
Yes. Good question. Naturally the formulary for Viberzi is developing but the majority of the claims for Viberzi during the first several weeks of launch have been approved.
And so I am very encouraged by it. ESI and CBS care market place Viberzi on formulary and an unrestricted position which I thought was a terrific development this early in the launch. I expect that over the next 9 to 12 months the formulary coverage for Viberzi is going to look just like the formulary coverage for Linzes.
Speaking about Linzes, it was added to CBS care mark formulary and then in the part D space well care and Athena and those are very significant formulary wins for the product and I am sure up 2016 and I think into ‘17 there is nothing really in my view at least as it relates to out side clients that is going to surprise us. We already have a line of sight to 2017. The products that are most important to our growth are first economical. They are most of their growth is coming from volume and single-digit price appreciation and so I think as long as we continue to communicate with payers and we are predictable and transparent about our future pricing decisions, I think we are going to able to maintain access across the entire product line and then as it relates to Vraylar, products off to a terrific start and we know psychiatry very, very well.
The feedback that we are getting is exceeding our expectation in terms of the actual experience with the drug formulary coverage is developing as expected. This is a category where while there are a lot of products there is a great deal of trial and error and so help plans are inclined to place the product on formulary even if its behind the use of a -- and I think that essentially what’s going to happen in this category is there will be a changing of the guard between the older rate typical’s the ones I just mentioned to new rate typical’s like Vraylar or even the two others because when you look at the benefit risk ratio of the newer ones including Vraylar it’s clearly better than what you with the older antipsychotics and we’re very encouraged by what’s going on with very Vraylar in the first eight weeks.
Operator:
Our next question comes from the line of Chris Schott of JPMorgan.
Chris Schott:JPMorgan.:
Great. Thanks very much just had a question just coming back to price given all the focus these days. Can you just comment at all just across the entire business when we think about the mix of price versus volumes may relative to new launches when you think about your 1Q sales in particular your 1Q pharma growth and how much of this is price versus volume and then just a quick second one come back to business development given the focus seems to be more on tuck ins at this point is it still fair to assume that you’re in deploy the majority of the cash that you are going to receive from the Teva deal over the next 12 to 18 months or could that take a longer period of time to redeploy into your business? Thank you.
Brenton L. Saunders:
Yes to let me quickly touch on price and then ask Bill to comment more specifically because I think that’s all true since you ask Chris across the entire portfolio. I think both in the branded and the generics business there has been a lot of debate and concern I think amongst the community around pricing. I think the reality is when you have innovative products that meet unmet needs that can distinguish themselves from older products pricing really isn’t this essential issue.
It’s a he ability to commercialize and support your drug with data. On the generic side it’s a very similar story; when you invest in R&D as Rob Stewart pointed out when you had a team that has 90 First-to-Files waiting at the FEA when they go after complex generics and higher barrier products you get a better pricing environment and so I think the net is there are others that have reported weakness in price but that’s because their portfolio lacks innovation it lacks differentiation and even in highly innovative areas on the branded side whether is multiple entries into the same market with very similar mechanisms it drives price down when you stand alone with your drive likely we do with Viberzi as an example you tend to have better pricing dynamics in the environment it’s really that straight forward Bill you want to comment specifically in our portfolio.
Bill Meury:
Yes I would just, first comment that our pricing strategies spends from the intellectual properties surrounding these products and we have exclusivity periods that extend into the well into the 2020’s and so we price for that the long term. If you want to look at their business overall in the United States the split was roughly 50-50 with the price appreciation of course being in the mid single-digits if you want to look at those products that are responsible for the majority of our growth and sales almost dozen products. The growth is coming 70% from volume and 30% from price. So it’s just a solid business and organic was back to the fact that we’re playing for the long-term here these are categories in which we have deep product offerings and strong customer relationships it’s not we don’t have short term outlook as it relates to price and we haven’t build in anything to 2016 estimates or even beyond that’s unrealistic given the current market dynamic.
Brenton L. Saunders:
Yes I think with respect to business development for the second part of your question and perhaps tuck-in is the right way to think about I like the ---- that came up earlier. On stepping stones because we’ve really walking at supporting the path for growth. We are not just looking at random tuck-ins to support non core areas where the like.
So it’s a very focused strategy more on a pathway that’s why I think a stepping stone approach is probably the right way to think about it and look we haven enough shorts on goal there are enough opportunities out there that we believe that the current capital allocation as described is the right way to think about it for the moment. So we will update you quarterly of our thoughts. If we think that the opportunities either don’t work because we don’t like science we don’t like the product profile before its too expensive then that could free up more money for additional share repurchase or additional debt repayment. But right now we think we have got the right balance based on our view of the world as we sit here today.
Operator:
Our next question comes from the line of Ronny Gal with Bernstein.
Ronny Gal:Bernstein:
Hi good morning congratulations on the quarter. Thank you for taking the question. If I could start with Fill or just a quick clarification first is ---of allowances that you mentioned for couple of product what exactly is it sounds a little bit like I just want to make sure its not a essentially reverse of over tuck-in channel to channel something like this and.
Tessa Hilado:
I will adjust that Ronny so basically its three -- all of our accounting policies and this relates specifically to Aczone the number in terms of an increase in allowance not a decrease in allowance is less than $20 million.
Brenton L. Saunders:
And just to be fair that Ronny, its one time and it on the overall business its really not significant as Tessa pointed out. The reason we called out specifically one is we are commitment to transparency but two, it is meaningful to the growth rate for the medical U.S. Medical segment and people do follow our statics very closely so we wanted to bifurcate and show that business is incredibly strong at 16% growth and that they the dampening of the overall segment was really a one-time event.
Tessa Hilado:
And just to clarify they had nothing to do with inventory or channels passing it all, prescriptions specifically for that product is very stable.
Ronny Gal:
Okay and then one for David, David you know, you put out the results on couple of days ago. Can you put the quality of life measures in context for us, it was very very strong and consistent with significant. But can you discuss essentially what is the benefit that the patient have experience in terms of how scale constructor and frankly how much relief are the patients getting in it?
Brenton L. Saunders:
Yeah so, we do have a patient recorded out come scale as probably as part of the phase three trials and we have discuss with the agency to what extent we’re going to be able to use the data from the PROs in that label. In terms of activities of daily leaving we got a very positive results. And in the first Phase C trial where the patients saw a significant benefit in that daily activities. So we are very happy about those results not just the trial wasn’t only positive because of changes in the bleeding profile
David Nicholson:
Sure and maybe Bill commercially you want to just touch on first, second related to its position Viz a V can be both as an substantially ahead.
Brenton L. Saunders:
Yes. I think, I mean listen this is ------ its different than, generates modulator and I think that’s going to flow right through to the benefit risk profile as we relative to another option this is the first study in the United States where all compound has shown an excellent efficacy and for the treatment ---- Vibriz, the impact on tumor size and bleeding it’s going to be really really important this is a large category over 10 million womens up from -----. This will be a flagship with our women’s heath business in a few years.
Outside the United State where it’s been launch in Canada and in EU once you adjust for price and population ---- sales is near $400 million. So this first trial was significant all in terms of important for the community of OBT ---- and women’s health in general but also important to us in terms of a big pipeline development.
Ronny Gal:
So that’s not a riding down the $400 million
Tessa Hilado:
That’s right, truly know that
Brenton L. Saunders:
Thanks Ronny.
Operator:
Our next question comes from the line of Liav Abraham with Citi Group.
Liav Abraham:Citi:
Good morning, and Brent can you comment on your commitment to double-digit underlying revenue growth of the medium-term with the ovreall current asset base given some of the potential over the near-term -- near to medium-term ---- and to what extent will this commitment in form you business development strategy so another words do you have a preference for assets that are on the market or close to the market versus pipeline assets in early to mid stage development or are you agnostic? Thank you.
Brenton L. Saunders:
Yes I mean our commitment to double-digit revenue growth is since -- strong we look at our ability to execute on that over the next few years and we think given our current assets and current pipeline on a risk adjusted basis, we think we can get there. Obviously they are always puts and takes that come to that. We have a high degree of confidence that we could do no other deals and deliver that growth over the next few years.
I think what we think about tuck in or stepping stone deals as I have been calling them, the intellectual property type of deals R&D deals are designed to get us into the 2020s well into the 2020s with double-digit growth because that’s the name of our business. It’s about new products launches. It’s about innovation and looking for medicines that support treatment are cures for unmet needs and so we’re going to continue to do that but we’re really thinking about well into the 2020s where we have to support the deal for our business to get to maintain the double-digit growth.
I think with respect to our stepping stone approach to market new product we’re really looking for innovative products that we think really do provide a meaningful differentiation in terms of unmet that need and that need we into our current therapeutic areas so that we can get more leverage out of our infrastructure weather that be G&A or selling the marketing and so that’s really how we speed we have this break commercial engine both in the US and outside the US that we want to continue to leverage and make more of and frankly makes our representative they makes from medical care teams and make our manage care teams more relevant when we talk about those therapeutic areas.
So there are multiple reasons why we like our therapeutic area leadership approach with multiple products across the entire broad spectrum. So I think we are in pretty good position to continue to deliver double-digit or about 10% topline growth. Bill anything you there.
Bill Meury:
Yes we are focused think about ‘16 and how does that happen in addition to Vraylar, Viberzi and Kybella which are true new product launches we have new indications or combinations or line extensions which also can support particularly healthy businesses and so for example -- launch in 2016 then of course we have the new indication for -- we will launch the multi dose preservative free form of -- and in early ‘17 we’ll launch a low dose or 72 mcg -- each of those product improvements is against a fairly significant and important part of our sales stream that’s how we think about the next 12 to 24 months.
Operator:
Our next question comes from the line of Louis Chen with Guggenheim.
Louis Chen:Guggenheim:
Hi thanks for taking my questions. I just have two quick questions here first we often get asked with respect to Allergan what your strategic vision is for the company longer term? Do you want to be a specialty or a pharma growth pharma company, do you want to be a large tech pharma or biotech, I was wondering if you could give us more color here and then secondly just on SG&A leverage just curious if you plan that overtime and if so what gives you confidence that you can achieve this objective. Thanks.
Brenton L. Saunders:
Yes thank you. Great question. Its interesting you have spec pharma label which is how I think most people describe it is purely a creation of many of you in that you are a spec pharma analyst many into that, that’s a Wall Street designation.
We have a few years ago designated ourselves as Growth Pharma and that’s strategically what we wanted be know as. We wanted be focused on topline growth therapeutic area leadership and a sustained R&D investment through our Open Science approach. And so that’s our strategy. We articulated it now for a few years as post-Teva it becomes even clear that we are a focused research based growth oriented company with strong therapeutic area leadership in the seven areas that we compete in with strong pipeline to support each of those areas and a commitment to being open minded around opportunities to enhance our leadership and enhance our growth through a stepping stone approach to M&A.
Tessa Hilado:
And on SG&A as I mentioned earlier, we have a very efficient operating structure as we know that in one of the charts we think will be at roughly 25% in the year in the fourth quarter with higher revenue except at a lower rate than that and as I also mentioned that good measured from as well as operating margin given the fact that we have of good number of launches from this year and on operating margins we continued to improved that sequentially quarter-over-quarter and we believe in the top of the industry.
Operator:
Our next question come from the line of Umer Raffat with Evercore ISI.
Umer Raffat:Evercore ISI:
Hi Thank you to taking my question. First perhaps for build, there is bunch of feedback online about sales construction and that those good to see your report both later as a key driver growth the growth. Could you just clarify where things stand in that division and then also a second one on generics division so I saw the 10-Q just was about $1.3 billion in generic sales versus about $1.7 billion in 1Q last year I understand there must be choppiness in product launches and stuff. Just wanted to understand that churn as well.
Thank you.
Brenton L. Saunders:
Yes I mean look I think our Botox therapeutic franchise I think the proof point is in the numbers that were delivered and the team is focused obviously there was some issues in our urology area that related to following company policy we take that very seriously we have a very strong compliance and internal audit process inside our company internal controls or at the forefront of we do and when people violate that we deal with it very strictly and severally and so that’s what happened there. I want to get too caught up on online chatters you can drive yourself crazy walking at some of those message forwards and think that the world was coming to an end not just at Allergan but across the entire world if you believe most of the stuff you see on those things but suffice it to say the business is incredibly stable resilient and relevant.
Bill Meury:
Yes I was just add I was at a recent sales awards trip that the management team that’s in place in the majority of that feels for us was focused on our customers and actually increasing the use of Botox and OEB which is one of the fastest growing segments of that product and so it’s sort of in our rear view mirror at this point.
Brenton L. Saunders:
On the generic side...
Bill Meury:
So I would say on the generic side this business continues to perform in line with our expectations. You can’t necessarily go look at historical year-over-year comparisons in this business as we are preparing for this business to merge with Teva. There is also a number of cyclical things within the business with product launches and timing of things like that. But under the underlying businesses performing incredibly strong, we continue to see price realization as I mentioned in my prepared remarks as mid single-digit and overall continues to fire on all cylinders with respect to R&D as well as promotional execution at launches.
AGN:
This is Paul. Just remember revenue never a good view of generics business performance because I can assure you in the second quarter with the launch of generic --- we are going to have blow out numbers on the revenue side and I agree with Rob that our businesses are performing very, very well and I think the Teva folks are going to very happy to closer transaction and continue that strength.
Umer Raffat:
Got it. But Paul just to be clear versus 4Q the $300 million drop in revenues they are like a non-bunch that sort of faded away?
AGN:
No there is also cyclical issues in the generic business as well. The first quarter is always the toughest quarter we’ve seen it year-over-year that continues to be the same trends that we’ve always had.
Umer Raffat:
Thank you very much.
Operator:
Our next question comes from the line of Jason Gerberry with Leerink Partners.
Jason Gerberry:Leerink Partners:
Hi. Good morning and thanks for taking my question and congrats to Bill for the change in role. So my question for Brad actually just thinking about the change in tone regarding a transformational M&A deal from July when you announce the Teva deal, the present where it seems like maybe there is a little of demphasis but still keeping an open mind the transformation deals. I guess what I am wondering is what’s change in that period of time given the valuations of go back and then secondly what’s the change in the treasury notice in the looked back roles if you can just walk us through sort of a restrictions in terms of using equity and so the ---- forest deal and even Allergan those three year. Thanks?
Brenton L. Saunders:
Yes so I think that perhaps if you picked up a slight change in tone its because as we’ve got in more comfortable with the current business that we have and operate as we got in more comfortable with our pipeline it goes to how I opened the call, we have the best pharmaceutical business in the world its growing pro forma 10% branded sales it has a deep pipeline about 17 mid to way stage pipeline opportunities. We have strong capital deployment opportunity both with share buybacks debt repayment and stepping stone deals and we have investment grade rated balance sheet and so we are in I think the ---position and our focus is going to beyond operating and running our company and continuing to put up quarter after quarter performance, if we can support that -or trouble boost that with opportunistic deals that may come alone like Allergan came alone in a very unique situation I think this is ball management team that’s going to look at what’s in the best interest of our shareholders to drive shareholders value and we will do it, but the realty is and I have been saying this for a long time shareholder value creation and we will do it but the reality is and thing for long time 99% of our focus. The management team sitting around the phone right now is on running our business and we are going to continue to put up executional excellence is our top goal and we are going to continue to support the business with growth oriented stepping stone deals but really our focus is on running the business.
Tessa Hilado:
With regards to the -- yeah so with regards to the treasure yields that you can imagine we analyze that expensively and based on our analysis, two things have come out, one is we don’t expect any material change in our tax rate and then the two of it -- is actually also affirm our ---- Irish domicile company.
With regards to a transformation of deals we believe we can continue to maintain our Irish domicile as you know that -- provide for us to be here look back in terms of the determining what we called good shares for purposes of calculating inversion. October 2016 is this three anniversary date for the ----- acquisition which then gives us more capacity to issue shares to a target company the one thing that you have to note though that we all -- flexibility to issue shares for cash without actually effecting our -- this is a foreign company. So those three nothing -- are sell into open market right and so ---- nothing in the current factory rules today that executing on our strategy whether that’s tuck-in or transformational deal.
Brenton L. Saunders:
And just to be cleared Jason I would say two things. One that the treasury rules had no impact on this small shift in --- as Tessa just outlined with perhaps just some minor maneuvering we could execute any transformational deal we wanted to do and not worried about that. Realty is why would we issue our stock at this price concerned we have just announced also $10 billion of buyback.
We think our stock or that currency is to an expensive to issue to so we are target at this point anyway.
Tessa Hilado:
If you look at from a liquidity perspective even with the $10 billion share repurchase authorization and if we execute up to that amount and the payment of debt I mean net net we still have sufficient liquidity to pursue deals.
Jason Gerberry:
Got it okay. Thank you.
Operator:
And our last question comes from the line of David Maris with Wells Fargo
David Maris:Wells Fargo:
Good morning, Brent and David on the pipeline I see the one buyer similar biosimilar for Avastin on the pipeline chart that stay will file in the second half of ‘16. Can you update us on the status of the others and Brent what role do the biosimilars play in the branded pharma model? Is this another asset that you could trade or that you’d consider trade or is it core to kind of Growth Pharma model?
Brenton L. Saunders:
Yes so may answer that part of David think talk about the status of the programs. Look I mean I think the way I think about biosimilars at least over the next few years is that for us, for Allergan, we have made most of the investment already. And we’ve seen good success with most of the programs in collaboration with Amgen.
So for us at this point, it’s part of -- we made the investment we should participate in the commercialization and or sales of those products through our partnership with the Amgen. I think long term I don’t think biosimiliars will neccesarily be a core part of our strategy we may decide to continue to invest in the partnership with Amgen because it’s been a good collaboration and successful partnership.
We may look at selective opportunity to participate on a one off basis and we do have capabilities in our own organization where we will walk to do some unique things but I think in fairness we are focused on supporting our seven therapeutic areas with the vast majority of our R&D dollars with the vast majority of our investment to make sure that we can continue to innovate around on that need and to support our growth pharma agenda. David do you want to touch on the...
David Nicholson:
Yes sure just briefly the other biosimilar that we are working on together with Amgen as I am sure you are all aware biosimilars for -- we anticipate getting the Phase 3 data later in the year. Obviously -- rarely in the pipeline EBITex is still in pre clinical development and detect is moving into the early stages of development this year at the cell line development proceeds and according to expectations.
David Maris:
Great. Thank you very much.
Brenton L. Saunders:
Yes I just thank everyone I know it’s a little bit of a longer call than normal but I think it was worth our time. Obviously we remain very focused on executional excellence on continuing to deliver our goals and agenda with respect to Growth Pharma. We do look forward to our next call with respect to second quarter earnings in August to update you both on earnings for the remainder of the year and our like post close of the Teva transaction.
So thank you again for your time and look forward to catching up again.
Operator:
This concludes today’s conference call. You may now disconnect.
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