AbbVie Inc. (ABBV) Earnings Call Transcript & Summary

Good morning, everybody. I'm Chris Schott from JPMorgan and pleased to be hosting a fireside chat today with the AbbVie management team. From the company, we have Rick Gonzalez, Chairman and CEO.

Good morning.

Mike Severino, President of AbbVie; and Rob Michael, the CFO. Thanks for joining us. Obviously, a pretty exciting time for the company. Before we kick it off, I did want to mention, given the pending Allergan transaction, we're not going to be having a breakout session post the fireside today. So with that, Rick, did you want to make some opening remarks as we think about kind of the new AbbVie as we look towards the Allergan close, and then we can jump into a discussion from there?

Sure, Chris. Well, first, thank you for having us here. We're certainly excited to be here. This is an exciting time for AbbVie. The business continues to perform extremely well, as you've probably seen, both in our overall performance so far through 2019 as well as our new product launches. And so we're off to a nice start. We're excited about advancing the transaction with Allergan. We continue to make good progress, and we continue to expect that transaction to close in the first quarter. And I think that will allow us to be able to reposition the business in a way that's even stronger than the historical success that we've been able to deliver, which has been pretty impressive over the past 6 years.

Absolutely. So maybe just digging into those new launches, can we just get an update on the SKYRIZI uptake share, where you're seeing share coming from? Obviously, there's been some great trends there.

Certainly, certainly. Well, SKYRIZI is doing extremely well. We're probably, what, 9 months -- 8, 9 months into the launch now, and I'd say SKYRIZI is what we anticipated it would be. We clearly were looking for an opportunity to come out with an asset that would redefine this market from the standpoint of efficacy and safety. And certainly, this particular medicine has been able to do that. It's been well accepted in the marketplace. I think physicians are excited about 3 factors. When you look at the level of efficacy that you see with SKYRIZI, it's pretty much unprecedented. In addition to that, in this class, I think physicians are normally used to seeing efficacy wane over time, yet this asset, we actually see efficacy improve over time. So the durability of response is something that physicians have not seen before. Quarterly dosing is certainly an important convenience for patients as well as physicians, and so I think they enjoy that aspect of it. Obviously, it's a market we know well and have executed, I think, extremely well in. If you look at the most recent data, the -- what we describe as the in-play market share, which essentially in-play is naïve patients, newly diagnosed patients and then anyone that switches, so whether that be second line or third line. And so the in-play share for SKYRIZI now, the most recent data, is about 25%, so it's the market share leader. And I think what's been even more impressive to us and a bit surprising, to be honest, is not a lot of that has come from HUMIRA. HUMIRA declined about 3 or 4 market share points from where it started prior to the SKYRIZI launch. And so our combined share now in psoriasis is almost 50%, just under 50%, 47% or so, and so roughly 1 out of every 2 patients we're capturing in the psoriasis market. So it's been an impressive launch. We expect it to continue, to remain strong and continue to build the most recent data that we've seen come out with the head-to-head against Cosentyx, we think, will be extremely helpful.

Great. Any color about how we should be thinking about net price for SKYRIZI as we look out to 2020? I'm assuming price hasn't been a lever here as you think about the share gains.

No. I mean this is a market where price typically is not what drives your performance. But from a standpoint of net price, I think you should be thinking about the net price of SKYRIZI and RINVOQ, we'll probably end up talking about RINVOQ, so I'll just address it here, roughly the same as HUMIRA on a net basis. That's the way to think about it, so they're roughly priced comparable to each other.

And you think that that's a sustainable dynamic as we go to market?

I do.

Okay. Excellent. You mentioned RINVOQ, maybe a similar set of metrics as we're thinking about how that ramp has been going.

Well, RINVOQ, again, a similar kind of profile. We tried to come up with a medicine that ultimately could be superior to HUMIRA. It clearly does that. I think it has incredibly impressive efficacy in refractory patients. But in addition to that, it's also an important asset that will ultimately be heavily used in first line as well. We can -- we're a little earlier in that launch. We're roughly, what, 4 or 5 months into that launch. Our in-play share there is about 9% now. It's continued to grow about 1 point every month over the last couple of months. The share is roughly about 1/3, naïve patients; 2/3, second or third-line patients. It continues to capture significant share, and we would expect it to grow and ultimately get to a position where it would challenge for leadership in the RA market.

You mentioned about 1/3 of the share is from naïve. Is that -- over time, do you expect that more of the share comes from the treatment-naïve? Or is most of the opportunity here going to be in the treatment-experienced?

No. I would expect that in the first phase of the launch, the first year to 1.5 years, it should be more skewed towards second and third-line patients. But as we see that dynamic play out over time, we should see the first-line share rise. And ultimately, it should have greater share in first line.

As we think about just the dynamic of these 2 products, maybe just compare and contrast the launch and market opportunity if we think about RINVOQ versus SKYRIZI.

Well, they're both doing extremely well. The market is bigger in RA, and there are more competitors in RA. So if you think about the psoriasis market, it's about -- in the U.S., about $7 billion. And if you look at the overall market in RA, it's about $20 billion. So think of it 2.5 to 3x the size of the psoriasis market. And as I said, there are more competitors in the RA market than there are in the psoriasis market. But I'd say both are very important markets. If you look at the combined revenue of HUMIRA, about 40% of that revenue comes from psoriasis and RA, so they're 2 important segments. The dynamics, I wouldn't say are a lot different. What's important to physicians is that they have confidence in the efficacy of the product. They get experience with the product. They have confidence in the safety profile of the product. We obviously have strong presence in both of those markets. So we're well-established in both of those markets, so we can deliver high levels of execution. So they're both attractive markets, but that's the basic difference.

Okay. And then finally on these, when you think about line extensions, I know it's an important part of the thesis here. Actually, it feels like one of these areas where The Street tends to chronically underestimate those additional opportunities. Maybe the ones -- from your perspective, what are the most important line extensions we should be watching for both these products over the next few years?

Well, there's a number of very important segments that will play out for those 2 products over the course of the next several years. Certainly, the IBD market is an important market. It's a large market. It's a market today that I would say, from a clinical efficacy standpoint, is still underserved. So it's a market that needs more assets to provide higher levels of response for those patients and be able to allow those patients the same control for longer periods of time. So we think both of these assets will play important roles in that market, and it's a sizable market. Atopic dermatitis is another market where, today, there's really only one competitor in that market from a biologics standpoint. And we think that's an important market, and we think RINVOQ will have an important an important opportunity to play in that market. PsA is another important market for us, and all of those will be indications that come out over the course of the next several years. I think one of the things to think about when you frame the art of the possibility for these assets, RINVOQ and SKYRIZI, you have to step back and think about HUMIRA. HUMIRA, one of the -- HUMIRA, took us about 13 years to build HUMIRA to be a $20 billion product. And one of the reasons why we were able to build it to be that size was it was the only TNF that had broad applicability across a large number of disease states, and so it was the number of indications that certainly helped us build to that size. When you step back and you look at RINVOQ and you look at SKYRIZI, those 2 assets will have all of the major indications that HUMIRA have when fully built out, plus one that HUMIRA doesn't have, which is atopic dermatitis. So if pricing were to stay the same, if you said to yourself, "What is the art of the possible over the long term for these 2 assets?" You should be able to build these assets to be $20 billion, combined or greater.

Yes. That's an interesting opportunity there. Maybe turning to HUMIRA. You mentioned before, volume is holding up really nicely here with -- despite the new launches, kind of getting a lot of share. I guess it seems like the trend has been a little bit better than you expected but elaborate a little bit more. Was this something you're anticipating? And do you think you can sustain this dynamic where you're seeing the nice ramp of the new launches and HUMIRA's share being relatively stable?

I think it's certainly something -- you're particularly talking about the U.S., I assume. And I think in the U.S., we should assume that HUMIRA will continue to grow well into the LoE event. The presence of these 2 having 2 assets in these categories gives you the opportunity to leverage the SG&A that you have in there. And as you make calls on physicians, HUMIRA has such a strong presence in the physicians, it's truly perceived to be the gold standard in this market, and so it tends to be their go-to product. Over time, I would expect that HUMIRA will start to slow as we move into '22 and '23, it will start to slow. And RINVOQ and SKYRIZI will obviously be ramping even faster at that point. But I think as we look at the short-term '20 and '21, we would expect to continue to see HUMIRA do well in the U.S.

Okay. Great. Updated our thinking also as we think about 2023 and 2024 for HUMIRA. I guess as we think about the European experience with biosimilars and the erosion curve we saw there, is that a good analogy as we think about what could happen in the U.S. side of the business?

Yes. It's a great question. Obviously, the U.S. market is different than any other market around the world. So there's not a perfect analogue that you can look at. It's not like it looks like exactly like a Germany or exactly like a Spain or a France. Having said that, there are certainly some things that you can, I think, draw from the experience that we saw in the international markets. One of the things we certainly saw, it was unlike the previous launches of biosimilars to Enbrel and REMICADE is by having 4 biosimilar players come in simultaneously, it created a fairly intense competitive activity between them to jockey for share. And obviously, price came down faster than what we would have anticipated, and then it stabilized. So the curve was steeper on the front end, and then it basically flattened out and pretty well stabilized. If you think about the U.S., there's going to be 7 competitors, maybe even 8, who enter the market in 2023. And so I think that competitive intensity is likely to be very similar to what we saw in the international markets. I think that's a reasonable assumption. So I think from that standpoint, if you look at it and you were to model it, I think you have to consider -- and if I look at consensus now, consensus still has a setup as more of a stair-step down over several years. I don't believe that's going to be what the situation looks like. I think it's going to be steeper on the front end, and then it will flatten out, so much more similar to what we saw in the international experience. Now the total depth of the drop, I think that's a little more difficult to analyze. To give you some idea of what that might look like, if you take the -- just the countries in the international markets that saw biosimilar competition across 2019 and you look at the total erosion of that base of business, it's about 45% to 48%. Some of that share, about 25% or maybe 30% of that is share loss, and the rest is price. So that gives you some flavor for the kind of impact. The U.S. market is different, though, because the U.S. market will be driven, in all likelihood, by negotiating with managed care and PBMs, and there are different dynamics around that. So it could be a little bit better than that. It could also be a little bit worse than that depending upon where the dynamics are. But I think thinking of that as the framework of how you think about 2023 is certainly a reasonable starting point.

What we see today, that makes sense. Also, as you think about the P&L in that same time frame, how should we be thinking about operating margins as you go through the HUMIRA erosion because I think that's a big kind of topic? It [ develops ] a story of what things look like.

It's an important point. Maybe, Rob?

Yes. So if you look at our guidance, Chris, in 2019, we're just above 47%. When you consider that we'll achieve greater than $2 billion of synergies from Allergan by year 3 as well as the P&L leverage that will come from revenue growth, I would expect our operating margins to increase heading into 2023. Now with the U.S. HUMIRA LoE event, we will see operating margins pull back to about the 45% range. That still puts us in the top tier of the industry.

Yes. So you think those margin trends can remain kind of in the pretty healthy level despite an erosion curve like...

Yes. And I think that's an important point because I have seen some models where people have, post 2023, our operating margin down in the 30s. That's not realistic. And then we should be able to hold the mid-40s.

And is that part of -- what's driving that, is there some OpEx kind of flex that you have in that time frame?

We would certainly address direct expenses. As we've looked at this, we don't think we'll be impacting the investment that will drive future growth. If you look at the situation that we had in 2019, we did a very good job of -- we kept our expenses flat, but we fully invested in the new product launches. So we've demonstrated an ability to adjust expenses accordingly, but we feel we're set up to address that and still drive future growth.

Speaking of investment, mainly R&D side of the business, can you talk a little bit about the pipeline as it stands today and some of the key readouts we should be watching?

Certainly. So building a pipeline that will drive our growth for the future has been an important objective for AbbVie, and it's something that we began working on immediately on becoming an independent company 7 years ago now. And that late-stage pipeline is delivering. We have a tremendous set of assets, like the launches that we talked about, like our hematology/oncology portfolio, and they're going to generate data in 2020 and beyond. In 2020, I'd highlight from immunology, upadacitinib. So we'll see psoriatic arthritis data this year. We saw the first of our 2 psoriatic arthritis studies at the end of last year, and that met all of our expectations and performed very, very well. The second study will read out this year. That study includes the structural endpoints that are very important in that disease. And those 2 studies, together, will support a filing in psoriatic arthritis, which is an important additional indication in hematology. I think it's one that is often underappreciated but is really quite important to hematologists and the patients. We're also going to see for upadacitinib, atopic dermatitis data. And so we had very strong Phase IIb data back a few years. The Phase III program is progressing very nicely, and we'll see those data. So that will take us into a new space with upadacitinib. For SKYRIZI. We just top lined some head-to-head data just yesterday, and there'll be more data coming. There, I would point to the first study in our Phase III Crohn's disease program. We'll see induction data later on this year. So that will be an important addition to what we're doing. In hem/onc, we'll also have a lot of data coming. In IMBRUVICA, we're going to see frontline data from the Phase III study in graft-versus-host disease, which is quite an important indication for which there hasn't really been any innovation in quite some time. So that will be an important data readout. We're also going to see the first of the Phase III combo work with IMBRUVICA and VENCLEXTA. So that is a story that makes very good sense from a point of view of the biology. Mechanistically, those 2 drugs should work together very, very well. All of the early phase data supports that, and now we're going to see the Phase III readouts. But it's also going to be a very important year for our early pipeline. We started building a very robust early pipeline several years ago, and now it's advanced to the point where we're going to see a steady cadence of proof-of-concept readouts over the course of this year, certainly, and then into '21 and '22, we're going to see on the order of half a dozen new programs, novel programs, each year giving proof-of-concept data. And in '20, those early programs, I would point to in immunology, our TNF steroid conjugate program, which is a very interesting program. It's, in some ways, a deceptively simple program. It's based on a couple of observations. One, we know that membrane-bound TNF is very highly expressed on the immune effector cells that do the damage in RA and other TNF-mediated diseases, and it's rapidly internalized when it's bound with the TNF antibody. And so that gives us the opportunity to deliver in a very, very targeted way a high-potency steroid, which we know has tremendous effect in these diseases but can't be given systemically. So that program has moved forward very nicely. We'll have proof-of-concept data there this year. And if that works the way all of the preclinical and basic biology says that it should, that would not be a drug just for RA, but that could really be a platform across TNF-mediated diseases. And by using that same technology with other targeting antibodies take us into other new spaces like lupus and diseases that have been very hard to approach with other technologies. We're also going to see a lot of data from our early oncology portfolio. We'll see proof-of-concept data from our most advanced immuno-oncology programs. There, we have programs aimed at targeting the immune-suppressive environment around tumors and also programs that augment the effector mechanisms that are responsible for keeping tumors in check. And so we're going to see a lot of data in 2020, and that pace will continue in the following years as well.

Does the Allergan transaction and kind of the ballast that brings the organization allow you to think about investing in R&D differently than you would have as a stand-alone company?

Well, the Allergan transaction certainly does a lot for us as a company. And one thing that it does is it gives us the long-term firepower to make sure that we can maintain the investment in R&D. That has been an important part of our identity since we've become an independent company and make sure that we can focus on driving innovation in the areas that I described, in the areas like immunology and oncology and in neuroscience, which we didn't have time to talk about just a moment ago. So I think it does a lot for us, and it does to make sure that we can continue to drive that investment.

The Allergan aesthetic business, I know you're creating a stand-alone unit there. Just any differences about how you're approaching or investing in that franchise as part of AbbVie?

We do believe that's 1 of the 4 major growth franchises that we'll have as part of the new company. So immunology, hematological, oncology, medical aesthetics and CNS neuro will be the major growth franchises of the new company. Medical aesthetics is a very attractive and important growth franchise for us. We're setting it up in a way very similar to the way we set up Pharmacyclics when we first acquired Pharmacyclics. We've had experience with that model certainly back in the Abbott days. We had a lot of experience with that kind of model. And we found that when you set these units up as totally independent organizations that you can drive very high levels of effectiveness in those organizations, and so that is our goal. And this -- it's a slightly different business than the business we operate in on our therapeutic side, so we think it makes sense to do that. It's a business that we do believe can benefit from increased investment, both increased R&D investment as well as increased business development investment. So we're setting up a dedicated R&D organization that will be part of it. Mike has named a Head of R&D from Allergan that will head up that group out in California. He'll report -- that person will report directly to Mike. And our goal will be to try to accelerate the advancement of innovation in that business, and we believe there is an opportunity to do that. In addition, we set it up as a global business because one of the things that Allergan was trying to do was to expand globally. There are many markets outside the U.S. where we believe these assets will perform well. As you probably know, AbbVie has a very broad geographic footprint around the world. We basically operate in 170 countries around the world. And so this structure is set up in a way where this unit can now go plug into any country that they want to operate in to be able to expand, and they can plug into the infrastructure we already have in place. But there'll be a dedicated unit within that infrastructure to be able to commercialize their products and support their products. And so I think we will be able to advance the geographic expansion of that business. The other thing we've done is Allergan's international business was a combination of both their eye care business and their medical aesthetics. We've now separated that. So medical aesthetics will be a dedicated international group, and the eye care business has been integrated directly in -- or will be integrated directly into the AbbVie business, the local affiliates. And so we think that will even give greater focus on the eye care business by applying more resources to it.

Yes, yes, makes sense. Maybe the last question here. Dividend has been a big piece of the AbbVie story over time. How are you thinking about the dividend over time, sort of target payout ratio we should be watching for?

Sure. Yes. So you're right, Chris. We're very committed to a strong, growing dividend. We just announced a 10.3% increase during our Q3 call, we've almost tripled the dividend since inception. The way to think about the payout ratio is it's a 48% in 2019. We'll continue to grow the dividend but not at necessarily the rate of earnings growth. And so you'd see that drift down to the low to mid-40s. In 2023, you'd see it drift to the low to mid-50s and then come back into the high 40s as we return to growth rapidly.

Okay. Great. Well, it seems like a pretty exciting time ahead. I really appreciate the time this morning.

Well, thank you very much.

Thank you.