AbbVie Inc. (ABBV) Earnings Call Transcript & Summary

All right. Thank you for joining us, everyone. I'm Dan Busby, the pharmaceuticals analyst at RBC Capital Markets, and I'm pleased to be joined by AbbVie for our next presentation. Joining us this afternoon are Mike Severino, Vice Chairman and President; Rob Michael, Executive Vice President and CFO; Jeff Stewart, Executive Vice President of Commercial Operations; and Liz Shea, Head of IR. So thank you all for being here. There's a lot to talk about. And given the limited time we have, I think it makes sense to jump right into Q&A.

So maybe to begin with the immunology business. I'd like to talk a little bit about Humira, SKYRIZI and RINVOQ, obviously, a lot going on. Humira and SKYRIZI already blockbuster products, RINVOQ is well on its way. Late last year, you provided combined 0.25 risk-adjusted sales guidance for SKYRIZI and RINVOQ of greater than $15 billion. And that was at a time when both products were not much more than a year into launch. There's a lot that could happen between then and now. That's a big number. But what gave you the confidence to put that $15 billion number out there?

Well, I would say it was a couple of things. One, it was the performance of the molecules, both clinically and in their initial phases of launch. If you look at RINVOQ and SKYRIZI, they have really fulfilled what our strategy was in immunology, going back to when we set out as an independent company about 8 years ago now. And we knew that immunology was going to be an essential area for us. And we knew that to be successful, we had to come up with products that were superior to Humira. So we have become leaders in the field with Humira, but we knew we needed to raise the bar on the standard of care. And if you look at the performance of RINVOQ and SKYRIZI, they've done that. Each of them has shown superiority to Humira and its lead indication. Each of them has delivered strong results across the board, not only in their first indications, of rheumatoid arthritis and psoriasis, but in a number of the follow-on indications that are starting to read out. Some of which are in regulatory review and others of which are wrapping up their Phase III programs. So when you look at that clinical performance and when you look at the launch trajectories of those molecules, in their initial indications, SKYRIZI, being just a few months ahead in psoriasis and RINVOQ in RA, the trajectories, I would say, actually even exceeded our expectations. Before launch, we set out what we thought that they could achieve. And quite frankly, there are many people who were skeptical that we could achieve that. And we exceeded those ambitions. The launches are going very well. SKYRIZI has become the market leader in in-place share and did so very shortly after its launch, really in a remarkably short time frame. RINVOQ is also off to a very strong start. It is doing very well with in-play share and is either a close second or a co-lead for in-place share in the market. And the molecule its jockeying with is Humira, our own. And so that trajectory, along with the Phase III readouts that we're starting to see and some of the important additional indications is what gave us the confidence to come out with the guidance that we did at the end of last year.

Okay. That's helpful color. And from a commercial perspective, how is your immunology spend allocated today between Humira, SKYRIZI and RINVOQ? And could you just comment on how you expect that to evolve going forward? I would suspect a lot of it will be shifted away from Humira going forward. But what does that look like as we get closer to 2023?

Yes. I think you captured it in general, but I'll give you some flavor on that. So for example, in psoriasis, we shifted -- when we saw the efficacy of SKYRIZI, we shifted almost all of our psoriasis promotion immediately over to SKYRIZI. And so really, the remaining effort on Humira is largely in 2 areas in derm. It's in psoriatic arthritis, where we don't have this SKYRIZI indication yet, and Humira is very, very strong there. And it's also in a smaller indication, although that indication is about $1 billion, that's HS or Hidradenitis Suppurativa, which is a pretty rare condition. So we still have spend against Humira there. But our general strategy will be, as we get superior data, when we see the performance of the new indications, we basically shift our promotional effort to the newer brands. And it just makes sense based on a long-term strategy and also basically the quality of those assets. So as we get closer, so as more indications come, for example, I mentioned PsA for SKYRIZI, the pending approvals in PsA and AS in rheumatology. And then you look ultimately at where we are, which are moving very nicely for some of the early indications for IBD, which will come later still before 2023, we will move our promotion to the new assets given what we project and see as their superior profile.

And then, Dan, if you look at just 2019, it's a really a great example of that, where we shifted the investment over to SKYRIZI and RINVOQ and fully funded those launches. But the overall company SG&A essentially stayed flat. So you really saw that play out or you won't see that play out as with atopic dermatitis because that is a new indication that we did not have in Humira. So we'll absolutely make sure we have the right level of investment to support that indication, so there will be incremental spend there. But for all the other indications, it's largely reallocation from the Humira spend.

Okay. And I'd like to ask a follow-up there. If we look at Street models, there's an absolute decline in SG&A spend that's modeled in 2023 and 2024. I'm assuming Humira plays a role in that. Given the reinvestment that you talked about, is that the right way to think about it? Like are there additional costs that will come out of the business entirely? Or would maybe more of a flattish SG&A line for those years be more realistic?

Yes. When you consider that, we expect the business to return to growth in 2024 and have very strong growth in '25. We have talked about high single-digit growth in '25 through the end of the decade, 2029. It wouldn't make sense for us to be cutting back infrastructure with the business still returning to growth so rapidly. So the best way to think about it, and I've spoken about it more in terms of operating margin, I think that's probably the best way to think about the profitability of the company. So we're approximately 50% today, I would expect to see that operating margin expand in 2021 as we ramp synergies. We'll also see some leverage in the P&L given revenue growth, but largely, that ramp of synergies should deliver additional operating margin profile expansion. And then in '23, I'd expect it to pull back. And I said previously that I think in the 45% range, it could be a little bit higher based on the most recent long-range plan, maybe a point or 2 higher, but still top tier in the industry in that 47% range. And then as we return to growth, revenue growth rapidly, we'll again see that operating margin expand. So I would expect to see us maintain top-tier operating margins even through the LoE event and continue to support the business and invest properly to support that long-term growth.

Okay. That's helpful color. And then with respect to the U.S. Humira erosion curve in 2023 and beyond, you pointed to the European experience several times, which implies a roughly 50% step-down, give or take. Given the number of biosimilars that could potentially be entering the market, a few of them may be interchangeable. What's your level of confidence that, that won't be 75% or 80%? Are there specific factors that lead you to believe that 50% number, give or take, is the right number with fairly high certainty?

Well, I think that, as you say, we have pointed towards the European experience because that is the best experience that we have. The situation in the U.S. is different. However, of course, there's no single country in Europe that looks just like the U.S. and the U.S. system looks like an amalgam of various different systems, if you look at the different channels in which we compete. But we think that, that guidance that we've given or that direction that we've given is maybe a better way to say it is directionally accurate. We've told folks that you can flex that a certain amount, if you want to look at the range of possibilities. But the more extreme scenarios, we don't view as likely given the features of the U.S. system.

I think you have to factor in the level of investment that biosimilar player would have to put into the U.S. market in order to gain share. It's a little bit different than when you look at some of those examples that's in Europe where you've got markets where there's no medical switching. And those are the cases where we see the most extreme levels of discounting, and that's because of [indiscernible] to go to those levels because they don't need to have the investment to support the business in those markets. So you have to factor that in. I think the 45% erosion that we saw in year 1, which you said put a plus or minus 5% on that range to give you a range. It's a good way to think about it, although, again, the U.S. is different. But given that there is a level of investment that's required, I think it's probably safe to say that you wouldn't necessarily see those extreme levels of discounting because they need to be able to support the growth of that business in terms of share, and otherwise, you have a P&L that doesn't work.

Right. Understood. Okay. And then moving on to atopic dermatitis. This gets a lot of focus. I'm sure you get a lot of questions on this. You have an upcoming July PDUFA date. You've guided to this as a $2 billion risk-adjusted opportunity by 2025 for RINVOQ. Can you provide any additional color on some of the assumptions that go into that number? On the last earnings call, I think you mentioned that it wasn't necessarily contingent upon having high dose approval. But what are some of the other considerations that went into that $2 billion and give you confidence in that?

Well, I think there are a number of factors that we looked at. One is the unmet need in that market. And this is a market that is really very underdeveloped. It looks like the psoriasis market did 15 years ago or so. There's a significant amount of unmet medical need, and there's a significant amount of market growth that would be anticipated over the next several years. There's only 1 entrant today, dupilumab. And while dupilumab delivers good efficacy for a number of patients, there are a large number of patients who either fail to respond to dupi or have come off dupi for 1 reason or another, often lack of efficacy, but there could be other reasons as well. And that set up really sets the stage for a high-efficacy agent like RINVOQ to come into the marketplace. The clinical performance has been very strong. We've delivered high levels of response, high levels of response at more stringent endpoints. So not just 75% skin clearance but 90% and 100% skin clearance at a very rapid impact, a very prominent impact on itch, which is typically the most bothersome symptom for these patients. And so we think there will be a very substantial unmet need that RINVOQ will address. And we think the profile matches up well against that need. We've said that our guidance is not dependent on the high dose. I mean we think both the 50-milligram and the 30-milligram dose have a favorable benefit risk. And it's our view that both are very appropriate for use in this patient population. But both performed very well. So we could be very successful with the 15-milligram dose as well if that were to occur. Although again, that's not our view of what's likely and that's not our base case assumption.

Okay. We're certainly looking forward to July. Maybe 1 more question on immunology before we move on to some of the other parts of the business. I'd like to touch upon the IBD opportunity. You're advancing both SKYRIZI and RINVOQ in Crohn's disease and ulcerative colitis. Based on the clinical data that you've seen thus far, how do you plan to position these products, SKYRIZI and RINVOQ in the market in those indications such that you're not effectively competing against yourself?

Well, the IBD market is one that is quite sizable and has unmet need, particularly with respect to keeping patients in long-term control, patients develop disease early in life durable control is very difficult to achieve. And so that are used for the need for more mechanisms and the ability to sequence mechanisms in different patients. And so we think there's actually plenty of room for 2 new mechanisms in this space, particularly ones with the characteristics that RINVOQ and SKYRIZI have. And so SKYRIZI is an infrequently administered biologic that across indications gives not only good response, but very durable response. So we think there will be a clear need in the marketplace for that profile. RINVOQ is obviously an oral. There may be some patients in which there is a preference for an oral. It has delivered in UC, the indication where we have Phase III induction data, very, very high levels of response that exceeded our expectations. So I would position that as a high efficacy oral in UC based on what we've seen today. And that's a need that really hasn't been met to date and one that I think will represent a very meaningful opportunity for us and be a very strong product profile out in the marketplace. Now the corresponding pieces of each program. So RINVOQ in Crohn's disease and SKYRIZI in UC are also underway. And so ultimately, we'll round out the portfolio. But we would view the positioning as an infrequently administered biologic with good durability and a high-efficacy oral, each of which provides meaningful opportunities for patients to maintain long-term control.

And Dan, some more flavor on that question, particularly as Mike said on the relative short term. So in the 2022 time frame, the way that we go at the market or the IBD space, we have 2 parallel sales forces even today. One of them is primarily the ulcerative colitis experts on Humira and the other one is primarily the Crohn's expert and they sort of work together. What's nice about this emerging portfolio in IBD and Mike highlighted how ultimately we're comfortable with ultimate copositioning. The first move into the market is going to be RINVOQ for UC and SKYRIZI for Crohn's. And our ambition is to bring these new best-in-class mechanisms in parallel with each other, RINVOQ for UC, SKYRIZI for Crohn's, and then we'll see how that rounds out over time but feel comfortable copositioning this. But it's the idea of the concurrent launch or the close to concurrent launch of both assets into our audience and our relationships with the gastroenterologists around the world is very compelling.

Great. That's good color. Let's pivot to aesthetics next. I'd say this is probably one of the biggest differences between kind of the long-term directional guidance that you provided and consensus forecast pertains to aesthetics. You've talked about a high single-digit annual growth rate over the next decade. The last time I look, Street forecast were closer to a 4% CAGR through 2030. Why do you think there's such a large gap in expectations in this therapeutic area? Specifically, I guess, what do you see that we don't necessarily see?

Well, we have a very good view to the performance of the aesthetics franchise over the course of the last year since close. And I would point to the strength and the resilience of that market through COVID is one of the things that gives us confidence. There was obviously a pause in the early days of COVID when the majority of these practices were shut down. But as they opened up, even with ongoing COVID restrictions, we saw a very rapid return to the clinic and very strong performance of the aesthetics franchise. And I think that really speaks to the underlying demand there, which is quite high. The performance of the assets has been very good. We're leaders in both the toxin space and the filler space. We've had the ability post the completion of the Allergan acquisition to invest more consistently in this space from both an SG&A and an R&D perspective. And so those are additional features that drive our confidence in continued growth. And we've built out other components of the franchise. Toxins and fillers are key components, but body contouring, we think is a very strong contributor going forward. And we've just recently announced an agreement to acquire Soliton which brings a new technology into the body contouring space, one that has application to the treatment of cellulite. Also tattoo removal but cellulite as being the key fit for the body contouring franchise. And that's one of the primary complaints of patients who are seeking aesthetic treatments in body contouring. So we think as we continue to build out that portfolio, as we continue to leverage our very strong position across all 3 of those areas. And as demand continues and as these markets continue to grow, and we've seen significant growth in these markets, we feel good about the numbers that we've put out in our ability to get high single-digit growth.

And I think that, as Mike touched on, it's the market growth difference, I think, is the driver of this fact with consensus. We see with the ability to invest more heavily in U.S. DTC, expanding sales force in China in the mid-tier cities, there's tremendous opportunity there to grow this market. And as the leaders in the market, we can certainly drive that. I think that's why your source is not necessarily, I think, a share discount. It's more about the potential for market growth what we see versus potentially consensus models, but we feel very confident in that high single-digit growth outlook. And then in terms of disconnect to consensus, I'd say probably a bigger source, frankly, is when I look at the '25 and beyond numbers for SKYRIZI and RINVOQ, and we're getting closer. I think consensus has moved up closer to the $15 billion in 2025. But that doesn't show really much growth beyond that, where I'd expect to see very strong growth beyond 2025. So as we think about differences with consensus models, I actually think SKYRIZI and RINVOQ are a bigger source than aesthetics although, to your point, aesthetics is a disconnect as well.

Okay. And we don't have time to get into all the competitive dynamics in aesthetics, but one recurring theme that we do hear in our conversations with KOLs is the power of the Allergan Aesthetics bundle. And so I guess, is -- it sounds like there potentially are opportunities to strengthen that even further. But at the same time, is this something that you think any of your peers would be able to break or create something similar over the next few years? It's a big competitive advantage now. How are you thinking about that longer term?

Well, we do have a very strong presence in each of the areas that I described, particularly in toxins and fillers, and that is a real competitive advantage. It's a competitive advantage in terms of the installed base we have, the number of accounts we have, the number of key customers we have and the long-term relationships that we have with those customers. And so that is, as I said, an important advantage, and it's one that we'll build as we develop our portfolio. We have a number of novel toxin programs in development that can come to the market in the middle of this decade. There are real advances in filler technology that go beyond hyaluronic acid. We have in the last several months or so, a little bit longer than that, acquired a portfolio of fillers from a company called Luminera, which brought a combination filler, hydroxyapatite and hyaluronic acid, which has real advantages. We have tropoelastin fillers and collagen fillers that are biostimulatory in their nature in development. So as we continue to build that suite, our presence will only get stronger. And we couple that with things like our digital focus and our customer loyalty apps. Alle is being launched, which provides real benefit to patients and practices. So all those things strengthen our competitive position in this marketplace.

Okay. I'd like to hand on a few more topics in our last few minutes. First, business development. You've allocated $2 -- $2 billion, excuse me per year through 2023. Can you talk a little bit about what happens after that? How you're thinking about this? And the follow-up would be, we've seen you do a couple of deals in hema, you continue to do a few deals in aesthetics. As we think about future areas and future priorities, do you have a bias towards those 2 therapeutic areas? Or are you casting a wider net?

Well, we have allocated $2 billion a year in the near term as a target or an amount that we would allocate towards business development to bring new technologies into our pipeline, sometimes bring marketed products into our pipeline. The areas that I think you can -- will see us focus on will be areas like oncology, not only hematological oncology but also solid tumors. And the aesthetics area will continue to be a focus. And then opportunistically, we will do other areas as well. So for example, we announced a small deal, but potentially very important deal that brought a gene delivery technology into our hands that has application to neuroscience, that was Capsida. That's a very attractive technology. For the right opportunity, we could add to our eye care franchise particularly focused on external innovation. Eye care is a very attractive area. It fits well with what we do. It is an area where data influences use amongst a relatively small group of highly scientific physicians and KOLs. And it's a good fit for the sort of market that AbbVie performs well in. It's an attractive business and one where there are real opportunities in the treatment of wet AMD, for example, potentially over time, even dry AMD and other areas. So that's a space that we could add to opportunistically. And as I said, that $2 billion allocation covers us through the near term and the midterm. That is 4x the amount that we spent on average is legacy app, so it's considerable firepower. You've seen us get some good deals done within that allocation. And then in the longer term, we'll have more flexibility if we need it. But right now, we don't see a need to do anything more aggressive than that. We feel very confident in the growth prospects of our on-marketed products, the indication expansion that is possible with those and the pipeline. So we'll have more flexibility but we feel good about our long-term growth, and we feel good about our internal prospects.

Okay. And we're about up on time. I want to ask one more question, very topical. Drug pricing, it's a fluid situation. I won't ask anything specific, but how should investors think about where your portfolio has the most exposure? Would that be the drugs that have the higher percentage of sales attributed to U.S. government pay? And if that's the case, which ones are those?

Well, the drug pricing conversation is still in this very fluid, and there are a number of different proposals that are on the table. So I think we're going to have to see where this lands over time. Right now I think the majority of the focus is still on things like COVID, although you hear conversations about drug pricing becoming more and more common and coming more into the floor. Our view is that there are a number of moderate proposals that we think would be the most productive. We've said consistently that we view the fundamental problem being affordability, meaning out-of-pocket costs, particularly for seniors on Medicare Part D. And the proposals that address that are ones that I think would be productive and ones that we would be supportive of. You're seeing that with Grassley-Wyden and H.R. 19. But I think we're going to need to see a little bit more specifics about how those progress and how this Congress and this administration plan to attack it before we can give real specifics on the question that you asked. Rob, I don't know if you want to add anything to...

Nothing, that's perfect. That's perfect.

Okay. Fair enough. We're a few minutes over. Thanks again, everyone, for joining us. It's a pleasure having you. Take care.

Thanks, Dan.

It's a pleasure.

Goodbye.