AbbVie Inc. (ABBV) Earnings Call Transcript & Summary

Great. Well, thanks for joining us, everybody. I'm Terence Flynn, the U.S. Biopharma Analyst here at Morgan Stanley. Very pleased to be hosting AbbVie this morning for the session. Today, joining us from the company, we have Rob Michael, President and COO; Scott Reents, who's CFO; Jeff Stewart, CCO; and Roopal Thakkar, who is Head of Development and Regulatory Affairs and CMO. But thank you so much all for being here. Really appreciate the time.

Thanks for having us.

Before we get started for disclosures, please see Morgan Stanley's research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that out of the way. Maybe Rob will go over to you. Just in terms of strategy here. I think one of the questions we get from investors more frequently is now that you've delevered here post the Allergan transaction? How are you thinking about capital allocation priorities here from a high-level perspective? And then again, we can dig into it a little bit further.

Yes. Look, I think, as you know, we generate a tremendous amount of cash. I think this year, free cash flow -- adjusted free cash flow is about $19 billion. We -- our primary means of returning capital to shareholders has been in the dividend. We've increased it by 270% since inception. We grew it by 5% this year despite declining earnings. So we're committed to continue to grow the dividend. So I'd say in terms of capital allocation, clearly, the dividend is a primary means of returning capital to shareholders. But given the amount of cash we generate, it gives us flexibility to one, deliver those strong returns to shareholders and invest in the business. And so given the rate of delevering, you just saw we got an upgrade from Moody's recently. We've done a very nice job. By the end of this year, we'll have essentially paid off all the incremental financing from the Allergan transaction. So we have much more, let's say, flexibility for BD. That said, we don't need to do anything to deliver on the high single-digit growth expectation for the second half of this decade. So really focus more on, think of it as small to midsized opportunities that will help drive growth in the next decade and really focusing on the five key therapeutic areas that will drive that growth. So for example, in immunology, SKYRIZI and RINVOQ, we expect to deliver robust growth into the next decade. And so there, we're looking for new mechanisms of action that can elevate standard of care and drive the growth in the next decade. Sort of what's the follow-on act for Skyrizi and Rinvoq. Those are the opportunities that we're really focused on in immunology. In aesthetics, we've demonstrated the ability to expand this market. We've done a couple of deals. Think of like Luminera, Soliton, were in cellulite where the focus there is really bringing new patients into our providers' practices. So things that can expand the portfolio would be examples of that. In neuroscience and psychiatry, we have a significant footprint. An example would be with Gedeon Richter. We've done a collaboration really focused on B3 selectivity that can really address [indiscernible] anxiety disorders, thinking that as what's the next act following Vraylar. So really focusing there on oncology. We're very excited about the pipeline we have in ADCs and IO. So anything next generation would be the focus there. And so -- and then eye care a great example because we think about the opportunities in retinal disease, glaucoma. REGENXBIO is a great example, where we've got the gene therapy now for wet AMD and diabetic hemopathy. Those -- that will be an example. So it's really thinking about those small to midsized opportunities to help drive growth in the next decade.

Yes. No, it makes sense. And as you think about the opportunity set out there, do you think there's a robust opportunity set? Because that's the other thing I think investors have a debate is just what is the opportunity set right now as you look across the landscape.

I mean our BD group is active looking at opportunities. I'd say we're certainly excited about different types of opportunities. I'd say there's enough out there that can contribute to the objectives we're pursuing for the long term.

Okay. Great. And kind of the related question is, obviously, the IRA list was published about 1.5 weeks ago or so here. I know you guys didn't have any initial drugs on that. But just as we think about strategy here, are you making any changes in terms of how you are approaching a post IR world, either in terms of R&D investments internally or how you approach external deals.

Sure. So just to clarify, we did have IMBRUVICA was -- and that wasn't a surprise to us because we -- for our modeling, we looked at time on market and essentially the size of the gross Medicare spend. So we were surprised at all to see Imbruvica on the list. It was part of our modeling. As we've looked at it, there's no -- I'd say fundamental change in strategy, no. But as we think about R&D and the programs we invest in, clearly, you have to look at investing in multiple indications in parallel, that's a little bit of a different approach. I think one of the unfortunate consequences of legislation. As you very well know, there's a different set of now small molecule versus large molecule. So do you approach thing differently there? In the past, we've studied in oncology, in particular, with small molecules, later line, smaller patient populations, but now the way the legislation is written, there's a disincentive to starting the clock. And so as you think about we need to pivot to more of that earlier lines, larger patient populations versus what we have done before. So I'd say we've adjusted the way we're thinking the lens we're using to look at R&D programs, but fundamental of the strategy, no, and we've highlighted, I believe we were here a year ago, highlighting that, look, relative to our peers, our Medicare exposure is lower. And we have reiterated the high single-digit long-term growth in light of IRA not to say that, that will have an impact on us and all the players in the industry, but we think we're in a position of relative strength, but we're still continuing to study the implications for IRA.

Okay. Great. And maybe one related one, I guess, is just there's been some debate about if the Medicare negotiation could spill over to the commercial setting. I mean, any thoughts on that? I know it's still early days, but how are you thinking about that?

From our experience, and there are multiple channels right now where you see government pricing. You can Medicaid 340B, you've got best price. We have not seen that spillover in the past. Our working assumption is that we do not expect to see spillover in the commercial channel.

Okay. Okay. Great. maybe now going back to the high single-digit revenue growth. I think consensus is mid-single digits last time I checked. So there's a disconnect there. And I think earlier this year, investors were concerned that maybe it would be low single digits because of some of the pricing questions around immunology. Now I think people are back to this mid-single-digit mindset. So as you think about that, what would you highlight as some of the bigger disconnects between your confidence in getting to that mid-single digit and maybe where investors are right now.

Yes, when I look at sell-side consensus from '24 through '29, the compound growth is just over 4% which is lower than our high single-digit guidance we've provided. And I'd say the lion's share of the difference of SKYRIZI and RINVOQ I do see a difference also for VRAYLAR and aesthetics. Each of about $1 billion, where we've said greater than $9 billion for aesthetics. The Street is about $1 billion lower for Vraylar, we said peak approaching $5 billion. The Street is about $1 billion lower. But the lion's share of the disconnect of SKYRIZI and RINVOQ not early. I mean, '25 right now, actually, the Street is slightly higher than the guidance we've given, $17.5 billion, $10 billion for Skyrizi, $7.5 billion for Rinvoq. The Street is actually at about $11 billion now. we'll get higher than $11 billion for SKYRIZI, below us on RINVOQ, they're 6.5%, but that's about $18 billion. So $25 [ billion ] isn't the issue. It's the growth beyond $25 [ billion ] it's something like low single-digit growth, and we expect much more robust growth from Skyrizi for a few reasons. One, we'll continue to see share gains and these are large markets that will continue to grow. But also if you think about the next wave of Rinvoq indications, we will see in the second half of this decade, opportunities like lupus, Vitiligo, alopecia giant cell arteritis. So there's another wave of Rinvoq indication. So we would expect robust growth for Skyrizi and Rinvoq the next decade. And right now, the Street is not modeling that type of growth beyond '25.

Okay. And I guess the other one where, again, at least from my perception, it seems like IBD is the other one that maybe people are modeling a little bit lower. And so I know you guys had some data for SKYRIZI recently in the head-to-head setting for Crohn's. So maybe just top down how you see IBD evolving now with these new or better targeted agents, you have an oral with RINVOQ and then the importance of this head-to-head data from SKYRIZI to -- just came out.

Yes. Maybe I'll start, and then Roopal can highlight some of the data that was just released. I mean if you think about the IBD space, which is before the new RINVOQ mid-decade indications, we were always surprised years ago on how fast IBD grew in favor of HUMIRA. I mean at some point, it was 35% to 40% of all revenue. So it's got the highest biological penetration, incredible unmet need. And so when we look at the most recent launches, we're very, very pleased. So we're seeing SKYRIZI today, which has been on the market for about a year, it's right neck and neck in terms of share capture to STELARA, okay? So very, very rapid uptake. We also see that RINVOQ, which is approved for later lines in both UC and within the last 8 weeks for Crohn's disease, also ramping very, very significantly. So RINVOQ for UC is in the low 20s in terms of overall in-play capture and RINVOQ CD is ramping even faster than Rinvoq UC did a year ago. So you have two very, very big horses here that are restating the standard of care in IBD. And what's so unique about both of those assets is that we've done modern study design where we are not only measuring symptom relief and symptom control or so-called remission, but now we're looking at the healing of the bowel, so endoscopic remission. And those endpoints are very, very significant. And we see the market perceptions moving towards. If I'm going to select an agent, I want to relieve the symptoms. I want to do it quickly, but I have to heal for the long term. And that's really what we've set with both of those agents. So we are -- continue to believe that based on the in-market performance that our IBD franchise is probably still, to your point, underappreciated in terms of how fast that will move that we've contemplated that. But we are super pleased with this data that we released yesterday. We had confidence that we could beat STELARA in a head-to-head trial. But when you see the data, it's super impressive. And it's going to give us two strategic elements. First, it's going to put pressure on the market leader from us, which will be important for share capture. And second, it will help to inoculate SKYRIZI over time from the biosimilar that ultimately comes from STELARA. So with that, maybe I'll let Roopal highlight the data that was released just yesterday, which is again, very impressive.

Thanks, head-to-head in Crohn's disease. One thing to point out, it was all TNF-IR, it's a relatively challenging population to treat and it gets back to some of the biosimilar discussion where in the future, we don't want to double step through maybe one against anti-TNF but then quickly move to SKYRIZI rather than a biosimilar STELARA, over 500 patients, so a large study. And even at week '24, we saw almost a 20-point differential in favor of SKYRIZI in the remission endpoint that Jeff highlighted. But then at week 48, what we've presented thus far was endoscopic remission doubling 32% versus 16%. More comprehensive data will be released at UEGW come here in a few weeks in October. But I think as you looked at it, physicians would look and say, okay, it seems like a similar mechanism of action. I got an IV induction. I get a subcutaneous maintenance. So it may not be very clear just looking at across trial comparisons. But when you put them head-to-head, then you really see the differences. Again, we've released two endpoints. Safety is consistent with what we've seen in the past, but a much deeper discussion will occur in October. Forskaren Rinvoq, IBD represents about for this year's guidance, about $1.5 billion. If you take a look at the 25% guidance we provided, it's $2.5 billion for SKYRIZI, about $1.8 billion for RINVOQ, so greater than $4 billion. So we do expect significant growth over the next couple of years in certainly beyond that.

Okay. Great. I guess the other area in immunology is atopic dermatitis. Obviously, there's been a lot of innovation there, including from RINVOQ. Again, I was -- I think I was more of a skeptic there initially, but you guys have proven me wrong as if you've done a great job of commercially. And so again, maybe speak to how much more share is left there in AD as again, this is one of those newer immunology markets. But then the other new entrant coming is lebrikizumab potentially another injectable. So how is that going to potentially impact the dynamics in atopic derm?

Yes, great question. No, we're pleased with atopic dermatitis. I mean, obviously, in the U.S., we had based on the oral surveillance study, a slightly more restrictive label than you did with, for example, Dupixent. But nonetheless, we've been able to achieve some pretty significant share capture. So we're now in the high teens. So we're a solid #2 obviously, behind the market leader, Dupixent which is impressive. And that level of in-play capture, which is largely in the second line, which is where our indication is largely set is going to continue to pull up our market share, which is around 6%. So we have significant momentum still to be able to drive share, TRx share over time. The U.S. is probably one of our lowest major markets in terms of share capture. It's still impressive, but we have share capture rates in other major markets, Japan, Canada, and other markets across Europe that are in the in-play capture rate of 30% to 45%. So very, very meaningful. And we -- when we listen to the derms over what they like about Rinvoq, you get to higher levels of skin clearance so instead of apazi for psoriasis, you have an [ EASI ] or an [indiscernible] of 90%, it's much more common, you see that level of clearance. And perhaps more importantly, when you interview patients, it's the speed and the suppression of the itch, which is the dominant basically symptom of this disease. So we're in very good shape there. We continue to study the drug in major trials. We have another ongoing head-to-head trial that's consistent with U.S. label against DUPIXENT. So we continue to develop data to differentiate against the interleukins. And we also are evaluating the ability to say, to your point on lebrikizumab, given the efficacy profile and the different mechanism, it wouldn't really make a ton of sense to start to sequence interleukins. Where you can think about a very powerful and also very safe JAK inhibitor that now has 5 years of safety data in the market. So we do think that it will continue to be a battle in the marketplace. But this is an exceptional market. I mean this market is still growing at 30%. It's 3x bigger in terms of the moderate to severe population in psoriasis. I think it's one of the most attractive markets in the industry, and we're going to be a significant player.

Okay. Great. Maybe coming back to a couple of high-level ones for Rob, is just the -- I think on the 2Q call, you guys provided some increased color around kind of '24 expectations for HUMIRA that I think we're welcomed by investors. But then there has been a more recent announcement around the CVS launch of Cordova and contract with Sandoz for their Humira biosimilar. So maybe just give us a mark-to-market and kind of does the commentary from 2Q still hold? Or has there been any other development have changed your view of '24 HUMIRA?

No, things are playing out as we expected. There's there's been no surprises. I mean Jeff and his team are going through the negotiations now. That's typical what happens this time of the year. So we'll see that play through over the next few months. but nothing really on the HUMIRA biosimilar front, I would say, changes our view. We feel very good about certainly the performance we've seen this year with less volume erosion. We did improve the guidance for this year by $400 million. But more importantly, we took up the growth platform up by $1 billion between the Q1 and Q2 guide. We've seen very nice performance from SKYRIZI in psoriatic and IBD. Aesthetics has performed better than we expect in terms of a faster recovery in China as well as, I'd say, overall BOTOX momentum. Still, I'd say in the slowdown in fillers, we haven't quite seen release yet. So that -- we're keeping an eye on that, but certainly toxins. The momentum has been there. but then also neuroscience. I mean, VRAYLAR with adjunctive MDD indication, we saw a very nice lift there. In our migraine portfolio in chronic migrate with BOTOX therapeutic as well as you think about the oral CGRPs [indiscernible] really strong performance. As we look at the performance coming out of the Q2 call, we clearly, nothing's really changed on the biosimilar front. We'll continue to see very nice momentum from our growth platform, which gives us a lot of confidence going forward.

And is that just a segue, and is that what's giving you the confidence in terms of potentially upgrading this trough EPS guidance of $10.70 that you mentioned on the 2Q call?

Yes, we've got a lot of questions on would we update the floor? When will we update the floor? Clearly, as you think about -- we gave that floor guidance that was during the Q4 call in advance of these last two quarters where we've actually raised our revenue guidance. So given the momentum in the business, and in particular, the growth platform gives us a lot of confidence on the floor. And we've been contemplating with in the Q3 call, we actually update that upwards. So we'll stay tuned, but it's something we're talking through. We're feeling very good about the performance of the business this year.

Okay. Okay. Great. And then maybe this may be one for Scott, just as we think through. I know previously, you guys have talked about trough margins in that 46% to 47%. Just wondering, does that still hold true here, again, given Rob's comments and kind of momentum in the business, how should we think about that? Again, I'm not sure if you guys want to tag team that.

Yes. Maybe I'll start. I mean you're right. With just like the trough earnings, we offered a 46% to 47% range on the operating margin. And that's really when you think about it, you've got the mix coming down from the HUMIRA erosion this year, but that will probably stabilize around 84% where we are now because as HUMIRA will decrease, will have a strong margin contribution, not the gross margin level from SKYRIZI and RINVOQ. On the operating margin side, as we went down that trough, it's important to note that we continue to invest in the business, even in the light of the decline on the top line and the earnings. We've continued to invest in the business. So when Rob went through the kind of the fundamentals, that's what really will drive any discussion we have. And on the operating margin, we see it kind of continuing about 46% to 47% through '24 and then expanding thereafter. I think it is important to note, though, that 46% to 47% is really still top-tier with an industry. So as we see the building of '25 and beyond to expand that still does offer some less capacity to continue to invest in the growing business.

Yes, we've factored into that. You saw it this year even though we've got gross margin gross profit dropping about $5 billion. We're increasing the R&D investment by $400 million, right? So we did contemplate that in the operating margin guidance is that we want to continue to invest in R&D. We expect that R&D investment to continue to increase, I think about driving that long-term growth. And so we haven't sacrificed investing in the business to deliver on that operating margin commitment. And so we're thinking about it as a trough level for the next 2 years. But as Scott mentioned, we return to robust revenue growth. I mean, we've demonstrated the ability to drive operating margin expansion by really leveraging the expense side. So I would expect to see us return to that but not by sacrificing investment in the business, we're fully committed in R&D and SG&A to drive our growth brands.

Okay. Great. Maybe Roopal one more for you. Teliso-V, another one of the pipeline assets that's advancing here, I think we're going to get the Phase II data later this year. Maybe just remind us what are you looking for to think about possibility for an early filing accelerated approval here based on that data set versus maybe just needing a fuller Phase III study.

So Teliso-V, that's our cMET antibody ADC with an MMAE warhead. Early data that we've seen in high expressers of CME in the EGFR wild-type subset was above 50%, and that's where FDA gave us breakthrough therapy designation. So we have over expressors that include intermediate and high roughly 150 or so by the end of this year, we'll have completed a minimum of 6 months of therapy. So with that, we'll see what the response rates are, if they're consistent with what we saw earlier and we'll get a better idea of the duration of that effect. And if we're still seeing the same high levels and strong duration, that's something that we would definitely approach agencies for accelerated approval. Even before that, we've already initiated the Phase III program that's randomized and comparator. So you'll have both of those ongoing in the readout later this year.

And remind us that -- so maybe what percentage of patients are falling to the high expressor category?

So I would say the over-expressors in that wild-type category at roughly 25%. I could probably split them down the middle, which are intermediate and which are high, the 12.5%, 12.5%.

Okay. And I guess the other one is on navitoclax. Just what other data from the Phase III trial could help swing the risk/benefit profile here? I know that was the other one you gave an incremental of the 2Q call.

Yes. We reported out the [spleen] volume reduction rate, which was double of the control versus the combo with the JAK 2 60% versus roughly 30%. So very strong data we didn't see the movement on symptoms as we would have wanted to that's an agency expectation for the dual. However, in our early-stage data and certain publications, we see that spleen volume reduction and changes in bone marrow morphology improvements in fibrosis seem to correlate well with harder outcomes like survival. So as we continue to follow that data from what we reported earlier this year through the end of this year, we'd be looking for the maintaining of the spleen volume reduction. We'll take another look at symptoms, but then bone marrow fibrosis to see if there is a greater improvement there. And we have an idea since we follow up longer what the harder events look like. And we start seeing a separation there, then I think it's clearly worth that conversation to see what we can do with that asset to bring it to patients.

And when that would be at what first half '24?

Yes. We'll get the read later this year, if it looks good, then first half of next year, start those discussions and potentially moving forward from that.

Okay. Okay. Great. Maybe just pivoting back to aesthetics. Rob, you had mentioned some of the trends you're seeing, I guess, we're just I was looking at our Google Trends data, it looks like BOTOX is tracking above for the quarter. Fillers also slightly above consensus. Maybe just talk through. And again, it's on global. But again, I know there's some U.S. versus ex U.S. dynamics there. So as you think through kind of the puts and takes you're going to not just third quarter back half of the year on the aesthetic side?

So I'll start with China first. What we saw was a much faster recovery in China, very robust growth in the first half of the year. That exceeded our expectations, which just drove part of the guidance update that we provided for aesthetics. So that, I'd say, was a positive. What we've seen recently, while the China market is still growing nicely, it has moderated somewhat given the macroeconomic headwinds. So we're keeping an eye on that. See, it's still growing nicely, but I'd say, moderated somewhat. In the U.S., we're seeing a similar dynamic we saw last year, which is a differential between the toxins market and fillers. Where we saw less of an impact in toxins and fillers and sometimes due to price point and the procedure. We're now at a point now we've lapped the event. We're seeing the U.S. toxin market return to growth, low single-digit growth, but return to growth. So I'd say BOTOX is performing nicely. With fillers, we're seeing it, it's taking a little bit longer to see that recovery. It's not -- we've lapped the slowdown. So we're not looking at the same type of market decline. We were talking about the first and second quarter, but we're still aiming in the third quarter, seeing so year-over-year market is still down. So that, I'd say the recovery is taking a little bit longer than we expected. Net-net, we feel good about the performance of the aesthetics business. We've taken up a collective $200 million for the year in each quarter, $100 million. So the performance is still strong, but I'd say the market it's something you have to keep a close eye on given the dynamics in China, but we're seeing the fillers market, but we're encouraged, particularly by what's happening on toxins.

Okay. And I guess the other one, I know we talked about this earlier this year is that the innovation, maybe how the company is thinking specifically on the toxin side. I know there's a competitor out there that a longer-acting. But again, when we last spoke, it sounded like the company is focused more on shorter acting as maybe like a way to continue to build this market. So again, maybe just kind of square that for us in terms of what we're hearing from a competitor about what the kind of needs are out there versus why you guys are going with a shorter acting?

I can start off. So we do have a program in place for long acting. And I think there's a segment of the population that really wants a truly long-acting. However, much of the conversation with patients is they do tend to come in to the office 2, 3, 4 times a year the clinics certainly like that because they'll come in for more than just one procedure. And for something like BOTOX that has multiple indications and more to come, that's a huge advantage. Now getting back to the short term, that is an ask, there's a couple of questions, right? One is I'm thinking about the toxin now because I have an event. We talk about weddings or reunions. And these toxins because of the longer half-life take long to have that peak effect. So if you're thinking and you want it now, they short acting that we're developing offers a solution right away. Now the other question we get is, well, I don't know if I want to commit to the toxin because I'm going to get a look that I may not be comfortable with for 90 days or longer. So the other benefit of the short-acting is a rapid onset and a rapid offset. So then someone can come in and say, "Well, let me see how I'm going to look." They see that and they're like, "Okay, I like it." And then they can move on to BOTOX and for maybe a smaller segment in the future as we develop the long-acting, then move on to a long acting.

That's a very interesting opportunity. If you think about what's going to drive our ability to deliver on that greater than $9 billion. It's like kind of high single-digit growth in aesthetics. It's about expanding the market. So this is a great opportunity for us to drive that market expansion with if you think about it as a trial talks and to bring new consumers and providers practices.

Yes. And what -- and maybe can you elaborate at all on kind of what you saw in 2Q about competitive dynamics out there. Again, it sounds like there's not much of an impact. But again, I know there's still some debate about how over the medium to long term.

And we do believe there is a place for a long acting. I think there's a question whether a Daxxify is truly providing the duration that's being spoken about. In terms of the share capture, we had assumed in our guidance, there would be some level of share capture from Daxxify. We've seen very little impact so far, I'd say, from our intelligence, looks like they've gained I'd say, a low single-digit share position, not all coming from BOTOX but low single-digit share capture. So a little bit lower than we had expected, but something obviously we're monitoring carefully.

Okay. Well, I think we're up against time. But thank you all so much for the time today. Really appreciate it.

Thank you.

Thank you.