AbbVie Inc. (NYSE:ABBV) Morgan Stanley 21st Annual Global Healthcare Conference 2023 September 13, 2023 10:50 AM ET

Company Participants

Rob Michael - President, Chief Operating Officer

Scott Reents - Chief Financial Officer

Jeff Stewart - Chief Commercial Officer

Roopal Thakkar - Head of Development, Regulatory Affairs.

Conference Call Participants

Terence Flynn - Morgan Stanley

Terence Flynn

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 this 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.

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.

Question-and-Answer Session

Q - Terence Flynn

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 de-levered 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.

Rob Michael

Yes look, I think as you know, we'ver generated a tremendous amount of cash. I think this year, free cash flow – adjusted free cash flow is about $19 billion. Our primary means of returning capital to shareholders has been 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 investment businesses. So given the rate of de-levering, you just saw we got an upgrade from Moody's recently. We have 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, I'd 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 focused more on, think of it as small to mid-sized 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, for Skyrizi and Rinvoq, we expect to deliver robust growth into the next decade. And so there we're really looking for new mechanisms of action that can elevate standards 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, and 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 D3 selectivity that can really address mood and 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 if 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 retinopathy. That would be an example. So it's really thinking about those small to mid-size opportunities to help drive growth in the next decade.

Terence Flynn

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 often debate, is just what is the opportunity set right now as we look across the landscape?

Rob Michael

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.

Terence Flynn

Okay, great. And kind of the related question is obviously the IRA list was published about a week and a half 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-IRA world, either in terms of R&D investments internally or how you approach external deals?

Rob Michael

Sure. So just to clarify, we did have – Imbruvica was on the list and that wasn't a surprise to us because when – for our modeling, we looked at time and market and essentially the size of the gross Medicare spend. So we weren't 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 of 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, is there is a different set of now small molecules versus large molecules. So do you approach things differently there?

In the past, we've studied in oncology in particular with small molecules, later lines, 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've 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 and 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.

Terence Flynn

Okay, great. And maybe one related one, I guess, is just that 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?

Rob Michael

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 spill over in the past. So our working assumption is that we do not expect to see spill over in the commercial channel.

Terence Flynn

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 biggest disconnects between your confidence in getting to that mid-single digit and maybe where investors are right now?

Rob Michael

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 is Skyrizi and Rinvoq, I do see a difference also for Vraylar and Aesthetics. Each about $1 dollars that we've said, greater than $9 billion for Aesthetics, the Street's about $1 billion lower.

For Vraylar, we saw the peak approaching $5 billion, the Street's about $1 billion lower. But the lion's share of the disconnect is Skyrizi and Rinvoq. Not early – I mean 25 right now, actually, The Street is slightly higher than the guidance we've given. It's $17.5 billion, $10 billion for Skyrizi, $7.5 billion for Rinvoq.

The Street's actually at about 11 now, a little bit higher than 11 for Skyrizi. Below us on Rinvoq, they are $6.5 billion. But net-net is about $18 billion, so ‘25 isn't the issue. It's the growth beyond ‘25. It's something like low single-digit growth and we expect much more robust growth from Skyrizi and Rinvoq 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 indications. So we would expect robust growth for Skyrizi and Rinvoq into the next decade. And right now, the Street is not modeling that type of growth beyond ‘25.

Terence Flynn

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. 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 that just came out.

Rob Michael

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 at 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-in-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 eight 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're 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 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 and we 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.

Roopal Thakkar

Yes, thanks Jeff. The head-to-head in Crohn's disease, one thing to point out, it was all TNF-IR, so 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 have presented thus far was endoscopic remission doubling, 32% versus 16%.

More comprehensive data will be released at UEG W will 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 got a subcutaneous maintenance.�? So it may not be very clear, just looking at the cross-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.

Rob Michael

For Skyrizi and Rinvoq, IBD represents about – for this year's guidance about $1.5 billion. If you look at the ‘25 guidance we provided, its $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 and certainly beyond that.

Terence Flynn

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 think I was more of a skeptic there initially, but you guys have proven me wrong as you've done a great job 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?

Rob Michael

Yes, great question. 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 number two, 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, TRF 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 when we listen to the derms over what they like about Rinvoq, you get the higher levels of skin clearance. So instead of a posi for psoriasis, you have an easy or an eczema score 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 a 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 five years of safety data in the market.

So we do think that it'll 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 three times bigger in terms of the moderate to severe population than psoriasis. I think it's one of the most attractive markets in the industry, and we're going to be a significant player.

Terence Flynn

Okay, great. Maybe coming back to a couple high-level ones for Rob. It's just, I think on the 2Q call you guys provided some increased color around kind of ‘24 expectations for Humira that I think were welcomed by investors.

But then there has been a more recent announcement around the CVS launch of Cordova and contract with Sandos for their Humira biosimilar. So maybe just give us a mark to market and kind of, does the commentary from 2Q still hold, or have there been any other developments that have changed your view of ‘24 Humira?

Rob Michael

No, things are playing out as we expected. There's really been no surprises. I mean, Jeff and his team are going to the negotiations now. That's typical. It happens this time of year, so we'll see that play through over the next few months. But nothing really on the Humira biosimilar front that I would say changes our view.

We feel very good about certainly the performance you'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 guides.

We've seen very nice performance from Skyrizi and Psyriatic and IBD. Aesthetics has performed better than we expect in terms of a fast recovery in China, as well as, I'd say overall Botox momentum. Still I'd say the slowdown in fillers, we haven't quite seen release yet, so 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 between chronic migraine and Botox therapeutic, as well as, you think about the oral CGRPs, QULIPTA and Ubrella, a really strong performance. As we, you know, look at the performance coming out of the Q2 call, while clearly nothing's really changed on the biosimilar front, we'll continue to see a very nice momentum from our growth platform, which gives us a lot of confidence going forward.

Terence Flynn

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 Q2 call?

Rob Michael

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 of business, and in particular the growth platform, it gives us a lot of confidence on the floor and we've been contemplating whether on the Q3 call, we actually updated that upwards. So well, stay tuned. It's something we're talking to and we're feeling very good about the performance of the business this year.

Terence Flynn

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

Scott Reents

Yes, maybe I'll start. I mean, you're right. With the, just like the trough earnings, we offered the 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 Humira this year. But that will probably stabilize around 84% where we are now, because as Humira will decrease, we'll have 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 fundamentals, that's what really will drive any discussion we have on them.

The operating margin, we see it kind of continuing, that 46% to 47% through ‘24, and then expanding thereafter, right. I think it is important to note though, that 46% to 47% is really still top tier within industry. So as we see the ability in ’25 and beyond to expand, that still does offer some nice capacity to continue to invest in the growing business.

Rob Michael

Yes, we factored into that. You saw 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 and the operating margin guidance is that we want to continue to invest in R&D. We will continue to expect that R&D investment to continue to increase as we 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 two years.

But as Scott mentioned, when we return to robust revenue growth, I mean we've demonstrated the ability to drive operating margin expansion by really leveraging the expense lines. And so I would expect to see us return to that, but not by sacrificing investment in the business. We're fully committed to investing both in R&D and SG&A to drive our growth brands.

Terence Flynn

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 a possibly for an early filing accelerated approval here based on that data set versus maybe just needing a fuller Phase III study?

Rob Michael

So Teliso-V, that's our c-Met antibody ADC with an MMAE warhead. Early data that we've seen in high expressors of c-Met in the EGFR line 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 six months of therapy. So with that, we'll see what the response rates are, if they are 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 three program that's randomized in comparator, so you'll have both of those ongoing in the readout later this year.

Terence Flynn

And remind us that, so maybe what percentage of patients fall into the high expressor category?

Rob Michael

Yes, so I would say the over expressors in that line type category are roughly 25%. I could probably split them down the middle, which are intermediate and which are high, so 12.5%, 12.5%.

Q - Terence Flynn

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 the other one you gave an incremental update on the 2Q call.

Rob Michael

Yes. We reported out the spleen volume reduction rate, which was double of the control versus the combo with the JAK2 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 and 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's a greater improvement there, and we'll have an idea since we follow-up longer, what the harder events look like. And if you 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.

Q - Terence Flynn

And when – that would be a what, first half ‘24?

Rob Michael

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 then.

Q - Terence Flynn

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 not 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 here going to not just third quarter, back half of the year on the aesthetic side.

Rob Michael

Yes. 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 tried 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 headwind, so we're keeping an eye on that. 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 some of that's 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. toxins market return to growth, low single-digit growth, but return to growth. So I'd say Botox is faring nicely.

With fillers, we're seeing – it's taking a bit longer to see that recovery. We've lapped the slowdown, so we're not looking at the same type of market decline. We were talking about in the first and second quarter. But we're still in the third quarter seeing still year-over-year markets still down.

So with 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, and each quarter $100 million. So the performance is still strong, but I'd say the market is something you have to keep a close eye on given the dynamics in China that we're seeing in the fillers market, but we're encouraged particularly by what's happening on toxins.

Q - Terence Flynn

Okay. And I guess the other one – I know we talked about this earlier this year, is that the innovation may be how the company's thinking specifically on the toxins side. I know there's a competitor out there with a longer acting, but again, when we last spoke, it sounded like the company was focused more on shorter acting as maybe like a way to continue to build this market.

So again, maybe just square that for us in terms of what we're hearing from the competitor about what the kind of needs are out there, versus why you guys are going with like the shorter acting.

Rob Michael

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 into the office two, three, four 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 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, the short acting that we are 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 are like, okay, I like it. And then they can move on to a Botox and for maybe a smaller segment in the future as we develop a 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 a 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, the trial toxin to bring new consumers into providers’ practices.

Q - Terence Flynn

Yes. And what – and maybe can you elaborate at all on kind of what you said on 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 this plays out over the medium to long term.

Rob Michael

We do believe there's a place for long acting. I think there's a question whether or not 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, it 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.

Terence Flynn

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

Rob Michael

Thanks, Terrance.

Scott Reents

Thank you.