AbbVie Inc. (ABBV) Earnings Call Transcript

Great. So good morning, everyone. This is David Risinger from Morgan Stanley. I cover both major and specialty pharmaceuticals, and it's my pleasure to host this session with the AbbVie leadership team. Please note that we do need to refer you to disclaimers, specifically the Morgan Stanley research site, www.morganstanley.com/researchdisclosures. And note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. It's not for members of the press. So if you're a member of the press, please disconnect and reach out separately. And if you have any questions, please reach out to your Morgan Stanley representative. So I wanted to thank the leadership team from AbbVie for joining. It's my pleasure to welcome Chairman and CEO, Rick Gonzalez, Vice Chairman and President, Mike Severino; and Executive Vice President and CFO, Rob Michael.

So Rick, why don't we sort of kick it off with you. Congratulations on AbbVie's recent corporate performance. Could you just provide an update, please, on the Allergan acquisition integration and how it's going, particularly in the face of COVID?

Yes. Thanks, David. It's a pleasure to be here with you. And I'd be happy to give you an update on the integration. I think overall, the integration has gone extremely well. We obviously had time to be able to plan quite extensively with the Allergan leadership team to be able to prepare for the ultimate integration. But I'd say we're tracking on all of the key milestones, including the synergy targets. And despite the fact that we obviously had the COVID disruption during this period of time, but I'd say the business is going well. And in fact, I'd say from a recovery standpoint, if I look at the Allergan business, in particular, the aesthetics business and the BOTOX Therapeutics business, which were most impacted by COVID in the second quarter, we've seen a strong rebound from both of those businesses. They both are tracking at or pretty close to 95% to 100% of previous pre-COVID levels. Most of the practices that do those procedures have reopened now and are starting to -- continuing to do procedures and, in fact, working their way through the pent-up demand that was created during the COVID crisis. So overall, I feel very good about the acquisition and how the integration is going. And more importantly, I feel good about the strategic value that it's going to create for the new AbbVie.

Excellent. And while we're on that topic, can you discuss both the evolving competitive landscape in aesthetics, and also the opportunities that you see for -- to bring greater innovation forward for Allergan Aesthetics?

Sure. Well, I'd say generally speaking, we view aesthetics as a very attractive market. And therefore, there's obviously competitors now. I'd say the competitors are relatively small compared to the footprint of Allergan and the size of Allergan and the number of customers that Allergan has in this market. So really, I mean, Allergan is the market leader by a significant margin in these categories. But if you look at this market, it's attractive from a couple of perspectives. It's attractive both from the standpoint that it has relatively low penetration rates. Meaning there's a relatively small percentage of the population who could use these procedures, who currently use these procedures. And that population is impactable by using classic digital or DTC techniques, and those techniques and investments have good returns. And so one of the things that you'll see us do are doing right now with Allergan is to invest more heavily and more consistently than Allergan had previously invested in driving increased patients moving into the category. So that will be with both DTC as well as digital investments that we're making in the business and be able to invest in those in a sustainable way, where Allergan tended to do more pulse investing in this area. The second area is the point you just raised. And this is, this is a market that I think there is a significant opportunity to be able to bring new innovation into the marketplace, whether that'd be minimally invasive techniques that can come into the marketplace or enhancements in the existing product lines to allow for other kinds of assets, whether they be assets like assets that not only -- let's take fillers as an example, not only fillers that do physical filling but also can stimulate biologically in a way to stimulate your own collagen or stimulate your own elastin to be able to provide long-lasting and skin brightness along the way. So there's a significant opportunity to be able to add more innovation in this area. And I'd say that's something that we're certainly in a position that we can do, whereas I think Allergan was trying to build out their therapeutic business. So it was a little more difficult to be able to do that. So we plan on growing this market 2 ways: one, by investing on driving more and more penetration; and two, by expanding our footprint, both in the areas that we're in now like toxins and fillers and body sculpting and moving beyond that into other adjacent spaces to be able to have the broadest, most effective line for aesthetic medicine. So it's a market we like a lot. From a competition standpoint, obviously, we have seen competition in this market. We studied it carefully, how Allergan handled competition, whether that'd be toxin competitors or filler competitors. And you certainly never want to underestimate your competitors as they enter the marketplace. But I'd say, Allergan has done a very effective job at being able to manage the competitive landscape. But the biggest opportunity here is to be able to grow this market. And that's something we plan on investing in pretty heavily to make sure that we can drive the market at maximum growth.

Excellent. And then before we pivot to some questions for Mike and Rob, and obviously, you can incorporate them whenever you want, but can you just talk at a high level, Rick, about your vision to drive the sales of new franchises to blunt the negative impact of U.S. biosimilars in 2023 and 2024? And if possible, could you speak to your general expectations for how one should think about the revenues at a high level and the margins during that '23 to '24 period?

Sure. I'd say the fundamental strategy that we have implemented at AbbVie really since we launched as a company was one that was designed to be able to blunt the competitive impact of biosimilar competition on Humira, particularly in the U.S. And so the investments we've made in building out the pipeline, the investments we've made in building out a $6 billion-plus hematological oncology business that we have now that's growing rapidly, and obviously, the investment that we made in Allergan were all designed to be able to put us in a position where we would be able to grow through the ultimate impact of biosimilar competition. And I feel good about where we are strategically positioned now. We're far enough along on that strategy that I think I can see the elements coming together. And I'll just quickly walk through them. If you think about RINVOQ and SKYRIZI, they're doing extremely well in the marketplace, exceeding our expectations by a significant margin from the projections we made before we launch them from an in-play market share standpoint and growing rapidly, gaining significant share in the marketplace. And it demonstrated that physicians and patients think these products are important new assets for their treatment. And so that's going extremely well. As we build out those indications, I'd tell you, the R&D team, I think, is doing an excellent job of building out those indications. As an example, we're going to have 3 launches in 2021. Atopic dermatitis, PsA and ankylosing spondylitis, will all be launched on the platform next year. Those will drive significant growth opportunities. You've seen the data on atopic derm, and we're obviously very impressed with the level of efficacy data that we've been able to demonstrate there in 3 large trials, and Mike will probably talk about that in more detail. And so eventually, if we look at RINVOQ and SKYRIZI, it will have every major indication of Humira plus one large indication, atopic derm that Humira doesn't have. And that gives us a lot of confidence that we can drive strong growth, leading up to '23 and then through '23 continue to drive strong growth. Hem/onc, as I mentioned before, we've grown that franchise now into a $6 billion-plus franchise, growing rapidly. There's significant opportunity to be able to continue to grow that franchise, and there's significant opportunity to be able to continue to expand the indications for VENCLEXTA and other assets there. If I look at the other progress that we're making from an R&D standpoint, I think we're making good progress with the internal pipeline. And again, Mike can talk about this in more detail. But in particular, the late-stage assets like navitoclax, 951, the TNF steroid. We obviously are excited to see the results that we were demonstrated there. And I'd say the external deals we've been able to do in this area, like Genmab and the CD47 deal that we recently announced. Those are excellent additions to our hem/onc franchise, which will allow us to be able to continue to grow in that area. But when I look at what will happen post '23, what gives me a lot of confidence is, today, we have 6 growth assets. We have SKYRIZI. We have RINVOQ. We have IMBRUVICA, we have VENCLEXTA. We have UBRELVY, and we have VRAYLAR, plus the aesthetics franchise that will all be able to drive significant growth. I think there's a very high probability that we'll add to chronic migraine asset and have another additional growth asset to be able to drive growth. And then we have the pipeline and the external opportunities continuing to feed into that. So I think what you should expect as an investor is, yes, there will be a significant impact in 2023 on Humira. And we've pretty much told the market that you ought to be modeling something similar to what we've seen in the international markets. But on the other side of that, we will come out of that and be able to grow very rapidly. We publicly communicated that we can maintain through the LoE event in the U.S. an operating margin profile of 45% and drive growth on the other side of it. So I feel good about the strategy, and I feel good about our execution around that strategy. And I think we've certainly proven that we can deliver on those expectations. The only other thing I'd add is I think one of the things that investors were concerned about was would you -- after that initial erosion that you saw in 2023, will it continue to erode after that. And I think the international business has now shown us, which is what we indicated to the market, that, that initial -- the competition that occurs in that initial phase is such that most of those biosimilar players go to their -- close to their floor prices, and we tend not to see a lot more erosion after that. And if you look at the countries right now, which is a sizable number of countries that we've now lapped biosimilar competition, that is how it's playing out. You've seen that business stabilize. And in fact, we overperformed a little bit in both first and second quarter, which is an indication of that stability. So I feel good about the strategy. I certainly feel good about the assets. I feel good about what Allergan has been able to give us to be able to further support those growth objectives on the other side of it, and I think we're in a pretty good position to deal with it.

Dave, Rob. I would just add on operating margin. As we've talked about before, if you look at the current profile of the company, we've guided to about 48% operating margin this year. As you think about -- as we realize the full synergies, as we see revenue grow, we have a track record of driving P&L leverage on the expense line. And so I would expect to see operating margins continue to expand heading into the 2023 event. Now with the U.S. Humira LoE rules, we will see operating margins pull back, but think of it more at the 45% range, which still puts us in the top-tier of the industry. And then as we return to revenue growth very rapidly, we will continue to see operating margin expand from there. So overall, we feel very good about the operating margin profile of the company over the long term.

Great. Thanks Rob. And then, Mike, could you talk a little bit more about the opportunities in R&D that you're most enthused about?

David, this is Mike. I'd be happy to do that. There are really a large number of opportunities in the pipeline that we're very excited about. If we take a step back, we knew it was important when we set out as an independent company almost 8 years ago now to develop an R&D engine that would bring forward a consistent stream of products and be able to drive our growth for the future. And we've made very, very good progress against that. You can see that in the work we've done with our immunology franchise, with RINVOQ and SKYRIZI; in our hem/onc franchise, with IMBRUVICA and VENCLEXTA and in other areas like hep C and virology. And so when we look forward at the opportunities that excite us, we want to continue to drive growth in immunology, not only with RINVOQ and SKYRIZI, but with the next-generation of products beyond that to continue to raise the bar on the standard of care. We've announced early phase proof-of-concept data from our TNF steroid conjugate program. That's a very exciting platform. I think it has real opportunities in rheumatoid arthritis and other TNF-mediated diseases. But it also represents a platform that we can use to take us into other areas by either changing the targeting warhead or the payload to get into areas that have been much more difficult to impact like lupus or scleroderma. So I think you'll see a lot more from us in that area. If you look at our hem/onc franchise, we have very good opportunities from our organic internal pipeline and from some of our recent additions. Navitoclax, which has moved into late-stage development, I think, is still underappreciated. It's a BCL-XL targeted agent that's shown very strong data in myelofibrosis with the potential for disease modification, can really change the way that illness is being treated. Really, there's only one mechanism and one dominant player, that's Jakafi. That hasn't been shown to be disease-modifying in prospective studies. Despite that, it's a market that's over $1.5 billion today, projected to grow to $3 billion. And we think we can really bring forward an important new drug there that can change the way that disease is being treated. That really highlights our expertise in apoptosis. We have earlier programs behind that both at heme malignancies and taking our expertise in apoptosis into solid tumors. There, I'll highlight the BCL-XL targeted warhead toward ADC deliveries, so our B7-H3 antibody that targets an XL warhead to solid tumors like non-small cell lung cancer and breast cancer, potentially, very, very exciting program and earlier efforts in apoptosis beyond that, things like our trail program in solid tumors and MCL1 in liquid tumors. So really a lot of work going on that builds on the expertise we already have demonstrated through programs like venetoclax and navitoclax. The efforts in solid tumors are continuing to move forward, particularly in immuno-oncology as well, and immuno-oncology can span solid and liquid tumors. We have epcoritamab now in partnership with Genmab, moving into late-stage trials. In diffuse large B-cell lymphoma and follicular lymphoma with very strong proof-of-concept data being generated. And our earlier I-O programs, both directed at BCMA and directed at solid tumor antigens, continue to make good progress. In immunology, I've touched on some of the key areas that we're focused on. And then we also have very strong efforts in neuroscience. We've advanced 951, which is an advanced therapy for Parkinson's disease patients into late-stage development. We have a number of early Alzheimer's programs, not just aimed at TAL, but inflammation that are very compelling. And with the addition of Allergan, we have the opportunities like major depressive disorder for VRAYLAR and the CGRPs, one of which is on the market for acute treatment of migraine, and strong Phase III data for prevention of migraine. There's a lot to be excited about in that portfolio. And we also have an additional source of innovation, which is our partnership with Calico, which is now moving into the clinic, bringing forward very, very interesting, very differentiated assets in areas like immuno-oncology and neuroscience. Over time, that can really, I think, add to all of the work that we're doing internally and bringing forward some very, very strong programs. The most advanced Calico program is in the clinic. That is an I-O program, and that's one that we're very excited about as well. So really, across the board, there's a lot to be excited about in our pipeline.

Excellent. Thank you for that comprehensive rundown. So maybe we could pivot just to the financials. And at a high level, I think it'd be helpful, maybe, Rob, for you to just discuss the cash flow prospects and AbbVie's capital deployment agenda. But I wanted to ask a question about the dividend. So I know the company is committed to increasing the dividend, but the dividend yield is already quite high and doesn't help the PE of the stock. So does it make more sense to allocate more future cash flow toward external transactions to enhance top line growth rather than raising the dividend at higher rates? I'd love to get your thoughts on that.

David, this is Rob. So if you think about the amount of cash flow the combined business generates, it's pretty tremendous and allows us to do a number of things. So if you just look at last -- in 2019, the combined companies generated about $20 billion of cash flow. So that allows us to rapidly pay down debt. We've committed to paying down $15 billion to $18 billion by the end of next year with further deleveraging beyond that. It also allows us to continue to support a strong and growing dividend. As you mentioned, you've had a track record of growing that dividend. We've nearly tripled it since inception, and we're very committed to continue to grow that dividend. And on top of that, we've also been able to set aside $2 billion per year to access external innovation. And the recent Genmab deal is a good example of the type of opportunity we're very interested in. So given the amount of cash flow the business generates, we're able to do all of those things. We're not sacrificing opportunities to pursue external innovation through the dividend. So we feel it's very important to continue to grow that dividend. It's important to rapidly pay down debt, and it's important for us to continue to access external innovation.