Elizabeth Shea - AbbVie, Inc. Richard A. Gonzalez - AbbVie, Inc. Michael E. Severino, M.D. - AbbVie, Inc. William J. Chase - AbbVie, Inc..

Jami Rubin - Goldman Sachs & Co. LLC Joshua Schimmer - Evercore, Inc. Jason M. Gerberry - Bank of America Merrill Lynch Steve Scala - Cowen & Co. LLC Christopher Schott - JPMorgan Securities LLC Geoffrey Meacham - Barclays Capital, Inc. Gregg Gilbert - Deutsche Bank Securities, Inc. Vamil K. Divan - Credit Suisse Securities (USA) LLC David R.

Risinger - Morgan Stanley & Co. LLC.

Good morning and thank you for standing by. Welcome to the AbbVie first quarter 2018 earnings conference call. All participants will be able to listen only until the question-and-answer portion of this conference. I would now like to introduce Ms. Liz Shea, Vice President of Investor Relations..

Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Michael Severino, Executive Vice President, Research and Development and Chief Scientific Officer; and Bill Chase, Executive Vice President of Finance and Chief Financial Officer.

Before we get started, I'd like to remind you that some statements we make today are or may be considered forward-looking statements for the purposes of the Private Securities Litigation Reform Act of 1995.

AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements.

Additional information about the factors that may affect AbbVie's operations is included in our 2017 Annual Report on Form 10-K and in our other SEC filings. AbbVie undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments except as required by law.

On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand AbbVie's ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website.

Following our prepared remarks, we'll take your questions. So with that, I'll now turn the call over to Rick..

Venclexta in AML and multiple myeloma; elagolix in uterine fibroids; and several important new indications for upadacitinib and risankizumab, such as Crohn's disease, ulcerative colitis, and atopic dermatitis, among others. We're excited to see the evolution of our pipeline from promising late-stage development compounds to on-market products.

We feel highly confident about our pipeline and its ability to drive top-tier long-term growth. Our pipeline represents a significant yet underappreciated growth driver for AbbVie. AbbVie is a company that has consistently demonstrated we live up to our commitments and we deliver top-tier performance.

We're a company that has exceptionally strong operating performance, as is clearly demonstrated by our financial results, an impressive late-stage pipeline, an efficient tax structure, and a compelling philosophy on return of capital to our shareholders, as demonstrated by our dividend growth and our share repurchase program.

So in summary, we're extremely pleased with our outperformance in the quarter and with the strong momentum of our business, leading to the increase in our expectations for 2018. We have a high degree of confidence in our ability to continue to successfully execute on our long-term strategy and deliver outstanding shareholder value.

With that, I'll turn the call over to Mike for additional comments on R&D.

Mike?.

Thank you, Rick. Today I'll highlight recent pipeline updates and discuss key milestones we anticipate for the remainder of 2018.

I'll start with our immunology programs, where we are nearing completion of the registrational programs for our two late-stage assets, upadacitinib and risankizumab, in their initial indications of RA and psoriasis respectively.

Based on the data we've generated to date, each of these assets has the potential to significantly advance standard of care in a number of immune-mediated conditions.

Earlier this month we reported top line results from the SELECT-COMPARE study, which evaluated upadacitinib against both placebo and HUMIRA in patients who did not adequately respond to methotrexate.

This was the fourth study in the SELECT clinical program, and the results showed a significant impact on both signs and symptoms and radiographic progression compared to placebo as well as improvements in important measures, such as ACR response and low disease activity compared to HUMIRA.

Given its strong profile, upadacitinib has the potential to be a best-in-class therapy in RA and could offer meaningful advantages over products on the market today or in development. We are also obviously aware of the recent FDA Advisory Committee meeting on baricitinib.

In our view, the primary safety considerations for bari relating to DVT and PE are the presence of an imbalance of thrombotic events in the controlled portions of their trials, challenges to finding the benefit/risk profile of the lower dose, and potentially concern over sustained increases in platelets in comparison to baseline.

When we look at the upadacitinib program, we remain confident in our safety profile, both overall and with respect to DVT and PE rates. Today we have unblinded results from four of the five pivotal studies that will support our global registration.

When we look across the controlled periods of these four studies, we have reported five patients with events of DVT or PE in the upadacitinib groups, as compared to four patients with these events in the comparator groups.

Thus, we see very similar numbers of events despite the fact that more patients received upadacitinib than comparator in these studies. Therefore, we do not see an imbalance in these data. Second, we have designed and conducted a program that will characterize the benefit/risk profile of both doses of upadacitinib independently.

Notably, our lower dose was included in all pivotal studies and important parts of our program, such as our head-to-head data against HUMIRA, and our structural data were performed at the lower dose.

Third, with respect to platelets, the pattern we observed with upadacitinib in our Phase 3 studies is a modest decrease in platelets by week four, which returns towards baseline over time.

We expect to see data from the final study in our registrational program, the SELECT-EARLY trial, in the coming months, with our regulatory submission following in the second half of the year.

Moving now to our other late-stage immunology asset, risankizumab, we've completed the registrational program for the psoriasis indication, and just yesterday announced that we have submitted our BLA in the U.S. The European submission is anticipated very shortly.

In all four Phase 3 studies in the pivotal program risankizumab consistently showed very high and durable rates of skin clearance.

Based on these results, we believe risankizumab has the potential to significantly improve upon current treatment options for both bio-naive and TNF-inadequate responder populations with moderate to severe psoriasis while offering the convenience of quarterly dosing.

We continue to make good progress with the development programs for both upadacitinib and risankizumab in several other immune-mediated conditions, including Crohn's disease, ulcerative colitis, psoriatic arthritis, and atopic dermatitis.

Phase 3 studies are underway for several of these indications, and we plan to start registrational programs for the remaining indications over the course of the next year. We look forward to providing updates on these programs as the data mature.

Moving now to oncology, where we continue to advance our programs for IMBRUVICA and Venclexta, we've seen very strong activity across a broad range of hematologic malignancies with these two therapies, demonstrating their potential to transform treatment by driving better long-term disease control and better outcome for patients.

With IMBRUVICA, we continue to build the body of evidence in CLL as well as in other blood cancers. We have several studies ongoing to evaluate IMBRUVICA alone and as a combination therapy in different patient segments, including young and fit patients and the watch-and-wait population.

These studies will add to the breadth of data supporting IMBRUVICA, providing physicians more evidence of the compelling clinical benefits in the front-line setting. We expect to begin seeing data from these Phase 3 trials next year.

Moving now to Venclexta, which is currently under Priority Review with the FDA for use in relapsed refractory CLL in combination with Rituxan, we continue to expect a midyear approval for this broader relapsed refractory CLL population, moving us further towards our goal of establishing Venclexta as a foundational chemotherapy-free option in the CLL market.

Beyond our core strategy in CLL, we are making great progress with our development programs to expand Venclexta across other hematologic malignancies such as AML and multiple myeloma. We remain on track to submit our U.S. regulatory application for Venclexta in AML later this summer.

And we look forward to bringing this new treatment option to the substantial group of previously untreated AML patients who can't receive high-dose induction chemotherapy. This submission is based on the substantial activity we've seen with Venclexta in our mid-stage studies and represents a significant acceleration of our AML program.

The Phase 3 studies in AML are ongoing, with data readouts expected next year. The Phase 3 program in multiple myeloma is also progressing well, with key data becoming available in the first half of 2019.

I'll now turn to our solid tumor programs, where, despite some disappointing news in the quarter that we won't be seeking accelerated approval for Rova-T in third-line or greater small-cell lung cancer, we're making continued progress with Rova-T in earlier lines of therapy as well as with our early-stage solid tumor programs.

In March, we announced top line results from the TRINITY study in third-line small-cell lung cancer. While Rova-T demonstrated single-agent responses in these advanced patients, after consulting with the FDA, we made the decision not to seek accelerated approval based on this single-arm study.

Although the results from the TRINITY study were not what we had hoped for, we believe that in earlier lines of therapy and in combination with other agents, Rova-T has the potential to provide important clinical benefit. And we look forward to data from the ongoing and MERU and TAHOE trials in first and second-line small-cell lung cancer.

The MERU and TAHOE studies are expected to read out in the 2020 timeframe and should provide definitive evidence of Rova-T's potential as an important treatment option for small-cell lung cancer patients. And finally, in the area of women's health, our regulatory application for elagolix in endometriosis is currently under review.

We recently announced that the FDA has extended the review time by three months after requesting additional information regarding the results of liver function testing from the clinical program. We have submitted our response to the agency.

And, based on our review of the data, we remain confident in our application, and we look forward to approval in the third quarter. In addition to the endometriosis program, we continue to make good progress with our pivotal program evaluating elagolix in combination with low-dose hormone add-back therapy in women with uterine fibroids.

In the first quarter, we announced positive top line results from both Phase 3 uterine fibroid studies, where elagolix in combination with low-dose add-back therapy met the primary and all ranked secondary endpoints in both studies.

Data from both pivotal studies as well as data from the six-month extensions will support our regulatory submission for elagolix in this indication in 2019.

So in summary, we have continued to make significant progress with our pipeline, and we look forward to many more important data readouts, regulatory submissions, and approvals throughout the remainder of the year. With that, I'll turn the call over to Bill for additional comments on our first quarter performance..

Thanks, Mike. As Rick said, we delivered another quarter of outstanding performance with strong top and bottom line growth. Total net revenues for the first quarter were $7.9 billion, up 17.6% operationally, excluding the impact of foreign exchange.

We reported adjusted earnings per share of $1.87, up 46.1% compared to the first quarter of 2017 and exceeding our guidance for the quarter. HUMIRA global sales were $4.7 billion, up 10.7% operationally. In the U.S., HUMIRA sales increased 11.4% compared to the prior year, with prescription volume growth of 9% and price in the mid-single digits.

Growth in the quarter was impacted by retail inventory destocking at a large specialty pharmacy. Excluding the impact of this destocking, HUMIRA sales growth in the U.S. would have been over 13%. Wholesaler inventory levels were below half a month in all quarters.

International HUMIRA sales were $1.7 billion in the quarter, up 9.3% on an operational basis or 20% including the impact of foreign exchange. The quarter's performance benefited to a degree from shipment timing. Excluding this impact, operating performance was over 7%.

Despite increasing competition, HUMIRA has maintained its strong position as the leading front-line therapy across all approved indications, demonstrating its unique product profile and strong physician preference.

Global IMBRUVICA net revenues in the first quarter were $762 million, up 38.5% year over year, with continued strong uptake in CLL as well as other approved indications. Global HCV sales in the first quarter were $919 million, with MAVYRET sales of approximately $850 million.

As Rick mentioned, we've been extremely pleased with the launch of MAVYRET in the U.S. and international markets. In the U.S., penetration of the commercial markets has exceeded our initial expectations, with formulary access across roughly 75% of covered lives and more rapid share gains than we originally anticipated.

In the first quarter, we saw an increase in global patient volume, driven primarily by the treatment of warehoused DAA failure patients in Japan and a slightly higher level of treated patients in the U.S. relative to volume in the back half of 2017.

Global sales of Duodopa, our therapy for advanced Parkinson's disease, grew 16.5% operationally, and we also saw strong growth with Creon and Lupron. Turning now to the P&L profile for the first quarter, adjusted gross margin was 80.2% of sales compared to 79.9% in the prior year.

This was inclusive of the year-over-year negative impact of partnership accounting and an additional negative impact of exchange due to the strengthening of hedged currencies. Adjusted R&D was 15% of sales in the quarter, supporting our ongoing pipeline programs in oncology, immunology, and other areas.

Adjusted SG&A was 21% of sales in the quarter, an increase of 20 basis points versus the prior year, reflecting continued investment in our unmarketed products as well as investment in advance of several upcoming product launches.

The adjusted operating margin was 44.1% of sales in the first quarter, an improvement of 200 basis points versus the prior year. Net interest expense was $251 million in the first quarter. The adjusted tax rate was 7.6% in the quarter, with the rate benefiting from the timing of compensation programs.

First quarter adjusted EPS excluding specified items was $1.87, up 46.1% year over year. As mentioned earlier this morning, based on our strong outperformance year to date as well as our outlook for the remainder of the year, we are raising our full-year adjusted earnings per share guidance to between $7.66 and $7.76.

At the midpoint, this new guidance range is $0.33 higher than our prior guidance, with more than half of the increase from stronger operating performance. Our revised midpoint represents annual growth of 38% versus 2017.

This revised guidance contemplates revenue approaching $32.6 billion and reflects a favorable foreign currency benefit of approximately 2%. Included in this guidance are the following assumptions for our key products. We expect U.S. sales of HUMIRA of approximately $13.7 billion.

We continue to see robust prescription growth and maintain a strong leadership position across all segments.

This guidance reflects the retail specialty pharmacy destocking that we are seeing in the market as well as a moderately more conservative stance on co-pay costs associated with cost accumulator programs in certain high-deductible commercial plans.

While these programs have not materially impacted the first quarter performance, we continue to monitor them closely in order to minimize any impact on patient access. At current exchange rates, we expect international HUMIRA sales to approach $6.4 billion this year.

This guidance assumes operational growth roughly in line with our prior expectations and is inclusive of the impact of direct biosimilar entrants in the fourth quarter of 2018. For IMBRUVICA, we continue to expect global revenues to AbbVie of greater than $3.3 billion, with U.S. sales just above $2.7 billion.

And we are now forecasting global HCV sales in 2018 to be approximately $3.5 billion. Turning now to the P&L for 2018, as Rick noted during his remarks, with the passage of tax reform, we will be making further investments to support long-term growth.

In 2018, we are forecasting SG&A approaching 20.5% of sales, reflecting investments to maximize the potential of assets launching in 2018 and 2019. We currently expect full-year R&D expense of just above 16% of our revised sales projection.

We are forecasting operating margin above 43.5% of sales, more than 100 basis points above 2017, inclusive of the incremental investments in support of our upcoming product launches and an expected negative impact from currency.

We now expect net interest expense of approximately $1.1 billion, inclusive of the financing impact of the announced share repurchase activities. And we are forecasting an adjusted tax rate approaching 9%. As we look ahead to the second quarter, we expect adjusted earnings per share between $1.94 and $1.96.

Our second quarter adjusted EPS guidance excludes roughly $0.34 of non-cash amortization, impact from tax reform, and other specified items. We are forecasting operational revenue growth in the second quarter of approximately 15%.

Holding exchange rates constant at current levels, we would expect foreign exchange to have a favorable impact to sales growth of approximately 3% in the second quarter. For U.S. HUMIRA, we expect sales growth in the second quarter approaching 10%. Internationally, we expect HUMIRA sales approaching $1.6 billion, assuming current exchange rates.

For IMBRUVICA, we expect U.S. sales approaching $700 million. And for HCV, we expect global sales of approximately $950 million, with approximately 40% of those sales coming from U.S. sales. With respect to the non-GAAP tax rate, the second quarter should be modeled in line with our annual guidance approaching 9%.

In summary, we are very pleased with AbbVie's performance in the quarter, with results well ahead of our expectations. We have driven industry-leading revenue and EPS growth and are well positioned to continue to advance our strategic priorities. And with that, I'll turn the call back over to Liz..

Thank, Bill. We'll now open the call for questions. Operator, we'll take the first question, please..

Thank you. Our first question today is from Jami Rubin from Goldman Sachs..

Thank you. Rick, I just have a couple questions. The first is I think that certainly some of us were surprised by the magnitude of the market share loss following the disappointing news around TRINITY. I think you lost about $30 billion in market cap. And given the small amount of revenues that we had in our models, that seemed like an overreaction.

But maybe not, the market is smarter than we are. But I'm just wondering.

As you were weighing the pros and cons of a Dutch auction or utilizing that authorized $10 billion buyback versus maybe making the decision to redeploy that cash into bolt-on deals, can you just talk about how you arrived at your decision to buy back stock instead of going out and buying assets? I think some investors saw the news as yes, this is bad news, but I think it also opened up questions that investors have had for so many years again about the durability of HUMIRA, the value of the pipeline, et cetera, et cetera.

So if you could, talk about that. And then, Mike, just to follow up, that was a really good explanation about upadacitinib and the trials that you've reported to date. But I'm just curious why you haven't disclosed the DVT/PE rates. You gave us the absolute number, but the actual rates.

And any clarity on Grade 2/3/4 hemoglobin decrease versus placebo, given we saw a dose response and placebo imbalance in your Phase 2b study. Thanks very much..

Hi, Jami. This is Rick. I'll take the first question and Mike can cover the second question. Certainly, I think we view the reaction to the TRINITY data as a gross overreaction. I'll come back to that here in a moment. But ultimately, we made the decision to go forward with the Dutch auction essentially based on that gross overreaction.

We fundamentally believe that the market reaction to the Rova-T data was overdone by a magnitude of 4x or 5x, and therefore, the stock is very undervalued. And when we see situations like that, we're going to take advantage of that. We think that's the appropriate thing to do.

We're in the fortunate position that we generate a tremendous amount of cash flow in this business. And despite doing this, we still have all the flexibility that we need to be able to do whatever acquisitions or licensing arrangements that we'd like to do to be able to build the business.

And we continue to work on various options, so we don't view this as in any way limiting our flexibility to be able to move forward and do the things that we need to be able to do.

As I said, we have the flexibility to be able to do both, and we think this is an appropriate use of some of our cash flow because we think the reaction was dramatically overdone.

And to that point, what I would say is if you look at our pipeline and you look at the level of performance that this company has delivered over the last several years, we've delivered top-tier performance. We've built a pipeline that is clearly capable of continuing to drive top-tier performance.

Rova-T was the smallest of those assets in our late-stage pipeline. It had an immaterial impact on our overall growth rate in third-line.

It was the only non-derisked asset that we had, meaning all the other assets that we have in our late-stage pipeline, we have a significant amount of Phase 3 data that supports the profile of those assets and the confidence that we have around regulatory approval of those assets. And so look, there are always bears on every stock out there.

There's always people who have an interest in shorting. They've been seeing ghosts now for a number of years. And at the end of the day, I don't see the same ghosts that they see.

Now, it doesn't mean that it wasn't painful to see the reaction, but our job is to continue to drive the business and to drive the level of performance, and you see that in the quarter that we're operating in. And I can tell you, we have confidence that you're going to see it going forward.

And over time, markets tend to figure things out, and I think in our case, that will be the case as well. So we certainly feel good about what our prospects look like going forward..

Thank you..

Okay, this is Mike. I'll take the question about upadacitinib and DVT and PE rates. So I think there are a number of things one has to consider when one evaluates the safety of any Phase 3 program. And comparison to background rates is one of the things that we look at, but it's certainly not the only thing and it's also not the most important thing.

We talked about our rates being within expectations of background, and they have been throughout the course of this program. And that is one of the early indicators that we look at as our data accrue.

But we now have four out of our five studies, which is a fairly substantial amount of our placebo-controlled and active comparator controlled program in the public domain, at least at the top line level.

And that's why in my explanation today, I focus on what we've seen there, because what you see within your own program is of course going to be the most important. So you ask why not disclose the DVT and PE rate, we will when we have our full program. The rate changes.

It has stayed within that background rate, but there's not a final number until we're done with our program. And when we unblind all of our studies, we'll talk to folks about the DVT and PE rate.

But we'll also talk about what we've seen within the randomized part of our trial and the overall safety picture, which, as I indicated, we continue to have confidence in. With respect to your question on hemoglobin, AEs of anemia have been uncommon across the program.

They've been seen in all groups, including placebo, and we haven't seen a signal for an increase..

Thank you..

Thanks, Jami. Operator, we'll take the next question, please..

Thank you. Our next question is from Josh Schimmer from Evercore..

Great, thank you. I have three very concise questions. First, how do you see the long-term sustainability of the HCV franchise performance in terms of price and volume relative to current levels? Two, do you see any scenario in which you could file for Rova-T approval this year in the U.S.

or ex-U.S.? And number three, maybe you can outline the path to market and positioning for Venclexta in myeloma. Thank you..

So, Josh, this is Rick. I'll take the first question. I think Mike probably will cover two and three. So long-term sustainability of HCV, HCV is obviously a big and attractive market. MAVYRET has done extremely well. It has a profile that fits the marketplace well. I think our execution and our launch strategy has worked well, both in the U.S.

and outside of the U.S. Although the patient volumes do vary a bit and they're not totally predictable, so you do see some fluctuation in treatment volumes around the world and within the U.S. as well, that makes it a little bit more difficult to be able to forecast and predict with a high degree of precision.

But this is a market that is going to be around for a long, long time and be a very big market. And I think now, essentially you have us and one competitor who have the lion's share of this marketplace. We're obviously doing extremely well. We have leadership position in a number of markets.

And where we don't have the leadership position, we're awfully close to the market leader and continuing to move in that direction. And so we view this as an attractive market, and we certainly view that we have an asset that will allow us to be able to stay highly competitive and in a leadership position going forward.

And so we view it as an important market for us, and we think we have the right tools to be effective over the long term..

Okay, this is Mike. With respect to your second question, for Rova-T in the U.S., we view the primary path to approval as the randomized studies, MERU and TAHOE, and that's based on discussions with the FDA. So unless things change substantially there, and we don't expect that they will, we'll continue to view that as the primary path to approval.

In Europe, we've not communicated a decision because we're still in discussions with the regulators. And when we reach a conclusion there, we'll obviously communicate it.

With Venclexta in multiple myeloma, we have an ongoing study in a broader multiple myeloma patient, but we also have efforts that are targeted at a particular subset of multiple myeloma, t(11;14). This is a subset that tends to be driven by BCL-2.

They have a phenotype that's a good fit for a BCL-2 inhibitor like Venclexta, and we've seen very encouraging initial results. So that's an area that we'll continue to pursue as well.

t(11;14) is a subset of multiple myeloma, but it's a fairly substantial subset, 15% to 20% of patients, with of course the overall myeloma population being quite large, unfortunately, so there are a significant number of patients with that translocation. So we see both as potential paths that are very promising for Venclexta in myeloma..

Thanks, Josh. Operator, next question, please..

Thank you. Our next question is from Jason Gerberry from Bank of America..

Good morning and thanks for taking my question. Quickly on U.S. HUMIRA, based on the updated guide, it looks like you're not getting much in terms of net price benefit anymore, and I'm just curious.

The comments about the co-pay accumulators and whatnot, is that just being conservative into something that's an unknown and difficult for you to quantify at the moment, or as you look forward in this market, do you see the new norm now as low single-digit net price benefits? And if you can comment in terms of where you guys are at with 2019 contracts, that would be helpful.

Thanks..

This is Rick. Maybe I'll cover most of that and then have Bill fill in any details. If you look at overall net price benefit that we're seeing in HUMIRA, it's consistent with what we've communicated at the beginning of the year.

And that is that we're seeing prescription volume growth of about 9% in the U.S., and we're seeing mid-single-digit price fall-through. And that's consistent with what we had planned for, with one price increase at the level that we have been communicating.

As far as accumulator programs and our comments around that, obviously these are a new entity that has moved into the marketplace. It's not a large percentage of the overall patient volume. It represents about 4% or so of the HUMIRA patient volume, so it's not a very large portion of the patients.

Obviously, we think these programs are bad policy, particularly for patients that are on specialty medicines, chronic specialty medicines. And we have not seen any impact from them in the first quarter yet, although I'm not sure we would see a big impact in the first quarter based on how they operate.

What we are assuming going forward is that, because of the higher deductibles that these patients will have that potentially we will see an increase in their use of the co-pay programs that we and all of our competitors have as well, that the amount of funds that they need to be able to get to their deductible will be higher than what we're running now on average across the board.

And so what we have built in is some additional amounts for that patient population. And probably the easiest way to think about it is this. So if they have a higher average deductible than what the average was in the prior years, most of these patients, because they do have chronic conditions, have many other medical expense as well.

So if they would normally have gotten to their deductible in month two at the lower deductibles, now they may not get to their deductible until month four. And obviously, we don't want to lose those patients over a month or two. So within our co-pay programs today, they have the flexibility to go higher.

They just don't go higher because of where the deductibles are. And so essentially what we're describing is that phenomenon that we have built in more expense associated with that. We're not sure whether we'll see it.

We think it's the appropriate thing to do, and we obviously have enough performance in the business that we can do it at this point and watch how it goes and still deliver exceptional performance and actually raise our guidance at the same time. So we're in a fortunate position from that perspective.

We're obviously monitoring it carefully and we're going to have to see how it sorts out. It may not be at the impact that we've described here, but I think it's the appropriate way to model the going-forward business until we have more experience with these programs.

On 2019, I think we're still early in that process, so I don't know that we have a lot of comments that we could give you at this point on that contract status. I would tell you in the discussions that we've had, we would not expect major differences in gross-to-net or major differences in the level of coverage that we have in lives.

So at a very high level, I think that's the way you ought to be thinking about it. But more specificity than that would come later in the year.

Bill?.

And then, Jason, the only other thing I'll add regarding our revised HUMIRA guidance is we are assuming that the destock that we saw in first quarter is a permanent destock. We don't have that coming back. And likewise, when we look at the retail channel in particular, we think we could see a little bit more destocking in the second quarter.

So that's been baked into the number as well..

Got it, thank you..

Thanks, Jason. Operator, next question, please..

Thank you. Our next question is from Steve Scala from Cowen..

Thank you. First, congrats on the great results. The trends in psoriasis for the IL-17s have become a concern. How are HUMIRA trends in psoriasis? And to what do attribute the weakness in the IL-17s? So that's the first question. The second question is on Rova-T.

You mentioned that you're encouraged by the single-agent activity you've seen in TRINITY, but you also mentioned durability as perhaps less than hoped. I'm wondering if you can elaborate. And then lastly, the SELECT-SUNRISE trial may suggest that you may advance upadacitinib at a lower 7.5-milligram dose in RA.

Is that the correct interpretation? Thank you..

Mike, why don't you cover two and three and then I'll come back and cover one?.

Okay, I'll start with SELECT-SUNRISE. So the SELECT-SUNRISE study was a study done in Japan. And it's not uncommon for the PMDA, the Japanese regulator, to request additional dose-ranging on studies that are done in Japan for a number of reasons. And so I think you should view the inclusion of the 7.5-milligram dose in that light.

The 7.5-milligram dose had lower levels of response, particularly when you look at measures like ACR50 and other more stringent measures, not only in SUNRISE, but also in our global Phase 2b study. So we feel very good about our dose selection, and we're not intending to pursue 7.5-milligram global.

With respect to Rova-T, we have seen single-agent activity now in two studies. We think that's very important. The level of activity we have seen is very different than what one would expect with conventional chemotherapy in that setting. That rate, if it's not zero, is in the low single digits.

We've seen results that show by independent radiographic review a 16% response rate in the data that we've put out previously. And that gives us confidence that we're seeing good activity, and that ought to translate into clinical benefit in those other studies that I described.

The comment regarding durability has to do just with the standard for registration from a single-arm study in a setting like this. And that standard is very high, and the patients that we studied in TRINITY were very advanced. Many were past a point of no return, if you will. There was a lot of very early mortality.

So in that setting, it's hard to demonstrate the sort of durability that we had hoped for, and that's what that comment reflects. But we feel good about the activity overall. And we think as we move forward in lines of therapy and also as we combine with other active mechanisms, there is the potential for real and important clinical benefit..

As far as the psoriasis trends in the IL-17s, I think the trends you're seeing on the IL-17s is similar to what we've talked about on previous calls, and that is that they tend to be relegated to second-line and beyond.

So typically, after the patient fails the first-line therapy, which in most cases is HUMIRA, then they'll go on to use an agent like the IL-17s. So I haven't seen a whole lot of change in the overall market dynamics around that.

Maybe another way to think about it is to more broadly look at HUMIRA, and not just the psoriasis market but overall the market. And if you look at HUMIRA, obviously it continues to perform extremely well.

It performs well because it's in big markets that are growing, and obviously the asset has the profile and our execution is such that we get the vast majority of the front-line patients moving into HUMIRA and we're able to sustain those patients over time. If you look at the overall market growth rate, it's running about 10% or 11%.

That varies from mid-single digits, 6%, 7% in rheumatology to high teens in derm and GI. So those are big markets that continue to grow nicely. If you look at our Rx growth, on average, it was about 9% this quarter.

Again, that varies at about a little over 6% in rheum, double-digit, 10%, 11%, 12% in derm, and GI is more like 12% or 13% overall script growth rates. The important thing in this market is to capture the front-line patients and maintain those patients over time.

And so if you look at every one of the sub-categories for HUMIRA, essentially RA, SPA, PSA, AS, psoriasis, Crohn's, and UC, those are the major categories that we measure and you look at first-line capture rate, HUMIRA is number one in every single one of those.

It varies anywhere from around 30% on the low end to as high as 56% of new patients capture on the high end across those categories. And so the brand continues to perform extremely well and the markets continue to perform extremely well.

But there's still room for a lot of agents in this market because not all patients respond to any one agent, so you need multiple therapies to be able to put those patients in the appropriate level of control.

And so the IL-17s and the IL-23s and many other mechanisms will have a role to play in the treatment paradigm for these patients going forward..

Thank you..

Thanks, Steve. Next question, please..

Thank you. Our next question is from Chris Schott from JPMorgan..

Great. Thanks very much for the questions. My first question was just on HUMIRA ex-U.S. and specifically Europe.

Can you just talk through a little bit of your expectations on qualitatively quarterly progression of that franchise from here as we think about the biosimilar entry later this year? And maybe as part of that, can you just talk a little bit about what you're doing ahead of biosimilar entry to defend the franchise, and should that – you kind of impact results at all as we think about the coming quarters? My second question was a Rova-T question and just on this dynamic around seeing additional data, not just single-agent but combination.

When can we think about getting more robust combination data with Rova-T specifically with some of the PD-1s? Is that something we could see this year, or is that something that's more of a 2019 or 2020 event? Thank you very much..

Chris, this is Rick. I'll cover the HUMIRA question and Mike will cover the Rova-T question. So as we indicated in the last call, we have started our preparation activities for biosimilars outside the U.S. in those countries that are going to face biosimilar activity in the fourth quarter of this year.

So we have implemented – started the process of implementing our defense strategy. I would say that is going as we would have expected. It's going well thus far, and we're preparing for what will ultimately be the impact that we see in the fourth quarter. We obviously saw robust growth in the first quarter. Bill may be able to talk to that.

There was some timing that was in – timing of some shipments within that quarter.

Bill, do you want to touch on that?.

Yeah, it was about 2 points of the overall. So if you back that out, the operational growth in the first quarter was 7%, which was still strong. Q2 we would expect a lower growth rate given the reversal of that timing. I think in the 3% to 4% range would be a good number to bank on at this point..

But I'd say if you look at last year and you look at where we are now, you would expect that the business will grow there up until the fourth quarter in the mid-single digit range, which is what we would expect. And then you will start to see the impact of biosimilars. A little harder to tell at this point exactly how that's going to go.

We've modeled it and I think we have a pretty good idea of how that will progress and I think it will fall within the expectations that we have put forth. But we're going to need to see as it actually plays out and we watch what the biosimilars' launch strategies really look like, but I think we're well prepared to be able to deal with that.

Rova-T?.

Okay. So with respect to combo data with Rova-T and I-O therapies, first I'll say that there's good pre-clinical rationale to believe that the combination of those two agents will be very effective. We currently have an early to mid-stage trial looking at the combination of Rova-T with I-O agents in collaboration with BMS.

That's looking at both nivo [nivolumab] and nivo-ipi [ipilimumab] combos. That is an early to mid-stage trial, as I said, so there's not a single period for data readout. Data can be presented as individual arms of the study mature. But I would say that over the course of this year and into the next, we ought to have data that we can talk about there.

So it's in that timeframe that we'll be able to see clinical data to support this hypothesis..

Thanks, Chris. Operator, we'll take the next question, please..

Thank you. Our next question is from Geoff Meacham from Barclays..

Hey, guys, thanks for the question. I have a couple of pipeline ones. Mike, when you look at both upadacitinib and risankizumab, the profiles look differentiated.

Is there anything that you can read into the durability of effect? I guess where I'm going with this is, when you look at the use of I&I [Inflammation & Immunology] agents, you see sequential therapies, and maybe every two to three years patients switch.

Is there a potential for either one of these assets to have a much longer duration of therapy, which obviously would impact the model? And then just on the hep C front, I just wanted to get a sense from you guys maybe over the course of this year where you see the pace of OUS new countries and new launches just with respect to reimbursement decisions and the like.

Thank you..

Okay, so I'll start with the question on upadacitinib and risankizumab. So when we look at the efficacy profiles, we also see significant differentiation. We see that in a number of important areas.

With upadacitinib, we see very high levels of response, high levels of response on the more stringent endpoints, high levels of response in biologic-inadequate responders, and that's in an RA population. Of course, we have other indications that we are pursuing as well, such as inflammatory bowel diseases and atopic dermatitis.

And the picture in each of these is slightly different in terms of what the therapeutic landscape looks like. What I would say is both the level of that response and the duration of that response that we've seen in the trials to date we view as very, very encouraging.

And so we think that that asset will have a very strong efficacy profile, and we do think that durability will be part of that. When we look at risankizumab, we see a picture that's very similar. We're driving very high levels of response, particularly on the stringent endpoints.

And there I would point particularly to the 52-week data in psoriasis, and those data are very strong and show very high levels of response at even the PASI 90 and PASI 100 level at those endpoints. So we also think that durability will be an important point for the risa story.

And so we think that between those two assets across the indications that I mentioned, we're going to be able to cover a large part of the medical need..

In the case of HCV, I think if you look at our business, we have been rolling out in all the major countries around the world. The most recent one that we rolled out was France, and prior to that was Japan.

Japan, obviously we had tremendous success in Japan, achieved market leadership in a very short period of time and sustained a very high level of market share, so the adoption of the product in Japan was extremely good. We're ramping in France now to some extent. What is left is typically smaller countries now.

We'll be rolling those out over the course of the next several months. As far as reimbursement decisions, it varies pretty dramatically. When the first generation of HCV products came out, many countries did two things.

One, they typically funded their later-stage later F-score patients, and they funded their healthcare budgets on a year-by-year basis, which isn't typical of how they would do a program like this. But because of that, they had to come back each year and make a determination as to how much funding they would put in.

We still see that happening in certain countries around the world. So it is a difficult question I guess for me to answer for you with any level of specificity. But generally speaking, I'd say if you look across the board, the overall reimbursed population is relatively consistent.

The mix is obviously different, but it does vary from country to country..

Thanks a lot..

Thanks, Geoff. Operator, next question, please..

Thank you. Our next question is from Gregg Gilbert from Deutsche Bank..

Thank you, a few quick ones. First, Bill, you mentioned the financing impact on the tender.

Can you talk to the financing aspects of that? Two, what's the latest on your ongoing HUMIRA IP litigation, and are there any milestones or dates we should be aware of? And lastly, Rick, back to corporate strategy, I was curious how you balance your views on short-term stock valuation with the reality that your enterprise value is quite large, bigger than Merck's for example, and many of the companies in biopharma.

So I know you don't want to be bigger just to be bigger, but it does seem that you have a unique opportunity on a relative basis, especially as your stock recovers here on the back of today's news. Thanks..

So on the financing, recognized financing costs include lost interest income as well as interest expense. So obviously, we're going to deploy a sizable amount of our cash to this.

We may have to top that off with some short-term loans just based on the timing of moving cash around between geographies, but this is not going to require any long-term financing..

Okay..

On the HUMIRA litigation, I would not say there's anything really new to report there. And frankly, litigation is probably not something we're going to spend a lot of time describing in a high level of detail.

But what I can tell you on the current litigation is it is proceeding as we have described to you, so the time windows are consistent with what we've described to you.

And I wouldn't expect any kind of significant event for quite some period of time as we go through the normal process that you go through in a litigation process like discovery, et cetera. So this is going to play out over years, as we've described to you before. So there's really nothing new to report there from that perspective.

I think you make an excellent point about the value of our company, the enterprise value of our company.

Obviously, the P/E of the stock compared to where it was several years ago, all of those things basically create an opportunity that if you wanted to do a larger transaction where you were using stock, it certainly puts you in a much better position to be able to do that.

And so that makes obvious sense in what you're describing and certainly gives us the ability to be able to do things like that. We tend to look at what we're going to do to build the business around the backdrop of what our company's value proposition is and we're trying to drive.

Our company value proposition is that we are committed to drive top-tier growth over the long term and build a pipeline that is capable of being able to drive us at that level despite all of the ins and outs that will occur in the business going forward and be able to perform at that level.

If we thought a large transaction was what was necessary to be able to do that, obviously we would pursue a large transaction.

But what I've said to you many quarters in a row now, we're in the fortunate position, like this quarter where we're driving a tremendous amount of growth, as we look forward, we believe we can continue to drive a significant amount of growth, a top-tier level of growth. You can never have enough pipeline in the business that we're in.

and so we obviously have a very strong desire to continue to build our pipeline. But right now, we're building it more around more individual products or platforms, bolt-on kinds of platforms. And most of the time, those don't require stock to be the vehicle by which you acquire those assets. That's not to say we haven't done it.

We obviously had stock in other transactions like Pharmacyclics, as an example. But that was more around the dynamics of the transaction that drove it than the need to have to do it through that vehicle. So I think your point is valid.

Our goal will be to continue to build the value of the company, so I would expect that we'll be in that position for quite some time. And we'll continue to evaluate what our strategic plan is to build it. But right now, that is our area of focus, more these bolt-ons and building the mid-stage and the early-stage pipeline..

Thanks for the color..

Thanks, Gregg. Operator, next question, please..

Our next question is from Vamil Divan of Credit Suisse..

Thanks so much for taking my questions. A couple quick follow-up ones on Rova-T and then one the co-pay accumulator side. Just on Rova-T, can you disclose what the cutoff was that you used for the high DLL3 expression in TRINITY? I don't think those are in the press release. I'm not sure if you've disclosed it since then.

And also, if you can, just comment a little bit on the toxicity side. Obviously, comments around the efficacy your\ made just in terms....

We're having a little bit of a tough time hearing you. I don't know if you can hear us all right..

Okay, I'm sorry. I can hear you fine. I'll try again. Just quickly on Rova-T, just what the cutoff was for high expression for DLL3 in the TRINITY trial and any comments on the toxicity side. And on the co-pay accumulator programs, I'm just curious.

As we've talked to consultants on this one, they think the impact might be more for newer products as they get launched because they don't – payers may not want to disrupt a large number of patients already on something like HUMIRA.

So do you think is a bigger risk for newer products like upadacitinib and risankizumab as they get launched, or do you think this is a significant risk for established products like HUMIRA and Enbrel right now?.

Mike, why don't you cover the first one? I'll cover the second one..

So on Rova-T, the cutoff for DLL3 high expressers had to do with percentage of cells expressing, and we've looked at cutoffs like 25% and 75% of cells. Now what we found is that most of the positives are high positives because then when this is expressed, it's expressed pretty broadly. But those are the thresholds that we've looked at.

I had a hard time hearing the second part of your Rova-T question. I believe it was about the safety that we observed in the TRINITY trial.

Is that correct?.

Yes, just how did that compare to what you were expecting? I think it looks a little bit more like....

So the safety in TRINITY has looked very consistent with what we observed in the Phase 1b and was very consistent with our expectations.

Some of the key events were actually present in lower percentages of patients, at least numerically, in TRINITY as compared to the Phase 1b, so for example, the sorts of AEs that we look at, like the effusions and the other AEs that were identified the Phase 1b trial.

But overall, I would say it was very consistent with our Phase 1b experience and very consistent with our expectations..

Okay. On the co-pay accumulator programs, I have not heard that description that you've described. But look, it's like anything else. There are lots and lots of programs out there. Could there be a program that was similar to what you're describing? Certainly, that can be the case.

I would say in general, as we look at these and as we think about them, essentially what they're designed to do is to raise the co-pay to a higher level. They're typically high-deductible plans that have a higher co-pay, and they try to force back on the patient a higher level of that co-pay and their responsibility to that co-pay.

The ones I've seen are built around – they cover all expenses, medical expenses that that patient has, so not just drugs but physicians or hospitalization or all those kinds of costs. And so essentially what it does is what I described before, is you may have a co-pay that's $4,000. The average is between $4,000 and $5,000 in these programs.

There are some that go as high as $10,000, but the average is more like $4,000 to $5,000. Let's say the typical co-pay would be closer to $1,500 to $2,000 on a typical medical program. So you have to get to a much higher co-pay in order for the insurance company to take on the greater responsibility.

And that is not specific to a product, at least in the experiences that I've seen. As I said, I don't view them as a major threat.

I view them as extremely bad healthcare policy because I think trying to put that level of burden on a patient who needs a chronic medication just is not the appropriate way to be able to try to manage those patients over the long term.

But having said that, this is a relatively small percentage, and we think the biggest impact will be that it will incur some additional costs for those patients going forward. And therefore, we are reflecting some of that cost in our P&L going forward as well..

Okay, thanks, and sorry about the audio there. Thanks..

Thanks, Vamil. Ylonne, we have time for one final question..

Thank you. Our final question today is from David Risinger from Morgan Stanley..

Yes, thanks very much. I had a few questions. First, could you just tell us what percentage of the U.S. population has a co-pay accumulator in their benefits? I just don't have a good understanding of where we are today. I thought it was a tiny percentage of the country, yet it is having an impact in 2018 when it's just getting started.

Second, with respect to the upadacitinib DVT and PE figures of five patients versus four in control, my sense was that the foreign control included three on HUMIRA, one on placebo.

And I guess my question is when do you think we'll get a better sense for the DVT and PE figures versus placebo? And then finally, with respect to your expectations for HUMIRA ex-U.S. sales declines in 2019 after biosimilars hit, I recall the company talking about potentially a 15% to 20% sales decline next year for ex-U.S. HUMIRA.

And I just wanted to make sure that I have that right, or maybe you can remind me what your expectations are. Thanks very much..

Okay. So, David, I'll do one and three. Mike will cover number two. So if you look at co-pay accumulators, I can tell you this is our internal data, so it will give you some idea. There are roughly about 20% of patients in the U.S. that are on high-deductibility plans now.

Of those, about 20% or so have co-pay accumulators associated with them, so that gets you to this about 4% of the overall HUMIRA population.

Now, I think one of the things that will happen over time is for those patients that can select out of these programs, I can tell you we're getting a lot of feedback from patient groups that are extremely unhappy with this policy.

And I think those patients that have the flexibility to elect out of a high deductibility plan that has it that use chronic drugs or have significant levels of medical care that is associated with a chronic condition, I think they will exit these programs because these programs don't make a tremendous amount of sense for them.

It may be that you have a lower cost of your premium up front but ultimately when they get hit with a big co-pay, that becomes a difficult thing for them to manage their way through. So we could see that percentage come down. Now in fairness, there are certain employers that that's the only program that they offer.

And so for those people, they won't have any choice of how they try to deal with it. But it's still a relatively small percentage. You said it's having a big impact in 2018. If you look at the grand scheme of HUMIRA, I wouldn't exactly describe this as a big impact.

But there could be some costs associated with it, and we want to make sure we've reflected those costs. We haven't seen, as I said before, any impact yet. We're going to have to measure it as we get into second and third quarter and see exactly what we experience.

We are committed to try to maintain those patients on therapy because we think that's the right thing to do. On HUMIRA OUS decline, your recollection I think is reasonably correct. I'd say we updated – and I'm trying to remember which call it was where we took it up slightly to 18% to 20% was the latest erosion curve that we described.

The bulk of that probably will occur between the fourth quarter of this year and the end of 2019 because we would expect that the impact to be able to defend that volume will play out over that period of time, and then there will be more modest declines or pressure going forward.

And so I would say right now we're still thinking it's in that 20% range, 18% to 20% range, but we needed to see some experience. I think without seeing actually what their launch strategy looks like, we're modeling everything against what we've seen with Remicade and what we're seeing right now with Enbrel.

And what we're modeling here is pretty consistent with what we're seeing out there. I don't fundamentally believe we should see something a lot different, but we want to see what that experience looks like. If it's different than what we've described, we'll obviously update the market once we have more experience with it..

Okay, so with respect to the question on upadacitinib and what we've seen in the controlled portions of our trials, as I stated in my prepared remarks, we've seen five patients in the upadacitinib-treated patients and four in the comparators.

It's important to keep in mind that comparators range across these studies and what we call placebo is actually different background therapy in different studies, so a placebo on a monotherapy study is minimal background therapy. It might be NSAIDs and other things.

In a methotrexate-inadequate responder study, placebo sits (01:19:03) on top of continued methotrexate. And of course, our HUMIRA study was blinded, so there actually is placebo administered there to maintain the blind. But of those case splits that we talked about, three were on HUMIRA and one came from our study that was identified as placebo.

That patient was on continued methotrexate. In terms of when we'll get our next tranche of data, that will be with the next study, the SELECT-EARLY study, which we said will read out in the coming months. That's also a substantial study with longer control periods..

Great. Thank you..

Thanks, David. That concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us..

Thank you. And this does conclude today's conference. You may disconnect at this time..