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

Steve Scala - Cowen & Co. LLC Jason M. Gerberry - Bank of America Merrill Lynch Joshua Schimmer - Evercore ISI Vamil K. Divan - Credit Suisse Securities (USA) LLC Andrew S. Baum - Citigroup Global Markets Ltd. Chris Schott - JPMorgan Securities LLC David R. Risinger - Morgan Stanley & Co. LLC John T. Boris - SunTrust Robinson Humphrey, Inc..

Good morning. Welcome to the AbbVie third quarter 2018 earnings conference call. All participants will be able to listen only until the question-and-answer portion of this call. 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 of Research and Development and Chief Scientific Officer; Bill Chase, Executive Vice President of Finance and Administration; and Rob Michael, Senior Vice President and Chief Financial Officer.

Before we get started, I would like to remind you that statements we make today are or may be considered forward-looking statements for 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..

Thank you, Liz. Good morning, everyone, and thank you for joining us today. I'll discuss our third quarter performance, our full-year 2018 guidance, and I'll provide some comments about our expectations for 2019. Mike will then provide an update on recent advancements across our R&D pipeline and Bill will discuss the quarter in more detail.

Following our remarks, as usual, we will take your questions. We delivered another quarter of outstanding performance with results once again ahead of our expectations. We've driven strong commercial, operational, and R&D execution resulting in industry-leading top and bottom line growth.

Adjusted earnings per share were $2.14, representing growth of more than 50% versus last year. Total adjusted operational sales growth of 18.5% was driven by a number of products in our portfolio including HUMIRA with global operational sales growth of nearly 10% and IMBRUVICA which grew more than 40% versus the prior year.

HCV was a substantial contributor in the quarter with more than $860 million in sales, and we also saw strong performance from several other products including VENCLEXTA, CREON, DUODOPA and LUPON.

Based on the continued strength of our business in the quarter and our progress year to date, we are raising our 2018 earnings guidance for the fourth time this year. We now expect full-year 2018 adjusted earnings per share of $7.90 to $7.92, reflecting growth of more than 41% at the midpoint.

This represents exceptional earnings growth and puts us at the very top of our industry peer group. And while 2018 certainly sets a very high bar for performance, we expect strong earnings growth once again next year.

Although it's too early to provide specific growth targets for 2019 as we're still in the midst of our annual planning process, based on our strong underlying business momentum, we are confident in our ability to deliver double digit earnings growth once again in 2019.

And importantly, we expect to deliver this level of growth despite a number of factors including direct biosimilar competition, impacting our more than $6 billion international HUMIRA business; a difficult comparison year, particularly in light of the rapid ramp of our HCV business in 2018; and the significant investment we will be making in 2019 to support new product launches including VENCLEXTA, ORILISSA, risankizumab and upadacitinib.

Clearly 2019 will be an important year for AbbVie, an opportunity for us to clearly demonstrate our ability to continue to drive strong earnings growth. In addition to the strong bottom line performance, we also expect to continue to generate significant cash flows.

Underscoring the continued confidence in our business, today we're announcing 11.5% increase in our quarterly cash dividend from $0.96 per share to $1.07 per share beginning with the dividend payable in February 2019. Since our inception, we have grown our quarterly dividend nearly 170%.

Also in the quarter, we announced two additional patent license agreements over proposed HUMIRA biosimilar products. These agreements, of which there are now five in total, are yet another example of the strength of our intellectual property, and we remain confident that we will not see direct biosimilar competition in the U.S. until 2023.

As we look at our business and evaluate our prospects, just about every aspect of our business is performing at or above our expectations. Our pipeline remains one of the best in the industry and the progress we're making to bring new products to the market will allow us to support our long-term growth expectations. Let me highlight a few examples.

We have invested significantly in oncology over the past several years to build a major new growth driver for AbbVie. Today our hematological oncology portfolio is now annualizing above $4 billion and growing at a robust rate, including growth of more than 48% in the third quarter.

As we continue to generate data that validates the utility of both IMBRUVICA and VENCLEXTA across a wide range of patient populations and cancer types, we expect this franchise to drive significant growth for many years to come.

This growth will be driven by further penetration in front-line CLL where we have a very broad clinical program including numerous trials evaluating our assets in different combinations against the other first line therapies including the gold standard FCR.

Growth will also be driven by expansion into other malignancies like AML and multiple myeloma, both sizeable indications that represent a multibillion dollar peak sales opportunity. We're also well positioned to grow our strong leadership position in immunology, with the introduction of our two new therapies, risankizumab and upadacitinib.

As we've built our immunology pipeline, our focus was to identify assets that not only improved performance over HUMIRA, currently the gold standard, but offered differentiated profiles versus other new mechanisms. We firmly believe that our two next generation assets have the potential to be best in category.

Risankizumab and upadacitinib are on track to launch in 2019, and we're confident based on their profiles both will perform very well and drive significant growth. This gives us three to four years of ramp and the opportunity to drive significant uptake of these two therapies prior to the expected entry of direct biosimilar competition in the U.S.

Elagolix is yet another compelling asset that represents a multibillion dollar growth opportunity. The recent launch of ORILISSA in endometriosis is tracking right in line with our assumptions, with broad formulary coverage expected by early 2019.

We expect to submit our regulatory application for uterine fibroids, another attractive follow-on indication, next year. This is an extremely exciting time for AbbVie. We've entered a new phase of our evolution, the phase where we clearly demonstrate the strength of our business and the strength of our pipeline. The continued momentum of the U.S.

business combined with the launch and ramp of several new products, including ORILISSA, risankizumab and upadacitinib, along with the outstanding performance of our heme-onc portfolio will allow us to grow through biosimilar impact in 2019 just as we had predicted.

So in summary, we continue to demonstrate outstanding performance driven by strong commercial, operational, and R&D execution.

We're making significant advancements in our pipeline and delivering outstanding financial results as evidenced by our industry-leading performance year-to-date and our confidence in our expectation to deliver double digit EPS growth again in 2019. With that, I'll turn the call over to Mike.

Mike?.

Thank you, Rick. This morning I'll highlight noteworthy pipeline updates from the quarter and discuss several of the key milestones we anticipate over the next 12 months. I'll start with oncology where we're making very good progress advancing our programs for IMBRUVICA and VENCLEXTA.

As Rick mentioned, these two therapies have the potential to transform the treatment of CLL and other hematological malignancies by providing chemotherapy-free options that deliver better long-term disease control and improved outcomes for patients.

IMBRUVICA has already changed the treatment paradigm in relapsed/refractory CLL and we're making significant progress in the front line setting. The current IMBRUVICA label in front line CLL is based on strong data from the RESONATE 2 study which evaluated IMBRUVICA versus chlorambucil in older CLL patients.

We have several ongoing studies evaluating IMBRUVICA alone and in combination in additional patient populations and versus more widely used comparators.

Our program includes studies in young and fit patients where we are evaluating IMBRUVICA versus regimens such as FCR, BR, and GAZYVA chlorambucil, often thought of as the gold standards in CLL treatment. We are also conducting studies in patients in the watch and wait population who are at increased risk of depression.

Data from two important studies in our front line CLL program the iLLUMINATE study and the Alliance study will be presented at the upcoming ASH meeting. In the iLLUMINATE study, we evaluated IMBRUVICA plus GAZYVA compared to a combination of GAZYVA and chlorambucil or GC.

In June, we reported that the IMBRUVICA arm in this study demonstrated significantly longer progression-free survival compared to GC. Based on these results in the third quarter, the FDA accepted our regulatory application for IMBRUVICA in combination with GAZYVA for first line treatment of CLL.

At ASH, the Alliance Cooperative Group will be presenting results from a Phase 3 study which evaluated IMBRUVICA alone and in combination with Rituxan versus BR.

In this study, treatment with IMBRUVICA alone or in combination with Rituxan demonstrated superior progression-free survival compared with BR in previously untreated CLL patients over the age of 65.

The evidence from these studies demonstrate IMBRUVICA's compelling clinical benefit in front line populations beyond those addressed by RESONATE 2 and will provide an opportunity to treat significantly more patients in the front line setting.

Over the course of the next few years, there will be additional data readouts for IMBRUVICA in front-line CLL that we believe will help drive further penetration. We continue to make good progress with IMBRUVICA in other hematologic malignancies as well.

In the quarter, we received approval for IMBRUVICA in combination with Rituxan as the first chemotherapy-free combination treatment for Waldenström's macroglobulinemia. This marks the ninth FDA approval for IMBRUVICA.

Moving now to VENCLEXTA, where we are making substantial progress in several hematologic malignancies, including CLL, AML, and multiple myeloma, in the quarter, we received an expanded label for VENCLEXTA to include minimal residual disease negativity data from the MURANO trial.

This follows our approval in the broader relapsed/refractory CLL setting received this summer and is VENCLEXTA's second label expansion in 2018. MRD negativity, which is undetectable disease at a threshold of 1 in 10,000 cells, is becoming an increasingly important goal in the treatment of patients with CLL.

The rates of MRD negativity demonstrated in the MURANO trial support VENCLEXTA's ability to drive deep responses and potential to provide long periods of remission for these patients. The inclusion of these data in the VENCLEXTA label is another important milestone for our program.

We are also making very good progress with VENCLEXTA in the front-line CLL setting. We recently announced positive top line results from the CLL14 study, which evaluated VENCLEXTA in combination with GAZYVA versus GAZYVA plus chlorambucil. We expect to present detailed data from this study at an upcoming medical meeting.

The CLL14 study will form the basis of regulatory submissions in the coming months and will move us further towards our goal of establishing VENCLEXTA as a foundational chemotherapy-free option in the CLL market.

Beyond CLL, we are also making good progress in other hematologic malignancies such as AML and multiple myeloma, where w0e've seen strong mid-stage data and are nearing completion of the first registrational studies in both indications. Our U.S.

regulatory application for VENCLEXTA in first-line AML patients who can't receive high-dose induction chemotherapy is currently under review with the FDA, with an approval decision expected by the end of the year.

This accelerated approval will be based on compelling data from our Phase 2 study, with confirmatory results from our Phase 3 program expected in 2019.

In multiple myeloma, we're expecting data in the first half of 2019 from the Phase 3 BELLINI study, which is evaluating VENCLEXTA in combination with Velcade and dexamethasone in patients with relapsed/refractory multiple myeloma.

We are also exploring VENCLEXTA as a potential treatment in front-line multiple myeloma, with Phase 3 studies expected to begin in 2019.

Moving now to immunology, where we continue to make good progress across all stages of our portfolio, we have built a strong leadership position in immunology, and AbbVie has played an integral role in defining the standard of care across the rheumatology, dermatology, and gastroenterology segments.

At the recent ACR, UEGW, and EADV meetings, we showcased our immunology portfolio and presented a total of 70 abstracts, reinforcing our deep scientific expertise and commitment to researching innovative therapies in these areas.

Our immunology franchise, which we believe is the best in the industry, is evolving to a portfolio of therapies with the forthcoming commercialization of our two late-stage assets, upadacitinib and risankizumab, next year.

In late-stage development, we have registrational programs ongoing for upadacitinib, our JAK1 selective inhibitor, in five immune-mediated conditions, including rheumatoid arthritis, psoriatic arthritis, atopic dermatitis, Crohn's disease, and ulcerative colitis.

And we plan to begin Phase 3 studies in the sixth potential indication for upadacitinib, giant cell arteritis, in the first half of 2019. In rheumatoid arthritis, the lead indication for upadacitinib, we remain on track to submit our regulatory application by the end of the year.

At the ACR meeting last week, we presented nine abstracts for upadacitinib in RA, including data from three of the five Phase 3 registrational studies. As we gather long-term data from the Phase 3 studies in the SELECT program, we remain very encouraged by the profile that we have observed.

Based on the data generated across our clinical program, we remain very confident in the benefit/risk profile for upadacitinib and believe that it will offer meaningful advantages over products on the market today or in development.

At the recent UEGW meeting, we presented Phase 2 upadacitinib data in ulcerative colitis, demonstrating that significantly more patients treated with upadacitinib achieved clinical remission and a scopic improvement in clinical response following induction therapy versus placebo.

These results look very promising based on the strong signal we've observed.

Moving now to our anti-IL-23 antibody, risankizumab, where like upadacitinib, we're evaluating the asset in several indications, in addition to the lead indication, psoriasis, we have Phase 3 studies ongoing in Crohn's disease, Phase 2 studies ongoing in ulcerative colitis, and expect to initiate Phase 3 studies in psoriatic arthritis in the first half of 2019.

The regulatory applications in psoriasis are currently under review, with approval decisions expected in the first half of 2019. Across each of the 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-naïve and TNF-inadequate responder patients with moderate to severe psoriasis while providing the convenience of quarterly dosing.

We are also making very good progress advancing our early-stage immunology pipeline, with several of our next-generation assets recently starting Phase 2 studies and several more expected to begin Phase 2 over the course of the next 12 months.

ABBV-599, our JAK inhibitor/BTK inhibitor combination, recently began Phase 2 in RA and will begin Phase 2 in lupus next year. ABBV-323, our CD40 antagonist, recently transitioned to Phase 2 in ulcerative colitis. And our anti-TNF steroid ADC program is moving through multi-dose Phase 1 studies, with Phase 2 expected to begin in 2019.

We look forward to providing updates on these programs as the mid-stage data mature. And lastly, in the area of neuroscience, we continue to make good progress with our preclinical and early clinical programs. Neuroscience is an emerging area of focus for AbbVie, and we are making considerable internal and external investments.

We're advancing research across several neurodegenerative disorders with innovative approaches such as targeting tau, trem2, cd33, and alpha-synuclein, just to name a few. In 2019, we and our partners expect to transition several programs from our neuroscience collaborations into the clinic.

So in summary, we've continued to make significant progress advancing and accelerating our programs over the quarter, and we look forward to many more important pipeline milestones in the coming months and through 2019. With that, I'll turn the call over to Bill for additional comments on our third quarter performance.

Bill?.

Thanks, Mike. We are very pleased with our strong third quarter results. Total adjusted net revenues were $8.2 billion, up 18.5% operationally excluding a 70 basis point unfavorable impact from foreign exchange. We reported adjusted earnings per share of $2.14, up 51.8% compared to the third quarter of 2017.

Adjusted EPS exceeded the midpoint of our prior guidance range by $0.13 due to favorable sales and operating margin profile dynamics. HUMIRA global sales were $5.1 billion in the quarter, up nearly 10% operationally.

In the U.S., HUMIRA sales increased 12.5% compared to the prior year, with more than half driven by underlying volume growth plus a mid-single digit price contribution. The growth rate in the quarter also reflected a modest stocking benefit from the launch of our new citrate-free formulation.

Wholesaler inventory levels remained roughly half a month in the quarter. International HUMIRA sales approached $1.6 billion in the quarter, up 4.2% on an operational basis and in line with our prior guidance.

In oncology, global sales of heme products were nearly $1.1 billion in the third quarter led by the continued strong growth of both IMBRUVICA and VENCLEXTA. In the quarter, IMBRUVICA net revenues were $972 million, increasing more than 40% versus the prior year, primarily driven by market share gains across all lines of therapy in CLL.

Venclexta revenues were $96 million in the quarter driven by uptake in the second-line plus setting as a result of our recent approval in the broad relapsed/refractory CLL segment. Global HCV sales in the quarter were $862 million. MAVYRET continues to perform very well, holding roughly 50% market share globally.

As expected, we saw sequentially lower sales internationally as a result of fewer warehoused patients in certain markets. We also saw double-digit operational sales growth in both DUODOPA and CREON. Turning to the P&L profile for the quarter, adjusted gross margin was 81.7% of sales, up 90 basis points compared to the prior year.

This was inclusive of the year-over-year benefit related to the termination of certain HUMIRA royalties and the impact of favorable foreign exchange partially offset by the dilutive impact of partnership accounting. Adjusted R&D was 15.4% of sales in the quarter, supporting our pipeline programs in oncology, immunology and other areas.

Adjusted SG&A was 19.1% of sales in the quarter, a decrease of 170 basis points versus the prior year, reflecting sales leverage as well as operational efficiencies. The adjusted operating margin profile was 47.2% of sales in the quarter, an improvement of 430 basis points versus the prior year.

Net interest expense was $302 million in the quarter, and the adjusted tax rate was 9.1%. Turning to full year guidance, as Rick mentioned, today we are raising our full year adjusted EPS guidance range to $7.90 to $7.92 per share, representing growth of 41.3% at the midpoint.

This guidance assumes an increase in adjusted net revenue which we now expect to approach $32.7 billion, with full year operational performance of approximately 15% which is also above our previously communicated guidance. At current exchange rates, we continue to expect a favorable foreign currency benefit on the year of less than 1%.

This forecast comprehends the following assumptions related to our key products. For IMBRUVICA, we now expect global revenues to AbbVie to be above $3.5 billion with U.S. sales above $2.9 billion. For international HUMIRA at current exchange rates, we now expect sales to approach $6.3 billion.

This updated forecast incorporates the latest dynamics we are seeing following the introduction of biosimilar competition across certain markets in mid-October. We continue to expect U.S. HUMIRA sales of approximately $13.7 billion, and we continue to forecast global HCV sales of above $3.5 billion.

We forecast full year adjusted gross margin to be above 80.5% of sales and now expect adjusted operating margin to approach 45% of sales. All other full year 2018 guidance assumptions remain unchanged. For the fourth quarter, we expect adjusted earnings per share to be between $1.89 and $1.91.

This adjusted EPS guidance excludes roughly $0.26 of non-cash amortization and other specified items, and represents year-over-year growth of more than 28% at the midpoint. We expect fourth quarter operational sales growth of above 7%.

At current rates, we would expect foreign exchange to have an unfavorable impact on reported sales growth of less than 1% in the quarter. In closing, once again, we have delivered outstanding performance in a quarter. We have driven top and bottom line growth that has been strong while continuing to advance our pipeline.

Our increased guidance range for 2018 puts us among the top of our industry peers once again with the midpoint of the range representing growth of more than 41%.

And underscoring our confidence going forward, as Rick mentioned earlier, today we announced an 11.5% increase in our quarterly cash dividend beginning with the dividend payable in February 2019. And with that, I'll turn the call back over to Rick..

Thank you, Bill. Before we open the call for questions I wanted to say a few words about Bill so this is the part where I'm going to embarrass Bill. I guess you won't be able to tell that because you can't see him but Bill, as you know, recently announced his intention to retire in the summer of 2019.

I can tell you that Bill has been my partner since we launched AbbVie, and he has played a very significant role in the tremendous success that we have been able to deliver. I've known Bill and worked with Bill in some form or fashion at least 25 years. Between Abbott and AbbVie, Bill has had a tremendous 30-year career.

I can tell you that personally I will miss Bill when he retires. I told him the story about me flunking retirement, that didn't seem to faze him very much. But in all seriousness, I know that Bill and his family are extremely excited about moving to Europe next summer and starting this new chapter in their lives.

So I can tell you that all of us here at AbbVie wish him and his family all the best, and I know he'll do extremely well and he's extremely excited about this move. As I mentioned, Bill will be with us until the middle of next year, so many of you will have an opportunity to congratulate him personally prior to his departure.

With that, I'll turn the call back over to Liz..

Thanks, Rick. We'll now open the call for questions. Operator, first question, please..

Thank you. Our first question is from Steve Scala from Cohen..

Thank you, and congratulations on a phenomenal performance. AbbVie is a couple weeks into direct international biosimilar competition.

What have you been seeing so far? And how does that feed into your thoughts for the year? And what will be the major pushes and pulls in 2019? AbbVie will have international HUMIRA headwinds but offset by a promising group of new products.

And it does appear that AbbVie is expecting a strong contribution from new products next year to blunt the headwinds to some extent. Thank you..

Amgen, Sandoz, Biogen Samsung and Mylan. I'd say that we have now seen pricing in every single market, so we have an idea of what pricing looks like in every single market. Doesn't mean it's stabilized in every single market yet, and I'll describe for you what that looks like in some level of detail here.

The discounting has been on the higher end of the planning scenarios that we had laid out. It's still within the planning scenarios that we had laid out but a little bit on the higher end of that and on the higher end of the relevant analogs. And what I mean by that is we use REMICADE and ENBREL biosimilars as the analogs that we have planned against.

We've seen discounting at ranges from as low as 10% to as high as around 80%. The higher discounting is seen in the Nordic tender countries. These are markets where it's winner takes all across the entire TMF category, so includes REMICADE and ENBREL as well. They have a policy of non-medical switching.

I'd say they're a bit of an unusual market from that perspective, and that tends to drive deeper discounts. So I would tell you this level of discounting is not a surprise to us in those markets. It's certainly not unprecedented. We've seen REMICADE tenders in these markets that were fairly early on at 72% discounts, some as high as 75% discount.

So this wasn't unexpected at all. They're not a big part of our business. They represent about 4% or 5% of the overall revenue of our international business. And they don't tend to move into the other markets based on any of the experience that we've seen or any of the experience that we've had.

So we now have price points, as I said, for the vast majority of the business, the revenue in the countries. I'm going to characterize it in this way. I think two-thirds of the total revenue internationally I would consider to be locked.

Now what do I mean about locked? So you can characterize locked as a country that's still protected, so it still has IP protection, so there is no risk in those countries; a country that has mandated discounting, so the country basically says when biosimilars enter the market, we're going to cut the price of both the innovator and the biosimilar, and they'll both be at the same price point.

France is an example of that, and then they just go out and compete in that marketplace. Or it would be a country that has already tendered, and so we know what the pricing is in the tender, we know what our position was in that pricing. So that roughly represents about two-thirds of the overall volume. There's a third that is still being negotiated.

We have pricing in those markets. We have a pretty good idea of where we stand, but there's still an opportunity for some movement in those markets. And so we need probably another month or two for that to be able to play out and for us to have a firm understanding of where the discounting will settle out and where our volumes will settle out.

Now to characterize for you what are we seeing versus what we planned for, I'd say on average the discounting is coming in approximately 10 points higher than what we would have anticipated.

So if you go back to the 18% to 20% that we've communicated before as a planning assumption that we had back a year or two ago, if you look at the new calculation, you would put that at 26% to 27%. Now, I caution you about locking in on that number. I'm only giving it to give you a relative perspective versus where we were.

Because obviously that number could move, and in all likelihood, I think it will move some. I don't think it will move dramatically, but I think it will move some. So we factored in all of this pricing that we've already seen. You've seen some of that in our fourth quarter estimates.

So you can basically look at that and factor that through 2019 as well. We factored that into all of our estimates, and we factored in further room for more downside. And that's why we're coming back to you and telling you we're absolutely confident we can deliver double digit.

In the fourth quarter call, we'll give you – at that point we'll have more accurate information on that third that is left, and we'll give you a specific guidance range at that point. But you can assume that it will be double digit as a floor. So hopefully, that gives you some idea of where we stand from a biosimilar standpoint.

To the rest of your question, I think one of the things that is important to keep in perspective here is obviously we'll see some headwinds in our international biosimilar – or international HUMIRA business based on biosimilars. But fundamentally, the business continues to remain extremely strong. Our U.S.

business continues to perform at a very strong rate, including HUMIRA. Our heme-onc franchise that I described to you in my formal remarks continues to perform extremely strong. And in fact, we're starting to hit the inflection point with VENCLEXTA.

With the MURANO data out and the excitement around AML, VENCLEXTA has moved up dramatically in patient starts. And so that will be an important contributor. And then obviously, we have a number of new products that we either have launched or will launch over the course of 2019.

ORILISSA is going well, and upadacitinib and risankizumab will both launch in 2019. So I think our prospects going forward look very strong..

Thank you..

Thanks, Steve..

The next question is from Jason Gerberry from Bank of America..

Good morning. Thanks for taking my questions and congrats to Bill on retirement. Best of luck in Europe, and it's been a pleasure.

Just to follow up, Rick, on the biosimilar erosion commentary on ex-U.S., is that 26% to 27% blended across Europe and ROW markets which may not be impacted or may even be growing? I'm just trying to understand as we think about the impact on 2019, because I know that I think Canada – I don't think we expect biosimilars in Japan, and Brazil may not be impacted.

So could you just provide some clarity there? And then on U.S. HUMIRA, your confidence and ability to continue to capture mid-single-digit pricing benefit where it seems like the broader industry is migrating to low single digit in the U.S.? Thank you..

Okay. On the biosimilar erosion, I think the best way for you to think about it is it's across the book of the $6.3 billion of business. So it does include countries that are not exposed, so it's a blended rate across those. So it would obviously be higher in the countries that do have biosimilar exposure.

And the number – I don't know, have we ever publicly described what the number is of the protected versus the unprotected?.

Not with any specificity, no..

Okay, then I guess I won't describe that. On HUMIRA's confidence on price in the U.S., if you look at our HUMIRA business, it's primarily a volume-driven business in the U.S.

And I would expect that we will continue, based on all of the contracts that have been negotiated for 2019, that we'll continue with a very similar price fall-through to what we had in 2018. So on the lower end of that mid-single digits is probably a reasonable expectation.

So not a tremendous amount of price, but no significant change from what we've had..

Great, thank you..

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

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

Thanks for taking the question. Maybe you can discuss your confidence in the outlook for approval of VENCLEXTA in the AML, despite not having a randomized data, as well as if you can quantify that part of the addressable market. Thanks..

Sure, this is Mike. I'll take that. So we've had Breakthrough Therapy Designation for AML in the U.S., which gives us good insight into the FDA's thinking on the standard for approval.

And when you couple that with the very strong Phase 2 data that we've generated where the combination complete response in something that's called complete response with incomplete hematologic recovery, which is the way the data are looked at in that field, are on the order of about two to three times higher than historical comparators.

It's the strength of that evidence based on – and that coupled with our understanding of what it's going to take to get approved in the U.S. that gives us confidence. We also have our Phase 3 studies up and running and well underway. And they're positioned to readout next year, so in 2019. So it's that full picture that gives us that confidence.

In terms of how much of the addressable market that represents, it's a substantial portion. AML tends to have a peak incidence later in life, and up to about half of patients can't undergo intensive induction chemotherapy and then go on to stem cell transplant. And for those patients, there really are very, very limited treatment options.

And it's in those very difficult to treat patients that VENCLEXTA has demonstrated the data that I described. So we think that there is a very real opportunity here that will be very important both medically and commercially..

And maybe to just give a little more color on VENCLEXTA, what we're seeing, because AML is obviously a portion of that, I mean, if you looked at the AML market in total, it's probably a couple of billion dollars.

And as Mike said, roughly half of that is addressable, although I will say we are seeing some activity where physicians are pretreating patients prior to induction chemotherapy to get disease activity down. So it could be even larger than half of that population in AML.

As I indicated in my remarks a few moments ago, we are seeing VENCLEXTA take a fairly significant inflection in growth since we released the MURANO data, and I think physicians have become more aware of the AML data.

If you actually look at patient starts compared to the first quarter of 2018 and looking at them versus the third quarter of 2018, they're up 73%. So obviously the brand is starting to really grow at a fairly rapid pace. It's at about a $400 million running rate right now and growing rapidly.

So I think you can expect that you'll continue to see very strong growth out of VENCLEXTA, and it will be an important contributor to our oncology growth going forward..

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

Thank you. Our next question is from Vamil Divan from Credit Suisse..

Hi. Great, thanks so much for taking the questions. Congrats to you, Bill, for the retirement. And just a couple actually on the margins I guess for you. One, the gross margins this quarter I thought were especially strong.

Was there any sort of one-time impact that sort of drove anything there, or anything we should be aware of? And then the comments from Rick regarding your expectation on biosimilars and sort of that 26%, 27% number, I'm curious how to think about your prior commentary on operating margins. You said 50% operating margin by 2020.

Does this sort of change in discounting, you're on the higher end of your planning scenarios, does that impact how you think about what your operating margins might be in that 2020 timeframe? Thanks so much..

Sure. So if you look at the quarter, this is only the first quarter that we've seen the full impact of the termination of HUMIRA royalty that were previously in place. So we're picking up about 160 basis points of favorability related to that royalty reduction. That was the big mover in the quarter.

We also did see some favorable exchange, call that maybe a little under 0.5 point, and then offsetting that going the other way was about 120 basis points related to partnership accounting. As you know, we book the profit that we pass to our partner on IMBRUVICA as a cost of goods sold. So that actually has a dilutive impact on the gross margin line.

So when you add that all up, that's how you get to the number that we saw in the quarter. In terms of progress towards 2020, look, certainly we're factoring in the biosimilar experience that we're seeing now into our 2019 plan, although I don't have a clear picture yet.

Be what I can tell you is, if you look at this quarter, we had very, very strong operating margin growth. We've increased by over 400 basis points on the 47% range. I think that that is the base that you've got to think of us starting to build off of in our inherent run-rate.

And then, next year we're going to pick up the benefit of royalty reductions, which ought to be about 170 to 180 basis points. So we're not going to be there in 2019. We never said we were going to be there in 2019.

But when you look at the rapid growth we'd be expecting in 2020 with the pipeline products really moving into full gear, we still remain confident..

Thanks, Vamil. Operator, next question, please..

Thank you. Our next question is from Andrew Baum from Citigroup..

Thank you, a couple of questions, please.

Could you give us some order of the magnitude of the royalties in relation to the settlements in Europe, whether they're meaningful or insignificant? Second, there have been some recent publications addressing the platelet impact of BTK inhibitors, suggesting that the bleeding that's seen with IMBRUVICA may be a BTK-specific phenomenon, rather than drug-specific (45:44) thinking about CALQUENCE, your competitor, and whether it may not be such a better mousetrap as initially envisaged.

And then finally, any update on the Boehringer Ingelheim District Court case? Many thanks – on HUMIRA..

Andrew, this is Rick. I'll cover one and three. So the magnitude of the settlement royalties, those are all confidential agreements, so I can't speak to the magnitude of those even in a qualitative way. I would just say that they're typical royalties that are associated with the license of important IP.

On the court case for BI, I can tell you we have confidence in our position. We don't fundamentally believe that the essence of what BI is describing is, if you get a large number of patents on a product, that in and of itself is a problem.

I don't believe there is case law to support that, nor do I believe that there is evidence that would support that position. I'd also say the following. Look, we have five settlements now. We have very sophisticated companies who have made a decision based on our IP to do a settlement agreement with us.

I think that speaks for itself about the magnitude and the power of our IP, and we remain confident in our position..

All right, this is Mike. I'll take the question with respect to BTK inhibitors. It's been our view for quite some time that the bleeding risks that are associated with BTK inhibition are on target, and that BTK specificity from follow-on compounds are therefore not a way to address those risks. The risks are manageable.

They are part of the overall benefit/risk profile of a BTK inhibitor like IMBRUVICA, which is overall very strongly favorable. But that specificity isn't a way around that. And we say that based on our preclinical understanding, and we also say it based on clinical data.

And if you look at a number of follow-on BTKs that have come forward with arguments around putative selectivity, you see the same picture, which is in very early, very small studies, it's very hard to detect these sorts of effects. But as one moves into larger, longer-term trials, a very similar risk/benefit profile emerges.

And I think we've seen that with a number of follow-ons, including CALQUENCE. So again, we believe that the bleeding effects are part of the benefit/risk of a BTK inhibitor, that they can be managed effectively, and we believe we have managed them effectively with IMBRUVICA.

Obviously, the overall benefit/risk is strongly positive, but we don't see any advantage in the follow-on BTK inhibitors in that respect..

And the only thing I'd add there is I think the market data would now support that. I mean, if you look at the relatively small indication that they have in MCL, I think they peaked at market share around 10% – 13%, and now they're declining to some extent.

So clearly, the market uptake on the product does not appear to be representative of a product that has differentiation..

Thanks, Andrew. Operator, next question, please..

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

Great, thanks very much for the questions.

Just coming back to the HUMIRA biosimilar erosion, how predictive do you see this higher 2019 erosion rate to be as we think about longer-term annual erosion for the drug OUS? So beyond 2019, do you think this higher 26% – 27% erosion rate is how we should think about this, or are you viewing 2019 more as an outsized one-time step down, and then a less severe annual impact as you think about 2020 and beyond? My second question was just on SG&A for 2019.

AbbVie stepped up spending this year. Does that put the company's spending at levels that can support these significant upcoming launches, or should we think about another step-up in spending as we look out to 2019? Thank you..

Okay, Chris, this is Rick. I'll take the biosimilar question.

I think what we've seen is as the biosimilars entered the market, and it's probably somewhat consistent with the fact that four of them entered basically simultaneously, the pricing has been more aggressive, which all along we've said we would see the biggest impact at launch in that first year, and then it would taper off as we got to the follow-on years.

And I think what we've seen play out now only supports that further. So I think you can expect a much bigger impact in 2019 in the countries that had an impact. And then it will slow as we get into 2020-2021. Now there will be countries that come on in the later years, and they'll experience probably a similar kind of a curve as we enter those markets.

So I think that's the way we think about it, and I think it's the best way for the investment community to think about it..

Chris, speaking in absolute dollar terms, we certainly will be putting more money into SG&A next year to support our launches. If you look at the quality of the assets and the importance of the assets to the overall AbbVie growth story, we are not going to do anything that would impede our ability to maximize their ultimate potential.

So from a dollar standpoint, we will certainly be putting money in for both risa and upa. Obviously, a lot of the spend is already in the base for VENCLEXTA and to a degree ORILISSA. However, moving into AML, there will be additional spend there. And ORILISSA, we have not seen this year the startup of the full DTC campaign.

So I think you should model increased spending on those assets..

Thanks, Chris. Operator, next question, please..

Thank you. Our next question is from David Risinger from Morgan Stanley..

Yes. Thanks very much. So I have two questions. So Rick and Bill, I was hoping that you could talk a little bit more about your view on capital allocation.

Obviously the company has been quite aggressive with respect to buying back stock and increasing dividend, but it appears that equity investors are more focused on the company's long-term revenue growth and seem to hope for more pipeline enhancement transactions rather than some of the other capital allocation opportunities for the company.

So I was just hoping that you could comment on that and how you see that balance? And then separately, with respect to the 26% to 27% that you mentioned, Rick, could you just clarify? I had thought that the 18% to 20% was over the two-year period, i.e.

between 2018 and 2020, so is the 26% to 27% over a two-year period such that you're talking about low teens ex-U.S. HUMIRA sales decline in 2019, and then again in 2020? Or are you talking about a 26% to 27% decline in ex-U.S. HUMIRA sales in 2019? Thanks so much..

Yeah, David. It's Rick. So let me answer number two first. So what I'm describing to you is the level of erosion that we would expect in 2019. It will moderate, but there will be some impact in 2020. You are correct that what we described to you was 18% to 20% over that two-year period of time. So, you're thinking about it the right way.

So obviously there's higher levels of erosion. Now, I will say, as I mentioned a moment ago, I think we have seen a deeper discounting strategy out of the blocks. And that will moderate some as we go forward. But I think you should assume that you will see more erosion in 2020 which would obviously raise that number going forward.

I don't think it will be dramatic, but I think you will see some impact. On capital allocation, I think our overall strategy is very similar to what we've operated with for quite some time, and that is that we view returning cash to shareholders as an important strategy.

Our dividend we're committed to a growing dividend, and obviously we've demonstrated that again in this call. We view our dividend as our primary vehicle to do that, although we have done some substantial buybacks as we saw the stock at a value that we thought was undervalued. We thought that was an appropriate use of it.

Our first priority is always building the business for the long-term. We're fortunate that we have a strong pipeline, and therefore we can drive significant growth.

So we focused a lot of attention on assets that we could bring in that would have an impact in that 2023, 2024, 2025 timeframe which are typically earlier stage, smaller kinds of transactions. But we've been active in that area across the range of areas, oncology being a good example, immunology being a good example.

We have done some transactions now in the area of fibrosis, and so we have a pretty active program in that area. We look at almost everything. We look at small opportunities, medium opportunities, larger opportunities, and we evaluate each of those.

It goes through a filter of, first, does it strategically fit, and second, is the value at a point that ultimately we can get a good return on it for our shareholders? And so we evaluate all these opportunities versus that. I don't see a fundamental shift in how we've operated from a capital allocation standpoint though..

Thanks, David. Operator, we have time for one final question, please..

Our final question today is from John Boris from SunTrust..

Thanks for taking the questions. So, Rick, just on biotech valuations, we've obviously seen a significant contraction. I think at an investor conference you indicated that you were interested in possibly doing a transaction somewhere in the $20 billion to $30 billion range.

Just your thoughts about the environment, at least currently, relative to biotech valuations contracting. Second question on the dissolution or the termination of the royalties, I think, Bill, a third of them went away in 2018. Two-thirds go away in 2019.

Can you just give some commentary or quantitatively what the impact is on the 2019 gross margin? Thanks..

So I'll start with that one first, John. So you're exactly right in terms of the gating between 2018 and 2019. I think you should expect next year to pick up about somewhere between 170 to 180 basis points on the gross margin line as a result of those royalties being eliminated..

On biotech valuations, I guess I'll clarify the $20 billion to $30 billion comment. What I was trying to describe in that meeting was what we viewed as a larger bolt-on, not that we were actively pursuing a transaction in that range.

But having said that, if you look regardless of value, if I look at biotech valuations now, although they've come down some, they're still valued pretty highly, and valued in a forward-looking way. And what I mean by that is if you get some early data, you tend to see valuations rise very rapidly in anticipation of future positive data.

But when we look at a transaction, just like everybody else in the industry, you have to evaluate the risk of that data not playing out in a larger study, a later study. And so valuations are still – for the stage of the product, still have a tendency to get ahead of where the right balance is for the risk reward of a good return.

Doesn't mean every single one of them is that way. But I'm talking in generalities now. And certainly all of us continue to look for those opportunities where there's the right value and an exciting opportunity. We have seen some of those that we've brought in, and we'll continue to look for those..

Thanks..

Thanks, John. 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 his time..