Good morning and thank you for standing by. Welcome to the AbbVie Second Quarter 2019 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer portion of this call. [Operator Instructions] And I would now like to introduce Ms. Liz Shea, Vice President of Investor Relations..

Good morning and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Michael Severino, Vice Chairman and President; and Rob Michael, Executive Vice President and Chief Financial Officer.

Laura Schumacher, Vice Chairman, External Affairs Chief Legal Officer and Corporate Secretary will join us for the Q&A portion of the call. Before we get started, I remind you that some statements we make today 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 statement. Additional information about the these risks and uncertainties is included in our 2018 annual report on Form 10-K and in our other SEC filings.

AbbVie undertakes no obligation to update these forward-looking statements 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 second quarter performance and highlights as well as our full year guidance which we are raising again this quarter. Mike will then provide an update on recent advancements across our R&D programs and Rob will discuss the quarter in more detail.

Following our remarks, we'll take your questions. AbbVie once again delivered an outstanding quarter with adjusted earnings per share of $2.26, representing growth of 13% versus last year exceeding our guidance.

Total revenues of more than $8.2 billion was also ahead of our expectations for the quarter with several key products contributing to that growth. We saw excellent performance from our hematological oncology business with global operational sales growth of nearly 40%.

IMBRUVICA is performing exceptionally well with robust share growth across multiple lines of therapy in CLL including new patient share of approximately 35% in the frontline setting, up approximately 10 share points over the past year.

This strong momentum directly relates to the growing body of clinical evidence, label augmentation, and recently updated treatment guidelines which now position IMBRUVICA as the only preferred therapy in the frontline CLL market.

VENCLEXTA also continues to make very good progress in the broad relapsed/refractory CLL setting and has established a strong growth trajectory in the recently approved indications for first-line CLL and AML. U.S. HUMIRA grew more than 7.5% versus last year driven by continued strong volume growth across all segments.

And despite a very competitive environment, HUMIRA remains the market leader across each of the three primary categories; rheum, derm, and gastro. During the quarter, we also announced our ninth global settlement agreement resolving all IP-related litigation with BI over their biosimilar HUMIRA.

This final settlement agreement reinforces our confidence that we will not see direct biosimilar competition in the U.S. until 2023. International HUMIRA sales were down 31% on an operational basis, reflecting the impact of direct biosimilar competition in Europe and other international markets.

The international biosimilar trends and dynamics remain consistent with our expectations. And SKYRIZI, our recently approved treatment for moderate to severe plaque psoriasis is performing significantly above our expectations, contributing nearly $50 million in revenue this quarter. The launch is going extremely well.

We are seeing strong prescription volume well above recent launch analogs in the psoriasis category. Through the first 11 weeks of launch, we already have approximately 1,700 prescribing physicians and approximately 3,750 patients have been treated with SKYRIZI including those in our bridge access program.

We're extremely encouraged by this uptake which supports our continued confidence in the asset. Commercial access for SKYRIZI is also tracking in line with our expectations. As a result of the launch progress and the momentum, we are increasing our full year guidance for SKYRIZI and now expect full year global sales of approximately $250 million.

The outlook for SKYRIZI remains very strong and it represents a significant long-term opportunity for AbbVie with multibillion-dollar peak sales potential. We're also very pleased with our overall commercial performance and financial results for the quarter. We remain well-positioned to deliver double-digit earnings growth once again in 2019.

As noted in our earnings release we are raising our full year 2019 EPS guidance and now expect adjusted earnings between $8.82 and $8.92 reflecting growth of 12.1% at the midpoint which is at the very top of the expectations for our peer group. Clearly, this is an extremely exciting time for AbbVie.

Before I turn the call over to Mike and Rob, I want to speak briefly about our proposed acquisition of Allergan and the progress we are making.

We've had an opportunity to speak with many investors over the past several weeks since the announcement to share the strategic rationale for the transaction and our outreach with investors will continue as we have a number of opportunities to engage with shareholders in the coming months.

The integration planning is already underway and we are working to ensure a seamless transition on day one. We've identified individuals within AbbVie that will lead the integration process and there will be dedicated teams to ensure there is no disruption to our strong momentum.

And finally I'll be meeting with the Allergan employees in the coming weeks. I look forward to engaging with and ultimately welcoming this experienced and very talented organization into AbbVie. We remain incredibly excited about the transaction which has significant strategic merit.

The acquisition represents a unique opportunity for AbbVie to accelerate our non-HUMIRA business, the AbbVie growth platform by adding highly valuable on-market assets with leadership positions across attractive growth segments.

AbbVie's new growth platform will achieve stand-alone scale immediately with sales of more than $30 billion in 2020 and top-tier growth prospects. And it will enable enhanced funding of our innovative R&D platform and provide ample resource for additional pipeline expansion which remains the core focus for AbbVie.

The combination of AbbVie and Allergan will also unlock significant value for our shareholders as we've outlined. The transaction delivers immediate robust financial benefits with EPS accretion of 10% in the first full year of combination increasing to above 20% at peak.

This is inclusive of more than $2 billion in annual pre-tax synergies and cost savings which is expected in the third year post-closing. This combination also provides significant additional earnings in the period following the loss of HUMIRA exclusivity.

And the transaction provides enhanced cash flow to support a strong and growing dividend while rapidly paying down debt and continuing to invest in our innovative pipeline through increased R&D funding and the acquisition of mid to late-stage assets.

And finally, we're actively seeking the relevant approvals for the transaction and are working towards our stated goal for closing in the first quarter of 2020. In summary, we're extremely pleased with our outperformance in the quarter and with the continued strong momentum of our business leading to another increase in our expectations for 2019.

Since 2013, we have built a strong foundation through outstanding execution and the advancement of our robust pipeline of new innovative medicines. Looking back, we have delivered 16 quarters of double-digit earnings growth and have consistently been among the peer group leaders for revenue and EPS growth.

We've launched 13 new products for major indications which have and will continue to contribute considerably to our growth.

While this level of consistent performance is truly exceptional, especially given the challenges which inevitably arise in a large complex business like ours the key to long-term sustainable strong performance has always been forward planning.

And Allergan represents another example of our proactive planning to ensure we will continue to deliver top-tier performance into the next decade.

Our strong track record of execution combined with the momentum of our business gives us tremendous confidence in our ability to continue to successfully execute on our long-term strategy and deliver outstanding shareholder value going forward. With that I'll turn the call over to Mike for additional comments on our R&D programs.

Mike?.

Thank you, Rick. We had another productive quarter with continued progress across all stages of our pipeline. In the area of hematologic oncology, we received FDA approval in May for VENCLEXTA in combination with GAZYVA for previously untreated patients with CLL.

This marks another major milestone for the VENCLEXTA program and illustrates its growing utility across CLL patient populations.

The frontline CLL indication is the fourth approval for VENCLEXTA and was based on data from the Phase 3 CLL14 study which were reviewed under the FDA's Real-Time Oncology Review program and led to approval in just over two months following submission.

The CLL14 data demonstrated that VENCLEXTA plus GAZYVA significantly prolonged progression-free survival in patients with previously untreated CLL compared to a combination of GAZYVA plus chlorambucil reducing the risk of disease progression or death by 67%.

The VENCLEXTA combination also achieved significantly higher rates of complete response and minimal residual disease negativity versus the comparator regimen.

At the recent EHA meeting, we presented detailed results from the BELLINI study, evaluating VENCLEXTA in combination with Velcade and dexamethasone in patients with relapsed/refractory multiple myeloma.

In a subpopulation of patients with a t (11;14) translocation treatment with the VENCLEXTA combination resulted in an observed 89% reduction in the risk of disease progression or death. Following consultation with the FDA, we recently resumed the CANOVA study, our registration-enabling trial in this biomarker-defined patient population.

Based on the data generated today, we believe there is a role for VENCLEXTA in this patient group, which represents roughly 20% of the multiple myeloma population. We expect data from the Phase 3 CANOVA trial in the 2021 time frame.

Moving now to IMBRUVICA, where we continue to build the body of evidence supporting IMBRUVICA across various patient segments in CLL as well as in other blood cancers.

Results from the CLL12 study a placebo-controlled Phase 3 trial designed to evaluate IMBRUVICA versus no treatment in the asymptomatic watch-and-wait population were presented at the recent EHA meeting. In this early CLL population, current standard of care has been observation rather than therapeutic intervention.

However, we believe there are patients with high-risk features within this segment who may benefit from treatment with IMBRUVICA.

Data from the CLL12 trial showed that treatment with IMBRUVICA significantly improved event-free survival, progression-free survival and time to next treatment in patients with treatment-naive early-stage CLL when compared to placebo.

Importantly, safety results from the study demonstrated that most adverse events were seen at similar rates between IMBRUVICA and placebo with the exception of atrial fibrillation, bleeding and hypertensive disorders, which we believe to be on-target BTK effects.

We are encouraged with this data as they further illustrate IMBRUVICA's potential in patients who typically don't receive treatment today.

In the area of solid tumors, we recently completed the Phase 3 study evaluating veliparib in BRCA-mutated breast cancer as well as the Phase 3 study in ovarian cancer, which is being run in collaboration with the gynecologic oncology group.

In both studies, veliparib achieved the primary endpoint of progression-free survival and safety was consistent with that observed in the previously reported studies. We are continuing to analyze the data from these two studies and plan to discuss the findings with regulators to determine if they are sufficient for registration.

Detailed results from both studies will be presented at an upcoming medical meeting. Now moving to immunology. We continue to make great progress with our two late-stage assets SKYRIZI and upadacitinib as well as with our early-stage immunology assets. Early in the second quarter, we received U.S.

and European approvals for SKYRIZI in psoriasis and we anticipate an FDA decision in the coming weeks for upadacitinib in its initial indication of rheumatoid arthritis.

We believe both of our next-generation therapies have proven to be differentiated assets in their respective initial indications and have the potential to be best-in-category medicines across more than a dozen diseases.

We expect data readouts from several follow-on indications over the next 12 months to 18 months and we look forward to providing updates as these programs progress.

And while we believe SKYRIZI and upadacitinib will set new standards across a broad range of indications, we believe we can push the standard of care even higher with our early-stage programs which include ABBV-599 our JAK-BTK inhibitor combination in Phase 2 for RA with proof-of-concept data expected last year and beginning Phase 2 in lupus later this year; ABBV-323 our CD40 antagonist in Phase 2 for ulcerative colitis with proof-of-concept data expected next year and beginning Phase 2 in Sjogren's syndrome later this year; and our TNF steroid conjugate program where early clinical work is ongoing and proof-of-concept data are expected next year as well.

In the area of women's health, we expect to submit our regulatory application for elagolix in uterine fibroids in the coming days.

Many women with uterine fibroids suffer from heavy menstrual bleeding and painful periods and elagolix has demonstrated the potential to become an important new treatment option for the large number of women suffering from this disease.

This regulatory submission will mark another major milestone in our elagolix development program, and we look forward to bringing this innovative new medicine to the market once approved next year. And lastly, a few updates in the areas of -- in the area of neuroscience.

We recently made the decision to stop the Phase 2 study for ABBV-8E12 in Progressive Supranuclear Palsy or PSP following a futility analysis showing that AB 12 did not demonstrate the efficacy we had hoped for in PSP patients.

Alzheimer's disease and PSP differ in a number of important ways including the genetic background in which they occur and the distribution and potentially the nature of TAL pathology. Therefore, the ongoing Phase II study in Alzheimer's disease will continue as planned.

Also in the quarter, we began the Phase III program to support the registration of ABBV-951, our innovative subcutaneous Levodopa/Carbidopa delivery system. In summary, we've seen tremendous progress across all stages of our pipeline in the first half of the year and we remain on track for further advancements in the remainder of 2019.

With that, I'll turn the call over to Rob for additional comments on our second quarter performance.

Rob?.

Thanks Mike. As Rick mentioned, we had another quarter of strong performance. We reported adjusted earnings per share of $2.26, reflecting growth of 13% compared to prior year and $0.05 above our guidance midpoint. For the second quarter, net revenues were up 1.5% on an operational basis, excluding a 1.5% unfavorable impact from foreign exchange.

Strong growth from several key products offset the impact of international biosimilar competition. U.S. HUMIRA sales were $3.8 billion, up 7.7% compared to prior year with volume growth of approximately 7% and a modest positive price impact. Wholesaler inventory levels remained below 0.5 month in the quarter.

International HUMIRA sales were approximately $1.1 billion, down 31% operationally, reflecting biosimilar competition across Europe and other international markets and in line with our expectations. As Rick previously mentioned, we are extremely pleased with the performance of SKYRIZI, with sales of $48 million in the quarter.

Hematologic oncology global sales were nearly $1.3 billion, up 39.1% on an operational basis, driven by the continued strong growth of both IMBRUVICA and VENCLEXTA. IMBRUVICA global net revenues were $1.1 billion, primarily driven by continued uptake in the frontline CLL segment.

In CLL, IMBRUVICA remains the market leader across all lines of therapy with new patient share of approximately 35% in the frontline setting. VENCLEXTA revenues were $169 million, driven by continued progress in the broad relapsed refractory CLL segment and our recent approval is for frontline CLL and AML.

We've seen market share gains across all approved indications including AML, where the launch is exceeding our expectations. Global HCV revenues were $784 million in the quarter, down approximately 17% on an operational basis, mainly driven by lower treated patient volumes in select international markets.

We also saw continued strong operational sales growth for both Duodopa and Creon. Turning now to the P&L profile for the second quarter.

Adjusted gross margin was 82.7% of sales, up 220 basis points compared to the prior year including a 290 basis point benefit related to expiration of HUMIRA royalties, partially offset by the impact of partnership accounting. Adjusted R&D investment was 14.9% of sales supporting our pipeline programs on oncology, immunology and other areas.

Adjusted SG&A expense was 19.6% of sales, consistent with our expectations. The adjusted operating margin ratio was 48.2% of sales, an improvement of 290 basis points versus the prior year. Adjusted net interest expense was $302 million and the adjusted tax rate was 8.7%.

In the quarter, we recorded a specified charge of $1.55 per share for the contingent consideration increase related to SKYRIZI future milestone and royalty payments. This non-cash charge includes the impact of both a higher risk-adjusted cash flow forecast following the recent regulatory approvals for SKYRIZI as well as lower discount rates.

As mentioned earlier, based on our strong performance year-to-date, we are raising our full year adjusted earnings per share guidance to between $8.82 to $8.92, reflecting growth of 12.1% at the midpoint. Excluded from this guidance is $3.13 of known intangible amortization and specified items.

We are also increasing our revenue guidance for the full year and now expect growth of approximately 2% on an operational basis. At current rates, we continue to expect foreign exchange to have approximately 1% unfavorable impact on full year reported sales growth. Included in this guidance are the following assumptions for our key products.

We now expect U.S. HUMIRA sales growth approaching 80%. We continue to see a robust volume growth and maintain a strong leadership position across all segments. For our hem/onc franchise, we now expect global revenues of approximately $5.3 billion. This includes IMBRUVICA global revenues of approximately $4.6 billion with U.S.

sales growth of approximately 27%. For SKYRIZI, as Rick mentioned, we now expect global revenues of approximately $250 million. We're now forecasting global HCV sales approaching $3.1 billion, which we expect to be split evenly between U.S. and international. And for ORILISSA, we now forecast sales to be approximately $100 million.

We are still in the early stage of market development. And while the launch ramp is slower than initially expected, we continue to believe ORILISSA will be a significant long-term opportunity for AbbVie. All other full year 2019 forecast assumptions for our key products remain unchanged. Turning now to the P&L for 2019.

We now expect adjusted net interest expense of approximately $1.2 billion. All other full year 2019 guidance assumptions remain unchanged. As we look ahead to the third quarter, we expect adjusted earnings per share between $2.28 and $2.30 excluding approximately $0.43 of non-cash amortization and other specified items.

We anticipate third quarter adjusted revenue of approximately $8.4 billion. At current rates, we expect a modest unfavorable foreign exchange impact. For U.S. HUMIRA, we expect sales growth of approximately 8%. We expect international HUMIRA sales of approximately $1 billion, assuming current exchange rates.

And for IMBRUVICA we expect global sales of approximately $1.2 billion. Moving now to the P&L for the third quarter, we are forecasting an adjusted operating margin ratio of approximately 48%, and we expect the adjusted tax rate to be in line with our full year guidance, which is just above our 2018 rate.

In summary, AbbVie has delivered another excellent quarter with results well ahead of our expectations. We expect this momentum to continue in the second half of 2019 putting us in a strong position to once again deliver top-tier earnings growth. And with that I'll turn the call back over to Liz..

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

Thank you. [Operator Instructions] And our first question today is from Steve Scala from Cowen..

Thank you. I have two questions. Rick in Q1 you warned us that SKYRIZI was unlikely to have meaningful sales in Q2 and today you delivered one of the biggest launch numbers in my memory. So what is going on? What has been better than expected? So that's the first question.

And the second question is the fact that it appears there will not be upadacitinib AdCom, could be great news or a bit troubling. Great, if approval is going to be an FDA rubber stamp and troubling if it implies the FDA is unlikely to approve the drug on August 19. So any perspective on what's going on with the regulators would be helpful. Thank you..

Okay. All right, Steve. I'll cover the first question and Mike will cover the second one. I would say, we have been extremely pleased with the market reaction to SKYRIZI. I think it's a clear demonstration as to the value of this asset in the marketplace, the higher level of efficacy, and the other attributes of the product.

And so I think it has clearly beaten the expectations that we have, and have gotten there much faster than we would've expected it to get to this level of performance. I mean, it's truly outperforming all of the analogs that are out there in this category.

I think one of the more impressive numbers from our perspective is, if you look at the in-play share, which we define in-play share to be naive patients plus all switching patients SKYRIZI after 10 or 11 weeks has already achieved 24% of the in-play share. And to put that in perspective prior to the launch HUMIRA was at 28%.

So it's almost to the level of what HUMIRA was as the market leader in that category. And interestingly enough about 75% or a little more than 75% of that volume is coming from other biologics. We've only seen HUMIRA trend down slightly from that. So it's clear that SKYRIZI is capturing significant competitive opportunities in the marketplace.

So, I mean, I think we're obviously pleased with it. It's reinforcing the expectations that we had long-term for the drug and I think we'll get to the ramp much faster than we had expected. So it's great news from our perspective.

Mike?.

So, this is Mike. I'll take the question on upa. So we submitted upa in late December of last year under a six plus two review clock. So we're pretty far along in the review process. We have said in the past and it continues to be true that we do not expect an Advisory Committee.

We feel good about the performance of upa both from an efficacy and a benefit/risk perceptive across the program and we do not have any concerns about approvability..

Thank you..

Thanks, Steve. Operator, next question please..

Our next question is from Geoff Porges from SVB Leerink..

Thank you very much for taking the question. Just a couple of things Rick that have come up since the deal was announced.

Could you comment on whether AbbVie has any opioid liability flowing through from legacy Abbott? And then secondly could you talk a little bit about the percentage of your revenue that comes from Part B and Part D and your view on the Grassley-Wyden bill? It seems to be getting bipartisan support.

So what effect would that have on your business outlook? Thanks..

All right. Great. So I'm going to have Laura answer the first question and then Rob and I will cover the second one..

Okay. With respect specifically to opioid liability flowing through we do not have any liability for opioid relating to Abbott's co-promotion with Purdue Pharma..

Great. Thanks..

Yes..

Okay. So maybe let me talk first about the Senate proposal that is out. I'd say from the standpoint of -- as we've said in the past, we're obviously very supportive of anything that lowers patients' out-of-pocket costs. I mean I think one of the most significant challenges that we face in the U.S.

is that the way the Part D design was built originally it didn't necessarily envision the level of specialized medicine it would develop over time, and the out-of-pocket cost for patients made many of those drugs unaffordable for the average senior.

And so anything we can do to reduce that, I think is a positive for the industry and it's certainly a positive for patients and we think that's a big plus. The Senate bill will reduce out-of-pocket costs to some extent.

I think the question is, is it enough? Can patients really afford the $3,100 of out-of-pocket cost, the average patient on Medicare? I think that's an important question to be debated.

The second thing that I think is important to be debated is, it's still very front-end loaded for the patient, meaning in the first few months of the year, they have to come up with the $3,100. And that's difficult for many of these patients to be able to do from a cash flow standpoint, have the ability to be able to do that.

So we would be looking to try to advocate for something that would spread that out across the year to make it more affordable on a monthly basis for these patients. And I think that's an important debate that should occur as we go forward.

I would say, there are some aspects of the legislation that we believe are punitive, particularly the innovation-driven companies. And clearly, it does give benefit to some other companies that don't have specialty products that get into the catastrophic phase.

And so, I don't know that that was the intent that companies should pay lower than what they pay today. I doubt that was the intent. But that is the nature of the way it’s structured today, and I think that's something that ought to be debated and discussed. But, it's a long road from here as you know. This will be debated and worked through.

These kinds of legislations are complex and they take time, and there'll be likely extensive changes that occur to the draft legislation. But I think, the merit of going after things that reduce patient out-of-pockets, I think is a good thing.

It's a bit premature at this point to start understanding or projecting what the impact would be on AbbVie's business.

I think anything we can do to lower out-of-pocket costs will obviously drive some level of increased volume and that has to be taken into consideration, but there's a lot of things that will be worked on between now and the time anything ultimately gets implemented. And then, as far as the percentage of business, I'm going to have Rob cover that..

Yeah. This is Rob. So Part D is about 20% of our U.S. sales or 14% of our global sales. Part B is very small less than 1% of our sales..

Great. Thanks very much..

Thanks, Geoff. Operator, next question please..

Our next question is from Jason Gerberry with Bank of America..

Hey. Good morning. Thanks for taking my questions. First I just wanted to follow-up on Geoff's question actually. This idea around the Purdue co-promote, because Abbott seems to be saying something different about where that liability could fall.

So, is your comment that AbbVie does not have any liability, is it really just on the fact that the issue is just not ripe yet, and it's just premised on so many hypotheticals that you don't want to cause fire or characterize that as a liability? So, just trying to understand if that's really it or if you guys have fundamental differences around the separation agreement when AbbVie spun off in 2013.

And then my second question just on upadacitinib. If approved, how quickly do you think that drug could replicate the early commercial success of SKYRIZI that we've seen so far? And if you can frame any of the critical variables in the labeling determination that you think would facilitate that sort of outcome. Thanks..

Okay. Jason, this is Rick. So on the first one, look, what we're describing to you is essentially our view, and I think our view is consistent with the language of the agreements of where the liability would fall. And just like any other company, I'm not going to speak for another company's liability.

They should speak for it themselves, but what we're telling you is that it's not an AbbVie liability. I don't know how much clearer I can be than that. The second one is the -- on upa. Obviously, upa is a drug that was built around the same kind of premise that we looked at SKYRIZI.

We were looking for an asset that could outperform HUMIRA that could demonstrate superiority to HUMIRA. It's obviously an oral delivery, which is an advantage from a patient standpoint. And it's demonstrated outstanding efficacy in clinical performance.

So we would expect it to be able to -- whether it can replicate exactly what SKYRIZI is doing or not, we will certainly put it in a position to be able to do that. And I don't think there's another more confident organization to be able to launch a product like upadacitinib or SKYRIZI than we are.

And so, I think clearly, we will be able to drive this asset to achieve its maximum level of performance. And I can tell you that obviously we're very excited about SKYRIZI and how it's performing and it's certainly meeting or beating our expectations, which is a good thing.

And I think I'm equally excited about upadacitinib, when I looked at the clinical performance of that asset and the attributes of that asset. So we like to get it on the market and go out there and launch the product and get it into the marketplace as quickly as possible..

Thanks, Stephen. Operator, next question please..

Our next question is from Navin Jacob from UBS..

Hi, Thanks for taking my questions. A couple if I may. Rick, wondering if you could comment on what the potential is for international reference pricing proposals that are potentially out there from -- perhaps coming from the Trump administration.

If that's feasible in any way to be pushed over to Part D, obviously the focus has been Part B, but there's also been discussion that it could be pushed over to Part D.

Is that feasible in any way in your mind? And then just on upa, all the data we've seen thus far looks incredibly differentiated versus the other JAKs in terms of safety, but wondering just from a regulatory standpoint, if the agency has a view around the class as a whole.

Do they distinguish the JAKs as being different between each other? Certainly, the data would point to that from what we've seen, but wondering how your conversations with the regulators are going with regards to that, especially given the fact that literally just as we were speaking a few minutes ago the agency updated the XELJANZ label to include a black box warning for VTE DVT? Thank you very much..

Okay. Very good. So let me cover number one and -- the first question and I'll have Mike cover the second question. I think if you look at the international reference pricing that was being proposed in Part D, as you know, we obviously have a very small Part D business, so it doesn't have a significant impact for us.

Whether or not, a structure like that or something similar to that could be moved over to D I think in a broad way that would require legislative action I believe based on the way the law is written today. But it doesn't mean that there couldn't be pilots or other kinds of methods to ultimately look at that.

So it's -- I think it's difficult to predict what it would look like. I think the Senate proposal I think is a good start with some modifications. I think the Senate proposal could be modified in a way that it could solve many of the issues that are out there.

And I think that one has a structure that then plays -- that could require some level of modification. But I think the framework around it is a good framework.

And so I would hope that that would get some traction to move forward and be modified in the areas that I referenced before, potentially look at smoothing the out-of-pocket, potentially even look at maybe trying to take the out-of-pocket down a little bit further.

And then relooking at the distribution across all of the different drugs that approaches through Part D all of the proprietary drugs and making sure that that distribution is appropriate across the full range of medicines that patients buy as Part D. It would be some fundamental modifications that I think could be looked at there.

Mike?.

Okay. I'll take the question on upadacitinib. So we feel very good about the performance of upadacitinib across its program, not only from an efficacy perspective, but from a benefit/risk perspective. With respect to the agency's view, I can't speak for the agency, but that generally will differ across different components of the program.

Obviously, there's been a lot of -- there's been a lot of focus on the DVT and PE issue with baricitinib. And then, we just saw this morning that the FDA has announced that they've updated the label for tofacitinib to include a box warning around similar events. What we've said consistently is our program hasn't demonstrated that risk.

So if we were to pick up labeling language like that or warnings around this issue, that would have to come from a determination from the FDA that they're going to move from some form of class labeling. And I'm not in a position to speak for them about that, certainly not today.

Our review is ongoing so we will update on our label when we have more information..

Thanks, Navin. Operator, next question please..

Thank you. Our next question is from Tim Anderson from Wolfe Research..

Hi, thank you. Two questions. Your share price was right at about $80 a share before you announced Allergan. It's now down over 15% since that transaction. You guys have had no setbacks in that time frame. You beat results today. So that says investors aren't enamored with the deal.

From investors you've met with what's the biggest pushback on the transaction? And what do you think investors are not appreciating? And second question on ORILISSA. On the market for about a year now did $19 million in the quarter. Your prior guidance is $2 billion in 2025. Is that still realistic? Thank you..

Sure, Tim. This is Rick. I'll cover both of those. So first on the share price, I think it's important to put in perspective, all of the larger transactions that have been done over the course of the last several years.

So, Bristol-Celgene, Takeda, Shire and others, I've had a similar reaction out of the blocks down -- I'd say the data I looked at prior to our announcement was down in the range of 10% to 16% at announcement.

I would say as we went out following the announcement you saw that the stock rose about 3% per day on that Wednesday, Thursday and Friday and while we were on the road. And that I think is a good indication as to, when you sit down and you get in front of investors. And you walk them through the strategic logic. And what this does for us longer term.

I think most investors that we met with, walked away with a positive impression. There are mechanical aspects of this, of how arms come in and short the acquirer. And we're obviously seeing our short volume go up significantly which is putting pressure on the stock. So, I don't think the stock's performing differently than what we would expect.

And I don't know that it's a specific indication to just the perception of the transaction. When we'll know what the perception of the transaction is, is when we close it. And the shorts move out of the stock and then the stock will trade on its merits. And I would be -- I'm encouraged that I think the stock will trade on its merits quite well.

This is a company that has performed extremely well over the last five or six years. And this strategically puts us in a position, where regardless of what happens with HUMIRA in 2023. We can continue to perform at a very high level. And that was the intention.

And as I said in my formal comments, the reason we've been so successful is that we run the business in a way to make sure that when there are issues or risks around the business that we take proactive actions to be able to deal with those. And that's what investors would expect us to do and that's what we do.

And this is an example where it will protect the company and the shareholders from a range of outcomes around HUMIRA when we see the LOE in 2023 in the U.S. and that's the way to run the business. And so, I'm excited about the Allergan transaction. I think it's a great set of assets. I think it's a very good organization, from an execution standpoint.

And I think it will add to our business in a positive way. And give us additional growth platforms that will allow us to continue to grow the company. As it relates to ORILISSA, our long-term guidance on ORILISSA remains the same.

As we indicated to all of you when we started this -- this is an example of a drug where you have to go out and build the market. Endometriosis hasn't had a new therapy in a decade or maybe even more than a decade. And so, you have to create the awareness. You have to create the confidence in a new therapy.

And you have to get patients to be aware of it, and then to be activated to go to their physician and get treatment. So, we're continuing to look at our launch strategy and make modifications where we think they are appropriate to accelerate the ramp.

And one of the things that we're looking at right now is if you look at the profile of the drug, the profile of the drug is excellent. There's -- it fits exactly the objectives that we need in a drug in this class. The physician uptake has been good.

We're getting good trial out of the physician base and getting pretty broad coverage out of the physician base. The third component for a drug like this is you have to -- as I said, you have to create awareness for patients. And you have to activate those patients to go into their physicians' office and talk about treatment of their condition.

And, I'd say, we're getting good awareness. In fact I'd say the awareness is slightly higher than what we would have projected. Where we're not getting enough activation, because these women are essentially -- they go to their physicians typically once a year or less on average.

So we want them to basically make a special visit, to ultimately come in and start to talk about their condition and what the appropriate treatment is for that condition. We're not seeing a lot of activation or -- at the level that we would expect of their routine visit schedule.

And so we are looking at some modifications to our current promotional strategy to try to increase that activation and that will obviously allow the ramp to increase. And that's the area of focus that we have today. So, you constantly modify your strategy to make sure that you're dealing with the elements that could enhance it.

And that's what we're doing..

Thank you..

Thanks Tim. Operator, next question please..

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

Thank you. A couple of questions please. Firstly, could you help us think through the potential impact of biosimilar Enbrel introduction in the U.S.

on your HUMIRA business? What's your level of confidence that any usage will impact only treatment-naive RA patients? Or is there risks to your in-built franchise of established patients? So that's the first question. Second with SKYRIZI.

In relation to the usage anticipated with the drug how much do you expect to be home administration versus in the physician's office? And are there ready economic incentives for physicians in that to select SKYRIZI as a result of that? And then finally, again on SKYRIZI the drug is not currently approved with psoriatic arthritis unlike some of your competitors.

That's about 30% I believe of the current psoriasis market. To what extent is that a disadvantage given it's going to take a while before you get the data? And there may be some questions about the Sharp scores and the comparative nature of that data versus the approved IL-17? Many thanks..

All right. Thank you. So impact of biosimilar Enbrel, I will tell you that there is no data that would support that it will cause a change in well-maintained patients. We obviously have REMICADE biosimilar in the U.S. marketplace today. It's not having any of that kind of impact granted it's an infused product but it's a -- outside the U.S.

when we had biosimilar Enbrel, it didn't have any material impact at all on HUMIRA. And so I don't expect that it would have any significant impact at all if Enbrel were to go biosimilar. And if it had any impact it would only be on naive patients so I don't think that's something that we would be overly concerned about.

On point number two what the split is between physician office and self-administered I don't know that I know the answer to that question so we may need to follow-up with you on that. So let us take a follow-up and get back to you on that.

On the third one Mike why don't you cover that?.

So this is Mike. With respect to psoriasis in psoriatic arthritis there is a degree of overlap between those conditions but patients often present with more prominent skin disease or more prominent joint disease. So our strategy is to have a portfolio of options for those patients.

Today we have SKYRIZI which has demonstrated outstanding efficacy on the skin disease. HUMIRA we still believe is a gold standard for patients who have primary joint involvement and prominent joint involvement. Going forward, we have Phase 3 programs both for SKYRIZI in psoriatic arthritis and for upadacitinib in psoriatic arthritis.

So we think across that range of options we'll have the best treatment option for each of those individual patient profiles..

And the only thing I'd add is you have to look at the data that's coming out today. I said the bulk of the volume that's coming to SKYRIZI today 77% of it is coming from other biologics. And I can tell you a significant portion of that is the IL-17s.

And just think about it from this perspective between SKYRIZI now and HUMIRA we really should capture almost 50% of all in-play patients. So I think that gives you some idea of the kind of impact that it's having and the competitiveness of SKYRIZI versus those alternatives that are available whether they're 17s or other 23s or TNFs..

Thanks, Andrew. Operator, next question please..

Thank you. Our next question is from Terence Flynn from Goldman..

Hi. Thanks for taking the questions and congrats on the SKYRIZI launch. One question. You mentioned in the past Rick that some smaller divestitures might be required as part of the Allergan deal. I think some investors assume Allergan's IL-23 would be one of those products. So just wondering if that's a fair assumption.

And then what's your confidence level in retaining SKYRIZI? And then the second question I had relates to the U.S. HUMIRA erosion curve.

Can you give us any sense of how you're thinking about that in the 2023 time frame and where Allergan fits into that? You mentioned managing the business where there's kind of risks and different outcomes but how did you guys think about that 2023 erosion curve with respect to Allergan in the business there? Thank you. .

So let me talk a little bit about the divestitures. We've commented on questions that have come up from investors in the broader nature of are we interested in divesting anything out of the portfolio. And generally I would tell you no. There could be some overlaps from an FTC standpoint and that -- and therefore we would deal with those.

Laura, is there anything additional you want to comment on from an FTC standpoint?.

Yes. I guess I will just say we filed our initial HSR filing. And obviously, we're working with the FTC to the extent that our product overlap. Specifically with respect to SKYRIZI, we do not anticipate that the FTC would require that divestiture at the very least because it's on market for a different non-overlapping indication.

And from the standpoint of the FTC's review of the overlap both the SKYRIZI product and the Allergan IL-23 will be considered pipeline assets. And SKYRIZI is being developed for a number of different indications while the Allergan product is only being developed for a couple.

So we really don't believe the FTC would require divestiture of SKYRIZI simply because it's on the market for a different nonoverlapping indication..

Okay. And then on the HUMIRA erosion curve -- we're obviously not in a position where we're going to talk to you what that erosion curve looks like this far out because obviously things can change along the way. And when we get closer to the point that we can give you a predictable erosion curve, we will obviously supply that to the market.

But we want to do it, when we have a high level of confidence that we can give you a number that is accurate. Having said that, as we've gone out and talk to investors, what we've described to them is, we have a base case erosion curve that we have built.

We have -- we update that erosion curve at least once a year, but sometimes more often than that based on -- as we see circumstances play out. We have updated the erosion curve based on the experience that we've seen in the international markets.

And I'd say specifically, we've updated the speed at which the curve drops in 2023 because the experience in the international markets is that it's not and has not been a stair step over a number of years. It has come down to basically where a year or three would've been and it's pretty much flattened out. And we are seeing the market outside the U.S.

in most countries around the world, reach a point where the competitive dynamics are clearly well within the expectations that we've built in our plan and are somewhat stabilizing I would say. So we've updated the U.S. erosion curve to look more like that international curve in the shape of that curve.

And then, we obviously do downside scenarios where we look at okay what scenarios could come together in a way that would create a higher level of erosion? And that's based on a number of competitor’s, interchangeability, changes to the U.S.

health care system and we do a number of different modeling assumptions around that to determine what a downside case might look like. If you look at the Allergan transaction, I think the beauty of the Allergan transaction is it guards against the full range of those options.

So, if we ended up on a downside scenario, the Allergan transaction allows us to totally buffer that impact. If we end up on the base case, then obviously AbbVie is in a much better position. And so there really isn't a downside scenario that I can come up with that the Allergan transaction doesn't make AbbVie stronger as we go through the LOE.

And that was the premise of the transaction and I think everything that we know about it today, only reinforces that that is the appropriate way to be able to manage the business over the long term..

Thanks, Aaron..

Great. Thanks you..

Operator, we have time for one last question..

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

Great. Thank you very much. So the results in the quarter were obviously very strong. I just want to understand a little bit better the gross margin. So the sales growth sequentially was over $400 million versus the first quarter, but the gross margin declined from 83.4% to 82.7%. So, if you could just give us some color on that.

And then could you talk a little bit about the benefits of leveraging HUMIRA in autoimmune disease with payers? I think that management has discussed in the past that payers appreciate the fact that AbbVie is a major player in autoimmune disease and the company can offer bundled programs to facilitate adoption of SKYRIZI and that should also help upadacitinib as well.

So, if you could just talk about leveraging the franchise. And then if there's any way to comment on the math that's involved so how you actually allocate rebates for example between SKYRIZI and HUMIRA that would be helpful. Thank you very much..

David, this is Rob. So I'll take your first question. So, if you look at our gross margin profile through six months, we're right at 83%. That's very much in line with our full year guidance.

I mean quarter-to-quarter, you'll see the profile fluctuate due to sales mix impact of foreign exchange and timing of spending, but we feel very good about the progress we've made in gross margin and we're tracking in line with our guidance..

So David, this is Rick. I guess the first thing I'd say is we don't leverage HUMIRA with our payers.

We obviously have a portfolio -- or will have a portfolio of assets that we believe provides payers with the greatest flexibility to cover the largest number of patients and that's a benefit for those payers to be able to have assets that give them the greatest level of coverage for -- from a clinical standpoint for those patients.

And as far as what the rebates are, we obviously don't publicly disclose what those rebates are for competitive reasons. But what I would tell you is -- I mean I've heard this rumbling out there about somehow trying to leverage HUMIRA for SKYRIZI as an example. And I'd just point to this quarter as an example all right? HUMIRA grew 7.7%.

It had 0.5 point of positive price, all right? So at the end of the day, obviously we didn't leverage HUMIRA to a great extent to get a position for SKYRIZI.

There are benefits that we would provide to payers, who allowed both products to go on formulary and -- but there isn't a big leverage component here that the market seems to be perceiving or you wouldn't have positive price. So, I think that answers two and three..

Okay. Thanks David..

All right. 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..