AbbVie Inc.

Good morning and thank you for standing by. Welcome to the AbbVie Fourth Quarter 2018 Earnings Conference Call. All participants will be able to listen only until the question and answer portion of this call. You may ask a question by pressing star 1 on your phone. 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, 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 some 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 interventions, 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 gap financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared marks, 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. This morning, I'll discuss our fourth quarter and full year 2018 performance, as well as our expectations for 2019. Mike will then provide an update on recent advancements across the R&D pipeline and and Bill will discuss the quarter and our 2019 guidance in more detail. Following our remarks, we'll take your questions. We delivered another impressive year, with results well above initial expectations. Adjusted earnings per share in the fourth quarter were $1.90, representing growth of more than 28% versus last year, and once again achieving our guidance for the quarter. Total adjusted operational sales growth of 8.3% exceeded our guidance for the quarter. This growth was driven by a number of products, including our hematological oncology portfolio with global operational sales growth of more than 50% and U.S. Humira, which grew more than 9% versus last year. Our international Humira sales were down nearly 15%, reflecting the impact of direct biosimilar competition in Europe, and other international markets. We also saw a continued strong performance from several other products, including Maverick, Creon, and Duodopa. AbbVie has demonstrated an exceptional track record of consistently delivering top-tier financial performance despite any market or competitive challenges, and 2018 was another clear example of that performance. We continue to drive strong commercial and operational execution, resulting in full-year 2018 global operational sales growth of more than 15% and adjusted earnings per share growth of more than 41%. As we look at the evolution of our business and of our strategy, we're pleased with the progress that we're making. AbbVie Strategy has contemplated biosimilar competition since day one of the launch of this company. Our focus has been on building a pipeline that would allow us to absorb the impact of biosimilar competition and maintain a strong and growing business. Although our work is never done, we have made tremendous progress building what we believe is one of the industry's most attractive pipelines. In hematological oncology, we have built a powerhouse franchise with Imbruvica and Benclexta. Today, this franchise is roughly $4 billion, with more than a billion dollars of growth expected in 2019 and significant growth anticipated over our long-range plan. In immunology, Humira in the U.S. will continue to generate strong revenue, driving roughly a billion dollars of growth in 2019. Since we became an independent company, our research and development efforts in immunology have focused on identifying and advancing new assets that could deliver efficacy superior to Humira and other new agents. Given the importance of this growth platform, we understood that in order to maintain and expand our leadership position, the development of highly differentiated assets was absolutely critical. We are now confident that with Rizokizumab and Upatacitinib, we have accomplished our objective. Both of our next-generation immunology therapies have demonstrated across multiple clinical trials, superiority versus Humira, and other competitive offerings. This efficacy was shown across a broad spectrum of patients, including Bio90 patients at one end of the treatment paradigm, and very difficult to treat patients who would fail one or more therapies at the other end of the spectrum. In our hands, these assets have the ability to become the new standards of care in immunology. We expect to launch both rizokizumab and ipatacitinib in 2019, and based on their profiles, anticipate broad formulary access. Beyond our new therapies in hemon and immunology, we've also developed other assets that represent attractive multibillion-dollar revenue opportunities, such as Maverick and Oralisa. And we have a base business that includes therapies like Creon, Duodopa, Synthroid, and Lupron, all products we expect will remain durable for many years to come. The event that has, for many years, concerned investors most has been the loss of exclusivity for Humira. Certainly the most frequently asked question that we get is what impact will biosimilars have on AbbVie's business? We have long been planning and preparing for the event that is now upon us. We are now facing direct biosimilar competition in Europe and other countries which represent approximately 75% of our international Humira business or approximately 25% of total global Humira revenues. As we described on our third quarter call, biosimilar competitors have been more aggressive with Humira than previous anti-TNF biosimilar analogs. But despite the more aggressive discounting, our strategy is working as we had intended. 2019 is a year that should clearly demonstrate to all investors that AbbVie is once again delivering on its commitments. In 2019, we will absorb roughly $2 billion of erosion related to biosimilar competition and roughly $400 million of additional impact following the entry of generic competition for androgel 1.62. We're also facing an extremely difficult comparison period due to the outstanding growth we drove in 2018. And in 2019, we'll also be funding five major product or indication launches. Yet despite all of these challenges, AbbVie expects to deliver positive revenue growth and double-digit EPS growth this year. This level of performance demonstrates that the strategy we have in place is working as we planned. and it should re-insure all investors of our ability to absorb the impact of direct biosimilar competition while maintaining a strong, growing, and vibrant business. Further to that point, our ability to deliver industry-leading EPS growth in 2019, despite the challenges I just outlined, is particularly notable given that this year many of our key pipeline assets will be at the very early stages of their launch trajectory and therefore providing minimal offset to the biosimilar impact. Given their product profiles, we expect these pipeline assets will grow substantially over the next several years and provide significant offset to the 2023 U.S. biosimilar event. So as I said, we're pleased with the progress with our strategy, and investors should view 2019 as a real test of that strategy. In summary, this is an important time for AbbVie. The continued momentum of our U.S. business and our hematological oncology franchise, combined with the launch and ramp of several new products, will allow us to grow through biosimilar impact in 2019, just as we had predicted. We've demonstrated a strong track record of managing and overcoming challenges, and our expected performance in 2019 is another clear example of that. And while we're certainly proud of what we've accomplished in the first six years as an independent company, I can tell you we remain focused and committed to delivering on our long-term vision for the company, sustained top-tier performance. With that, I'll turn the call over to Mike for additional comments on our R&D programs. Mike?

Thank you. 2018 was a very productive year with significant pipeline advancement, including numerous development and regulatory achievements and successful data readouts across our pipeline. We secured regulatory approvals for several programs, including Benclexta in the broad relapsed refractory CLL population and conditional approval for Benclexta in newly diagnosed AML patients ineligible for intensive chemotherapy. approval for Imbruvica in combination with Rituxan as the first chemotherapy-free combination treatment for Waldenstrom's, the ninth FDA approval for Imbruvica overall, and for Oralisa for the management of moderate to severe pain associated with endometriosis. We completed registrational studies and submitted regulatory applications for our two next-generation immunology therapies, risin-kizumab in its initial indication, psoriasis, and upatacitinib in its first indication, rheumatoid arthritis. Across each of the four Phase III studies in the pivotal program for psoriasis, risin-kizumab showed consistent, high, durable rates of skin clearance. Based on these results, we believe Resynchizumab has the potential to significantly improve upon current treatment options for both bio-naive and TNF-inadequate responder patients with moderate to severe psoriasis while offering the convenience of quarterly dosing. Our regulatory reviews are well underway, with approval decisions expected in the second quarter. With epatocitinib, our goal is to deliver a differentiated treatment to RA patients. We designed a broad and comprehensive set of six pivotal studies in RA, enrolling nearly 5,000 patients across multiple populations, including two studies with biologic comparators. We evaluated epatocitinib head-to-head against the standards of care in RA, including methotrexate and Humira, and in a broad range of patient types within the moderate to severe RA segment. This includes monotherapy treatment in patients who are naive to methotrexate, as well as studies in very difficult-to-treat patients who have failed one or more biologic therapies. Across the select clinical program, both doses of upatacitinib performed extremely well and demonstrated a strong benefit-risk profile. Based on our analysis of the data generated across the registrational program, We believe the 15 milligram dose represents the best dose for the RA indication, as it delivered maximal efficacy across a wide range of studies, drove strong results on important structural endpoints, and demonstrated superiority to Chimera in our head-to-head study. Thus, this dose provides the differentiation we were seeking when we designed our program. Our regulatory submissions are currently under review, and we expect approval decisions in the second half of this year. In addition to the successful trial readouts for upatacitinib and risankizumab, we also reported positive data from several Phase III studies in other areas of our pipeline, including elegolics in uterine fibroids, vanclexta in frontline CLL, and data from several important Phase III studies in our frontline CLL program for Imbruvica, including results from the ECOG, Alliance, and Illuminate trials. Data from these three studies show treatment with Imbruvica alone or in combination significantly prolonged progression-free survival compared to therapies such as FCR, BR, and Gizaiva plus chlorambucil in previously untreated CLL patients. We also initiated several phase three programs, including studies for epatocitinib in atopic dermatitis and ulcerative colitis. In addition to the progress we made across our late-stage programs, we also advanced a number of early-stage assets into mid-stage development, including our JAK-BTK program in RA and our CD40 program in ulcerative colitis. And we transitioned several preclinical programs into human trials, including our novel TNF steroid conjugate and our ROR gamma T programs. Clearly, we made tremendous progress advancing our pipeline in 2018. and we look forward to many important pipeline milestones in 2019 as well. In hematologic oncology, we'll see data from several Phase III studies for Venclexa this year, including results from the Bellini trial in relapsed refractory multiple myeloma and from our two frontline AML studies, as well as the detailed data from CLL14, our Phase III study for Venclexa in frontline CLL. These data and subsequent label augmentations will build upon the body of evidence demonstrating vanclexus potential as a foundational treatment option across a number of hematologic malignancies. Earlier this month, the vanclexus CLL14 data were selected for FDA's real-time oncology review program. This program is aimed at expediting the review and approval process for supplemental drug applications. Results from CLL14 have already been shared with the FDA, which was part of the agency's evaluation process leading to the decision to offer the real-time review. Very soon, we will begin submitting data as part of the review process and expect an approval decision later this year. We look forward to bringing this new treatment to market in the frontline CLL population. In the area of solid tumors, we'll see data this year from our Phase III study for DeptoxM in newly diagnosed glioblastoma multiforme. This is an extremely difficult-to-treat form of brain cancer with a very high unmet need and limited treatment options. We've seen encouraging trends in overall survival in our Phase II study and second-line GBM and look forward to the results of our frontline Phase III study to define the future regulatory path for the program. We also expect several assets from our early-stage solid tumor programs to transition to proof-of-concept studies this year, and we'll share data from these programs as they mature. In the area of immunology, as I previously mentioned, we expect regulatory decisions later this year for upatacitinib in RA and ricin-kizumab in psoriasis. In addition to their lead indications, we continue to make great progress with upatacitinib and risankizumab in a number of other immune-mediated conditions. This year, we'll report mid-stage data for upatacitinib and axial spa, and we plan to begin phase three development in giant cell arteritis. Overall, this year we'll have 10 active, ongoing registration-enabling programs for upatacitinib and risankizumab. We're also making good progress with our early stage immunology pipeline, which includes programs aimed at redefining the standard of care in autoimmune diseases. We have several promising assets, including ABBV323, our CD40 antagonist, ABBV3373, our TNF steroid conjugate, and ABBV599, our combination JAK-BTK inhibitor. And in the area of women's health, following completion of the pivotal trials for elegolics and uterine fibroids, we plan to submit our regulatory application around the middle of the year. So, in summary, in 2018, we made tremendous progress advancing our pipeline, achieving a number of key clinical and regulatory milestones across all of our therapeutic areas. And we expect 2019 to be another very productive year for our R&D organization. We look forward to updating you on our pipeline progress throughout the year. With that, I'll turn the call over to Bill for additional comments on our 2018 performance and our 2019 guidance. Bill?

Thanks, Mike. Today I'll review the highlights of our performance for the fourth quarter and full year 2018 and then walk through our 2019 outlook. As Rick mentioned, we have completed another year of outstanding performance, delivering top and bottom line growth that ranks AbbVie among the very top of our industry peers. We reported adjusted earnings per share of $7.91, up more than 40% compared to 2017, and $1.44 above the midpoint of our initial expectations for the year. For the year, adjusted revenues were $32.7 billion, up 15.2% on an operational basis, excluding a nearly 1% favorable impact from foreign exchange. For the fourth quarter, total revenues were $8.3 billion, an increase of 8.3% on an operational basis, excluding a 1% unfavorable impact from foreign exchange. This performance reflects double-digit underlying volume growth, offset by approximately 2.5 points of negative price. Global sales of Humira were $4.9 billion in the quarter, up 1.4% operationally. In the U.S., Humira sales increased 9.1% compared to the prior year, reflecting high single-digit volume growth plus price. Wholesaler inventory levels remained below half a month in the quarter. International Humira sales were $1.3 billion in the quarter, down 14.8% operationally, reflecting the introduction of biosimilar competition across Europe and other international markets. Global Humira sales for the full year 2018 were $19.9 billion, reflecting operational sales growth of 7.4%. Full-year sales of Humira in the U.S. grew more than 10%, and international Humira sales approached $6.3 billion, performing in line with our expectations. Hematologic oncology global sales were $1.1 billion in the quarter, up 50.3% on an operational basis, driven by the continued strong growth of both Imbruvica and Van Clexta. In the quarter, Imbruvica net revenues were $1 billion, primarily driven by continued uptake in the frontline CLL segment. Van Clexta revenues were $124 million in the quarter, driven by continued uptake in the second-line plus setting as a result of our mid-year approval in the broad relapse refractory CLL segment. For the full year, our Heme-Ox global revenues were $3.9 billion in up 45.8% on an operational basis. Global HCV sales for the fourth quarter were $862 million. Maverick continues to perform well, holding roughly 50% market share globally. For the full year, HCV sales exceeded $3.6 billion and was above our previously communicated guidance. We also saw continued double-digit operational sales growth for both Duodopa and Creon. Turning now to the P&L profile for the fourth quarter, adjusted gross margin was 79.8% of sales, up 80 basis points compared to the prior year. This was inclusive of the year-over-year benefit related to the termination of certain royalties with Yamira, partially offset by the dilutive impact of partnership accounting. Adjusted R&D was 16.5% of sales, supporting our pipeline programs in oncology, immunology, and other areas. Adjusted SG&A was 21.6% of sales, an increase of 30 basis points versus the prior year, reflecting continued investment in our on-market products, as well as investment in advance of several upcoming product launches. The adjusted operating margin was 41.7% of sales in the fourth quarter, an improvement of over 100 basis points versus the prior year. Net interest expense was $319 million, and the adjusted tax rate was 9.1% in the quarter. Fourth quarter adjusted earnings per share, excluding specified items, were $1.90, up 28.4% year over year. In the quarter, we recorded a net charge of $2.75 per share related to the partial impairment of intangible assets acquired as part of the StemCentrics acquisition. The net after-tax impact of this impairment and the related adjustment to contingent consideration liabilities was $4.1 billion. This one-time net charge has been excluded from our adjusted EPS results. As we look ahead to 2019, our full-year adjusted EPS range is $8.65 to $8.75, reflecting growth of 10% at the midpoint. Excluded from this guidance is $1.26 of known intangible amortization and specified items, as well as non-cash charges for contingent consideration adjustments related to the expected approval of risin-kizumab in the first half of the year. On the top line in 2019, we expect revenue growth of approximately 1% on an operational basis. At current rates, we would expect foreign exchange to have just less than 1% unfavorable impact on reported sales growth. Included in our revenue guidance are the following assumptions for our key products. In 2019, we expect U.S. Humira to once again be an important contributor to our performance, with revenue growth of approximately 7%. We expect 2019 international Hemera to be down approximately 30% on an operational basis, reflecting the impact of biosimilar competition outside of the U.S. For our Hemog franchise, we expect global revenues of approximately $5.1 billion, contributing more than $1 billion of growth. This includes Imbruvica global revenues to AbbVie, approaching $4.4 billion, and with U.S. sales growth of approximately 21%. For Van Clexta, we expect sales of approximately $725 million. We expect global HCV sales of approximately $3.3 billion in 2019, with roughly flat performance in the U.S., and international sales of approximately $1.7 billion. For Oralista, we expect sales of approximately $200 million. We are pleased with the early stages of the launch and expect demand to ramp given recent increased formulary access, which now stands at approximately 70%. For Creon, we expect approximately 10% sales growth. For Duodopa, we expect revenues approaching $500 million. For Lupron, Synthroid, and Synergist, we expect sales to be roughly flat year over year. And for Androgel, we are forecasting sales of approximately $100 million following the entry of generic competition for Androgel 1.62. Finally, we are expecting a regulatory decision for both risin-kizumab and upatacidinib later this year. We will provide specific guidance for these assets following their respective approvals. Looking at the P&L for 2019, we are forecasting an adjusted gross margin ratio of above 82.5%. This profile reflects a year-over-year benefit of the Humira royalty reduction, as well as the impacts of partnership accounting. We are forecasting R&D expense of approximately 15.5% of sales, reflecting funding action supporting all stages of our pipeline. We are forecasting SG&A to be approximately 20.5% of sales in support of five major product or indication launches. For 2019, we are forecasting an operating margin ratio of just above 46.5%, roughly 200 basis points above prior year, inclusive of the required investment on our new product launches. We expect net interest expense approaching $1.3 billion. and we model a non-GAAP tax rate just above our full-year rate in 2018. Regarding our first quarter outlook, we expect adjusted earnings per share between $2.05 and $2.07, excluding approximately $0.31 of specified items. We anticipate first quarter revenue of approximately $7.7 billion. At current rates, we would expect foreign exchange to have an unfavorable impact on reported sales growth of approximately 2% in the first quarter. For U.S. Humira, we expect sales of approaching $3.2 billion. We expect international Humira sales of approximately $1.2 billion, assuming current exchange rates. And for Imbruvica, we expect sales of approximately $1 billion. Moving now to the P&L for the first quarter, we are forecasting an adjusted gross margin ratio in line with full-year guidance and spending levels slightly favorable relative to the full-year profile due to investment timing. We expect an adjusted tax rate just below 8% in the first quarter, lower than our expected full-year rate, reflecting the fact that the tax impact of equity compensation is most pronounced in the first quarter of each year. In summary, AbbVie has once again delivered an excellent quarter and full year results. We've driven top-tier revenue and EPS growth while also advancing our strategic priorities and our pipeline. And our strong growth prospects have enabled us to position the business for yet another year of double-digit earnings growth in 2019, despite biosimilar dynamics and the required investments to support several major product and indication launches. We are very pleased with AbbVie's strong performance. And with that, I'll turn the call back over to Liz.

Thanks, Bill. And now we'll open the call for questions. Operator, first question, please. Thank you. And as a reminder to ask a question, please press star 1. Our first question today is from Steve Scala from Cowan.

Thank you very much. In 2019, if Humira grows $1 billion in the U.S. but declines $2 billion OUS, it would have to grow 11% in 2020 to hit the $21 billion guidance figure. Is that still your expectation? Secondly, do you anticipate an FDA ad comp for upatacitinib? And then lastly, perhaps in part due to Abby's openness to do a deal and its desire to have another therapeutic vertical, there's been some speculation that Abby might pursue a big deal even in an unfriendly way. Considering the many moving parts at EV, what is your appetite right now for a big deal, and would you consider an unfriendly one? Thank you.

Yeah, Steve, this is Rick. So I'll cover one and three, and then Mike can cover number two. So, first of all, if you look at Jumeirah, obviously we continue to see strong growth in the U.S. We're continuing to see the biosimilar effect play out. We've assumed within our planning period of 2019 that we'll see some continued erosion from a price standpoint across the time period that is greater than what we currently have, you know, is currently in place. So, obviously, we'll have to see how that plays out. You know, in the end, if we look at the long-term targets that we put in place, we still feel confident in the overall long-term targets. Whether or not one product is slightly different than another, I mean, we'll see how that plays out. But we obviously feel confident in what we have committed to, and we maintain that commitment. As far as the appetite for a big deal, I can tell you that is not something that we are contemplating.

Thank you. Okay, so this is Mike. I'll take number two. With respect to Yupa and the potential for an adcom, I think it's important to keep in mind that we're in very early stages of our regulatory review. But if you look at the practice of this review division, you know, it's common for filings like this for new molecular entities in RA to go to an EDCOM, so it's certainly possible. But we'll have a much better idea once we're further along in the review process. Thank you.

Thanks, Steve. Operator, next question, please. Thank you. Our next question is from Andrew Baum from Citi.

Thank you. Apologies if I missed the early part of the call, but just in terms of what's embedded in your 2019 adjusted earnings guidance for Humira in international markets, if you could give us additional color on that, that would be great. Second, you recently had a management reorg. Could you talk to that in relation to also succession planning in the organization? And then finally, you disclosed a couple of negative headlines in two phase three, the LIPRIB trials. over a year ago. I haven't seen the data for that. It's of broader interest as well as for as the when might you see that data being presented. Many thanks.

Hi, Andrew. I'll start with your first question. It's Bill Chase. Our guidance around Humira for 2019 is in the U.S., strong growth, 7% is what we are recommending that you model. Outside of the U.S., obviously, with the advent of biosimilars, We are forecasting a decline, and currently we view that as about 30% on an operational basis.

Okay. So, Andrew, this is Rick. I'll cover number two. We did announce a change in our organizational structure at the executive level. The purpose of that change, you know, we've operated now for six years with a fairly broad management structure reporting into me. And the purpose of the change really was to narrow the focus of the direct reports that I had that ultimately would allow us to focus and execute even at a higher level. around what our strategy is going forward. In addition, we have a very talented executive leadership team, and we wanted to get those people some additional experience in other areas, and this will allow us to be able to do that. I've heard all the rumors about potentially me retiring. I can tell you they are not true. You know, as many of you probably know, I retired once, and I can tell you I'm a heck of a lot better at running AbbVie than I was at retirement, so... Hopefully, that clarifies it.

So, this is Mike. With respect to the LipRib data, you know, so we announced those top line results when we had them. You know, we're committed to publishing all results and making the data available. I don't have a specific meeting or a specific timeframe, you know, to point to here on the call today, but we will be making those data publicly available.

Thanks, Andrew. Operator, next question, please. Thank you. Our next question is from Jeff Meacham from Barclays.

Hey, guys. Thanks for the question. Just had a few on Humira. For OUS, are there countries that still need to be contractually locked in for 19 and with your new guidance bill, are there resets at year end looking to 2020 and beyond? And then when you guys talk about the U.S., the strategy seems to be moving Humira to later in the paradigm and across different markets, and then UPADA and RISU upstream. As you guys get closer to launch, are you thinking about how is the contracting going to make this happen? Is it just about discounts or rebates, or are there more novel strategies under discussion? Thanks, guys.

Yeah. So this is Rick. I'll cover those first two. So There are still some countries where, obviously, it is still evolving. The southern European countries are probably the most significant, and to some extent, Germany. I'd say we haven't seen a lot of movement in price over the last 60 days or so, but we are anticipating, and as I said, we built into our forecast some incremental decline in price just to make sure that we felt comfortable with where it potentially could go. As far as other countries in 2020, the majority of the volume doesn't come under additional biosimilar exposure in 2020. The more significant countries are in 2021. So there is some, but the majority of it occurs in 2021, not in 20. As far as what you've described as contracting dynamics, I think if you talk about our go-to-market strategy for these products, you know, we're not in a position, nor from a competitive standpoint, do I think we would want to talk about at this point what our go-to-market strategy is. But I think in general, the way you can think about these assets, and it's certainly the way we're thinking about it is, now that we've produced the data on OOPA and RISA across a broad range of indications, it is validated for us that these assets ultimately are superior to what's out there today. And clearly, as I indicated, we now have enough data across a broad range of clinical trials and across a broad range of patient population from naive patients to TNF inadequate responding patients that we know these assets will ultimately be able to deliver significantly superior results to both Humira as well as other assets that are out there other medicines that are out there and therefore the logical strategy with these assets is to position them to be lead products in the marketplace you know we would obviously put a contracting strategy in place that will you know be consistent with that approach and obviously we will fund those those launches in a way to be able to drive that approach in the marketplace, both in the U.S. as well as outside the U.S., and we expect the uptake to be consistent with the profile of those assets.

Thanks, Rick.

Thank you.

Thanks, Jeff. Operator, next question, please. Thank you. Our next question is from Tim Anderson from Wolf Research.

Thanks so much for the questions. I have a question on spending infrastructure over the long term. So naturally the big concern is Humira biosimilars and how that impacts the P&L. And one of the levers you could potentially pull is cutting cost at some point in the future. And I know you've given long-term operating margin guidance, but can you give us kind of more detail on how you see SG&A and R&D evolving over time? I'm wondering if you can, you know, cull large amounts of spending out of these line items, it seems like that could be challenging in the context of still investing heavily in the I&I space with your other assets. So how much is spending a major lever that can be pulled in the future? And then the second question just goes back to Humira International. So in October, you revised down your erosion guidance And now, just three months later, you've revised it down again in terms of international performance for 2019. Can we be confident that you won't have to revise it down yet again at another point in the current year? Thank you.

Well, Tim, this is Rick. So I'll cover most of those questions, and Bill can fill in with anything that I haven't covered. So let me start with what you described as the guidance. And let me go through the history of the guidance because I think it is important to lay out. You know, we came out with the original guidance back in 2015, and that was based on what we saw out in the marketplace with primarily at the time Remigade and then followed it with Emeril. And we updated it, I think, in 2017, specifically what we thought. And then from that point forward, we said we needed to see what it would look like going forward. On the third quarter call, what we – we were only – To the best of my recollection, we were three weeks into biosimilars, right? And we made it fairly clear, and I think if you go back and you read the transcript, it's fairly clear that what we were giving the market was a snapshot of what we saw at that time. And, in fact, I think I said at the time, you should not assume this is guidance. It's likely to get worse. So hopefully we were clear at that point. As far as specifically to your question, as I indicated, we have built in further erosion that we haven't seen yet. So in the number that Bill described, the 30 to 31 percent, which is roughly five points above where it was before, that has some assumed erosion that has not occurred. And, look, what we're giving you is our best estimate of erosion. what will happen. Obviously, this is driven by not us, it's driven by competitors and their behavior. And so ultimately, it's not like, you know, we have a crystal ball that we can predict exactly what they do. What I can tell you is this, we have a high level of confidence in delivering the bottom line performance that we described to the market. And we have enough, you know, ability to be able to do that. And we have a high level of confidence in double digit EPS. So that's what you should rely upon. Whether or not things move around a little bit, they could. But to the best of our ability, we're forecasting what we believe, and I think I'd say it's a reasonably high probability that those numbers should be accurate. As far as spending and infrastructure, I mean, obviously, as we look at what's going on in these various markets – just like we do with any product that experiences an LOE, we flex as quickly as possible the spending around those products to be reflective of what's appropriate in that particular market and under those circumstances, and we're certainly doing that with Humero right now in the international markets. But obviously, one of the things that's important to remember here is We're going to launch, or we've either just launched or will launch over the course of the next 12 months, four major products that have multi-billion dollar potential. If you think about Venetix Flax, it's in its very early stages now. It's just received the broad label in CLL and in AML, so it's essentially a relatively small product that's now growing rapidly. Or ELISA, we just launched that product. We're going to launch apatocitinib. We're going to launch rizokizumab. These are all multi-billion-dollar assets. We're going to fund those to the extent that is appropriate to drive the potential because that is ultimately what will offset and absorb the biosimilar impact. And so that's the strategy that we'll drive.

Yeah, the only thing I'd also add is as you look at the – the 50%. Look, the big part of the story from here on out is going to be obviously P&O leverage given our robust sales that we're expecting once these new products get up into their ramp. So 2020 should be a sales expansion year. But even then, you know, we're always going to be thoughtful about how we deploy our resources. You look at this year on an operational sales increase of 1%, we're still delivering 200 basis points of margin progress. So I think that's pretty good. And we are appropriately funding those new product launches. The only way you can do that is being thoughtful about your overall book of SG&A, and do some prudent reallocation, and obviously you could infer that's happening in the numbers this year. So, look, we're always going to be thoughtful on spend, but the real way to get to an improved op margin is going to be through sales leverage, P&L leverage, and we're going to remain focused on making sure that we appropriately fund new opportunities.

And the only other thing I'd add is, I think it's important to keep in perspective how this business is performing. We have a business here that for six years has delivered top-tier performance. Last year, it grew the bottom line 41%, grew the top line 15%. If you look at 2019 and you look at that guidance range at the midpoint being 10%, you back out the share repurchase, which is about three or four points of it. It says that the underlying business, despite taking almost a $2.5 billion head, is growing at 6% or 7% from an EPS standpoint. If you adjusted for the $2.5 billion, the bottom line is growing at 23%. There aren't many businesses around here that have that kind of performance. Top line, the same thing. If I adjust the top line, which is roughly 1%, if I adjust it for the $2.5 billion, the rest of the business is growing high single digits. And so, you know, you certainly want to make sure that you're in a position that you can continue to drive this business in a way that it can continue to perform because that is ultimately the way you're going to absorb biosimilars. And I would tell you that despite the fact that these biosimilars have priced more aggressively than we thought or the analogs would have suggested, the business is absorbing them effectively. And that's what the strategy was designed to do.

Thanks, Tim. Operator, next question, please. Thank you. Our next question is from Jeffrey Porges from SBB Lyric.

Thank you very much for taking the questions. First, could you just talk a little bit about pricing, Rick? What assumptions about pricing have you baked into your guidance for particularly U.S. revenue growth in 2019? And what do you think are the political risks that could affect that outlook? And then secondly, could you talk a little bit about the launches of UPA and RIS in 2019. Could you help us understand what, if any, ability you have to prepare for those launches in your discussions with payers? Should we be expecting them to launch with the same sort of trajectories as their preceding products in that class, or should we push those launches out to 2020 as you get into that payer cycle? Thanks.

You know, I think if you look at pricing, we have now, you know, we were one of the companies that made a commitment that we're going to do one price increase per year a couple of years ago, and it would be below double digits, and we've obviously honored that going forward. So we've done the price increase for this year. You saw that it was lower. 6.2% roughly. And so I think you know what the pricing will be in 2019 because we have no intention of doing another price increase in 2019. I think if you look overall, yes, the industry has adjusted to some extent, I believe, to the environment as it relates to pricing. Our business is not a business that is driven to any great extent by pricing. We're fortunate that we have, you know, innovative products, and volume is the vast majority of it, Bill. You know, I mean, you're probably talking, well, in 2019, you're probably talking overall negative price.

For the entire book a bit. Yeah. The U.S. low single digit.

Yeah. So it's not heavily reliant upon price, nor last year was it heavily reliant upon price. Okay. So I think we're comfortable with where we are from a pricing standpoint. We don't see any exposure related to that. As far as OOPA and RZA. Obviously, we will want to get these products on formulary as broadly and as quickly as possible. I would say that's an area that we have a team that is good at doing that, effective at doing that. Obviously, based on the fact that we assume RIS is going to be approved here in the not too distant future, we have to be in a position where we are in discussions. Nothing that I'm going to update you here on, but I would say the operating assumption that is probably a good assumption is that we will end up with broad coverage of these assets. As far as the ramp is concerned, I think I understood your question, and I'm going to answer it in the backdrop of what I thought you asked. What I thought you asked is how would I compare these to prior competitive launches? I can tell you that we would expect, like other launches, that we'll take a little bit of time in order to ramp, but I'd say also with our expertise in this area and the portfolio of assets that we have and the profile of these particular drugs, from a clinical standpoint, I would expect that these assets we'll be able to drive significant share over time and a significant capture of new patients and switching patients, and that will certainly be the strategy we have in place to drive a significant part of those available patients to these better assets.

Great. Thanks very much, Rick.

Thanks, operator. Next question, please. Thank you. Our next question is from Chris Schott from J.P. Morgan.

Great. Thanks very much for the questions. My first one was just following up on the longer-term international human error business, so beyond 2019. Do you see 2019 as a peak rate of erosion for that business and then maybe more moderate step-downs beyond 2019? Or could we see several years of this more severe erosion level as we just think about kind of getting past this year and the outlook for that business? My second question was on capital allocation. And I guess, is the more challenging EU Humira environment change or alter your priorities at all? I guess, specifically, the company's been very active on the share repo front over the past few years. But how do you balance, I guess, that repo with, you know, priority with diversification, given some of these Humira dynamics that we're seeing playing out? Thank you.

So, I think... I would see that you have gotten the vast majority of the impact from a price erosion standpoint in 2019. But remember what I described before. We have factored into our plan further erosion as you go throughout the year. So there'll be some annualization impact that you would obviously see in 2020 if that is to kind of play out the way that we have planned for. And then you will have some countries that will go biosimilar in 21 that have not gone biosimilar to date. And they would obviously have some impact, although I would say most of those countries, it should be a lower impact. But, you know, we're going to have to see how that sorts itself out. So, certainly, I don't think you'll see a step down that's as significant as we've seen in the first year, because there have been very aggressive prices in certain countries. And so, you know, you'll obviously get to the point at which the biosimilar players, you know, have gotten to what they believe is the floor of of where they want to operate. And so I think you should see it moderate, I guess is the best way to describe it. As far as capital allocation versus share repo, I'd say if you look at how we've operated this business since day one, we've obviously been very vocal about how we view the business and what our mission is and what our vision is for the business. and that is to drive long-term, sustainable, top-tier performance. And in order to do that, you have to invest in the business appropriately. We've obviously invested significantly in R&D. Since we launched the company, we grew R&D significantly. We've obviously been very active from a BD standpoint. At the same time, we have a business that generates a tremendous amount of cash flow. and we generated enough cash flow that we had opportunities to be able to also do share repurchase and other methods of being able to return in capital to shareholders, such as a growing dividend. And so we try to balance those things in a way that is appropriate, but never to not strategically invest in the business. That's always our first priority. If you look at the share repo that we've done in 2018 as an example, I think the thing you have to remember, and the numbers I quoted you a minute ago I think are reflective of that. Yes, share repo is driving some of the EPS growth if you look at the bid point, but it's relatively modest, 3% to 4% of that. And it wasn't driven for the purpose of doing that. Ultimately, we did the share repo and we announced it, I believe, in that first quarter call that we were going to do a significant amount of share repo because of And we thought that was fundamentally important to be able to return cash and capital back to shareholders. And so we did it long before we ever knew what the biosimilar pricing would be. So it wasn't driven for the purpose of driving the short-term versus the long-term. Having said all that, we continue to be active in looking at opportunities that are out there. We have a very active business development group. We look at things that are small, things that are medium, things that are large. and we certainly have the wherewithal to be able to do things, if we could find something that strategically fit and we could get a good return on that, I can tell you we would act, and we would act swiftly in order to do that. I think you've seen us do that before. If we could find another imbuvica or we could find another rizikizumab out there, I can tell you we would aggressively pursue that. And so, you know, we fundamentally – have a pipeline that we believe has the ability to do what we strategically intended it to do, and that is to absorb the impact of biosimilars. Our focus is to ramp that pipeline as rapidly as we possibly can and make sure we're in a position to be able to continue to drive strong growth in the business. Thank you.

Thanks, Chris. Operator, we'll take the next question, please. Thank you. Our next question is from Jason Gerberry from Bank of America.

Hey, good morning. Thanks for taking my questions. First one, just coming back to USG Mira, just curious, the softening of the 2019 number, just sort of curious, to what degree is that cannibalization from the next generation immunology brands? Just sort of curious if that's a factor or if it really was just sort of maybe the moderation of pricing. And then my second question is, I guess with Jamie no longer on these calls, I'll ask the question, you know, Rick, how are you defining a large M&A deal? That's a question that we're getting from investors, so if you can maybe put some parameters around that, that'd be great. Thank you.

Last time I defined a large bolt-on, it had an undesirable reaction in the marketplace. You know, look, the largest transaction that we've done so far has been pharmaceuticals. That's what I view as a, you know, the size of a, you know, roughly a large bolt-on kinds of transaction. And when I say a large deal, I'm thinking about, you know, a very significant kind of deal, you know, merger-type deals. You know, we're not contemplating anything of that magnitude at all. U.S. Jumeirah, you want to cover that, Phil?

Yeah, sure. So, you know, if you look at U.S. Jumeirah, we're guiding 7% in 2019. That's coming off of a number in 18 of 10%, and with, as I think you pointed out, a lighter price increase on the year. So, You know, if you really factor out the change in pricing year over year, you'll see that the business is still performing very, very well. Volumes are still pretty much pegged right where they have been historically. You've got the law of large numbers here a little bit, but I wouldn't read much into underlying dynamics on Humira other than continued strong performance in the U.S. Thanks.

Thanks, Jason. Operator, we have time for one final question. Thank you. Our final question today is from Catherine Hsu from William Blair.

Yeah, good morning. I'm just curious about the He-Monk franchise strategy. Apparently, Bubeka and Manita Cox are doing well. What are you thinking about boosting over that? There's, of course, the PI3Ks that you used to have with other companies and returned. And there's also the cellular therapy, which is a very big space that is out there. Just wondering about your general strategy there.

Thanks. Yeah, so this is Mike. I'll take that. With respect to our Hemon franchise, you know, both Imbruvica and Venclexta are performing very well, both from a data perspective and from their trajectories in the marketplace. One of the things, you know, that I think is particularly attractive about those two with respect to our franchise is that they cover a broad range of hemolygmancies. They work well together in areas like CLL. and mantle cell lymphoma, MCL, and then they also have some unique areas. For example, like venetoclax in AML. So that's going to be an important area for us going forward. It's now annualizing over $4 billion. It's growing at a robust rate. So I think you can expect to see us continue to work in this area. You know, we're going to look at how we not only continue to develop those mechanisms in areas like multiple myeloma, prevent cleft stuff, but also how from our earlier pipeline we can add additional mechanisms so that that will further strengthen our position. And there are a lot of things in our early, now approaching mid-stage pipeline, work in apoptosis and other areas that could apply there. And of course, we're looking more broadly than that. You've seen us do early-stage deals, but early-stage deals that give us access to interesting technologies. We have some very early plays that could be aimed towards cellular therapies and to other mechanisms that could further develop that franchise.

Thanks, Catherine. That concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.advi.com. Thanks again for joining us. Thank you. And this does conclude today's conference. You may disconnect at this time.