AbbVie Inc.

Good morning and thank you for standing by. Welcome to the ABVI First Quarter 2019 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 one on your touchtone phone. 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 the purposes of the Private Security Litigation Reform Act of 1995. ABVI 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 ABVI's operations is included in our 2018 Annual Report on Form 10-K and in our other SEC filings. ABVI undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. On today's call, as in the past, non-GAAP financial measures will be used to help investors understand ABVI'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 Web site. 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 first quarter performance and highlights as well as our four-year guidance, which we are raising this quarter. Mike will then provide an update on recent advancements across the R&D programs, and Rob will discuss the quarter in more detail. Following our remarks, we will take your questions. I'm pleased to report that we're off to an excellent start in 2019, reinforcing our confidence in the long-term fundamentals of our business. We are seeing strong momentum across all aspects of our operations, with excellent growth from our hematological oncology portfolio, continued robust growth from humera in the US, international biosimilar impact is trending within our expectations for 2019, and importantly, our late-stage pipeline continues to deliver, with the recent approval of Skyrizy and major markets globally. We delivered first quarter adjusted earnings per share of $2.14, representing growth of more than 14%. First is the prior year, and once again, exceeding our guidance. Total revenues of more than $7.8 billion were also ahead of 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 more than 43%. US humera grew more than 7% versus last year, driven by continued robust demand. International humera sales were down 23% on an operational basis, reflecting the impact of direct biosimilar competition in Europe and other international markets. The international biosimilar trends and dynamics have been consistent with our expectations. We also saw substantial contributions from several other products in our portfolio, including Maveritt, Creon, and Dua Dopa. We're certainly pleased with our commercial performance and our financial results for the quarter, and 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 guidance and now expect adjusted earnings between $8.73 and $8.83, reflecting growth of 11% at the midpoint. In addition to the strong financial results, we have continued to make significant progress in building a pipeline that will allow us to maintain a growing and vibrant business. Since our inception, we have put tremendous effort and resources towards developing new therapies that advance the standard of care across a spectrum of important disease states, with special emphasis on doing so in a broad range of immune-mediated diseases. Our central focus has been on advancing new medicines that will raise the bar and address important therapeutic needs for patients. We believe that Rizikizumab and Yapatisitinib have achieved the objectives that we set forth. Both of these therapies have demonstrated differentiated clinical profiles versus Humira, as well as other mechanisms on the market or those in development. This profile, coupled with our strong commercial execution, gives us tremendous confidence that both will be the new standards of care in their respective indications. We recently announced the approval of Rizikizumab, now known as Skyrizi in the US and Japan, for the treatment of adult patients with moderate to severe plaque psoriasis. These approvals mark a major milestone for AbbVie and further demonstrate our commitment and leadership in immunology. We're certainly pleased with the approved label for Skyrizi, which reflects its best in category efficacy, favorable benefit risk, and quarterly dosing. As you know, we also have a highly experienced team, including the leading immunology marketing team and Salesforce, which will support this launch. Given its compelling product profile, we expect to secure rapid and broad formulary coverage for Skyrizi with more than 50% commercial access by the end of July, a 90-day access metric not achieved by any other recent launch in the psoriasis category. Skyrizi represents a significant long-term opportunity for AbbVie with multibillion-dollar peak sales potential. We have also been planning and preparing for the forthcoming regulatory approval and commercial launch of Eupatosytenib, our JAK-1 selective inhibitor, in rheumatoid arthritis. We have been extremely encouraged by the level of efficacy and benefit risk profile observed across the entire Eupatosytenib clinical program, including its clear superiority versus SHMRA, the current gold standard for the treatment of RA. Based on the data generated across our program, we believe Eupatosytenib will offer meaningful advantage over other products on the market today for those in development, and we remain on track for US regulatory decision in the third quarter. With the robust and differentiated data we've produced from our assets and the launch of several new products now underway, we remain confident that the strategy we have in place is working extremely well. We're excited to see the evolution of our pipeline assets from promising late-stage development compounds to successful on-market products. Skyrizi marks the 12th new product or major indication approval for AbbVie in the last five years, demonstrating the productivity of our R&D investment, which is vital for the long-term success of any innovation-driven biopharmaceutical company like ours. So in summary, I'm extremely pleased with the strong execution and pipeline advancement we're seeing, leading to our increase in expectations for 2019. We're off to an exceptional start of the year, followed by several years of market-leading performance, and we're well positioned to continue to deliver top-tier financial performance in 2019 and beyond. With that, I'll turn the call over to Mike for additional comments on our R&D programs. Mike?

Thank you, Rick. I'll start with immunology, where, as Rick noted, we've made significant progress with both of our late-stage assets. We recently received approval in the US and Japan for Skyrizi in moderate to severe plaque psoriasis, and expect an approval decision in Europe very soon, based on the positive CHMP opinion we received at the end of February. These approvals are supported by a broad clinical development program, where Skyrizi demonstrated a very strong profile in phase III studies across more than 2,000 patients. We are pleased with the Skyrizi label, which reflects the efficacy and safety profile demonstrated across our program. As we evaluate the available biologic treatment options, we believe Skyrizi has a -in-disease product profile, with differentiated attributes across the categories that physicians and patients deem most important, including skin clearance, durability of response, and dosing, with a favorable benefit-risk profile. In our phase III studies, Skyrizi demonstrated very high rates of durable skin clearance, with more than 80% of patients achieving Posse 90, and 60% of patients achieving Posse 100, or complete skin clearance, at one year. Importantly, the proportion of Skyrizi-treated patients who achieved these high levels of response increased over time. In fact, the level of complete skin clearance at the one-year mark is the highest reported in a phase III program, to our knowledge. In psoriasis, both speed and durability of response are important considerations for an optimal therapy, as loss of efficacy is a key concern for both patients and physicians. Our clinical trials demonstrated clearance after just a single dose of Skyrizi, as measured by the mean change in Posse score. The average skin clearance following the first dose was 58%, increasing to 91% after two doses, and 95% after five doses. Skyrizi also provides a -in-category dosing profile, with convenient quarterly dosing and flexibility for in-office or at-home self-administration. We look forward to bringing this new treatment option to psoriasis patients. We also continue to make good progress with the development programs for Skyrizi in several other immune-mediated conditions, with late-stage studies ongoing in several follow-on indications. We look forward to providing updates on these programs as the data mature. Moving now to our other late-stage immunology asset, Eupadocitinib, where regulatory applications are currently under review for its initial indication, rheumatoid arthritis. Our regulatory submissions are based on a comprehensive phase III program. In our program, Eupadocitinib demonstrated strong results across a wide range of patients, including patients early in the treatment paradigm who are naive to methotrexate, as well as patients who are heavily pretreated with biologics. Eupadocitinib is the only JAK-1 selective inhibitor to meet all primary and secondary endpoints across all registrational trials. Importantly, Eupadocitinib demonstrated clear superiority versus humira across all key measures evaluated in a -to-head study, as well as clear structural benefit in two phase III studies. Eupadocitinib also performed extremely well as monotherapy, which we view as another important differentiator, because although methotrexate is commonly used as a first-line therapy, many patients do not respond to or cannot tolerate methotrexate treatment. Based on the data generated across our clinical program, we remain confident in the benefit-risk profile for Eupadocitinib, and believe that it will offer meaningful advantages over other therapeutic options. We continue to anticipate a regulatory decision in the third quarter, and look forward to bringing this new therapy to the market. Moving now to our hematologic oncology portfolio. In the quarter, Imbruvica received FDA approval for its 10th indicator. For use in combination with Gizeba in frontline CLL. This represents the first approval for a chemotherapy-free combination regimen in treatment-naive patients with CLL. The approval was based on results from the phase III Illuminate study, in which treatment with a combination of Imbruvica and Gizeba demonstrated a significant improvement in the risk of progression or death, compared to treatment with Clarambacil and Gizeba. The Illuminate trial is one of several important phase III studies that have demonstrated treatment with Imbruvica alone, or in combination, significantly prolonged progression-free survival, compared to therapies such as FCR, BR, and GC, in previously untreated CLL patients. These studies add to the breadth of data supporting Imbruvica, providing physicians more evidence of its compelling clinical benefits in the frontline setting. The data from three of these studies have been reflected in the NCCN treatment guidelines for frontline CLL, which now position Imbruvica as the only preferred regimen in the major segments of this market. We anticipate submitting data from other phase III studies in frontline CLL for label augmentation later this year or early next year. Moving out of NCLEXTA, where our supplemental NDA and frontline CLL is currently being reviewed by the FDA under its real-time oncology review program. In conjunction with this submission, VenCLEXTA received priority review, as well as a fifth breakthrough therapy designation. If granted, this approval will provide physicians and patients an important new treatment option and substantially expand the addressable population for which VenCLEXTA is approved in CLL. We anticipate a regulatory decision later this year. Last month, we disclosed top-line data from the phase III Bellini study in patients with relapse refractory multiple myeloma. While the study met the primary endpoint of progression-free survival, a higher proportion of deaths was observed in the VenCLEXTA arm compared to the control arm. Based on these data, the FDA placed a partial clinical hold on all trials evaluating VenCLEXTA in multiple myeloma. We're working with the FDA to further analyze these results, but based on the data we have produced to date, we continue to believe there is a potential role for VenCLEXTA in the T1114 biomarker-defined myeloma population. We will provide updates on the multiple myeloma program as they become available. Moving now to the area of women's health, where we're nearing completion of our pivotal program for oligolics in uterine fibroids. Our registrational program evaluated nearly 800 women with heavy menstrual bleeding associated with uterine fibroids in two pivotal studies. The results of the two pivotal studies demonstrated that oligolics in combination with low-dose hormone ad-back therapy significantly reduced heavy menstrual bleeding compared to placebo. Current non-surgical treatments are limited in this area, and women suffering from uterine fibroids need more therapeutic options. The results from these studies represent a significant advancement for women suffering from uterine fibroids, and approval in this disease would represent an attractive follow-on indication. We remain on track to submit our regulatory application in the middle of this year. And in neuroscience, we are in the process of initiating a phase three trial to support registration of ABBV951, our innovative subcutaneous levodopa-carbidopa delivery system. Continuous delivery of levodopa-carbidopa has proven to be very effective in managing motor fluctuations in patients with advanced Parkinson's disease. DWOPPA has helped to establish ABBY's presence in this market, and by providing patients with a less invasive non-surgical delivery option, this next generation approach has the potential to broaden the treated patient population and help strengthen ABBY's position in the advanced PD market. In summary, we're extremely pleased with the productivity of our R&D organization as we continue to invest in our pipeline to develop innovative medicines and support our long-term growth. We're seeing progress across all stages and in all therapeutic areas of our pipeline, with many important catalysts expected over the next 12 to 18 months. With that, I'll turn the call over to Rob for additional comments on our first quarter performance.

Rob? Thanks, Mike. As Rick mentioned, we had another quarter of outstanding performance. We reported adjusted earnings per share of $2.14, up more than 14% compared to prior year, and 8 cents above our guidance midpoint. For the first quarter, net revenues were up .4% on an operational basis, excluding a .7% unfavorable impact from foreign exchange. Strong growth from several key products offset the impact of the first full quarter of international biosimilar competition. US humerus sales were $3.2 billion, up .1% compared to prior year, driven by continued strong demand. Wholesaler inventory levels remained below half a month in the quarter. International humerus sales were $1.2 billion, down 23% operationally, reflecting biosimilar competition across Europe and other international markets, and in line with our expectations. Hematologic oncology global sales were $1.2 billion, up .2% on an operational basis, driven by the continued strong growth of both Imbruvica and VanClexta. Imbruvica global net revenues were more than $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 more than 25% in the frontline setting. VanClexta revenues were $151 million, driven by continued progress in the broad relapse refractory CLL segment and our recent launch in first line AML. We continue to be pleased with our strong global position in HCV. In the US, HCV revenues were up more than 17%, reflecting higher market share versus the prior year quarter. Our international business has also experienced positive share dynamics. But given patient de-warehousing in select markets during the prior year quarter, international HCV revenue declined approximately 25% on an operational basis, consistent with our expectations. We also saw continued strong operational sales growth for both Dua Dopa and Creon. Turning now to the P&L profile for the first quarter, adjusted gross margin was .3% of sales, up 310 basis points compared to the prior year, including a 280 basis point benefit related to the expiration of humero royalties. Adjusted R&D investment was .3% of sales, supporting our pipeline programs on oncology, immunology, and other areas. Adjusted SG&A was 20% of sales, consistent with our expectations. The adjusted operating margin was .1% of sales, an improvement of 400 basis points versus the prior year. Net interest expense was $325 million, and the adjusted tax rate was 7.9%. As mentioned earlier, based on our strong performance year to date, we are raising our full year adjusted earnings per share guidance to between $8.73 to $8.83, reflecting growth of 11% at the midpoint. Excluded from this guidance is $1.47 of known intangible amortization and specified items, as well as a non-cast charge for contingent consideration related to the recent approval of Sky RISI. We plan to communicate details about this charge on our second quarter earnings call. This revised guidance continues to contemplate full year revenue growth of approximately 1% on an operational basis. At current rates, we now expect foreign exchange to have approximately 1% unfavorable impact on fully reported sales growth. As Rick and Mike noted, we're pleased with the recent approval of Sky RISI. Given the quarterly dosing schedule and our free goods programs to bridge patients to commercial access, we expect very modest sales contribution from Sky RISI in the second quarter. For the full year, our revenue guidance includes approximately $150 million of Sky RISI sales, which will predominantly occur in the second half of the year. All other full year 2019 forecast assumptions for our key products remain unchanged. Turning now to the P&L for 2019, we now expect an adjusted gross margin ratio approaching 83%. And we now expect adjusted operating margin to be just above 47%, roughly 250 basis points above prior year, and inclusive of the required investments for our new product launches. All other full year 2019 guidance assumptions remain unchanged. As we look ahead to the second quarter, we expect adjusted earnings per share between $2.20 and $2.22, excluding approximately 30 cents of non-cash amortization and other specified items. As mentioned earlier, this guidance excludes a non-cash charge for contingent consideration related to the approval of Sky RISI. We anticipate second quarter adjusted revenue above $8.1 billion. At current rates, we would expect foreign exchange to have an unfavorable impact on reported sales growth of approximately 1.5%. For US Humira, we expect sales growth of approximately 7%. We expect international Humira sales of approximately $1 billion, assuming current exchange rates. And for Imbruvica, we expect global sales approaching $1.1 billion. Moving now to the P&L for the second quarter, we are forecasting an adjusted operating margin ratio comparable to first quarter results. We anticipate higher spending in the second half of the year related to new product launches. And we expect the adjusted tax rate to be in line with our full year guidance, which was just above our 2018 rate. In summary, ADVI has once again delivered an excellent quarter, with results well ahead of our expectations. Our strong growth prospects have enabled us to position the business for another year of double-digit earnings growth in 2019, despite biosolar dynamics and the required investments to support several major product launches. We are very pleased with ADVI's strong performance. And with that, I'll turn the call back over to Liz.

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

Thank you, and as a reminder to ask a question, please press star one. Our first question today is from Steve Scala from Cowen.

Thank you, I have a few questions. First, raising guidance after the first quarter is clearly a sign of confidence in the outlook. I believe ADVI raised after Q1 last year on its way to a great full year performance. How many times in its history has ADVI raised guidance after the first quarter? Secondly, on the gross profit margin was quite strong. You mentioned the royalty relief. Were there any other one-time benefits in the quarter? And then lastly, ADVI has an exciting late stage pipeline, but also an expansive early to mid-stage pipeline. Within the early to mid-stage pipeline, what products look most interesting and promising? Thank you.

Hi, Steve, this is Rick. I'll take the first question. I mean, obviously we feel good about how the year's starting. I'd say we've started with a tremendous amount of momentum. Certainly as we look at the performance of the Hematological Oncology business and US Humira and many other products, they're performing extremely well. And so that's certainly driving the level of confidence that we're seeing, as well as we've now seen a substantial period of time that I think we can measure the impact of biosimilar competition outside the US and feel good about how that is tracking against our expectations. Specific to your question, we raised guidance three times in the first quarter, and we raised guidance, I think, 13 out of the 25 quarters that we've reported. And certainly you would not raise guidance in the first quarter unless you had a high level of confidence that you could deliver that or greater performance across the year. That would just be a foolish position to take. So in both of the prior years where we raised in first quarter, those ended up being years where we outperformed significantly. So I think it is a good indication of the level of confidence that management has in the business, whether it be our business or any other business. I think it demonstrates the level of confidence, otherwise you wouldn't choose to do that. And certainly I'm extremely pleased with how we've come out of the blocks in 2019, and I'm pleased with how the pipeline has continued to deliver. And obviously we'll be launching two major products this year, Skyrizy, and ultimately we anticipate being able to launch a better system this year in addition to the products we've already launched recently and are driving a tremendous amount of growth. So I have a lot of confidence in how the business is gonna perform. With that, I'll turn it over to Rob to answer your second question.

I see if it's Rob. So we feel very good about our progress in gross margin. We just printed a new high. The line share of the improvement you're seeing comes from the termination of human royalties. We do have efficiencies in foreign exchange helping cover the impact of partnership accounting. But as you can see from our full year guidance, we feel very good about the progress we've made in gross margin, so I wouldn't anticipate a lot of one-time impacts. Mike, why don't you answer it to Ray.

Sure, so this is Mike. We have obviously invested considerably in our late stage pipeline, but we've also paid a large amount of attention and invested to make sure that we have a broad and promising early to mid-stage pipeline as well. So I highlight programs from a couple of areas. Although it's a late stage program, I think it's one that doesn't get a lot of attention, and so I think it's worth mentioning, which is DepthDUX-M, which used to be known as ABT414, which is our EGFR targeted ADC in EGFR-amplified glioblastoma multiforma. That has delivered very interesting mid-stage data in second-line patients with GBM, and is in a randomized phase three study with overall survival as a primary endpoint now in front-line GBM. So I think that is potentially a very interesting opportunity because there really is very limited treatment options available for these patients, and so that's one that I think we can keep an eye on. Turning to our early pipeline, I would highlight in oncology our work in apoptosis, which is really an extension of what we learned discovering and developing Venetoclax or BCL2 inhibitor. We have a phase two study ongoing now with a different molecule with nebitoclax, which inhibits both BCL2 and BCLXL, and that combination inhibition, that pattern of inhibition has potential in myelofibrosis and can specifically address the clone that drives that very serious hematologic disorder. There's really only one pathway currently that treats that disease. The current standard of care is JAKOF-e. In our phase two study, we're looking at patients who failed or didn't respond to JAKOF-e, so we're looking at a pretty resistant population, and even early on, we're seeing some very interesting responses, and I think there's also real potential that we could address the underlying pathophysiology and therefore be disease modifying in the bone marrow fibrosis. So that study's accruing by the end of this year, early next year, we'll be in a position to make a decision to advance that program into later stage development. We also have a number of other programs that are just a little bit behind that one, an apoptosis, programs like our TRAIL program, which is an apoptosis related program that has promise in solid tumors, including things like colorectal cancer and pancreatic cancer, and we're seeing some very interesting responses in good PKPD relationship in our early studies there, and we have a BCXL targeted delivery for solid tumors also that's at about the same stage of development. If we shift to immuno-oncology, we've done a lot of work to advance our pipeline there, and one of the most novel programs in that area is a program called GARP, which is now ABBV151. That modulates TGF-beta and Treg function, which is thought to mediate the tumor immunosuppressive environment. So that's a program that I think has a lot of solid science behind it and is now in the clinic, and we have a number of other novel IO programs in the clinic as well. If we now shift our focus to immunology, couple things I would point to are TNF steroid ADC. That has promise to deliver very high levels of response to patients, because we know that steroids are highly effective at managing the symptoms of RA and other immunologically mediated diseases, but they can't be given at high doses for long periods of time. So this program attempts to deliver a novel steroid directly to the immune effector cells in RA without systemic consequences or systemic adverse effects. What we know from the early studies is we're able to dose this molecule in the range where we would expect to see efficacy without seeing those widespread steroid-like effects. And we're now moving into a randomized study that will give proof of concept and should read out next year. We've invested in other programs in immunology as well, like our CD40 antagonist and our JAK-BTK combination program. So a lot of data to come there. The last area I'd focus on is neuroscience. People are familiar with our Tau antibody, which is in phase two, but we've built a broad pipeline behind that. And our two neuroinflammation assets that we're developing in partnership with Elector are now in the clinic. And so those are some very interesting programs. So there's a lot of data to come over the next 12 to 18 months.

Thank you.

Thanks, Steve.

Operator, next question, please. Thank you. Our next question is from Krishat from JP Morgan.

Oh, great. Thanks very much for the questions. My first one was on Skyrazy and just how we're thinking about that launch ramp. I guess historically, I think we've seen some of the newer psoriasis agents having relatively gradual ramps and then maybe taking a few years to really gain momentum. I guess is that fair to think about in this situation or when we think about the higher payer access you cited and the commercial infrastructure you have, should we think about a little bit different dynamic here? And the second question just kind of building on that is, how are you thinking about Humira dynamics in dermatology with this launch and with a range of new agents coming in? I know that business has remained fairly healthy, but should we think about the growth slowing in that indication over time? And then maybe the final one was just on business development priorities. Just latest thoughts on how you're thinking about business development and I guess specifically how you're prioritizing revenue growth potential versus diversification as you think about potential deals that you would be looking at. Thanks so much.

Hi, Chris, it's Rick. I think if you look at Skyrazy and you look at the ramp and you compare it to historical ramps, one of the limiting factors in the historical ramps has been their ability to be able to get market access, broad-based market access in a reasonable period of time. And that's always a limiter no matter what product we're talking about, what specialty product we're talking about. If you don't have access, it makes the launch extremely difficult. What most companies do is subsidize with free goods for a period of time until they can get access. But no one has gotten access like we're describing here. So certainly access should enhance the ramp of Skyrazy. Now, having said that, it takes a few months, even in our case, to get to the level of access that we're talking about. So in the current quarter, you shouldn't expect much in the way of Skyrazy revenue because we are going to use free goods extensively during that period of time. But that access should ramp dramatically as we get towards the end of the quarter and moving into the next quarter. And then you should expect that the product will ramp. As with any new mechanism, it obviously takes some time to get physicians familiar with it. But I would expect Skyrazy to ramp more significantly than what you've seen with historical ramps. I think that would be a reasonable way to be thinking about it. As it relates to humerid dynamics, I think you have to look at the profile of Skyrazy and think about where it would fit in the treatment paradigm for patients. Here you have an agent that has POSI-90, POSI-100 scores like we've never seen before. And it's an agent that has a good benefit risk profile. So from a safety standpoint, I think there'll be a high level of comfort around it. And it's an agent that obviously has significant advantages from a dosing standpoint where patients will only have to inject themselves once a quarter. So when you look at all those dynamics, you have to ask yourself the question, why wouldn't that be a frontline agent? And indeed, that will be certainly how we'll be positioning this agent. It has the profile to be able to deliver against that criteria that would be appropriate for frontline naive patients. And obviously, an agent that will also be used extensively for those patients that are switching from a therapy that ultimately they're not getting the level of efficacy that they desire or need. Now, Humira obviously will maintain, there's a large number of well-maintained patients. On Humira, obviously you don't switch a patient that's well-maintained, that's just not appropriate. And so, but I would expect that you will start to see Humira slow somewhat in the psoriasis category as Skyrizy starts to ramp in a very significant way. Your last question is around business development. And what I'd say there is, if you look at our business, obviously our business continues to perform well. We've launched a significant number of products over the course of the last several years. You're starting to see that diversification. In fact, last year, if you look at what drove our growth, it was very balanced growth between Imbruvica, Humira, Maverick, and to a lesser extent, Ben Cleksta. So you're starting to see that diversity or that diversification play out. Now, obviously we're launching significant number of additional assets. We launched some at the end of the year, and then more will launch this year with Skyrizy and Yopata Sydney. That will drive over time more diversification. Having said that, we have a business that generates significant cash flow, and our first priority is always using that cash flow to be able to invest back in the business. And so, we look at all different kinds of transactions, small ones, medium-sized ones, and larger ones. We look at them all in the backdrop of, do they strategically fit? Can they enhance the long-term performance of the business? And are they valued at a point at which we can get a good return for the investment that we need to make? And when we find those, we obviously act on those, and we have the financial wherewithal to do that. So that's how we think about it, and I wouldn't say that's different than how we've historically thought about it, but that is how we look at business development. Thank you.

Thanks, Chris. Operator, next question, please.

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

Oh, hey, good morning. Thanks for taking my questions. I guess this first one on the EU-Humira guidance, I think the 2Q guidance was for a billion, which was about 40% down, so I was just wondering if you could help square that for us in terms of the 30% erosion for the full year, and then also help us reconcile, I think Biogen yesterday mentioned that there's about 35% biosimilar share in Europe, so just trying to put these data points together, it would seem like perhaps the erosion profile might be a little bit worse in Europe than the last guidance, so if you can provide a little clarity there, that'd be helpful. And then, I guess just second question, just on the ORA list, the launch, can you just give us a little color how this is progressing? Is it progressing according to plan? Are there some early challenges that may be a little greater than initially anticipated? That'd be helpful as well. Thanks.

Okay, Jason, this is Rick. I'll answer those questions for you. First, to the point that you made about the erosion, the erosion that we quoted on the call was 30% against the total international base. I think we said at the time, if you just looked within the segment that was going biosimilar, that was around 40 or 44%, something in that range, so it is consistent with that. The guidance is consistent with what we originally talked about, and I'd say that's the guidance that we're absolutely comfortable with as things are playing out. If you look specifically to the Biogen comment, I think what Biogen said, although I didn't read the transcript, but others did, is I think what they said was that share was in Germany. And I'd say it's in the range of that in Germany. I can't remember the specific number that they quoted, but remember, Germany has a quota system that they use, and that quota is that 40% of the prescriptions written by their doctors, their physicians, should be biosimilar products, and so they're obviously gonna drive to that 40%, and they're approaching that now, so I don't think that is a big surprise. If you look more broadly across all of Europe, or all of the areas that are affected by biosimilars in Europe, then the share would be about 16% right now in the first quarter. We would expect that that would rise over the course of the year, which is just how we planned it. We planned two things, rising share and more price erosion as we advance towards the fourth quarter, and that is how our forecast is built. So it's tracking against that forecast well. I think if you look at Biogen and Amgen, I'd say they have been the most aggressive in the market thus far. So Biogen quoted what they were getting up that share in Germany. I have no reason to believe that that wasn't accurate, but that's essentially how the biosimilars are going. So I'd say, I think now after we had more experience, we're pretty comfortable with how the biosimilars are sorting themselves out. On a world where the ramp is going, or the launch is going as we would have expected, we have spent quite a bit of time out educating physicians. This is a physician population that hasn't had a new medicine in this area, nor did they prescribe a lot of these types of medicines in their practice generally. I'd say the receptivity that we're seeing from physicians is very good, very positive. The feedback we're getting from patients as they start, I think is encouraging, it would be suggestive of the fact that even at the 150 milligram dose, patients are seeing rapid relief of pain. So I think that's certainly positive, and they like the profile of the drug. We started the DTC campaign a couple of months ago, and that'll be an important aspect of this launch. And we said all along, this is an area where we're ultimately gonna have to build the market. And it's important to remember, these patients are typically younger women, right? And they don't go to their doctor every couple of months, they go to their doctor typically once a year. So engaging them and making them understand that there is a therapy available, and therefore they should go to their doctor off cycle is an important part of this launch, and building this launch. But I'd say it's tracking well, compared to what we would have expected. The drug has right now about a $60 million running rate, and growing. So it's within the expectations that we had. And long term, I can tell you, our expectations are still that this will be a very sizable product for us going forward, albeit it's gonna be more of a slower ramp than some other products like an HCG, where they ramp very rapidly.

Got it, thank you.

Thanks Jason.

Operator, we'll take the next question please. Thank you, our next question is from Naveen Jacob from UBS.

Hi, yes, thanks for taking my questions. Maybe a question for Bill and a question for Rick if I may. Bill, with a nice increase to your operating margin guidance to 47% for 2019, how confident are you in your 2020 operating margin guidance of 50%? What's driving that 300 bips of increase? And then second question for Rick. Obviously the pharma group over the last two, three weeks has been under significant pressure. Last week at least was associated with Medicare for all concerns. Before that, IPI and rebate rule. There's a lot of things proposed, a lot of things discussed. I guess Rick, help us understand, beyond obviously, I'm not gonna ask you to handicap political outcomes, but beyond the political hurdles, what are some of the practical hurdles associated with broader forms such as Medicare for all? And then with regards to the rebate rule, what are your expectations going into next year, assuming implementation, how that will affect our visibility to deal with marketplace which is fundamentally has been driven with the information marketplace, which is fundamentally been driven by, a lot by how pairs position products. Thanks.

All right, thank you. Rob, why don't you answer the first?

Hi Naveen, this is Rob. So we're in the process of developing our LRP right now, so I'm not gonna give you 2020 guidance, but let me tell you how to think about it. If you think about the 2019 profile, we're up about 250 basis points, despite the investment for new product launches and flattish sales. In 2020, you should see increased P&L leverage as those new products ramp and the overall top line grows. So that's the way I would model it.

As it relates to the debate that's ongoing about affordability of healthcare and affordability of medicines, it certainly is obvious to everyone that there is a very significant debate that is ongoing here. I think it fundamentally comes back to having patients have access to the medicines that they need and making sure that those medicines are priced in a range where they are affordable and they're justified based on the pharmacoeconomics of those particular agents. At least you'd hope it will get to that debate, and I think eventually it will get to that debate. And so as you look at patients' ability to be able to access medicines, I think it's important to think about it in the backdrop of where is the challenge in that. I will tell you as an example, and I don't think we're unusual, but we have a very extensive patient assistance program. And that program actually allows patients up to 600% of poverty, which I think is around $150,000 a year worth of income for a family of four or somewhere thereabouts, that in the event they can't afford their medicines, they can come to us and we obviously will provide them medicine even free of charge, and we provide a significant amount of medicine to those patients. Those programs are available to commercially insured patients, to uninsured patients, and therefore there shouldn't be a patient that falls into that category that doesn't have access to an add-b medicine regardless of their ability to be able to pay. Now, do people fall through the net and they don't realize it? We're looking into that, and we may actually do some additional awareness campaigns to make sure patients understand how to be able to access that program. But I would tell you, we have pretty broad coverage of that program, and we monitor how many patients don't qualify because of their income levels, and we always constantly look at whether or not we have that set appropriately for patients who can't afford the medicine. And so we adjust it in time based on the percent over poverty income to ensure that we're trying to cover the vast majority of those patients. So you shouldn't have a significant problem with those kinds of patients, and then you look at commercially insured patients, obviously the industry provides a significant level of co-pay assistance to those patients, and so that shouldn't be a challenge. Where the challenge does exist, because these programs are not available broadly to patients on Medicare Part D, is in Medicare Part D. The non-LIS portion of Medicare Part D has very high -of-pocket costs for medicines, particularly specialty medicines. And to sort of put it in perspective for you, a Medicare Part D patient, if you compare their -of-pocket expense to a commercially insured patient, a patient on Medicaid, a patient who is in Part D but part of the LIS program, their -of-pocket expense for something like Humira is a little over 50 times, five zero times what it is compared to those other patient populations, which is a pretty significant burden on those patients. And so I think one of the things we're trying to drive as we go through this process is I think it is the industry's responsibility to help step up and try to cover some of that cost and share some of that with the government to be able to make it affordable for those patients. That is just too high a burden on Medicare patients to be able to afford that. And I think that's the area that you have the greatest challenge from an ability to access these kinds of medicines. And so we are obviously trying to come up with ways that we can suggest or try to participate in the process to help alleviate that challenge. And I think we should be willing to come to the table and help drive that. Now, people say, well, what about the cost associated with that? Well, if you look at the Part D plan and you look at the overall cost compared to how enrollment has increased over time, I would tell you that the Part D plan has worked extremely well from a competitiveness standpoint. You know, the insurers that negotiate this and the PBMs that negotiated on behalf of the government drive a pretty hard bargain. And you see fairly significant rebating or discounting in this program. I think one of the challenges, and I'll get to that here in a minute when we talk about rebates, one of the challenges is it would appear most of that rebate is being put back into the premiums, lowering the premiums. And so there is this debate. Where should that rebate money go back? Should it go back against the actual drug cost or should it be built back into the premiums? And look, that's not a decision that we make. And I think that is part of where the rebate challenge comes in. Now, as it relates to patients, well certainly, I think most of us believe that patients shouldn't be paying against the list price if there's substantial rebates. And so the rebate rule, as it's proposed right now, would allow manufacturers like us to discount at the point of sale or at the point of pharmacy to be able to reflect that and then that would be reflected in what the patient pays. I can tell you we are totally supportive of the patient paying off of the rebate price or the discounted price. I think that is absolutely appropriate. Whether the rebate rule goes through as is or some modification or doesn't go through at all, look, I can't handicap that. We have analyzed how it would, as it's currently proposed, and as we've said many times, it doesn't affect our business one way or another. Whether it's a rebate or a discount, they are one and the same. And so I think we're comfortable with, if that were to go through, being able to manage our business in a very similar way to the way we manage our business now. I think one of the challenges with Medicare for All would be you'd have to look pretty carefully at this drug benefit because you would have patients who if they switched off one of those other programs that went on Medicare, at least the way Medicare Part D works right now, their copay out of pocket is going to go up dramatically. And I think that's not something that they would necessarily like. So I think that's a significant challenge. But I think one way or another, we have to attack that and resolve this group, making sure that they have good access, affordable access to drugs that they need. Now these are drugs that don't get abused. Now at the end of the day, take a drug like Humira. Humira is step edited, has prior authorization. The patient has to fail all of the lower cost alternatives before they ever get access to a medicine like Humira. So there is not any real risk of abuse in this kind of a category. And so I think that's something else that's important to put in perspective as we have this debate.

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

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

Thanks for taking the questions. Just want to clarify some of the points on guidance. On the fourth quarter call you indicated to Oralyssa would be around 200 million this year. Is it still on track for that or might that take a little longer to achieve? And then just to follow up on your answer to Jason's question about the OUS guidance for Humira this year, sorry, in the second quarter being down 40% year over year. You talked about the expected cadence of erosion in Europe, but OUS is still projected to be down 40%. So maybe you can elaborate on the answer and reconciling that with the initial guidance of 30% for global XUS for the year. Thank you.

So on Oralyssa, Josh, this is Rick. On Oralyssa I would say that we're tracking against that number, so we're not changing our guidance on that number. And obviously, as I said, it has a running rate right now of about 60 million, so it's ramping significantly from that. And I'd say based on everything we know today, we're comfortable with that ramp. I'm not 100% sure I understand the question that you asked on the second one. Rob, I mean, you said something about 40% in the second quarter.

So Josh, this is Rob. If you look at the guidance and compare that, there were total international sales in the prior year. That will put you at a 33% operational decline. So I'm not sure how you're getting your 40%.

And that, Josh, this is Bill. That would be in the second quarter. As you look at the gating of the impact around biosimilars, recognize in Q4, we're gonna be comparing against a quarter in the prior year that already had some biosimilars. So you'd expect actually that year over year impact to be less than what we're seeing in the first three quarters. So it averages out to our overall guidance. Okay, thanks.

Thanks, Josh.

Operator, next

question,

please. Thank you. Our next question is from Jeff Meacham from Barclays.

Morning, everyone. Thanks so much for the question. Just had a few, Mike on Vinclexa and Myeloma. The imbalance, I'm sure, was a surprise. What's the hypothesis at this point? I'm not sure it's clear what's different about Myeloma versus CLL or AML in terms of unique safety, tolerability risk, and how does this alter your long-term view of the value of the drug? And then Rick had another one on capital allocation. You guys have obviously expressed confidence in the long-term trajectory and without a large transaction. So my question is whether there are triggers that would evolve that strategy. For example, if OUS Humira is worse than expected later this year or next, or your launches don't hit initial objectives, what do you do from there and how much of a priority is the payout in that scenario? Thank you very much.

Okay, so this is Mike. I'll take the first one. So with respect to Bellini and the imbalance that we observed in mortality in the overall population, yes, obviously that was a surprise to us. That's not something that we would have expected to see. I think it's hard to say with certainty what drove that, but I think comparing and contrasting the situation to CLL is important. So what we know about CLL is that CLL is BCL2 driven and you see that in the efficacy results that we've driven across our CLL program from the very early studies in 17P-Del, from the Murano study and all the work that we've done. If you look at multiple myeloma, that there are, from our perspective, really two groups. Now I'm speaking from a BCL2 biology perspective. There is a subset, which is this T1114 subset. So it's a subset, but it's about 20% of the multiple myeloma. And that's obviously a significant proportion given that T1114 group, given that myeloma overall is very big. And that subset is very highly BCL2 driven in its biology. Then there's the broader population where the hypothesis was a little different. There the hypothesis was primarily synergy with proteasome inhibitors that we've seen mechanistically and that we saw in earlier studies. And so the Bellini result is that overall non-selected group. And so while we can't tell you with certainty today what drove that, what we can tell you is that that behavior is very different than what we've seen in other populations. Now in the T1114 group, it's very BCL2 driven. The early data that we've seen suggests that we should see a good effect. And that's why we continue to expect that the drug has a role in that population. Now obviously we're gonna need to take the time to work with the FDA around the issues of the partial clinical hold, but we do believe that in the long term there will be a role, or at least the potential for a role in that population. So that's really the difference between multiple myeloma and CLL. So does this change our long term view of the value of the asset? No, it doesn't change our long term view of the value of the asset. It doesn't change our view of CLL in any way. And we had always felt that the larger opportunity, because the clear link to the biology for Venclexta in myeloma was in that biomarker driven population.

Okay, Jeff, this is Rick. So on your question, I think the best way to think about it is this. You look at 2019 and I think it is a good test of our ability and our strategy's ability to be able to withstand significant LOE. You know, if you think about 2019, you have roughly just under $5 billion of humerus that's facing LOE, and probably something in the neighborhood of about $500 million of Andrew gel that's facing LOE. And you're in the very early stages of the launch of several of our new products, like Oralysa, like Skagrazy, and ultimately it will be like Yipata Cytinib. So you're not getting much benefit. In fact, if anything, you're getting a little down draft because everyone knows in the first year or so of a pharmaceutical launch, you lose money because you have to apply a significant amount of SG&A to it to create the RAM. So you actually have headwinds from a profit performance standpoint. So, and you can see based on that, we have a business now that still has positive revenue growth and has EPS growth of 11%, let's call it. And yes, there's some share repurchase in there, but if you adjust that share repurchase out, it's still high single digit EPS growth. So tremendous EPS growth, despite those headwinds that we're facing. And I think that demonstrates the strength of the underlying business. And it was really designed to be able to deal with that. Now, having said that, I don't know that those kinds of dynamics are what's gonna drive how we look at opportunities that exist from an acquisition standpoint. What drives that is what I described before. It was always better to have a stronger business than you can't have too strong of a business. So at least that's the philosophy that we operate with. And so as we look at different kinds of transactions, we evaluate them against their strategic fit and then can we get a good return on those assets? And if our analysis suggests that we can, then we obviously try to act on those. And that's what drives from a capital allocation standpoint where we invest. And I don't see a dramatic change in the way international biosimilars behave because obviously I think we've seen enough of that now that we have a pretty good idea of how they're behaving. That that would drive, that would be a trigger event in and of itself. I think what will drive what we do is ultimately can we build a stronger business if we were to acquire an asset, whatever that asset may be?

Thanks, Jeff. awkward, do we have time for one

final question? Thank you. Our final question today is from Vamil Devan from Credit Suisse.

Hi, great, thanks for taking my questions. So just two on the product side. First for the Patissini, I think we're about four months from the PDUFA date. Just wondering, I don't know if you've, apologize if you mentioned that on your prepared remarks, but wondering if you have any updated thoughts on the likelihood of an adcom ahead of the decision and just the impact we got the recent safety update on Xeljanz regarding the, you raised some more questions around thrombosis risk with Jack inhibition and wondering how you think that might impact the review. And then the second one on Sky Rizzi, you mentioned the dosing advantage you guys have over Tramphia, just looking at the label, there is a little bit higher rate of immunogenicity with the product than we see with Tramphia. I think it's about 14% of patients had antibodies that could be classified as neutralizing. So just wondering how you think physicians might think of the trade off between more convenient dosing, but maybe a little bit more immunogenicity for a chronic condition like psoriasis,

thanks. Sure, so this is Mike, I'll take those. With respect to Eupaticitinib, we're still in the relatively early stages of our review, but we are several months into it. With respect to the likelihood of an adcom, what I've said before is that advisory committees are common for these sorts of applications, so for novel molecular entities. It wouldn't be necessarily surprising if we had one or concerned to us

if

we had one. But based on what we're hearing today, we do not anticipate one. And so obviously, as we get closer, we'll be able to provide additional color on that. With respect to Zeljanz and the safety finding that came out of their large scale study, I'd say a couple things. One, we need to see the data presented in full, and we need to see how that translates through to their label, but I'll point to a couple features. One, that was at a dose that was higher than approved in RA for Zeljanz, and it was in a very particular patient population because it was in their cardiovascular safety study. So these were patients who were selected to be at high risk for cardiovascular disease, so they were a little different than the broader patient population. Our program hasn't demonstrated an increased risk for VTEs, for -pata-citinib, compared to essentially all of the competitors that we had in the trial, which include Humira, includes methotrexate, and in our monotherapy studies for a portion of the time, it even includes TruClosibo. So we feel very good about our data set. With respect to Skyrizi, what I would point to is the performance of the product. We have very, very strong performance. We are clearly covering the pathway very effectively and doing that with a favorable benefit risk profile. We have skin clearance that's actually rising over time and very durable out to a year. And so I don't see that as a concern at all for us.

Okay, thanks for taking the questions.

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

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