Visa Inc.

Good morning and thank you for standing by. Welcome to the AFI Fourth Quarter 2018 Earnings Conference Calls. 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 Schre, 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 Finance 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 Security Submigration Reform Act of 1995. Abbey 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 Abbey's operations is included in our 2017 annual report on account 10-K and in our other SEC filings. Abbey undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events and violations, except as required by law. On today's conference call, as in the past, non-GAP financial measures for the youth and health investors understand Abbey's ongoing business performance. These non-GAP financial measures are reconciled with comparable GAP financial measures on our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll now turn the call over to Rick.

Thank you, Liz. Good morning, everyone, and thank you for joining us today. 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 we'll 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 .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 US 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 Dua Dopa. AVI 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. AVI's 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 within Bruvica and Van Kleksta. 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 Amyology, Humira and the U.S. will continue to generate strong revenue, driving roughly $1 billion of growth in 2019. Since we became an independent company, our research and development efforts in Amyology 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 leadership position, the development of highly differentiated assets was absolutely critical. We are now confident that with Rizekizmed and Eupatocetinib, we have accomplished our objective. Both of our next generation immunology therapies have demonstrated across multiple clinical trials, Superiority vs. Humira and other competitive offerings. This efficacy was shown across a broad spectrum of patients, including bio-naïve 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 Rizekizmed and Eupatocetinib in 2019, and based on their profiles and we anticipate broad formulary access. Beyond our new therapies in hemon and immunology, we have also developed other assets that represent attractive multi-billion dollar revenue opportunities such as Maverick and Oralysa. We have a base business that includes therapies like Creon, Zuodopa, 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 Abbe'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 in 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 Abbe 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 Andrewgel 1.62. We are also facing an extremely difficult comparison period due to the outstanding growth we drove in 2018. In 2019, we will also be funding five major product or indication launches. Yet despite all of these challenges, Abbe 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 reassure 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 Abbe. 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 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. Thanks, 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 BenClexsta in the broad relapse refractory CLL population and conditional approval for BenClexsta in newly diagnosed AML patients ineligible for intensive chemotherapy, approval for Imbruvica in combination with Rituxan as the first chemotherapy-free combination treatment for Waldenstroms, the ninth FDA approval for Imbruvica overall, and for Oralyssa 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, Rysinkizumab in its initial indication, psoriasis, and Eupadacitinib in its first indication, rheumatoid arthritis. Across each of the four Phase III studies in the pivotal program for psoriasis, Rysinkizumab showed consistent, high, durable rates of skin clearance. Based on these results, we believe Rysinkizumab 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 Eupadacitinib, 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 Eupadacitinib -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 more biologic therapies. Across the select clinical program, both doses of Eupadacitinib performed extremely well and demonstrated a strong benefit-risk profile. Based on our analysis of the data generated across the registration 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 points, and demonstrated superiority to humira in our -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 Eupadacitinib and Resenchizumab, we also positive data from several Phase III studies in other areas of our pipeline, including L-golic in uterine fibroids, then Klexta in front-line CLL, and data from several important Phase III studies in our front-line CLL program for imbruvica, including results from the ECOG, Allianz, 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, and previously untreated CLL patients. We also initiated several Phase III programs, including studies for Eupadacitinib 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 Venklexta this year, including results from the Bellini trial in relapse refractory multiple myeloma and from our two frontline AML studies, as well as the detailed data from CLL14, our Phase III study for Venklexta in frontline CLL. These data and subsequent label augmentations will build upon the body of evidence demonstrating Venklexta's potential as a foundational treatment option across a number of hematologic malignancies. Earlier this month, the Venklexta 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 Depthux-M in newly diagnosed glioblastoma multiforma. 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 Eupatocitinib and RA and Resenckizumab and psoriasis. In addition to their lead indications, we continue to make great progress with Eupatocitinib and Resenckizumab in a number of other immune-mediated conditions. This year, we'll report mid-stage data for Eupatocitinib and Axial Spa and we plan to begin Phase III development in giant cell arteritis. Overall, this year we'll have 10 active ongoing registration enabling programs for Eupatocitinib and Resenckizumab. 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 PNF steroid conjugate, and ABBV599, our combination JAK-BTK inhibitor. And in the area of women's health, following completion of the pivotal trials for elegolix 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 ABBV 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 .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 .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 .4% operationally. In the U.S., Humira sales increased .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 .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 .3% on an operational basis, driven by the continued strong growth of both Imbruvica and VanClexa. In the quarter, Imbruvica net revenues were $1 billion, primarily driven by continued uptake in the frontline CLL segment. VanClexa 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 HEMOX global revenues were $3.9 billion, up .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 Dua Dopa and Creon. Turning now to the P&L profile for the fourth quarter, adjusted gross margin was .8% of sales, up 80 basis points compared to the prior year. This was inclusive of the -over-year benefit related to the termination of certain royalties with Ymira, partially offset by the dilutive impact of partnership accounting. Adjusted R&D was .5% of sales, supporting our pipeline programs in oncology, immunology, and other areas. Adjusted SG&A was .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 .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 .1% in the quarter. Fourth quarter adjusted earnings per share, excluding specified items, were $1.90, up .4% -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 STEMCETRICS 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 RIS and KISM-AB 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 Humira to be down approximately 30% on an operational basis, reflecting the impact of biosimilar competition outside of the U.S. For our HEMAC franchise, we expect global revenues of approximately $5.1 billion, contributing more than $1 billion of growth. This includes Imbruvica global revenues to ABDI, approaching $4.4 billion, with U.S. sales growth of approximately 21%. For VanClexta, 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 Dua Dopa, we expect revenues approaching $500 million. For Lupron, Synthroid, and Syngest, we expect sales to be roughly flat year over year. And for Andergel, we are forecasting sales of approximately $100 million following the entry of generic competition for Andergel 1.62. Finally, we are expecting a regulatory decision for both RysnKiznam and Upadasydnib 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 human-era royalty reduction, as well as the impacts of partnership accounting. We are forecasting R&D expense of approximately .5% of sales, reflecting funding action supporting all stages of our pipeline. We are forecasting SG&A to be approximately .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. human-era, we expect sales of approaching $3.2 billion. We expect international human-era sales of approximately $1.2 billion, assuming current exchange rates. And for Umbruvica, 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, ADVI has once again delivered an excellent quarter and full year results. We've driven top-tier revenue in 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 ADVI'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 Cowen.

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 you how to sit in it? And then lastly, perhaps in part due to ADVI's openness to do a deal and its desire to have another therapeutic vertical, there's been some speculation that ADVI might pursue a big deal even in an unfriendly way. Considering the many moving parts at ADVI, what is your appetite right now for a big deal and would you consider an unfriendly one? Thank you.

Yes, 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 Humira, 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 YUPPA 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 our A to go to an adcom, 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 Braun 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 from two phase three the Lipribe 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 US, strong growth, 7% is what we are recommending the model outside of the US. Obviously, with the advent of biosimilars, we are forecasting a decline and currently we view that as about 30% on an operational basis.

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, 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. As many of you probably know, I retired once and I can tell you I'm a heck of a lot better at running an abbey than I was at retirement. So, hopefully that clarifies it.

So, this is Mike with respect to the LIPRIB data. So, we announced those top line results when we had them. We're committed to publishing all results and making the data available. I don't have a specific meeting or specific time frame to point to here on the call today, but we will be making those data publicly available.

Thanks, Andrew. I'll bring the next question, please. Thank you. Our next question is from Jeff Meacham from Barclays.

Hey, guys. Thanks for the question. Just out of Hue 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 US, the strategy seems to be moving Humira to later in the paradigm across different markets and then Yipata and Rizu 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, we're not in a position, nor from a competitive standpoint, do I think we would want to talk about at this point where our go-to market strategy is. But I think in general, the way you can think about these assets, and certainly the way we're thinking about it is, now that we've produced the data on RUPA and RZA 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 and adequate responding patients, that we know these assets will ultimately be able to deliver significantly superior results through 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. We would obviously put a contracting strategy in place that will be consistent with that approach. And obviously, we will fund those launches in a way to be able to drive that approach in the marketplace, both in the US as well as outside the US. And we expect the uptake to be consistent with the profile of those assets.

Thanks, Ray.

Thank you.

Thanks, Jeff. Operator, next question, please. Thank you. Our next question is from Tim Anderson from Wolff 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 bosom layers and how that impacts the PNL. 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 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 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 EMRL. 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 were only, to my 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%, 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 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. Under those circumstances, 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, you know, we're going to launch or we either just launched or will launch over the course of the next, you know, 12 months, four major products that have multi-billion dollar potential. You know, if you think about Venetic 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 Elissa, we just launched that product. We're going to launch hepatocytinib. We're going to launch ryzokizumab. 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 adore the biosimilar impact. And so that's the strategy that will drive.

Yeah, the only thing I'd also add is, as you look at 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 to into their ramp. So 2020 should be a sales expansion year. But even then, we're always going to be thoughtful about how we deploy our resources. You look at this year on a operational sales increase of 1%, we're still delivering 200 basis points of op 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 had delivered top tier performance. Last year, it grew the bottom line 41%, through 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 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.

Thank you. 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 pristine 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, .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. You know, 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 about the US low single digit.

Yeah. So it's not heavily reliant upon price, nor last year was it heavily reliant upon price. So I think, you know, 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 UPA and RZA, you know, obviously, we will want to produce products on formulary as broadly and as quickly as possible. I would say that's an area that, you know, we have a team that is good at doing that, effective at doing that. And so, obviously, you know, based on the fact that, you know, we assume RZA 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 we, you know, 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 and, you know, I can tell you that we would expect, like other launches, that will 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 will 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 JP Morgan.

Great. Thanks very much for the questions. My first one was just following up on the longer-term international humero 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 outlooks that business? My second question was on capital allocation. And I guess is the more challenging EU humero 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 humero dynamics that we're seeing playing out? Thank you.

Yeah. 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 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 2021 that have not gone biosimilar to today. And they would obviously have some impact, although I would say most of those countries, it should be a lower impact, but 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'll obviously get to the point at which the biosimilar players have gotten to what they believe is the core 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 midpoint, but it's relatively modest, three to four percentage of that. And it wasn't driven for the purpose of doing that. Ultimately, we did the share repo and we announced that I believe we had a key in that first quarter call that we were going to do a significant amount of share repo because of tax reform. 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's 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 ryza-kizma out there, I can tell you we would aggressively pursue that. And so we fundamentally have a pipeline that we believe has the ability to do what we strategically intended it to do. And that is to to make sure that 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.

Good morning and thanks for taking my questions. First one, just coming back to USG MIRA, curious, the softening of the 2019 number, just curious to what degree is that cannibalization from the next generation immunology brands? Just curious if that's a factor or if it really was just maybe the moderation of pricing. And then my second question, I guess with Jamie no longer on these calls, I'll ask the question, 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 a large bolt on. 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. USG MIRA, you want to cover that Bill? Yeah,

sure. So, you know, if you look at USG MIRA, we're guiding 7% in 2019. That's coming off of a number in 18 of 10%. And with a, 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 US.

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 HEMONC franchise strategy. Apparently, Ibuika and Manitococ are doing well. What are you thinking about boosting over that? There's, of course, the PI3K that you used to have with other companies and returned. And there's also cellular therapy that was a very big space that is out there. Just wondering about your general strategy there.

Mike? Yeah, so this is Mike. I'll take that. With respect to our HEMONC franchise, you know, both Ibuika and VanClexsta 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 human lignancies. They work well together in areas like CLL and mantle cell lymphoma, MCL, and then they also, you know, have some unique areas, for example, like the Vanetoclax in Anne now. 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 Clexsta, but also how from our earlier pipeline we can add additional mechanisms so that that'll further strengthen our position in HEMONC. And there are areas that could apply there. And of course, we're looking more broadly than that. You've seen us do, you know, early stage deals, but early stage deals that give us access, you know, 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 play of the call, please visit our website at .abbe.com. Thanks again for joining us. Thank you. And this does conclude today's conference. You may disconnect at this time.