艾伯維 (ABBV) 2014 Q3 法說會逐字稿

Good morning and thank you for standing by. Welcome to the AbbVie third-quarter 2014 earnings conference call.

(Operator Instructions)

This call is being recorded by AbbVie. I would now like to introduce Mr. Larry Peepo, 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, and Bill Chase, Executive Vice President of Finance and Chief Financial Officer. Joining us for the Q&A portion of the call are Laura Schumacher, Executive Vice President, Business Development, External Affairs and General Counsel and Mike Severino, Executive Vice President of R&D and Chief Scientific Officer.

Before we get started I'll remind you that some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements.

Additional information about the factors that may affect AbbVie's operations is included in our 2013 annual report on Form 10-K and in our other SEC filings. AbbVie undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments except as required by law.

On today's conference call as in the past non-GAAP financial measures will be used to help investors understand AbbVie's ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today which can be found on our website.

Following our prepared remarks we will take your questions. So with that I will now turn the call over to Rick.

Thank you, Larry. Good morning, everyone, and thank you for joining us.

During today's call I will spend a few minutes on our strong results in the quarter as well as our performance since we launched as an independent company. I will also discuss our pipeline advancement including forthcoming data and other milestones.

I will then turn to call over to Bill who will provide additional color regarding the quarter and our outlook for the remainder of the year. We will also make sure we leave enough time for your questions.

Since launching AbbVie 22 months ago we have focused on driving strong performance, creating shareholder value and building a robust pipeline to drive future growth. To that end we have delivered a total shareholder return of more than 90% representing $40 billion of shareholder value creation.

Today we reported robust third-quarter results with adjusted earnings per share of $0.89, significantly exceeding our guidance range for the quarter. This included operational sales growth of more than 8% also ahead of our outlook for the quarter. We drove this performance with double-digit growth across a number of products including Humira, Synagis, Synthroid, Duodopa and Creon.

In the quarter we also delivered improvements in gross margin and continued to invest in the business for future growth. And for the second time this year we significantly raised our full-year EPS guidance range for 2014 reflecting the robust performance of our underlying business and positive trends we expect through the remainder of the year.

This guidance reflects EPS growth for 2014 despite the headwinds created by the loss of exclusivity in our lipids franchise. Our results demonstrate the strength and sustainability of our portfolio and they underscore our continued focus and execution.

Our third-quarter results were led by Humira, which delivered nearly 18% global operational growth. Humira's performance was driven by several factors including continued market growth resulting from increasing penetration across therapeutic categories and geographies. As we've indicated in the past, Humira's broad label and new indications are a competitive advantage.

We recently reported positive results from our Phase 3 studies of Humira in HS, a chronic inflammatory skin disease that currently has no approved treatment options. We are on track to submit our US and European regulatory applications for HS this year.

We also spent the last several years developing and implementing a strategy that we believe will protect and grow our leadership position in immunology including product enhancements and intellectual property. And behind Humira we have a number of promising immunology assets in development. As a result, we are confident in our strategies to defend our position across our immunology categories.

Our interferon-free HCV therapy represents another exciting vehicle for strong growth. We are on the cusp of approval with the regulatory reviews progressing very well. We are actively engaged with regulators on various fronts and have completed our preapproval manufacturing and clinical inspections.

As we said at a healthcare conference last month, we do not expect that an advisory committee meeting will be required prior to US approval. In anticipation of US commercialization by yearend and European approval in early 2015, we have built the appropriate infrastructure and are fully prepared for our launch.

Our next-generation HCV program also continues to progress well. We are currently conducting Phase 2b studies and expect to transition to Phase 3 development in 2015.

Beyond HCV we have a robust pipeline of promising development programs. These programs span specialty therapeutic areas and include both biologics and small molecules.

All told we have more than 40 active clinical development programs underway. This includes 12 products in Phase 3 development or currently under regulatory review.

We have a high level of enthusiasm in our oncology pipeline which includes 10 new molecular entities being studied in more than 55 clinical trials. In collaboration with Roche, we will present additional data on ABT-199 at an upcoming medical meeting including Phase 1 data on AML and early data from a trial combining ABT-199 with Gazyva.

We will also see data from a large single-agent study in relapsed refractory CLL patients with 17p dilution in early 2015. As a reminder, if the data warrant and regulatory authorities agree that ABT-199 addresses an unmet medical need in this patient population, these data have the potential to support an early pathway to registration.

Veliparib is our PARP inhibitor in development for a wide range of solid tumors. Over the past year we have initiated four pivotal studies. This includes Phase 3 trials in neoadjuvant breast cancer, BRCA breast cancer and most recently two studies in non-small cell lung cancer that include patients with squamous and non-squamous cancers.

We are also excited about ABT-414, our anti-EGFR monoclonal antibody drug conjugate being evaluated in combination with chemotherapy for glioblastoma multiforme, the most common and most aggressive type of malignant primary brain tumor. We were recently granted orphan drug designation for ABT-414 by the EMA and FDA and we are moving aggressively to start a Phase 2 study in patients with GBM by early next year.

Also in our late-stage development in our oncology pipeline is elotuzumab in partnership with Bristol-Myers Squibb for multiple myeloma. Results from the pivotal trial in relapsed refractory multiple myeloma patients are expected in early 2015.

Our late-stage neuroscience pipeline includes daclizumab and Duopa. Daclizumab is in development for the treatment of multiple sclerosis. Despite advances in the MS category there continues to be a significant need for novel high efficacy agents with favorable benefit-risk profiles.

And we believe daclizumab has the potential to be an important therapy in this large and growing market. We presented promising pivotal trial data earlier this year, which demonstrated patients treated with daclizumab had a statistically significant 45% reduction in annualized relapse rates versus Avonex. We have begun to engage with global regulatory authorities and are working with our partner to complete our regulatory applications in the first half of 2015.

Duopa is AbbVie's novel therapy for advanced Parkinson's Disease and is currently under regulatory review in the US with an FDA action expected in early 2015.

Elagolix is our compound in Phase3 development for endometriosis and Phase 2b for uterine fibroids. We continue to expect to see initial data from the first of two pivotal studies in endometriosis later this year and plan to report top-line data shortly thereafter.

We will also see data from the mid-stage program in uterine fibroids next year as well.

As I mentioned, we have a number of promising immunology assets in development including oral selective JAK1 inhibitors, several biologics and two biospecific biologics currently in mid-stage trials. We expect to see data from the selective JAK1 inhibitors next year allowing us to make a decision regarding Phase 3 development.

In summary, we delivered excellent performance in the quarter and our pipeline continues to evolve. We are on the verge of a number of important milestones including the commercialization of our interferon-free HCV combination and we are a prepared for a successful launch.

AbbVie is poised to deliver top-tier performance including strong sales and earnings growth beginning in 2015. We have a high degree of confidence in our strategy and our performance.

With that I will turn the call over to Bill for a more detailed view of our results. Bill?

Thank you, Rick. This morning I will review our third-quarter performance and provide an update on our outlook for the remainder of 2014.

This was another very strong quarter for AbbVie as we exceeded our guidance on both the top and the bottom line. Total sales increased 8.3% on an operational basis excluding 0.5% unfavorable impact from foreign exchange.

Humira delivered global sales of more than $3.2 billion, up 17.8% operationally and up 17.5% on a reported basis. In the United States Humira sales increased 25.3% driven by continued market expansion, strong prescription trends and share gains partially offset by a reduction in retail buying patterns. Internationally, Humira sales grew 10.3% on an operational basis excluding a 0.6% unfavorable impact from exchange.

International growth was driven by strong underlying trends including the uptake of new indications and share gains but was partially offset by the timing of shipments in international markets. We continue to see double-digit market growth for Humira in most international markets. Certainly we are well on track to significantly exceed our original full-year guidance for Humira.

AndroGel sales were $232 million, down 6.7% from the prior year. We continue to see a notable slowdown in the market with overall prescriptions down significantly. However, we did gain share from competitors during the quarter and benefited somewhat from favorable pricing trends.

US sales of Synthroid were $200 million, up 24.3% over year. Synthroid maintains strong brand loyalty and market leadership despite the entry of generics into the market many years ago. The overall market has experienced low-single-digit growth with Synthroid growth outpacing the market including pricing trends.

Global Lupron sales were $196 million in the quarter, up 0.4% on operational basis. Lupron continues to hold a leadership position and maintain significant share of the market.

US Creon sales were $148 million in the quarter, up 47.6%. Creon maintains its leadership position in the pancreatic enzyme market where the product continues to capture the vast majority of new prescription starts. Growth in the quarter benefited from a favorable comparison to the prior-year quarter.

Sales of Synagis were $109 million in the third quarter, up 18.3% on an operational basis. Synagis, which protects at-risk infants from severe respiratory disease, is a seasonal product with the majority of sales in the first and fourth quarters of the year. Growth in the quarter was driven by continued product uptake and strong commercial execution.

Sales of Duodopa, our therapy for advanced Parkinson's Disease approved in Europe and other international markets, were $56 million, up 20.8% on an operational basis this quarter. Performance is in line with recent trends as well as our full-year outlook for the product.

And sales in our lipid franchise were down significantly due to generic competition. We expect these trends to continue for the remainder of 2014.

I will turn now to the P&L profile for the third quarter. The adjusted gross margin ratio was 81.1% somewhat above our expectations and up 140 basis points year-over-year. This reflects the loss of exclusivity in our lipid franchise offset by favorable mix impacts across the portfolio as well as margin enhancing initiatives we have implemented.

Adjusted SG&A was 26.4% of sales in the third quarter up more than 9% year-over-year reflecting continued investment in our growth brands and preparations for our upcoming HCV launch. Adjusted R&D was 16.2% of sales in the third quarter, up more than 14% versus the prior-year quarter. As expected, our absolute R&D investment was up sequentially over the second quarter as we increased funding of our mid- and late-stage pipeline assets and additional Humira indications.

Adjusted net interest expense was $53 million and the adjusted tax rate was 22.4% in the quarter. Third-quarter adjusted earnings per share excluding non-cash intangible amortization expense and specified items were $0.89, well above our previous guidance range of $0.77 to $0.79.

On a GAAP basis earnings per share were $0.31. You will recall that in early September we updated our third-quarter and full-year GAAP EPS guidance to reflect upfront payments related to the Infinity and Calico agreements, which were treated as specified items.

Also in accordance with the final regulations issued to the pharmaceutical industry in the third quarter by the IRS, AbbVie has booked an additional year of its branded prescription drug fee which we have treated as a specified item. By way of background, starting in 2011 the pharma industry was required under the Affordable Care Act to begin paying a fee based on branded prescription drugs sold to the US government.

During the third quarter of this year the IRS issued final regulations which change the recognition of the fee from the period in which the fee was paid to the period for which the fee is owed. As a result, the industry is now required from an accounting perspective to recognize in 2014 one additional year of the fee.

There is no cash flow impact of this one-time adjustment. Due to the timing of the termination of the Shire transaction, the majority of one-time costs related to that event were reflected in our fourth-quarter results.

Moving on to our outlook for the remainder of the year, this morning we significantly raised our adjusted EPS guidance for 2014. We now expect adjusted earnings per share guidance of $3.25 to $3.27. As a reminder, our 2014 outlook continues to exclude any potential revenue from the expected 2014 US launch of our HCV therapy.

Our revised GAAP guidance for the year includes the full impact of the Shire transaction costs. Given our strong product performance we now expect sales to exceed $19.5 billion in 2014. We are forecasting an adjusted gross margin ratio of approximately 79% for the year reflecting product mix and actions we have taken to further improve our margin profile.

We expect full-year R&D expense to be somewhat above 16% of sales as we continue to advance our late-stage pipeline. And we expect SG&A expense of around 27% of sales in 2014.

We are forecasting net interest expense of about $250 million for the full year and we continue to expect an adjusted tax rate just above 22%. As you know, our business generates significant cash flow and we expect this to grow in 2015 and beyond with new product introductions. As a result, we announced last week that AbbVie's quarterly dividend will be increased by more than 16% to $0.49 beginning with the dividend payable in February 2015.

We intend to maintain our strong commitment to a growing dividend going forward. And we disclosed a new $5 billion share buyback program to be executed over the next several years further reflecting our commitment to return cash to shareholders.

So, overall we are very pleased with our strong third-quarter performance as well as our outlook for the remainder of 2014. And with that I will turn it back over to Larry.

Thanks, Bill. We will now open the call for questions. Elon, we will take our first question, please.

Thank you. (Operator Instructions) Chris Schott, JPMC.

Great. Thanks very much for the questions.

First one for Rick, operationally AbbVie seems to be obviously firing on all cylinders here. But with the Shire deal you highlighted the potential for greater access to your cash flow as well as the diversification that deal would bring.

So on those two topics, first can you talk about your access to cash flow and your ability to deploy capital on an ongoing basis with your current tax structure and the recent dividend increase? And then second on the business development side, what is the sense of urgency at this point to further diversify AbbVie? And can you give us any color on the range of M&A options you are considering.

I guess specifically should we think of Shire as a one-off or would the Company still consider pursuing large-cap acquisitions? Thanks very much.

I think this question has come up a couple of times now since the termination of the Shire agreement and in the backdrop of the Shire agreement. And so I think it is important to put it into perspective and important to acknowledge that at the outset there were certain attributes of the Shire transaction that made it unique and out of the normal course of our M&A strategy.

I would say specifically the potential for inversion is only offered with target selections of very significant size and the benefit of inversion allowed for an acquisition price that was obviously higher. So I think one of the things that you must remember as we approach the opportunity with Shire was against the backdrop of where was AbbVie overall because I think that's an important perspective to keep in mind.

If you think about the prospects of our business, they were never brighter than they were when we approached the Shire transaction. We have cleared most of our significant LOE events. Our growth brands are exhibiting extremely strong growth, particularly Humira.

We've built a deep mid- and late-stage pipeline with several potential blockbusters which we believe will allow us to drive top-tier EPS growth starting in 2015 and beyond. HCV is a good example of that, ABT-199 is a good example of that, daclizumab is a good example of that and there are many more. And while I think it is fair to ask the question has our strategy, our M&A strategy changed following the Shire affair, I think it is also important to acknowledge that we are a company that is in an even stronger position today than we were before we announced this deal.

Today's earnings show that very clearly. The base business is running stronger than our guidance at the beginning of the year suggested to us. We have a much better idea of the size of the HCV market and our potential to stake out a significant position in that market.

We found positive data readouts on dac, 888. ABT-199 continues to perform well and we have continued to be active in the LNA front.

So there are no developments really that have happened to our business. In fact, any development that has happened has actually been a positive development.

But don't leave us with a tremendous amount of confidence that we can drive the level of performance that we have projected and the level of performance that we need going forward from 2015 with our base strategy. Which brings me to M&A. If you look at our cash flow and our ability to access that cash flow we clearly have the wherewithal to be active in the M&A front.

What is more is we have a track record in our ability and our willingness to pursue and acquire attractive assets assuming two things, it makes strategic sense and they have a good financial return. That's essentially the criteria that we use.

We've always said that our highest priority for our cash is to deploy it to further grow the business and make the business more and more healthy going forward. And I think you can expect us to continue to do exactly that, deploying cash to acquire attractive on-market and pipeline assets to further enhance our growth.

But what I don't think is that we absolutely have an imperative to run out and do another $50 billion deal. In fact, I would tell you we don't have that imperative. And it's unlikely that we would do another $50 billion deal.

As I said before, Shire is a unique opportunity based on a number of different factors, some of which don't exist in the same way as they did before. So the underlying growth prospects for AbbVie don't require us to do a transaction that size.

I would also say we're not going to limit ourselves to what we do. We look at individual products, we look at midsized companies and we look at larger companies. And we are going to continue to do that and continue to look for those opportunities that strategically fit and give us a strong financial return and we will deploy our capital accordingly.

The other thing I would say is, we have always committed that we will return cash to shareholders and that is a commitment that we've made as part of our cash. You saw us do that here recently with the dividend increase and the buyback program, and those are the two priorities for the cash. The cash isn't trapped.

Obviously we have access to the cash for offshore acquisitions. We have access to the cash if we choose to repatriate it. Obviously we have an incentive to look outside the US first if we choose to but we have total flexibility as it relates to our cash.

Thanks, Chris. Elon, we will take our next question, please.

Jami Rubin, Goldman Sachs.

Thank you. Congratulations on a terrific quarter. This is either for Rick or Bill.

Clearly 2015 is shaping up to be a huge year. I think 2014 turned out to be a much bigger year that you or anybody else anticipated just given the profitability of the base business. But 2015 is really shaping up to be a very big year with the hep C launch.

But as we move out beyond 2015 post the HCV launch, can you comment on the pace of earnings growth? Obviously with biosimilar competition towards the end of the decade for Humira that is going to have an impact on your earnings growth. But will 2015 be a one-off year, or how should we think about the pace of earnings growth going forward?

And then a second question for you, Rick. We have a lot more information now about the hep C market. We now know the pricing of the new Gilead combo.

We've seen the spectacular initial launches of Sovaldi. Can you comment on how I think early at one point you talked about achieving a 20% market share in this massive market, can you refresh us on your expectations just given how much more information we have now? Thanks very much.

First, I would say on the expectations for 2015 and beyond. Obviously we're not going to give guidance out multiple years but I think I can frame it this way for you.

If you look at what we expect to be able to deliver out of our pipeline including HCV and other assets like 199, we have a high level of confidence that we can continue to drive strong growth over the long term. As far as the biosimilar impact is concerned, obviously that is something we have looked at and we have carefully analyzed and we have had now a number of years to put a strategy in place that we believe will protect Humira through that period of time.

And so we've obviously modeled what that looks like and I can tell you we have confidence in what we can do in that area. I'm not going to give you a lot more specifics on that at this point. We've described in detail what it looks like, that is a combination of three major areas: product enhancements, both formulation as well as device, intellectual property and commercial strategies.

And this is a market we understand well. And as I said, I think we have planned this out very well and I think we have a high level of confidence in our ability to be able to execute that strategy in the face of biosimilar competition.

There will be a time where we can give you more color. I know this isn't very satisfying to you. There will be a time where we can give you more color, this just is not the time to be able to do that.

We have to make sure that we have planned this out appropriately. And so in the future we will be able to give you a little more detail around that.

As it relates to hepatitis C, what I would tell you is this, if you look at the hep C market and HCV for us, it's a very exciting opportunity and I will tell you it is a very important opportunity for AbbVie. So let me say in the backdrop of we are getting very close to entering the US market once we are approved, it wouldn't be prudent for us to provide a lot of specific details around our commercial strategy or our go-to-market strategy.

But what I can do is I think frame for you how we think about the competition in the marketplace, how we think about the marketplace -- I'm not going to provide an expectation at this point but I will give you some perspective, I think. As we have said many times before, we believe the clinical performance of our product across all patient types is very strong. It is especially strong in the psoriatics and difficult-to-treat patients.

And we believe that will be an important factor in how we compete in the marketplace. We believe relapse rates and SBRs are important. We still don't believe that minor differences in pill count or shorter duration of therapy in certain patients will significantly change the competitive dynamics in this marketplace.

In fact, I would tell you in our interactions with many KOLs, they indicate that they're going to go with 12 weeks of therapy in patients to minimize the risk of relapse in those patients. As far as the market is concerned to the point you made, we see the market as being even more attractive than we thought about it a year ago.

It is certainly bigger than we thought. It is far more receptive to high curate therapies that are highly tolerable and the market wants alternatives, that is clear.

So I can tell you we feel very good about our ability to compete in this market and create meaningful share for our product. But as I said, I am not going to go through a lot of specifics around the commercial strategy until we have launched.

The last thing I would say is as you know, the 2014 guidance we provided excludes any HCV revenues so it's not counting on any HCV revenues. Whatever we get in HCV will obviously be upside.

But certainly when we provide 2015 guidance and product-specific detail, at that point we will provide you with what our expectation is for HCV for 2015. Thanks.

Thanks, Jami. Next question please, Elon.

David Risinger, Morgan Stanley.

Yes. Thanks very much. So I missed a little bit of the call.

I just wanted to ask a couple of questions about some of the select product upside. I guess specifically maybe you could just make an overall comment on whether inventory levels changed at AbbVie between the end of the second quarter and the end of the third quarter, i.e. was there a buy-in or buy-out for the Company overall?

And then second, were there any buy-ins for any select products of note? And then third, with respect to Kaletra ex-US, I don't know if you commented but that was unusually strong.

Could you just explain that revenue number in the quarter and what we should think about for the fourth quarter ahead sequentially? Thank you.

Inventory I will discuss in really two different pieces. You've got inventory at wholesalers and then obviously you've got inventory in the retail chain. At the wholesaler level our inventories across all products in the US was roughly consistent between quarter two and quarter three.

The retail channel is a little tougher to call, as you know. In Q2 we did see some speculative buying in advance of a price increase around Humira. We think some of that buying came out in Q3, although obviously it didn't mute the overall performance of the brand to a meaningful extent.

But in general at the wholesale level everything was consistent quarter to quarter. From a Kaletra ex-US standpoint, that product is subject to some volatility based on tender timing and you saw that in the third quarter.

I think the long-term outlook for this brand is probably somewhat negative from a single-digit standpoint. So I think what you are really seeing in Q3 was the anomaly of tenders internationally.

Got it. Thank you.

Thanks, David. Elon, next question please.

Mark Goodman, UBS.

Yes, I was hoping you could give us a flavor for how much of the pre-spend for the HCV launch is already showing up in the quarter here? And how much additional we should be expecting in the fourth quarter and the first quarter? And then second, if you could just go through what data we will be seeing at ASH?

We're not going to get into specific details on how much of the HCV investment we've put in. Suffice to say we have obviously begun spending this year and you should expect that spending to increase sequentially in the fourth quarter. And that has been reflected in the profile guidance we have given.

Change in salesforce, has that started already?

Excuse me?

Salesforce?

We are all ready to go on HCV. We are just waiting approval.

So that is already reflected in the third quarter?

It is.

On your question regarding ASH, this is Mike Severino, I'll take the question regarding ASH. There is going to be a number of important presentations on ABT-199, our BCL-2 inhibitor. This includes initial single-agent data in AML.

And we will also provide a number of updates on our ongoing earlier studies, an update on our Rituxan plus 199 study in CLL, including an update on patients who have stopped therapy. And we're going to have first data on a chemo combination study of bendamustine plus Rituxan plus 199 in non-Hodgkin's lymphoma in DLBCL. And there will be a number of other updates including 199 and GA101 in CLL from early-phase studies.

Thanks, Mark. Elon, we'll take our next question, please.

Jeff Holford, Jefferies.

Hi. Thanks very much for taking my questions. So just on your HCV program that you mentioned do you expect to bring a new (technical difficulty) at any point into your next-generation program and give us any updates on how you think you might go about that if that is the case?

Secondly around margins, other results of some of the cost savings you would've looked at as part of the Shire transaction going forward, did you see any opportunities in the base business going forward that you can look at for further margin enhancement? And then just lastly, this will be for Rick, of course, are you concerned that by highlighting your underlying tax situation that you could have potentially made the Company vulnerable to a takeover by a foreign company going forward? Thank you.

So Mike, why don't you cover the first question.

Sure. With respect to our plans for hep C we feel very good about both our current-generation hep C program and our next-generation hep C program, which is advancing very nicely through the clinic.

We are currently in Phase 2b studies with our next-generation program. That combines our next-generation protease inhibitor and our next-generation NS5A inhibitor. Things are progressing very well.

We're going to continue to evaluate these data as they roll out and we will be providing updates in appropriate scientific settings over the course of the next year. We are always looking at promising mechanisms in our early discovery efforts and we will continue to evaluate those efforts in light of the clinical results I described as well.

Overall, though, I feel very good about the progress we are making in hep C. And I think we're going to have a compelling offering with first-generation. And it's an area that we are committed to and it's an area that we will remain activate in.

Jeff, on cost savings I can tell you this is an organization that has always been focused on driving cost out of the business. I think you can see that to an extent on the progress we've made on gross margin. And certainly we keep our eye open for those things all the time.

I think in 2015 if you look at some drivers behind the business, the dynamics trend favorably for operating margin expansion. Obviously the TriCor/Trilipix LOE event is fully behind us at that point.

You are seeing the efficiency efforts play out on gross margin and we would obviously expect a strong positive impact of the HCV launch which offers both a high gross margin as well SG&A profile improvement. So too early to get into a specific operating margin number for you for next year but I'm confident we are going to having a nice story to tell on this when we get into it next year.

And on your question about potentially being a takeover target, let me address it this way. If you look at our situation about offshore cash we're certainly not unique in our industry.

In fact, I would say we are pretty consistent with how our industry tends to operate, so I don't know that we flagged anything in the process. But essentially I'd tell you that our goal as a company is to stay a strong, sustainable independent company. We have demonstrated that we can drive strong shareholder value.

You see that in the TSR that we've delivered, we see that in our market cap. So I can tell you my focus is on driving the business at top-tier performance, building out a robust pipeline and delivering strong returns for shareholders. My philosophy is if you do that well the market rewards you both in your PE as well as your market cap and that is the focus that we have for the business and that is what we pay attention to going forward.

Thanks very much.

Elon, next question please.

Colin Bristow, Bank of America.

Good morning and congrats on the quarter. Just on hep C, arguably you're most competitive versus Harvoni in the treatment experience cirrhotics with the TURQUOISE-II data. Given your excluded prior protease inhibitor patients, how should we be thinking about this from a labeling perspective and can tell you help us quantify the size of this population?

And then just a little more on the label. I know it is hard but how confident are you that you can get a 12-week liberal in the treatment experience cirrhotics and how important is this for you from a commercial perspective? It seems like the FDA has a very high bar for the SVR sacrifice versus duration of therapy. Thanks.

We are in the midst right now of dialogue with the Agency over labeling. So it is just not appropriate to talk about a lot of the specifics that we are talking through with them.

I can tell you we feel comfortable with our data set in cirrhotics and across all the other patients. We certainly feel comfortable when we look at our 12-week and 24-week data in cirrhotics. Both have excellent SVR performance.

And so we don't feel at all uncomfortable with the direction that our labeling is going in. PI failures --

Treatment regimens are obviously evolving considerably. I think I would point to the overall breadth of our data both in cirrhotics and outside of cirrhotics.

We feel very good with our profile we have very high SVR, very high curates. And again we feel very good about the profile that we see. I think that's probably --

Okay. Thanks, Colin. Next question, Elon.

Alex Arfaei, BMO Capital Markets.

Good morning and thank you for taking the questions. Bill, could you please build on your earlier comments about gross margin. What specifically are these margin-enhancing initiatives that you are referring to and is this what we can expect going forward because we would only expect gross margin going up with hep C?

And a follow-up, could you please give us an update about your efforts to simplify your current hep C regimen with fewer pills, please? Thank you.

Regarding the gross margin line, a couple of things are at play on that line. First and foremost, as you know, we have obviously lost TriCor and Trilipix, which had a higher-than-average gross margin than the corporate rate. So that is some headwind we've actually been facing over the last couple of years and you can see we've negotiated that nicely.

Offsetting that has been a couple of things. First of all there is an impact of product mix in pricing but equally important there have been efforts that we put in place to reduce cost and that can be manufacturing cost, supply chain cost, as well as of course to address some of our royalty burden on Humira as well.

And you are seeing some of that play out this year. Next year with HCV coming online we would expect that to have a gross margin that would be higher than the corporate mix. And Humira has been performing very very nicely as well and that ought to have a benefit on that line item as well.

You kind of broke off when you said the last question but I think what you asked was what are we doing to work on simplifying the regimen for HCV, is that what you asked?

That is correct, yes.

Okay. Well, let me start with what I commented on before. We don't believe the difference in pill burden is going to be a competitive disadvantage. So first and foremost I would tell you that.

The second thing is we are working on some ways to be able to simplify our regimen with the current generation and those continue to progress well. Next generation has significant simplification associated with it as well and that will be an advancement as well.

So we have an active program in both areas to move it forward. We are not at a point where we want to talk a lot about it beyond that but we are working on ways to simplify the regimen and continue to make sure that we are advancing the regimen. This is a market that I can tell you we are absolutely committed to for the long-term and we are investing in a way to be able to continue to sustain our position in the market.

Thanks, Alex. Next question please, Elon.

Mark Schoenebaum, ISI Group.

Thanks a lot for taking the question. Number one, do you guys happen to have data out there in the hep C it around how many patients are actually under the active care of a treating specialist? That is a data point that one of your competitors historically has provided and declined to provide in the most recent quarter, just wondering if you have a view on that?

And then number two on hep C, have you generated yet any data for your regimen in Victrelis or Incivek failures? And then finally on Humira, can you just give us the year-on-year price versus the volume change, please? Thank you.

As far as the data of the number of patients under active care with specialist, I am assuming you are talking about hepatologists and infectious disease specialists. Our people know that but to be honest with you I don't know that number. Does anybody else in the room know that number?

Yes, I don't think we have done for you, Mark.

So maybe as a follow-up we will try to provide that. I can tell you that as we have geared up commercially we obviously believe that it is important and I have seen the numbers, that a significant percentage of the patients are under the care of specialists.

But I would also tell you that based on the massive number of GI specialists, that is also an important commercial channel to cover. And we have scaled our salesforce to cover both aspects of it, both specialists as well as GI physicians as well. But I don't remember, Mark, the actual split between the two.

Mark, on Humira you really have a tale of really two different markets. In the US we have typically been able to take some price along with the category.

And if you really look at volume trends, script trends which this quarter were very very strong, you can pretty much get back to the 25.3% growth on the quarter by looking at that strong TRx and really reconciling it back to the price increases we have taken this year. Ex-US we typically see negative price so ex-US is primarily more than 100% volume. On a total brand basis I think you can think of price this quarter netting out in the mid single digits and the rest being volume.

And the PI failures?

With respect to data on PI failures those aren't data that we have generated yet. It's something that we would look at and maybe do in the future.

Thanks a lot.

All right. Thanks, Mark.

Steve Scala, Cowen.

Thank you. I have two questions. First on hep C, AbbVie would appear to have a potential competitive advantage in the sickest patients where treatment to 12 weeks might be necessary and I know that AbbVie isn't going to reveal pricing today but given this possible competitive advantage, what are reasons that AbbVie would not price at a premium?

Maybe you can provide at least one reason why AbbVie wouldn't price at a premium? And then second, a bit of a broader issue, AbbVie has done a terrific job maintaining Humira's position as the leading TNF despite very similar competitive products and very high price points.

It seems that your competitors that sell basal insulins and inhaled asthma products could have learned from your strategies. But as managed care seems to be rotating among the big therapeutic categories and attempting to extract price, why won't we see this happen in TNFs? Thank you.

I will try to answer your two questions. Although I would say your first question basically asked me about our pricing strategy, which I'm not going to go into any detail.

But what I would say to you is we have looked very carefully at the overall market, how our product would be positioned in that market, our ability to be able to take share and we've come up with a strategy that we believe optimizes our ability to take a meaningful share position. We've looked at alternatives that were different, some of which similar to what you described and some of which weren't similar to what you described. And so we've come up with what our commercial strategy will be and we are going to execute that upon launch of the product and approval of the product and at that point we will provide you more color.

On Humira and payer actions, what I would tell you is this. We have competed in this market for a long long time. Obviously in the US market the payer component is a very critical components.

It's an area where we have good relationships with payers. There have been lots of competitive entrants into this market and I would say predictions of Humira's market share erosion and that hasn't occurred.

It is partially because if you look at the product and its ability to be able to perform clinically, if you look at the breadth of the menu of applications and indications that it has, that plays a very important role. And so I don't see the payer dynamic changing significantly in anti-TNFs going forward. This has been a competitive market for many years now and we have done quite well in that market and there's always price pressure and you have to work through that in the appropriate way.

I would say, Steve, that we certainly feel good about how 2015 settled out for us with payers on Humira.

Thank you.

Thanks, Steve. Next question, please.

Vamil Divan, Credit Suisse.

Yes, thanks for taking the questions. A couple here.

One, you recently announced this $5 billion buyback program. Can you just let us know if you've already started executing on that program and if so how much buybacks have you completed this quarter? I guess specifically I'm just wondering in terms of your -- what your share count expectations might be that are baked into your new 2014 earnings guidance and is it a very different number from what we saw at the end of the third quarter?

And the second one kind of following up on Chris's question earlier on M&A. You talked about size, can you talk a little bit about maybe therapeutic areas that might be of a priority now, for example rare diseases where Shire is obviously strong?

Is that an area in particular that you may wish to invest more? Any thoughts around areas of investment would be helpful. Thanks.

So Vamil, the quarter is not done yet. The fourth quarter that is.

We do intend to when the year finishes you will see that we have repurchased shares. But I can't give you exact guidance on what that number is going to be at this point in time.

Vamil, on the M&A strategy I think if you look at what our strategy is for AbbVie we want to build leadership positions in specialty focused areas. If you look at what we are good at, what we are really good at is taking products that have strong clinical data and the decision-making process is driven around clinical data and being able to be able to go out and commercialize that effectively.

And so we really have two primary goals when we look at M&A. One is to build out those areas where we currently have leadership positions like immunology as an example and other areas where we have a leadership position. Our goal is to try to restate standard of care in those segments and in many cases we are looking at multiple different mechanisms of action to be able to try to do that.

Standard of care restatement in the areas that we have leadership positions in, and then we have areas where we have emerging strengths where we want to build out leadership positions and expand more aggressively. Oncology is a good example.

199, we believe will create a good anchor position for us in that market. 888, 414, we have a number of assets coming behind that.

Certainly we would be interested in looking for more oncology assets if there was the right kind of opportunity with on-market products in oncology and had some commercial infrastructure in place, that would be attractive to us moving forward. Rare diseases is certainly a profile of the specialty market that is consistent that what we look at and I would say hepatology is the other area that would be of strong interest. I'm not giving you the complete list but I'm giving you sort of the top-of-mind areas that we focus on.

Vamil, one other thing. Just in the event that you were inferring something through your question, our increase in the guidance for the year is purely based on the business fundamentals as we see them.

We are not anticipating that being significantly moved by our buyback activity. Just wanted to be clear on that.

Okay. That's helpful. Thank you.

Thanks, Vamil. Elon, we have time for one more question, please.

Mark Purcell, Barclays.

Thanks for taking my question. On Humira can you help us understand the benefit from the royalty rolloff in Q3 from the cessation of payments to Merck KGaA I think was in June and how that schedule of rolloff changes going forward through the plan expiries in both US and Europe?

Secondly, could you help us understand the size of the international shipment timing effect for Humira in terms of how much growth it took off the ex-US sales?

Third, the IL-17 is about to launch in psoriasis, I think it is about 15% of Humira sales. Could you help us understand the impact you feel those will have, or otherwise, on your business for next year?

And then lastly on debt, $9 billion of long-term debt. Can you help us understand your plans to restructure that and that is with respect to potential capital employment going forward.

So mark on the dynamics in gross margin, I guess this is the simple way to think of it. We in the quarter had about a 1 point headwind from related to TriCor/Trilipix LOE event.

We made that up and then some. Our ability to make that up was driven probably somewhat equally by product mix and cost efficiency as well as including the royalty stack. I'm not going to get into specifics on how much that royalty stack impacted it.

What I can tell you, though, is it is not all royalty stack. We have a lot of activities going on right now to streamline our supply chain and our overall manufacturing base.

In terms of as this thing plays out over the LRP, we have never been specific on what the exact royalty stack is. Some have estimated it is between 5% and 10%. We said those are good estimates.

And one of the benefits of that royalty stack is it will be largely removed at the point that we lose exclusivity on Humira. So that's an important upside for the product when we come to that point in time.

In terms of the impact of international shipments on Humira, that put some volatility quarter to quarter in the ex-US Humira number. This quarter it was about 1%. It wasn't huge.

Debt question.

From a debt perspective what I would tell you is we are pretty happy with our balance sheet right now. We are building cash. We are looking at ways to deploy that cash whether it be through M&A or giving it back to the shareholders as you have seen in our recent announcements.

I don't think there is any compelling reason to necessarily reduce the amount of debt on our balance sheet so as those maturities come up we are looking to term those things out. But as a whole we think we've got a very very strong balance sheet.

On the IL-17, we study every new mechanism that comes into this market and develop a strategy to deal with that mechanism going forward. We understand the IL-17 very well in the data that we have seen so far.

What I would tell you is if you look at many other mechanisms that have come into all the different categories we compete in whether it's RA, or GI, or psoriasis, this is a tough market to break into and gain significant share. Because there is a reluctance to ultimately go to a new mechanism very quickly.

These are very potent drugs that have sometimes unknown side effect profiles until they are in large populations. And that tends to make physicians more reluctant to switch en masse patients and so we view IL-17 as a good mechanism. There is no question it is a good mechanism.

But we view it early on it will be like other mechanisms that have come into this market. It will probably be more for failures, TNF failures, and eliminate some of that rotation that would have occurred. But we don't assume that it's going to have a dramatic impact on our psoriasis share going forward.

Thank you.

All right, thanks Mark. And that concludes today's conference call.

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