艾伯維 (ABBV) 2015 Q1 法說會逐字稿

Good morning, and thank you for standing by.

Welcome to the AbbVie first-quarter 2015 earnings conference call.

(Operator Instructions)

I would like to now introduce Mr. Larry Peepo, Vice President of Investor Relations.

Good morning and thanks for joining us.

Also on the call with me (technical difficulty) 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 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 2014 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'll now turn the call over to Rick.

Thank you, Larry.

Good morning, everyone.

Thank you for joining us for our first-quarter 2015 earnings conference call.

Today we are pleased to report strong results, with adjusted earnings per share of $0.94, up more than 32% from the first quarter of 2014 and significantly exceeding our guidance range for the quarter.

Our performance included strong operational sales growth of nearly 18%.

We delivered these results with growth across a number of products in our portfolio, including uptake of our new HCV therapy, Viekira, as well as strong growth from HUMIRA, Synagis, Synthroid, Creon and DUODOPA.

We continue to see strong underlying demand for HUMIRA, with accelerating prescription growth and continued market share gains.

We also saw improvement in gross margin to 82.9% and we continue to see our investment in the business deliver strong results.

Based on our outperformance, we've raised our full year EPS guidance range for 2015 by $0.05, reflecting our strong underlying business performance year-to-date and the expected continued positive trends through the remainder of the year.

And we have also done this despite the negative impact of foreign exchange.

In addition to our strong financial results, we also have advanced several of our most important strategy priorities during the quarter.

Since the start of the year, we have achieved a number of important regulatory and development milestones, including the EMA approve of our interferon-free HCV treatment, the regulatory submission and priority review of our two DAA ribavirin-free once-daily combination for genotype Ib HCV patients in Japan.

The US regulatory approval for DUOPA, our therapy for advanced Parkinson disease and the US and EMA regulatory submissions for ZINBRYTA, our novel treatment for relapsing/remitting multiple sclerosis.

We also reported positive top line efficacy data results from the first Elagolix pivotal trial in endometriosis.

Recently, our partner, Galapagos, reported positive data on our partnered selected JAK 1 compound.

Each of these milestones continued to underscore the advancement and the robust nature of our mid- and late-stage pipeline.

Importantly, we recently announced the acquisition of Pharmacyclics, a strategic addition to our business that will provide significant benefit for our shareholders and the patients which we serve.

Pharmacyclics acquisition will add another compelling growth platform to add these existing strong prospects in immunology and virology.

It will accelerate AbbVie's clinical and commercial presence in oncology, broadening our portfolio in hematological oncology, an attractive and rapidly growing market in a segment where we have several other assets in mid- and late-stage development.

While strategically important, this acquisition will also drive strong financial benefits.

It further diversifies our revenue base and significantly enhances our revenue growth across our long-range plan.

We expect the transaction will be accretive beginning in 2017 and significantly accretive in the years that follow.

Specifically, as we have outlined, we expect accretion in excess of $0.60 per share in 2019, ramping to more than $1 per share by 2021.

The addition of Pharmacyclics will augment AbbVie's already strong position and growth prospects.

We remain on track to complete the acquisition in the second quarter.

When we launched AbbVie as an independent company nearly 2.5 years ago, it was our stated goal to build an innovation-driven, patient-focused biopharmaceutical company which could driver strong sustainable performance over the long term.

Our efforts have been focused on developing a culture of innovation and building a strong and talented team, driving strong performance from our current portfolio and building a robust pipeline of innovative new drugs and enhancing our efficiency and delivering outstanding returns for our shareholders.

As we look back at our performance, we are pleased to say that we have made significant progress towards all of these objectives.

Our 2015 guidance underscores our goal of driving industry-leading growth this year, as we expect, earnings-per-share growth of 27% at the midpoint of our guidance range.

Our strong first-quarter performance certainly supports our ability to deliver on this objective and we expect to be among the top performers over our long-range plan.

In fact, given our execution across a number of fronts and the strategic actions that we have taken in the business and now the addition of Pharmacyclics, we are well positioned to generate top-tier growth through the rest of the decade and beyond.

As we look at our business following the acquisition, we are strategically positioned with a number of compelling growth platforms.

Clearly, we are enthusiastic about our oncology franchise.

The acquisition of Pharmacyclics is highly complimentary with our existing oncology pipeline, which is comprised of five late-stage assets poised to launch over the next few years.

This includes our BCL-2 inhibitor, Venetoclax, and our duel PI-3 kinase inhibitor, Duvelisib, both being investigated for the treatment of a wide range of blood cancers.

So, our portfolio will include three novel and promising mechanisms for the treatment of hematological malignancies, BTK inhibition, BCL-2 inhibition, and PI-3 kinase inhibition.

We intend to move quickly to explore combination therapies that have the potential to significantly elevate the standard of care and improve efficacy in hematological cancers.

The combinations have the potential to reduce or eliminate the toxic chemotherapeutic agents currently being used in the management of these conditions.

Our oncology pipeline also includes Veliparib, our PARP inhibitor, being investigated for a wide range of solid tumors and ABT-414, our antibody drug conjugate for glioblastoma multiforma, both of which have demonstrated signals of efficacy.

We are also partnered with Bristol-Myers Squibb on Elotuzumab, in late-stage development for front-line and relapsed/refractory multiple myeloma.

We will see data from a number of our oncology programs as the year progresses, including data from Venetoclax in relapsed/refractory CLO patients with 17-P deletion, as well as mid-stage data on Veliparib in non-small cell lung cancer and Phase III data on Elotuzumab in relapsed/refractory multiple myeloma.

We also anticipate numerous readouts on Imbruvica, including data from the RESONATE-2 study in CLL, Phase III mono therapy data in relapsed/refractory mantle cell lymphoma and additional details from the Phase III trial in relapsed/refractory CLL.

Our combined late-stage oncology franchise will represent a significant source of growth for AbbVie in the coming years, with peak year sales estimated to exceed $15 billion.

Our virology franchise will also be a growth driver for AbbVie going forward.

With the launch of Viekira, we have established a meaningful position in HCV, another large and growing category.

Our global launch of Viekira, which has been underway roughly three months, continues to perform within our expectations.

As a reminder, the racking services do not capture all the sources of prescription data for Viekira, including certain managed-care organizations and a number of government entities.

When all the sources are considered, Viekira weekly prescriptions are tracking well ahead of reported levels.

Our international launch is progressing faster than anticipated and discussions with government payers in various countries are underway and advancing rapidly.

We are pleased with the pace of our progress internationally, which is tracking ahead of our planning assumptions.

This will lead to a higher level of international sales this year than we originally expected.

Viekira will be a significant product for us and we continue to expect an annualized run rate of more than $3 billion in global sales by the end of 2015.

Our current position will serve as a strong base from which we will launch further enhancements and innovations.

Our next generation HCV program continues to progress well.

It is our goal with this program to bring to market a ribovirin-free once daily pan-genotypic combination.

Our next generation HCV program is generating promising early SVR data.

Earlier this month, we disclosed preliminary results from a 79-patient Phase IIB study of next generation protease inhibitor ABT-493 and our next generation NS-5A inhibitor, ABT-530.

The interim data showed that treatment with the two compounds in non-cirrhotic genotype1-A and 1-B patients receiving the ribovirin-free therapy for 12 weeks resulted in SVR-4 rates of 99%.

Full data from the Phase II studies will be presented at future medical meetings.

Evaluation in other genotypes continues to progress with encouraging results.

We are also evaluating shorter durations of therapy with this combination, with data expected later this year.

We remain on track to advance our next generation HCV program into Phase III later this year, with commercialization expected in 2017.

The HCV market is significant.

We expect it will remain a large and attractive opportunity for many years to come.

Our immunology franchise represents another compelling growth platform for AbbVie.

Clearly, we have established a strong leadership position in the immunology market with HUMIRA, the world's leading anti-TNF.

Behind HUMIRA, we have a rich pipeline of mid- and late-stage immunology assets in clinical development.

This includes our two selected JAK 1 inhibitors, currently in mid-stage development.

As I mentioned, our partner, Galapagos, recently announced promising top-line 12-week data from the first of two Phase IIB studies in RA, supporting our thesis that JAK 1's specificity can drive high levels of efficacy while maintaining an appropriate safety profile.

We look forward to seeing additional data from the ongoing trials, as well as results from a mid-stage study of our internal JAK 1 inhibitor, ABT-494, as the year progresses.

We are also working to advance several other mid-stage immunology programs, including ABT-122, our anti-IL-17 TNF combination and an anti-IL-6 nanobody, among others.

All our R&D efforts are focused on advancing the standard of care of each of our areas of immunology leadership.

As we have said, we expect HUMIRA to continue to drive strong growth and significant cash flow generation for many years.

We have a multifaceted strategy in place, which we believe will allow us to protect and grow our immunology position.

We have two new indications in late-stage develop, as well as a new formulation currently under regulatory review in the US and in Europe.

We have a robust portfolio of intellectual property protecting HUMIRA, which we intend to enforce if infringed by a bio-similar applicant.

We have hundreds of patents globally, covering the formulation, manufacturing and indications for which HUMIRA is approved.

As the first fully human mono-clone antibody approved, the extensive clinical trial work, development and investment we undertook lead us to many important inventions with HUMIRA.

We have important intellectual property covering these innovations and we intend to enforce this intellectual property.

We recently received a commission decision in Europe regarding compliance with the pediatric investigation planned for HUMIRA.

With this decision, we will now apply for a six-month extension to our composition of matter patent, extending the date for this key European patent from April, 2018 to October, 2018.

Beyond the pipeline assets I have already mentioned, we have a number of other compelling pipeline programs that have potential to deliver significant peak year sales.

All told, we have more than 40 active development programs underway, spanning large and growing specialty categories.

Our late-stage pipeline has been significantly de-risked as a result of ongoing clinical work, already demonstrating safety and efficacy.

This includes ZINBRYTA, which, as I mentioned, is currently under US and EMA regulatory review for relapsing/remitting multiple sclerosis; Elagolix, which is our compound in Phase III development for endometriosis and Phase IIB for uterine fibroids; Atrasentan, our internally discovered compound in late-stage development for diabetic kidney disease; and a number of other attractive assets in mid- to late-stage clinical trials.

We have a number of attractive growth platforms, which sit within the context of a company that consistently generates strong financial results and consistently meets financial commitments.

We believe AbbVie has a unique investment identity, as we offer promising pipeline prospects, along with strong growth and compelling shareholder returns.

Our business generates significant cash flow, which we expect will grow in 2015 and beyond with new product introductions.

To that end, earlier this year we increased our quarterly dividend to $0.51 beginning with the dividend payable in May.

This increase follow an increase of nearly 17% late last year.

Since the inception as an independent company in 2013, we have increased the dividend nearly 28%.

We intend to maintain our strong commitment to a growing dividend going forward.

Additionally, we've utilized our strong cash flow to enhance our pipeline through licensing and partnering activities.

We view these activities as an important component of our R&D strategy and we expect to continue to augment our pipeline in the coming years.

Finally, operating margin expansion is a key priority for AbbVie.

We have initiatives in place to improve efficiency across our operations and we have delivered significant improvements in our operating margin profile since we launched in January of 2013 to the current level today of just over 40%.

We are forecasting additional improvements in operating margin profile in 2015, reflecting these efforts as well as favorable leverage across our income statement.

We remain committed to improving this metric across our long-range plan.

In closing, since AbbVie became an independent company, we have been focused on executing our key strategic priorities.

We've established a strong track record, consistently exceeding our financial commitments, generating strong shareholder returns and driving leading performance of HUMIRA and other products in our portfolio.

We've also built a promising late-stage pipeline, which will fuel our future growth and we've gained regulatory approval on several important products and advanced many more.

We have set a strong foundation for the Company.

The addition of Pharmacyclics significantly strengthens our long-term growth prospects, positioning AbbVie for top-tier growth through the rest of the decade and beyond.

With that, I'll turn the call over to Bill for some additional comments on the first-quarter performance, as well as our second-quarter outlook.

Bill?

Thank you, Rick.

This morning I will review the first-quarter performance and provide an update on our outlook for the remainder of 2015.

As Rick said, we are very pleased with the strong quarter we delivered.

Reported sales were up 10.5% despite a challenging foreign exchange environment.

Operational growth on the top line was a very strong 17.8%.

HUMIRA delivered global sales of more than $3.1 billion, up 26% on an operational basis.

We continue to see strong momentum from HUMIRA, with robust growth across categories driving all-time high market share for the brand.

US HUMIRA sales increased 39.6%, driven primarily by prescription volume increases in excess of 20% and favorable pricing impacts.

Wholesale inventory remained constant at fourth-quarter 2014 levels of less than half a month.

International HUMIRA sales grew 14.8% on an operational basis, excluding a 14.6% unfavorable impact from foreign exchange.

As occurs periodically, the first quarter was favorably impacted by the timing of shipments in select markets.

For the full year 2015, we continue to expect global HUMIRA sales growth in the mid-teens on an operational basis.

International sales of Synagis were $335 million in the quarter, up 8% on an operational basis.

Synagis, which protects at-risk infants from severest respiratory disease, is a seasonal product, with the majority of sales in the first and fourth quarters.

We continue to expect 2015 Synagis sales growth to be similar to 2014 performance.

Global Viekira sales in the first quarter were $231 million.

In the US, many of our contracts have start dates in the April and May time frame and we expect those to begin to ramp in the second and third quarters and build for the remainder of the year.

Our commercial efforts are focused on driving strong penetration in the AbbVie exclusive accounts.

We have been successful in this regard, with our largest contract, which has been in place since the beginning of the year.

Internationally, we have been able to secure reimbursement in many markets faster than we had originally anticipated.

As a result, as Rick indicated, we expect a higher mix of international sales this year than originally forecasted.

Globally, we continue to expect an annualized run rate of more than $3 billion in sales by the end of 2015.

Global Lupron sales were $192 million in the quarter, up 3.8% on an operational basis.

For the full year 2015, we expect Lupron sales to be roughly in line with 2014 sales.

US sales of Synthroid were $186 million, up 18.8% versus the prior-year quarter.

For the full year 2015, we expect Synthroid sales to be roughly flat from 2014 levels, in line with market trends.

AndroGel sales $153 million, down significantly due to continued marked declines and the entry of generic competition for 1% formulation.

As we've said previously, we expect AndroGel sales of less than $500 million for the full year 2015.

US Creon sales were $127 million in the quarter, up 18.8%.

We continue to capture the vast majority of new prescription starts in the pancreatic enzyme market and we expect double-digit sales growth for Creon in 2015.

Sales of Duodopa, our therapy for advanced Parkinson's disease, grew 19.5% on an operational basis in the quarter.

We expect continued double-digit growth for Duodopa, with a modest level of US sales in 2015.

Our US launch will be getting underway in the second and third quarters and as we've said previously, we anticipate a gradual ramp for product sales in the US this year as physicians grow familiar with the product.

The foreign exchange environment has clearly been challenging for our industry over the last few quarters, and, like our peers, we saw a negative impact on our top line in the quarter as a result.

While we are not completely immune from currency swings, our global business structure and hedging actions we have taken will allow us to deliver our bottom-line commitments despite foreign exchange headwinds and protect shareholders from the negative impact.

As a result of this mitigation, we will see a favorable effect on our margin profile.

We showed continued improvement in gross margin as a percentage of sales in the first quarter.

The adjusted gross margin ratio was 82.9%, up 450 basis points from the prior-year quarter, driven by the effects of exchange, product mix and operational efficiencies.

Adjusted R&D was 16.1% of sales, reflecting funding actions in support of our mid- and late-stage pipeline assets.

Adjusted SG&A was 26.7% of sales in the first quarter, down from the prior year, contributing to continued improvement in operating margin leverage.

The adjusted operating margin in the first quarter was 40.1% of sales, up 620 basis points versus the prior-year quarter.

The majority of this improvement was driven by product mix and efficiencies.

We are on track to deliver an operating margin profile in excess of 40% in 2015.

Adjusted net interest expense was $67 million and the adjusted tax rate was 22.3% in the quarter.

First-quarter adjusted earnings per share, excluding non-cash amortization expense and specified items, were $0.94, up 32.4% year-over-year and exceeding our previous guidance range.

On a GAAP basis, earnings per share were $0.63.

As Rick communicated, this morning we increased our adjusted earnings per share guidance range for 2015 by $0.05.

Our adjusted EPS guidance range is now $4.10 to $4.30.

This range reflects EPS growth of 23% to nearly 30%.

The increase in guidance is reflective of the strong underlying performance of the business that we see playing out this year, and we have raised our outlook despite the increasingly negative impact from foreign exchange.

We are now forecasting roughly 7% negative top-line impact from currency this year, which we have covered in our guidance increase.

Our 2015 adjusted guidance range includes the previous communicated $0.20 dilutive impact of the Pharmacyclics acquisition.

It excludes $0.53 of amortization and specified costs, including Pharmacyclics transaction costs booked in the first quarter.

We plan to communicate specific profile guidance for the combined company, as well as the 2015 accounting impacts of the transaction, on our second-quarter call in July.

Regarding the second quarter, we expect adjusted earnings per share of $1.04 to $1.06.

This excludes roughly $0.09 of specified items and non-cash amortization and includes a modest amount of Pharmacyclics dilution, based on partial quarter impact.

So, in conclusion, we are very pleased with our out performance in the first quarter and its impact on our full-year projection.

We have driven strong top- and bottom-line growth and delivered operating margin expansion, while also advancing on our strategic priorities.

This puts us in a strong position to deliver industry-leading growth this year.

With that, I will turn it back over to Larry.

Thanks, Bill.

We will now open the call for questions.

Ilan, we'll take our first question, please.

Thank you.

(Operator Instructions)

Our first question is from Mark Schoenebaum from Evercore ISI.

Hey, guys.

Thanks a lot for taking the question.

Congratulations on a fantastic P&L management this quarter.

Rick, I heard during your opening comments you talked a little bit about your long-range plans, kind of qualitatively about operating margin improvement as part of your long-range plans.

What I'd like to know, perhaps, is can you -- are you willing or can you yet quantify where you see operating margins going over the medium to long term?

And if you can't do that today, which would be understandable, do you have plans to maybe schedule an analyst meeting or some other venue at which you might communicate a long-range plan to investors?

Also, can you comment on whether or not your assumption for operating margin improvement over the medium to long term is, or is not, dependent on revenue?

In other words, can you commit to your investor base that AbbVie can and will expand its operating margin, even if the top line were to come in below your internal expectations?

Obviously, there the focus would be the HUMIRA bio-similar erosion curve.

Thanks so much.

Good morning, Mark.

This is Rick.

Thanks for the question.

I think probably the best way to answer your question is to talk for a few moments about the philosophy by which we manage the business and how we think about investment and how we think about revenue, and ultimately how we try to deal with changes in those dynamics.

Let me start by saying, I'm sure you understand that our business strategy is really designed to maximize both short- and long-term profitability of the business, getting shareholders strong returns and strong value over that long period of time.

That philosophy really plays out in how we look at investment decisions -- whether we're increasing investment or we're decreasing investment.

What I would say is, this management team at AbbVie, that came out of Abbott, has always been disciplined in our approach to resourcing opportunities, as well as overall P&L management.

We manage the business with the objective of driving robust growth in both revenue and EPS, but at the same time, improving operational efficiencies.

And I think you have seen some of that and I'll talk more about that in a moment -- and costs, in order to maximize shareholder returns, but again, short-term and long-term.

The examples I would give you is this: take a look at what you have seen play out since we launched as a new Company.

For example, our gross margin profile have improved from 76.2% in the first quarter of 2014 to 82.9% this quarter.

Additionally, if you look at despite building the infrastructure that was necessary to be an independent public company, operating margin profile has improved from 33.7% in first quarter of 2014 to 40.1% in the most current quarter.

So we have delivered significant improvement in both of those metrics and we are committed to continuing to do that.

Importantly, we have delivered six points of operating margin profile improvement in the last four quarters.

The other thing I would say is, we have seen a number of comparisons to various peer groups as it relates to AbbVie.

I think it's important to recognize that no two companies are identical when it comes to product mix, geographic coverage, the size of the market that they operate in, the brand's responsiveness to investment, and many other factors.

I realize it is tempting to do these macro comparisons and I would even agree to some extent that it's instructive at some level.

But I'd also tell you there are limitations and flaws in doing it.

I can tell you that we benchmark and compare ourselves to many companies and we believe that we compare favorably to most of our peers.

I'm going to give you a couple of examples here.

When you compare AbbVie to the other large-cap pharma peers -- Bristol, Lilly, Merck, Pfizer -- what you would see is the following: our gross margin profile is on average approximately 6 points higher.

Our R&D profile, on average, is 5 points lower.

Our SG&A profile, on average, is 3 points lower.

And our operating margin profile is about 13 points higher.

Our geographic footprint is similar to many of those peers, but our product mix is different.

They have more primary care.

Then when you compare AbbVie to the pure biotech peers -- specifically Amgen, Biogen, Celgene -- what you'd see is that our gross margin profile is, on average, 6 points lower, and that's due to differences in the product mix.

Our R&D profile is approximately 4 points lower.

Our SG&A profile is approximately 5 points higher.

That is driven by geographic distribution of our revenues, especially the percentage of revenues that come from international sales.

As you probably know, it's about 45% for us and many biotech companies have 70% of their revenues coming from the US.

There are other anomalies that you have to be careful, such as some biotech companies have a definition of adjusted SG&A that excludes the impact of equity-based compensation, which we include.

There are other accounting differences as well.

So, finally, when you compare to this group and you look at our operating margin profile, it's approximately 7 points lower, as it exists today.

But the conclusion of assuming that, that is related to investment spending is not accurate.

In fact, I would tell you it's misleading.

If you look at our total investment spending, R&D and SG&A, our investment spending on a profile basis is slightly below those peer companies.

The entire difference is in the gross margin profile, because of the product mix.

We have shown significant improvement there with more to come, and we are committed to deliver more, but that is the fundamental difference between those two peer groups.

Again, as we look at this data, it is instructive.

On balance, I would tell you that, based on the geographic footprint that we have that is larger than many biotech companies, the product mix and investment in R&D and SG&A, the analysis shows us that we are favorable to both of those peer groups.

In the end, what really matters is what investment decisions do you make in the business and what is the return that you ultimately get for them.

Can you maximize the short- and the long-term value for the shareholder?

Our philosophy is, we invest in businesses and the brands to maximize that value, meaning we increase investment when we can drive a strong return and we reduce investment when we can't, or our product gets to the end of its life cycle.

I would tell you that I believe we do both very well.

Let me give you an example of each.

If you think about the last two years, we have protected shareholder profitability the last two years as our $2.5 billion lipid franchise went generic.

We did it by drastically reducing costs in that brand and other parts of the business.

We are doing the same thing right now on AndroGel.

It's the obvious decision for us.

I would just tell you it's the culture that we have here.

Now, let's take the opposite example of that, HUMIRA.

HUMIRA is a complex business model.

HUMIRA sales and profit contributions come from a broad geographic footprint, with about 40% of its sales coming from outside the United States.

HUMIRA has an unparalleled breadth of indications and we use a unique selling model for HUMIRA.

We utilize specialized and dedicated sales organizations for all major indications.

We manage and invest in HUMIRA to maximize its short- and its long-term value to the Company and to our shareholders.

I think it's pretty hard to argue with our success.

When we took the Company public a little over two years ago, HUMIRA was a $9 billion product.

Today, in 2015, HUMIRA is a $14 billion product.

$5 billion of growth in 2.5 years, despite the foreign exchange headwinds.

The brand is 55% larger.

If you take Enbrel and Remicade together, over that same period of time, HUMIRA grew almost twice as much.

So we think the performance speaks for itself.

I can tell you that, based on the performance, the strong potential for future continued growth, accelerating script trends in the US, and strong international growth, cutting HUMIRA spending today is not a prudent long-term strategy for us.

Finally, I would make two last points.

We have been very clear that we are committed to driving strong continued improvement in operating margin profile.

You saw that this quarter, and we are going to drive further improvements in 2015 and across the long-range plan.

Our goal is to drive strong growth and operate as efficiently as we possibly can to maximize profitability.

We are not going to make a prediction right now, because we've just made a significant acquisition, and we need to start to integrate that acquisition and we will be in position to be able to communicate things after that.

Second, I will get to the final part of your question, because I think what you are really trying to ask me is, if there was some unforeseen surprise around HUMIRA, how would we react to that?

Let me begin by saying the following: we do not in any way expect that type of an event to happen.

In fact, I tell you quite the contrary.

We anticipate HUMIRA will be a growth driver for us for many years and our investment in new indications like HS and uveitis speak volumes for our confidence.

However, to answer your question, if the bear scenario played out and threatened to materially impact the profit contribution of HUMIRA, we would apply our investment philosophy in an appropriate manner.

We would take prompt and appropriate action to reduce our expense base accordingly, with an eye to minimize the impact for the investors.

To us, as I said before, that is the obvious strategy.

It's part of our responsibility to shareholders as Management.

As a new company, we have met or exceeded expectations in every quarter of our existence, including this quarter.

We take our responsibility to deliver on our commitments and our performance to shareholders very seriously.

If we saw any unforeseen event impact the business, we would aggressively pursue actions to preserve profitability.

That is part of the culture and the commitment that we have.

In fact, I tell you, we are doing that right now.

We are protecting shareholders against significant foreign exchange impact.

So that is the philosophy we run the business.

Hopefully, that answered the question that you asked.

Thanks for the very thorough answer.

I really appreciate it, Rick.

Look forward to more communication after PCYC closes.

Next question is from Jami Rubin from Goldman Sachs.

Thank you.

I don't want to beat a dead horse.

Obviously, there's been a lot of focus on operating margins, but Rick or Bill, maybe you can comment on our math here.

Clearly, we see the improvements in gross margins and much of that will come from royalties going away on HUMIRA as R&D seems to be in line with other large biotech peers.

But SG&A seems to be where things appear to be a bit out of kilter.

If I do a bottoms-up analysis on HUMIRA, it would seem that it would be difficult to spend more than $1 billion, maybe $1.5 billion if you really stretch it.

That leaves about $4 billion to $4.5 billion for the rest of the portfolio.

When I look at the rest of the portfolio -- Synagis, Lupron, Synthroid -- these are drugs that I don't think require active promotion and I can't imagine requires the multi-billion dollars in expenses.

Obviously, there is other stuff thrown in there, but when I bring it all back to where we started out here, it seems that there is about $2 billion in excess spending.

Can you comment on this?

Is there anything structural that would prevent you from eliminating that without really touching the HUMIRA spend?

Maybe another way to go about this is that, is there anything structural that would impede you from achieving large-cap biotech operating margins, which, in the next couple of years, are forecasted to be in the low 50% range?

Thanks.

Well, first, Jami, I disagree with your analysis on the investment expense, because if I take your own report and I add together the SG&A and the R&D spend for those three companies that I mentioned, we are slightly below the total investment when you include SG&A and R&D.

It's a question of how you distribute your investments.

I'd say the second thing is, in many cases, we have a broader portfolio of products and a broader geographic spread of our products than some of those companies do.

Is there anything structural?

No.

There's nothing structural.

Obviously, we have a geographic footprint that's much larger than many of those other companies.

We believe that is a competitive advantage.

As far as HUMIRA spending is concerned, we obviously do bottoms-up budgeting every single year.

We justify what we are going to spend.

I would tell you that the selling model that we have is somewhat unique in the industry.

But I'd also tell you that the performance that it's delivering is unique as well.

And products don't sell themselves.

So at the end of the day, we believe we are getting a good return out of the investment that we are making.

And we are balancing our ability to be able to perform and invest long-term as well as short-term to give a good return, and we make tweaks all the time.

I would also say that when you look at some of those brands, the broad conclusion that they don't require promotion is not an accurate conclusion.

Lupron has promotional activities associated, as an example, with it.

So, generally speaking, what I would say is that there is nothing structural that would cause us not to be able to make significant changes.

And as I mentioned in my comments to Mark, if we were in a situation where ultimately that was something that we believed was in the best long-term interest of shareholders, then we would make that change.

But we are certainly not in that position now.

You look at our performance this quarter, we are growing rapidly.

We expect to continue to grow.

We have a number of pipeline drugs that we believe will be approved over the course of the next two years.

We're certainly going to put ourselves in a position to be able to launch those drugs and be effective.

And we're going to balance the investment we're making in other areas against that investment to try to be as efficient as possible.

And we believe that is the appropriate way to run the business.

We don't believe it is appropriate to try to hit some margin target of whatever the number is by cutting R&D or productive SG&A.

We don't think that is in the long-term interest of the shareholders.

Okay, thank you.

Thanks, Jami.

Next question is from Jeff Holford from Jefferies.

Thanks very much.

I have got three questions.

The first is a very short one.

Just wonder if you can comment a bit more in terms of the gross margin uplift you've had there?

Just give us a bit more breakdown in terms of what was mix, what was efficiency and what was FX?

Second, if you could comment around, there have been quite a few experts speaking around patents on HUMIRA, really focusing on dosing and formulation patents specifically and potential weakness there.

Would you say that, that is the key area of the IP portfolio to focus on, or are there potentially other stronger areas that aren't being discussed?

Then lastly also on IP, I wonder if you can talk to any of the IP that you have in the areas of Alzheimer's, (inaudible) antibodies and just tell us a little bit more around that.

Thanks very much.

Jeff, it's Bill Chase.

I will start with your gross margin question.

I'm actually going to expand it to operating margin as well, because exchange impacts those profile metrics differently.

On the gross margin basis, exchange made up a little over half of the improvement in the quarter.

The remainder was product mix and efficiency.

I would say you could split those, the remainder two-thirds, one-third.

On the operating margin line, where exchange has less of an effect, what we saw was about a one-third impact of exchange and the rest being leverage on the P&L product mix and efficiencies.

Thank you.

This is Laura.

I will take the question on IP.

As we have said before, we have a robust portfolio of IP that covers a wide variety of patents, including manufacturing patents, formulation patents, process patents, and patents that cover virtually every indication for which HUMIRA is currently approved.

We think these patents have a very broad applicability to any bio-similar application and the earliest of these patents expires in 2022.

When thinking about these patents, it's important note that HUMIRA was the first fully human monoclonal antibody.

As such, little was known about how to use fully human monoclonal antibodies, and the work that we did in the area was foundational.

Collectively, we think these patents were the subject of extensive prosecution in the patent and trademark office over nearly a decade.

And we think, given the innovative nature of our work and the rigorous prosecution, that the patents are strong and will withstand challenge.

Who wants to talk about the Alzheimer's IP?

With respect to IP -- this is Mike Severino.

With respect to IP in Alzheimer's disease, we are active from a research perspective in a wide range of areas and we're active in neuroscience as well and that work generates IP.

It has done so in the past and it will continue to do so in the future.

I think you will see us continue to pursue research activities in this area over time.

Yes, we just haven't provided a lot of detail there yet, Jeff.

Okay.

Thanks very much.

Thank you.

Our next question is from Marc Goodman from UBS.

Yes, on the Viekira overseas, can you give us a sense of what countries the growth came from?

And just what new countries are coming on, so we can get a sense of just the geographical mix there?

And then you mentioned Atrasentan.

Can you give us an update on that product?

We haven't talked about that in a while.

Where is it?

When are we going to see data?

Third question is, why are there still such significant separation costs that you are excluding from the numbers, given that we are a couple of years out from the separation from Abbott?

Thanks.

Okay.

This is Rick.

I will talk a little bit about the international rollout.

You know, obviously, we have launched in a number of European countries and a number of other select countries outside of Europe.

Germany is a good example of one that has gotten significant uptake.

But you will see Italy coming online, Spain has come online, and a number of other ones have come online.

It's the major European countries that you would expect to be the greatest value.

Then we are assuming Japan we will see in the fourth quarter as well.

This is Mike Severino.

With respect to Atrasentan status -- that's our molecule that is being studied in diabetic neuropathy.

That is progressing well.

It's in a Phase III study.

That is an outcome study and it's event-driven.

It's hard to make exact predictions about when it will read out.

But I think those data will continue to mature over the next few years, and so I think you can expect to hear more from it in that time frame.

I think it's fair to say, though, because it's an outcome-driven trial, this trial will take a significant period of time to hit the number of events, based on the end point that we have assumed.

Yes, that's correct.

Several years.

Marc, on separation expenses, when we separated from Abbott, we operated under a number of transition service agreements that generally had a two- to three-year timeline.

The majority of those we are off of, with the exception of two large ones.

That has to do with the rollout of the existing back office in Abbott and how quickly we could create a new back office.

We have made great progress on that, rolling out a very efficient shared outsourced model, but we are not completely done with that.

We will be done at midpoint of this year.

The other major initiative, as you can imagine, is disentangling the IT environment and infrastructure in general, is extremely complex.

That will be done by the third quarter.

Those are the majority of the costs you're still seeing coming through.

Our next question is from Alex Arfaei from BMO.

Congratulations on the good quarter.

Rick or Laura, the intellectual property, the HUMIRA intellectual property that you referred to, will that protect you against bio-similars manufactured outside the US?

In other words, are there other ways for bio-similar companies to circumvent those patents with ex-US manufacturing?

And second question on HUMIRA -- the US growth is truly impressive.

You mentioned, I think, all-time peak market shares.

Could you put numbers around those market shares and major indications?

And then finally, on hep C, why did you exclude cirrhotics in your Phase II?

And will you have cirrhotic data later this year?

Thank you.

I will take the IP question first.

With respect to the IP, that patents that I am talking about broadly are global patents.

We have global patents covering manufacturing and process.

The specific indication patents that I referenced are US patents.

We have patents pending outside the US right now.

Those patents have not issued yet.

But we think the portfolio we have is very broad and we think we will have some protection outside the United States as far as, certainly right now, manufacturing process enformulation.

In terms of market share, Alex, let me give you just a quick snapshot.

Rheumatology -- we've got about a roughly 25% share right now.

In dermatology, it's approaching a 40% share.

In the gastro space, it's around 45% market share for us.

So very strong market share.

This is Mike Severino.

With respect to the our next generation ACV program, I think you are referring to comments we made about a 99% SVR for response rate in genotype 1 non-cirrhotic patients.

Those are simply the first data that we have available.

We have not excluded cirrhotic patients from our Phase II program.

You will see our Phase II program continue to mature over the course of this year and we will be providing updates as appropriate.

Thank you.

All right.

Thanks, Alex.

Next question, please.

The next question is from Vamil Divan from Credit Suisse.

Thanks for taking the questions.

Just a couple more on the hep C side.

One -- can you share your internal sense of the market share breakdown right now?

It's obviously a tougher market than usual for us to see from the outside.

Between yourselves and Gilead, any color there in terms of the breakdown would be helpful.

And then in terms of the next gen, we're seeing some good data over here at EASL, definitely from competitors.

How do you think about the duration there?

Does yours need to be an eight-week regimen?

Are you looking maybe at even potentially shorter than that?

How do you think about that, given what the competitors are showing over here?

Okay.

This is Rick.

I will cover the market share piece.

We are obviously still pretty early on into the launch.

We're three or four months into the launch.

Maybe the easiest way to characterize it is this: if you actually look -- I am going to give you a slightly different number than we've given you in the past because it will relate better to the overall market share.

If you look at what we have under contract now in preferred or exclusive contracts total -- in other words, there is still a percentage of covered lives that have not contracted yet -- and that percentage actually has stayed pretty constant for the last 30 or 45 days.

That's why I am going to give you a total market share.

You would say we have about 21% of the market that is under contract where we are a preferred agent within those accounts.

The vast majority of those have come online roughly in the March time frame.

They are actually spread for March, April, May.

Obviously, ESI came on early on, and we have now demonstrated within the exclusive that we have been in for 90 days that we are able to achieve high share.

But ultimately, what will deliver the overall share in the US market will be ramping up in these other preferred or exclusive accounts.

And we are not going to be able to see that data probably for another 90 days or so as they come online and we ramp.

The best way to think about the US just qualitatively would be that you will see this, essentially this lighter ramp in the first half of the year for the US and a faster ramp in the second half of the year.

Then the parity accounts, obviously, we've had a number of those under contract and we are ramping there.

They are not ramping as high as the exclusive accounts did.

So, the blended share will be determined.

It's really too early, I think, to give you a prediction yet.

But within 90 days or so I think we will be in a better position to be able to predict that.

But it will be a blended share between what we are able to drive in these preferred accounts, the level we get in parity accounts, and then obviously, in the areas where Harvoni is contraindicated, we are getting some share out of their exclusive accounts.

It would be the blend of all of those.

But now I would say you should think about it in the teens right now, the low end of the teens, but should ramp from there.

All right.

This it is Mike Severino.

With respect to data coming out of EASL and short-course therapy in the future for hep C, I think it's still a bit early to say where various regimens around the industry are going to sort out with respect to treatment duration.

We have seen hints that six weeks may be possible, but those have sort of come and gone in the past and I think we are going to need more data to know where treatment durations will really sort out over the next few years.

What we do know is that it's very important to have high response rates, very high cure rates, and I don't personally believe that people will be willing to sacrifice a lot in terms of cure rates to shave, for example, two weeks off of treatment duration.

That is certainly the philosophy that we are taking.

I think those data will continue to evolve and we will keep a close eye on them.

With respect to our next generation program, we are going to study eight weeks.

And we will go where the data take us.

We will go as short as we think the data support, again, while maintaining those very high cure rates.

I think when I look at all the data coming out of EASL, I still see our regimen as very competitive and I think treatment durations that we are exploring are going to be appropriate for the landscape that we see out there in three to five years and beyond.

Thanks, Vamil.

We will take the next question, please.

Our next question is from Steve Scala from Cowen.

On the January call, AbbVie said it would provide more specific guidance on 2015 Viekira sales expectations as the year unfolds.

What uncertainties still exist such that a single-point full-year guidance number is not being provided now?

That is the first question.

Second question is, I thought both the ABT-199-17P deletion and the Elotuzumab readouts were supposed to be in early 2015.

What does it imply that the data is not yet available?

Lastly, what has been the tone and the substance of your conversations with partners J&J with Ibrutinib and Roche with ABT-199 post the news of the Pharmacyclics acquisition?

It would seem that there could be issues and/or concerns, and I'm just wondering if that is the case?

Thank you.

This is Rick.

I will take the guidance question.

It is specifically two things.

It's what I just mentioned a moment ago -- that many of these exclusive accounts are just now coming on.

If we look at our experience in the earlier ones, it has taken us about 90 days to get to peak share.

So we need to make sure that we can demonstrate that level of share in those accounts to be able to give you an accurate prediction, because obviously that drives a significant part of the share and the volume.

Then the second thing is, it's this issue that we described before, and that is, clearly we are having greater success than we had planned in the international markets, and so the mix is different than what we expected in our original planning process.

We need more time to see that roll out.

That is gated based on how you get reimbursement in those countries.

We don't want to give you an inaccurate number and we want to see it play out a little bit longer.

But what we do know is that we feel confident that we should be able to hit the greater than $3 billion running rate by the end of the year.

We've looked at that carefully and we've recommunicated that.

When we are at a point that we feel comfortable that we can give you a full-year estimate, we will provide that to you.

This is Mike Severino.

With respect to Elotuzumab and ABT-199, specifically the 17P del data -- the question, if I can paraphrase, is, are we on track and when can we see more data from these programs?

We are on track with both programs.

Elotuzumab, you will see an update at ASCO, so that's in the very near future.

With ABT-199 and 17P del, we are on track; we are working with the data.

Recall that this is an open label study, so we are working with the data.

And what we see is consistent with our expectations.

We will look for an appropriate venue and time frame to share details of those data externally, but we continue to have confidence in that molecule and have a view towards a regulatory submission later on this year.

On the partner aspect of it, first, let me start with J&J.

Obviously, Pharmacyclics is an independent company right now.

The relationship that they have with J&J is not something that we can interfere with or be directly involved in.

We have had communication with J&J.

It's been very, very positive.

I think we have worked with J&J in other aspects of relationships that we have had in our prior experience with Abbott, and they are a fine company.

I think the relationship will work extremely well.

I would make similar comments about Roche.

I think Roche, Genentech, we've had good relationships with and we don't anticipate any challenges in managing our way through this relationship between the two partners.

Thank you.

Thanks.

We will take the next question, please.

Our next question is from Robyn Karnauskas from Deutsche Bank.

Thanks for slipping me in.

Sure.

Two questions, I guess, for Rick.

First of all, I guess, are you opposed to an Analyst Day just to help us understand in greater depth your rationale behind the confidence in HUMIRA, how you run your business?

And the second question is, I appreciate that you are confident in your HUMIRA business, but when you talk about a disaster scenario, what is that for you?

Is that a launch of a bio-similar, or is that massive share loss?

Do you run your business like that is the possibility?

Or do you run your business like, we are so confident in HUMIRA that it's something where we are not really worried about?

Just trying to understand how do you run your business versus your confidence.

Thanks.

Okay.

Two big questions.

Thank you.

So the Analyst Day, we have kicked around the idea of an Analyst Day.

We may do something post closing Pharmacyclics.

It's obviously something we need to plan for and not only be able to talk about the other aspects of the business but talk about our oncology strategy in more detail.

I would stay tuned on that.

We think there are a number of things that we could communicate.

Kind of a summer or fall kind of time frame, I think, would be the most appropriate time and others have suggested similar suggestions to us about doing an Analyst Day.

So, that is something that we are considering.

What I would tell you on the HUMIRA situation -- it is not the launch of a bio-similar.

Obviously, we have a strategy in place that we believe will allow us to continue to drive strong performance out of HUMIRA post a launch of a bio-similar.

But what I would tell you is, we obviously have contingency plans that we have in place that we would pull the trigger on.

Remember, it's going to be not just one single launch, right?

Because HUMIRA is sold all around the world.

There will be different countries.

Obviously the US is a significant part of that, and the major European countries are another significant part of it.

But we would be evaluating every single country on an ongoing basis and we would make a determination.

I would say the disaster scenario for us would be that ultimately we were significantly unable to achieve the objective that we built into our long-range plan.

We've obviously built into the plan expectations of how we would deal with any price erosion that might occur, any share erosion that might occur, and then we have a contingency plan that basically would be built around missing that particular set of assumptions.

And you wouldn't pull it all at once; you would basically start to titrate, if you were missing, in a way, to be able to offset or mitigate any financial impact versus what you had planned for.

So, I think that is the way to think about it.

That is really helpful.

Thank you.

Thanks, Robyn.

Our next question, please.

Our next question is from Chris Schott from JPMorgan.

Thanks for the question.

First one was just on HUMIRA.

Was just interested in your perspective and how you are thinking about the bio-similar Remicade launch in Europe this year?

I guess, what are you expecting there in terms of uptake?

And how should we think about this launch as a comp that, if a bio-similar HUMIRA was to enter the market in Europe, let's say in late 2018, is the Remicade bio-similar ramp something that we should think about as a reasonable comparison there?

Second question was on leverage and business development priorities post-PCYC.

What is the sense of urgency at this point to add or build upon existing growth verticals with further in-market product acquisitions post this deal?

Is that still a priority?

Or should we think about AbbVie coming back to focusing on some of these earlier-stage, more R&D-focused transactions going forward?

Thanks very much.

Thank you.

On HUMIRA and the bio-similar launch and the Remicade bio-similar launch expanding beyond the countries that it has been in now for a couple of years -- what I would say is, we have been watching these launches carefully in the countries that they have been in for some period of time.

If you look at those countries, relatively modest share has been achieved by the bio-similar product in most of those countries.

And it's well within the expectations of what we would have assumed.

We are watching the competitive response and learning from how that competitive response works.

And I would say, so far that is consistent with what we would have expected from a pricing standpoint and a strategy standpoint.

So within the countries we are in now, where we are seeing these launches, I can tell you HUMIRA is not impacted.

We are continuing to grow patient share within those countries.

There certainly isn't any direct impact on HUMIRA within those countries where we see it today.

Is it a good metric in order to measure what we could expect with HUMIRA?

That is probably a little bit difficult to judge, because again, it all boils down to your position in the marketplace.

And I would also say that the European market and international markets are different than the US market for a number of different reasons.

So if you were to assume that a HUMIRA bio-similar would be in the US prior to the international markets, then I would say it's not a good surrogate at all to look at, because I think the US will be a very different kind of competitive situation.

Again, I think even in the European markets, each product is positioned a little bit differently within the market.

It boils down to, how does the competitive response handle the launch of that product.

That one is a little tougher for me to answer, but I would say for right now, it's tracking the way we would have expected it to be.

On the BD priorities post deal, if I understand the question correctly, are we looking to go out and find another large growth platform?

The answer is no.

We have obviously made a significant commitment here with the acquisition of Pharmacyclics and it positions us well in this sector and ultimately it was a platform play for us and it's the platform play that we would assume that we needed or wanted going forward.

So now I think you will see us go back to a similar kind of strategy that we had before, which is more looking for individual products that we can build out, the areas that we have specific therapeutic interest in, like immunology, like virology, like oncology, and continuing to add on to that.

Potentially some tuck-in kinds of acquisitions, smaller acquisitions, to add to it, but more of what you have seen from us in the past.

Thanks very much.

Thanks, Chris.

Operator, we have time for one more question, please.

Thank you.

Our final question today is from Colin Bristow from Bank of America.

Hey, guys.

Thanks for squeezing me in.

Sure.

Just to piggyback on Vamil's question, we are seeing new data sets from Merck and Gilead at EASL.

I was just curious, how do you see Viekira Pak competitive position as we move into 2016, given this intense vine competitive landscape?

And there's another one on hep C. There has been some discussion in the hep C community that real-world realized cure rates [for] Viekira Pak could be a greater [del] than they've seen in clinical trial versus Harvoni, given the complex regimen.

I would love to get your feedback here based on your experience so far.

And then just one quick one on Imbruvica.

One of your peers recently entered into a partnership with a BTK inhibitor for autoimmune conditions, including RA.

Is this something that you plan to pursue with Imbruvica?

Thanks.

With respect to EASL, we continue to feel confident that Viekira Pak will provide competitive efficacy in the time frame you are describing, in the 2016 time frame and beyond.

Recall that cure rates with Viekira are very high and that the regimen has been well-tolerated.

We don't see major shifts, for example, in duration of therapy in the time frame that you are describing that would change that picture in any meaningful way.

Of course, over the longer term we have our own next generation program, which I talked about a little bit earlier in this call, which will continue to drive innovation in this space.

We feel good about our presence in hep C today and will continue to do so over the years that follow.

With respect to real-world cure rates with Viekira Pak, that doesn't match our experience, so I really can't comment on that report.

Our real-world experience is actually quite good with respect to adherence to the regimen; and therefore realizing the sort of cure rates that have been demonstrated in clinical trials.

With respect to Imbruvica or BTK inhibition in autoimmune disorders, obviously that is something that has been a focus of research for a number of companies, including ourselves.

It's something that we will continue to investigate.

I think we will be positioned very well to pursue that aggressively, given our extensive experience in immunology and post close, given PCYC's experience in BTK inhibition.

It's certainly something that we would keep a close eye on, something that we would pursue.

Thank you.

Thanks, Colin.

That concludes today's earnings conference call.

If you would like to listen to a replay of the call, please visit our web site at AbbVieinvestor.com.

Thanks again for joining us today.

Thank you.

This does conclude today's conference.

You may disconnect at this time.