艾伯維 (ABBV) 2015 Q2 法說會逐字稿

Good morning and thank you for standing by.

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

(Operator Instructions).

I would now like to introduce Mr. Larry Peepo, VP 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; Laura Schumacher, Executive Vice President, Business Development, External Affairs and General Counsel; Michael Severino, Executive Vice President of Research and Development and Chief Scientific Officer; and Bill Chase, Executive Vice President of Finance and Chief Financial 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 (technical difficulty).

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 for our second quarter 2015's earnings conference call.

We delivered another strong performance with second-quarter results ahead of our expectations, including adjusted earnings per share of $1.08 representing growth of more than 31% versus the second quarter of 2014.

Our results included strong operational sales growth of nearly 20% driven by a number of products across our portfolio, including strong performance from our newly acquired oncology therapy, IMBRUVICA, continued global uptake of VIEKIRA and continued strong growth from HUMIRA, as well as other products in our portfolio, including Creon, Synthroid and Duodopa.

We are particularly pleased with the high quality of our results in the quarter.

We saw a significant margin expansion, continued R&D investment and SG&A leverage and we delivered these results despite a significant foreign exchange headwind.

We are also pleased with our outperformance and progress year to date.

We've driven strong commercial, operational and R&D execution resulting in industry-leading top and bottom-line performance.

During the quarter, we advanced several important strategic priorities, continued to enhance operational efficiency and achieved a number of regulatory and clinical objectives.

Importantly, we completed the acquisition of Pharmacyclics, augmenting AbbVie's already strong position and growth prospects.

I will discuss our progress with Pharmacyclics in more detail in just a moment.

We are also driving strong performance from our current portfolio, including HUMIRA, which is off to a very good start in the first half of the year with robust underlying global demand and exceptional performance in the US.

We made significant progress with our mid and late-stage R&D programs.

During today's call, our Chief Scientific Officer, Mike Severino, will provide an update on our pipeline.

And we've also continued to improve efficiency across our operations, delivering roughly 800 basis points in operating margin expansion this quarter versus the prior year, achieving an operating margin profile of 44.2% and we remain committed to improving this metric across our long-range plan.

This quarter and our first-half results demonstrate the significant progress that we've made towards our objective of delivering industry-leading growth.

As I mentioned, during the quarter, we successfully completed the acquisition of Pharmacyclics, a strategic addition to our business that adds another compelling growth platform to AbbVie's strong prospects in immunology and virology and accelerates AbbVie's clinical and commercial presence in oncology.

While strategically important, the acquisition of Pharmacyclics will also drive strong financial benefits, further diversifying our revenue base, significantly enhancing our revenue growth across our long-range plan and delivering EPS accretion beginning in 2017.

And as we have outlined, we expect accretion related to the acquisition in excess of $0.60 per share in 2019, ramping to more than $1 per share in 2021.

Pharmacyclics will operate from its Sunnyvale, California headquarters under the leadership of Erik von Borcke.

Erik has held a number of leadership positions within AbbVie since joining the Company in 2001, including his most recent role as Vice President of Global Marketing.

The transition has been seamless and we have been impressed by the caliber of talent we've welcomed from Pharmacyclics into AbbVie.

We saw strong momentum with IMBRUVICA in the quarter.

Full second-quarter US IMBRUVICA sales were $234 million.

We continue to expect IMBRUVICA to drive US sales of approximately $1 billion for the full calendar year 2015.

Since we completed the Pharmacyclics transaction, we have seen additional positive data and progress on our regulatory objectives, including positive readouts from two Phase 3 studies, HELIOS and RESONATE-2.

With respect to the positive RESONATE-2 data, a significant portion of our valuation for Pharmacyclics was attributed to advancing into first-line treatment.

And while we assumed a very high probability of success, these data provide strong evidence of IMBRUVICA's dramatic efficacy in a front-line setting and further derisks this component of our model.

Our virology franchise will be a significant growth driver for us in 2015 and in the years to come.

With the launch of VIEKIRA, we have established a meaningful position in the HCV market.

We continue to see progress, particularly internationally, which is tracking ahead of our planning assumptions.

We received approval in 47 markets and we expect a number of additional countries to come online as the year progresses and into 2016.

This includes Japan where we continue to expect a regulatory decision during the second half of this year.

As a reminder, in Japan, we will commercialize a 12-week two pill once-a-day ribavirin-free combination.

Overall, we continue to see excellent progress across our total pipeline.

We've advanced several assets into the regulatory approval cycle.

We've moved assets into pivotal trials, reported positive data from several assets and we expect additional regulatory approvals as the year progresses.

We are also encouraged with the advancement and derisking of our mid and our late-stage pipeline.

Over the past six months, we have reported positive data from several programs.

For example, earlier this year, we reported positive top-line results from the first of two Elagolix pivotal trials in endometriosis.

Our partner, Galapagos, recently reported positive interim top-line findings from two Phase 2b studies of our partner in selective JAK1 inhibitor in RA.

We've also recently seen data from the six-month extension trial of the first Elagolix endometriosis pivotal study and the results were consistent with the previously reported efficacy and safety findings.

Several other assets such as venetoclax in relapsed refractory CLL patients with 17p deletion are demonstrating strong results.

We are very encouraged with each of these data readouts.

In summary, we delivered another quarter of strong results, exceeding our guidance range for the quarter.

When we launched AbbVie back in January of 2013, we set an objective for ourselves -- to build an innovation-driven patient-focused biopharmaceutical company capable of delivering and sustaining top-tier financial performance.

We have made significant progress in building the key strategic elements necessary to deliver on that objective.

We are driving exceptional performance out of our existing portfolio, including HUMIRA.

We have a robust pipeline with several assets with multibillion dollar potential.

We are achieving significant operational efficiencies, which are apparent in our first-half 2015 results.

And we've added another major growth platform with Pharmacyclics and IMBRUVICA.

We have also delivered on our commitments to shareholders with a total shareholder return since launching the Company in January of 2013 of more than 125%.

We are well-positioned to deliver industry-leading EPS growth in 2015 and we continue to make significant progress advancing our pipeline and other strategic actions that will position AbbVie for top-tier growth through the rest of the decade and beyond.

With that, I will turn the call over to Mike.

Mike.

Thank you, Rick.

It's an exciting time to be leading research and development at AbbVie.

We have a broad and robust pipeline that includes more than 40 active clinical development programs, including 10 programs in late-stage development or under regulatory review.

Our core areas of focus include immunology, where we are leveraging our deep expertise to develop next-generation biologics and small molecules that elevate the standard of care; oncology, including assets to address both hematologic malignancies and solid tumors; neuroscience, with a particular focus on developing disease-modifying therapies for Alzheimer's and other neurodegenerative conditions; and virology, with an emphasis on continuing to evolve the HCV treatment landscape.

We are also placing focused investment in our late-stage programs in women's health with Elagolix and renal disease with Atrasentan.

Today, I will cover each of these areas and highlight some of our most promising programs.

In immunology, we've established clear leadership positions across therapeutic categories, including rheumatology, dermatology and gastroenterology and we are leveraging our expertise to build upon these strong positions.

Our strategy is centered upon identifying treatments that offer differentiated profiles relative to currently available therapies with a goal of continuing to raise the standard of care.

We have several promising assets in development, including two oral selective JAK1 inhibitors, several biologics and a bi-specific biologic currently in mid-stage trials.

Most advanced are our two selective JAK1 inhibitors on the cusp of completing mid-stage development in RA.

As Rick mentioned, earlier this year, our partner, Galapagos, announced positive top-line interim data from two Phase 2b studies in RA.

Over the next few months, we will evaluate data from our internal program, ABT-494 and make decisions about next steps.

We also believe our DVD-Ig antibody platform holds tremendous promise in the treatment of immune-mediated conditions.

ABT-122 is our combination anti-TNF anti-IL-17, two validated mechanisms in Phase 2 trials for RA and psoriatic arthritis.

Our early development work with the DVD platform has established that our DVDs have favorable drug-like properties similar to monoclonal antibodies and can be manufactured reliably.

We will see data from our mid-stage trial in RA in early 2016.

And we have other promising mechanisms in development.

Including an IL-6 nanobody, as well as several early-stage programs.

Finally, in immunology, we continue to innovate with HUMIRA.

We have new indications and formulations in late-stage development.

We recently received a positive opinion from the EMA for Hidradenitis Suppurativa and we expect a US regulatory decision in the second half of this year.

We also received EMA approval for a new HUMIRA formulation specifically designed to reduce injection pain and reduce injection volume compared to the current formulation.

This new formulation is currently under review by the FDA.

And we are on track to submit our US and European regulatory applications for uveitis in the second half following the recent completion and positive results from our second pivotal trial.

The acquisition of Pharmacyclics significantly accelerated AbbVie's clinical and commercial presence in oncology.

With IMBRUVICA, we have established a leadership position in the treatment of blood cancers and we are well-positioned to build upon that strength with other promising assets in development.

Within the hematologic oncology space, we have three novel mechanisms that are either on market or in registration-enabling trials -- BTK, PI-3 kinase and Bcl-2 inhibition.

We are well-positioned to continue to evolve the treatment landscape with innovative combinations of these and other mechanisms.

Our goal is to markedly improve efficacy by achieving deep, durable disease control and/or remission.

As I mentioned, IMBRUVICA represents our first foray into this therapeutic category and we are pleased with the continued progress we've seen with IMBRUVICA since the close of the acquisition.

At the recent ASCO meeting, we, and our codevelopment partner, Janssen, presented data from the Phase 3 HELIOS trial, which studied the combination of bendamustine and Rituxan, or BR, with or without IMBRUVICA in relapsed refractory (technical difficulty).

The study demonstrated that IMBRUVICA improves outcomes when combined with BR, illustrating that IMBRUVICA is not only effective as a single agent, but it is also potent and safe when used in combination.

We also announced top-line results from the Phase 3 RESONATE-2 trial comparing IMBRUVICA monotherapy to chlorambucil in patients age 65 or older with previously untreated CLL.

The results illustrate that treatment with IMBRUVICA improved progression-free survival and multiple secondary endpoints, including overall survival in the first line setting.

We plan to present and publish the full results and will submit the data to regulatory authorities in the second half, building upon our existing set of indications and expanding into the front line CLL setting.

We've also continued to make progress with our first-in-class Bcl-2 inhibitor, venetoclax.

At the recent EHA meeting, we presented updated study results showing patients with relapsed refractory CLL taking venetoclax in combination with rituximab had an overall response rate of 84% with 41% of patients achieving a complete response.

While early, these encouraging results speak to the valuable role venetoclax may play in novel combinations with the potential to restate standard of care in a variety of these cell malignancies.

We recently received the FDA's breakthrough therapy designation for venetoclax in relapsed refractory patients with a 17p deletion genetic mutation.

We plan to present the data that supported this designation at the upcoming ASH meeting and we remain on track to submit our regulatory applications for the 17p deletion indication by the end of 2015.

Our hematologic oncology pipeline also includes Duvelisib, a dual PI-3 kinase gamma delta inhibitor being investigated for the treatment of a wide range of blood cancers.

And we are partnered with Bristol-Myers Squibb on Elotuzumab, a monoclonal antibody targeting CS-1, a protein primarily expressed on the surface of myeloma cells in late-stage development for front line and relapsed refractory multiple myeloma.

Data from the Phase 3 study in relapsed refractory patients recently published in the New England Journal of Medicine showed that adding Elotuzumab to standard treatment significantly reduced the risk of disease progression.

We expect our partner to submit regulatory applications for this indication this year.

We are also leveraging this mechanism within the context of our antibody drug conjugate platform with ABBV-838, an anti-CS1 ADC currently in early-stage clinical development.

Our pipeline also includes late-stage assets in development for the treatment of solid tumors.

Veliparib is our PARP inhibitor being investigated as a treatment for several solid tumor types.

In contrast to other PARP inhibitors in development, which are being evaluated as monotherapy, specifically in cancers with inherited genetic deficiencies in DNA repair and in later lines of therapy, we've taken a different approach with veliparib.

We have numerous ongoing Phase 3 trials evaluating veliparib in combination with common DNA-damaging chemotherapies in a wide range of clinical settings.

Veliparib has demonstrated promising signals of efficacy and is currently in late-stage development for breast cancer and non-small cell lung cancer.

Additionally, we plan to evaluate veliparib in combination with checkpoint inhibitors with clinical trials planned for 2016.

We are leveraging our strong capabilities in protein engineering with ABT-414, our antibody drug conjugate for glioblastoma multiforma, or GBM.

GBM is the most common and most aggressive type of malignant primary brain tumor.

The early data for ABT-414 are promising and we recently initiated additional single arm studies and a randomized controlled trial in second line GBM, which could provide a pathway to registration if the data are consistent with earlier phase studies.

Certainly the area of immuno-oncology has recently garnered significant attention.

We have an active discovery program with an objective to drive the next wave of immuno-oncology development beyond checkpoint inhibitors.

We are particularly focused on the use of our bi-specific platform to support conditional activation of the immune system in the vicinity of tumor cells and we are leveraging the emerging science of soluble T-cell receptor technology as well.

We anticipate multiple immuno-oncology assets moving into the clinic in the 2016 timeframe.

Our virology franchise will be a significant growth driver for us in 2015 and in the years to come.

With the launch of VIEKIRA, we've established a meaningful position in the HCV market and our current position will serve as a base from which we will launch further innovation.

We are on track with our next-generation HCV program to bring to market a ribavirin-free, once daily, pangenotypic combination with high rates of efficacy and a competitive duration of therapy.

Earlier this year, we disclosed preliminary results from a Phase 2b study of our next-generation protease inhibitor, ABT-493, and our next generation NS5A inhibitor, ABT-530.

The interim data showed that treatment with our next-generation combination in non-cirrhotic genotype 1A and 1B treatment-naive and experienced patients receiving the ribavirin-free therapy for 12 weeks resulted in an SVR4 rate of 99%.

Today, I am pleased to report that the SVR12 results are equally impressive.

In fact, the dose we intend to pursue in Phase 3 drove an SVR12 rate of 100%.

Evaluation in other genotypes continues to progress with encouraging results and we're also evaluating shorter duration of therapy with this combination.

We expect to present data from the Phase 2 studies at the AASLD meeting later this year and we remain on track to advance into Phase 3 development this year with commercialization expected in 2017.

In neuroscience, we are focused on pursuing transformational therapies for the treatment of conditions like Alzheimer's disease, Parkinson's, MS and other neurodegenerative conditions.

ZINBRYTA, our investigational biologic for relapsing remitting multiple sclerosis, is currently under regulatory review in the US and Europe with regulatory decisions expected in the first half of 2016.

The filings are based upon strong pivotal trial results, which demonstrated patients treated with ZINBRYTA had a statistically significant 45% reduction in annualized relapse rate versus Avonex, an established standard of care.

Given the product profile, novel mechanism of action and its once monthly subcutaneous administration, we believe ZINBRYTA has the potential to be an important therapeutic option.

We are also in the early stages of our US launch of Duopa for advanced Parkinson's disease, which was approved earlier this year.

We are continuing to innovate with Duopa, working on drug delivery improvements and moving toward less invasive approaches and continued improvements in the Duopa pump.

We also have numerous early-stage neuroscience programs underway that have the potential to come to fruition in the later years of our long-term plan.

For example, earlier this year, we entered into a collaboration with C2N Diagnostics to develop and commercialize a portfolio of anti-tau antibodies for the treatment of serious brain disorders.

Tau is a key protein associated with the pathologic progression of Alzheimer's disease and like amyloid, tau also has the ability to be imaged and tracked in the central nervous system.

We recently received an orphan drug designation and initiated a Phase 1 program in patients with progressive supranuclear palsy, a rare and debilitating neurologic disease.

We are on track to start clinical development with C2N in Alzheimer's disease in 2016.

Finally, as I mentioned, we continue to make focused investment in our late-stage programs in renal disease and women's health.

Atrasentan is our internally discovered selective endothelin antagonist in late-stage development for the prevention of progression of diabetic kidney disease.

A large global Phase 3 program is currently underway evaluating the impact of Atrasentan on renal outcomes such as the onset of end-stage renal disease, transplantation or death due to renal failure.

Elagolix is our compound in Phase 3 development for endometriosis and Phase 2b for uterine fibroids.

Given the high prevalence of these conditions and the current lack of treatment options, we view Elagolix as a significant opportunity.

Our goal with Elagolix in endometriosis is to bring to market an oral therapy that provides a high level of efficacy with minimal menopausal side effects such as hot flash while preserving bone health.

Earlier this year, we announced positive top-line results from the first of two ongoing Phase 3 clinical trials.

Initial results from this study show that after six months of treatment both doses of Elagolix met the study's co-primary endpoints with a safety profile consistent with prior studies.

We have also now seen data from the six-month extension of the first Elagolix endometriosis pivotal study and the results were consistent with previously reported efficacy and safety findings.

We will see top-line results from the second pivotal study in endometriosis in the first quarter of 2016.

And we plan to disclose top-line data from our Phase 2b trial in uterine fibroids in the fall.

So in summary, since the start of the year, we've made significant progress and are on track to advance several programs in the coming months.

We've built a promising late-stage pipeline comprised of potentially transformational medicines, which will fuel our future growth rate.

With that, I will turn the call over to Bill for additional comments on the quarter and 2015.

Bill.

Thank you, Mike.

This morning, I'll review our second-quarter performance and provide an update on our outlook for 2015.

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

Operational growth on the top line was a very strong 19.4%, excluding an 8.3% negative impact from foreign exchange.

Reported sales were up more than 11%.

HUMIRA delivered global sales of more than $3.5 billion, up 16.4% on an operational basis.

We continue to see strong momentum for HUMIRA as the market leader around the world.

On a reported basis, currency had a negative 8.8% impact on global HUMIRA sales and reduced international HUMIRA sales by nearly 18%.

US HUMIRA sales increased nearly 29%, driven by prescription volume and favorable pricing impacts.

We've seen acceleration in market growth this year in the US with HUMIRA driving double-digit growth in the gastro, rheum and derm segments.

Wholesale inventory remained constant at less than half a month.

Internationally, HUMIRA sales have grown nearly 9% on an operational basis in the first half of the year consistent with our planning expectations.

As we noted last quarter, the first quarter international growth rate of nearly 15% was favorably impacted by the timing of shipments in select markets.

Consequently, international sales growth in the second quarter was negatively impacted by this shipment timing.

Market growth internationally remains strong with most major markets experiencing double-digit growth and HUMIRA's international marketshare has remained stable despite new competitors and the loss of a biosimilar, infliximab.

HUMIRA's momentum has not been adversely impacted by the biosimilar.

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

This reflects a forecast for the US growth approaching 30% and 9% to 10% operational growth internationally.

Global VIKIERA sales in the quarter were $385 million.

In the US, we are ramping share in our exclusive accounts and have now achieved our target level of penetration in our largest contract.

As we have said previously, the contribution of the international launch has exceeded our planning expectations, which will lead to a higher mix of international sales this year.

International sales of VIKIERA in the second half will also benefit from an expected approval in Japan where we will commercialize a two-drug, once-daily ribavirin-free combination.

As Rick noted, total US sales of IMBRUVICA in the quarter were strong at $234 million.

Given the May 26 closing date for the Pharmacyclics transaction, we recorded a partial quarter of IMBRUVICA sales, including $97 million of US sales and $10 million of international profit-sharing.

For 2015, we anticipate Pharmacyclics adding more than $750 million to our top line for revenue occurring after the May 26 closing date.

Global Lupron sales were $198 million in the quarter, up nearly 10% on an operational basis.

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

US sales of Synthroid were $187 million, up nearly 12% versus the prior-year quarter.

For the full year 2015, we expect modest growth for Synthroid.

AndroGel sales were $170 million, down significantly due to continued market declines and the entry of generic competition for the 1% formulation.

We expect AndroGel sales somewhat above $500 million for the full year 2015.

US Creon sales were $159 million in the quarter, up significantly from the prior year.

We continue to capture the vast majority of new prescription starts in the pancreatic enzyme market.

We expect double-digit sales growth for Creon in 2015.

Sales of Duodopa, our therapy for advanced Parkinson's disease, grew more than 20% 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 this quarter 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.

Turning to the P&L profile for the second quarter, since becoming an independent company, we have placed a high priority on becoming more efficient and driving operating margin improvement.

We are pleased with our progress in the quarter as we delivered an adjusted operating margin of 44.2% of sales.

Excluding a modest negative impact from Pharmacyclics, our operating margin improved 820 basis points versus the prior-year quarter.

More than 500 basis points of this improvement was driven by efficiencies and P&L leverage.

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

The adjusted gross margin ratio was 85.3%, up 570 basis points from the prior-year quarter driven by exchange, operational efficiencies and product mix.

Adjusted R&D was 15.9% of sales, reflecting funding actions in support of our pipeline assets.

Adjusted SG&A was 25.1% of sales in the quarter, down from the prior year, contributing to overall continued improvement in operating margin leverage.

Adjusted net interest expense was $137 million, reflecting the impact of debt issued in conjunction with the Pharmacyclics acquisition.

The adjusted tax rate was 21.9% in the quarter.

Second-quarter adjusted earnings per share, excluding non-cash intangible amortization expense and specified items, were $1.08, up 31.7% year-over-year and exceeding our previous guidance range.

On a GAAP basis, earnings per share were $0.83.

Moving on to our outlook for the remainder of the year, we are confirming our 2015 adjusted EPS guidance range of $4.10 to $4.30.

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

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

It excludes $0.84 of intangible amortization and specified costs, including Pharmacyclics transaction costs.

Regarding the P&L profile for 2015, the following estimates have been updated to include the impact of significant foreign exchange and the Pharmacyclics acquisition.

On the top line, we expect revenue growth on an operational basis of roughly 20%.

We are forecasting approximately 7% negative top-line impact from currency this year, resulting in a reported sales growth of around 13%.

We are forecasting a significant increase in our operating margin profile, which we expect to reach approximately 42% of sales in 2015.

Excluding the negative impact from the Pharmacyclics acquisition, we expect to deliver roughly 650 basis points of improvement over the prior year.

About 500 basis points of this improvement results from efficiency initiatives and leverage across the income statement.

We are forecasting an adjusted gross margin ratio approaching 83%.

This is an increase from our original guidance reflecting significant year-over-year improvement driven by the impact of exchange, product mix and actions we've taken to further improve our margin profile.

We will continue to invest in our pipeline supporting our exciting opportunities in oncology, HCV, immunology and other areas.

We are forecasting R&D expense of approximately 16% of sales.

And we expect to continue investing in our growth brands with SG&A levels at approximately 25% of sales.

We are now forecasting net interest expense of about $625 million for the full year, including the incremental debt from the Pharmacyclics acquisition.

And we continue to expect an adjusted tax rate in the 22% range in 2015.

Regarding the third quarter, we expect adjusted earnings per share of $1.05 to $1.07.

This excludes roughly $0.14 of specified items and non-cash amortization and includes the impact of Pharmacyclics dilution.

We expect third-quarter revenue growth on an operational basis in the low 20 percentage range, excluding approximately 7% negative impact from exchange.

So in conclusion, we are very pleased with the level of quality in the quarter and our performance in the first half of 2015.

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

This puts us in a strong position to deliver top-tier industry growth this year and in the years to come.

And with that, I will turn it back over to Larry.

Thanks, Bill.

We'll now open the call up for questions.

Operator, we will take our first question, please.

(Operator Instructions).

Jami Rubin, Goldman Sachs.

With respect to HUMIRA international sales, you pointed to shipment timing, tough comparisons and FX as reasons for the underperformance, but wouldn't Remicade biosimilars be the real culprit here?

What evidence, specifically, can you share with us that suggests that this quarter's performance was more of a one-timer versus a new trend?

Maybe you can share what you're seeing in terms of marketshare changes, etc.

And then a question for you, Rick, on potential for US biosimilars.

As you know, Amgen filed an IPR on two long-dated patents.

Maybe you can talk to those patents that are being challenged and put that into the context of your broader patent defense strategy.

Thanks very much.

I'll take the first question.

I may have Laura Schumacher answer the second question for you.

So it's a good question and I'm going to answer your question, I'd say, very directly and very clearly because I want to make sure that there is no misunderstanding or confusion around this issue.

But the bottom line when we are all done is I will tell you that we have seen no impact from Remicade biosimilar on HUMIRA in the international market, but I will give you some color to be able to support that.

So I'm going to go back to first quarter.

When we announced first-quarter results, if you look at Bill's formal remarks, in his remarks, we identified the fact that they benefited from shipment timing and that is exactly what we are seeing here and I'd tell you that the impact we are seeing here is consistent with what we expected in that.

The second thing I would tell you is that when we put out the original guidance on HUMIRA, both at the beginning of the year and when we raised guidance, within that guidance range, we had assumed international performance growth of HUMIRA at 9% to 10%.

If you look at the performance in the first quarter, we delivered 14.9% growth in the first quarter.

Second quarter was 3.6%.

The average for the two quarters, or the first half of the year, is 8.8%.

We are confirming now explicitly that the second half is forecasted internationally to be 9% to 10%, which is exactly what it was in the original guidance.

We are also confirming the original guidance.

So obviously, if you thought we were sitting here with our toes hanging over the edge of the cliff, that would be an awfully foolish thing to do.

So I can tell you we absolutely have no concerns around that.

So let's talk specifically around what we are seeing with biosimilars, and I will give you a little bit of facts maybe to support it.

So the biosimilar Remicade has been approved now in 46 countries.

It's actually launched in about 36 of those countries.

They participated in 5 national tenders and they participated in about 11 regional or hospital tenders.

If you look at markets that they've been in for more than a year to be able to measure what their market share is, their total market share is 2.8%, so they haven't had any meaningful impact.

We measure every one of those markets that they're in.

We've been doing it from the very beginning (technical difficulty).

Through all those markets HUMIRA continues to grow as we would've expected it.

We don't see any impact from, nor do we expect any impact, (technical difficulty) biosimilars within those markets.

We obviously continue to watch that.

If we look at the pricing within those markets, the median discount versus the innovator is about 25% off.

For the ones that were tendered, it's a little over 50% off, which again is in the range of what we would've expected.

The reaction that we are seeing in the market is consistent with what we expected.

So I would just tell you that it's playing out as we anticipated.

Now we need to continue to monitor, but I can tell you that we don't have any concerns in that area as we would've expected.

So the reality is this is nothing more than movement of shipments between a handful of countries.

I'll give you a couple of examples maybe to make you feel a little bit better.

So if you take France, which I know there's been a lot of public concern about France.

If you look at our growth rate in the first quarter and our growth rate in the second quarter, they are almost identical.

If you look at Canada, our growth rate accelerated between first and second quarter.

If you look at the Netherlands, our growth rate accelerated between first and second quarter.

Now there are countries where clearly we saw tenders move around.

There weren't any countries that were impacted by biosimilars; they were due to other events.

So the reality is this is nothing more than shipment timing.

Did I answer your question?

I think we might have muted her line.

Go ahead on the IPR.

With respect to your question about Amgen's IPR, as we've said before we have a broad portfolio of IP covering manufacturing, process, formulation and methods of use.

Amgen's IPR does not impact our patent defense strategy.

We don't know why Amgen selected the two formulation patents that it did to challenge -- potentially challenge in IPR, but it does give some perspective on the breadth of our IP, including over 40 additional patents that are not the subject of the IPR.

Operator, we'll take our next question, please.

Jeff Holford, Jefferies.

First question is on new HUMIRA, the one you just had approved in Europe.

Can you just give us a bit more color around some numerical data, whatever you have, around the clinical differentiators you seem to have there on pain and injection volume?

Just give us a bit more review whether the label that you are getting there is going to help you potentially do hard switches in some of the markets you are thinking about and how this product could help you in the future potentially as a biosimilar defense mechanism because that's not entirely clear from this.

And then just on VIKIERA contracts in the US, could you just give us any updates on how these are actually playing out versus how you thought they were going to, just some of the metrics you're looking at?

And then just last question around VIEKIERA, does your run rate for the last quarter of the year, the $3 billion run rate that you are looking at, does that assume a full quarter of Japan?

How important is that in your minds at achieving that run rate?

Thanks very much.

Very good.

I'll answer most of the first question.

Let me see if Mike maybe will add a little bit of specificity.

So there were two benefits that the new formulation was designed to do.

We know that there are patients who ultimately stopped therapy with the current product because of the pain that they feel upon injection.

So we know that's an important driver of adherence of the product.

And so we designed this product as a differentiation.

The clinical data -- Mike, I don't recall the specific numbers.

Do you recall the actual percent?

So there are data in the studies that were submitted to regulatory agencies.

We are still waiting on final labeling in the US and in Europe.

So I think it's probably a (multiple speakers) that might be in labeling, but we assessed this in the course of the clinical development program.

But what I would say is it's a significant reduction in pain, a very significant reduction in pain.

The second part is that this will also allow us to ultimately reduce the volume of injection volume and therefore potentially over time reduce the number of injections, particularly on the loading dose.

So as we've said before, this is an incremental improvement to the product.

We think it's a meaningful improvement.

We've obviously studied the different kinds of things that we can do to HUMIRA.

We have other things that we are continuing to work on, but we think these are a meaningful opportunity to be able to launch the product.

We haven't formally decided exactly how the product will launch or at least formally announced how the product will launch, so I'm not going to talk through any details around whether or not it will be a full conversion or ultimately a phased-in kind of an approach based on certain countries.

And so that's essentially how we see the product and we do think it will be differentiated in a significant enough way that it will have both a material impact on HUMIRA itself, HUMIRA's performance itself, as well as a differentiator versus competitors.

So on VIEKIERA Pak, as far as contracting is concerned, I would say the contracting hasn't changed a lot in the US from the last time we talked on the call.

As we indicated, we had a number of exclusive contracts that were coming online (technical difficulty) they're now up and running.

We are ramping within those particular contracts.

I would say we are ramping within the expectations that we expected.

If you look at our single largest customer in the US that's an exclusive, we've now reached peak share there and so ultimately we've reached the level of share that we had anticipated and it's a very high level of share.

And so now the rest of the growth will be around driving these incremental contracts and then also driving additional share gains within the parity accounts and the non-exclusive accounts.

And that's the work that goes on day by day by day.

As far as the $3 billion run rate that we've talked about before, I would say we are still tracking against that.

You asked specifically is Japan important.

It does assume that we have a full quarter of Japan and I would say Japan is an important market for us.

Now based on everything that we know today and the competitiveness of that product and where we are in the regulatory cycle, I think we should get a full quarter's worth of Japan, potentially even maybe a little bit better than that.

As we look at VIEKIERA, the other thing I would say is, when we originally launched VIEKIERA, our expectation was that we would build this into a meaningful product for us and then position ourselves so that as we launched a next-generation asset, which, as you know, we've described as a pangenotypic ribavirin-free QD product and the profile of the next generation is maintaining consistent with what we would've expected, that then with the launch of that, we will continue to gain further share with that product as we introduce that product in the marketplace.

If we look at our performance so far, I think we're up 67% quarter over quarter.

If you look at just the second-quarter running rate, it says the product is tracking at about a $1.5 billion product and continuing to grow nicely.

The international side of the business obviously has performed better than the US.

I think the US has not met our expectations.

I think we understand why and we're continuing to work on that, but certainly the international market is performing incrementally better than what we expected.

And so I think everything that we are looking at right now would suggest that that should be a solid number.

I would say there are three factors that are important for that to happen and we are continuing to monitor those three things.

One is we have seen patient volumes in the US, overall volumes in the market decline.

The latest data would suggest genotype 1 patients are down around 175,000, 180,000 now on an annualized basis.

We are assuming that's the level that it will stabilize at.

And I think the data would suggest that that is a reasonable assumption.

The second assumption is that the VA has run into funding difficulty, so the level of patients that they are treating is down and we are assuming, starting October 1, that they will get additional funds and they will come back up to the level that we saw in the earlier part of the year.

And then the third assumption obviously is Japan that we just talked about.

So those are the three things that I think will drive the ultimate performance.

I guess the last thing I would say is, if you look at our overall performance in the first half and both in second quarter, I think it demonstrates the strength of the business that we have here.

If you look at consensus, we were slightly off the consensus number for VIEKIERA this quarter, but yet we overperformed and we overperformed because we delivered better operational efficiency, we delivered overperformance in other areas and the balance of our business and our ability to be able to still deliver strong performance even when there are changes, I think, should be, one, reassuring to investors and two, it demonstrates the strength of the overall business.

Thanks.

That's very helpful color and congratulations on a great IMBRUVICA number.

Thanks, Jeff.

Next question, operator.

Marc Goodman, UBS.

First of all, you have a guidance range that's pretty wide.

I was just wondering why you didn't tighten it this quarter.

Second, you talked about immuno-oncology, you would have multiple assets in the clinic by next year.

Can you talk about -- are these going to be similar types of assets to PD-1, PDL, things like that, or are they kind of the next wave of products?

I'll cover the first one.

We haven't narrowed the guidance range yet.

We probably will here as we get closer to third quarter, narrow the guidance range.

And I would say the primary reason for that is foreign exchange has certainly been more challenging than we anticipated and we want to see how that plays out.

We told investors that we were going to cover foreign exchange, that we weren't going to do -- we weren't going to pass that on and so we just want to see another quarter's worth of performance here and what foreign exchange does over that period of time to feel more comfortable that when we narrow the range we are within a range we are comfortable with.

It's just that simple.

Mike, why don't you talk about immuno-oncology.

Certainly.

With respect to immuno-oncology, we are really referring to the next wave of programs.

These would be things beyond PD-1, PL-1 or perhaps things that might combine well with those mechanisms.

But we are looking at driving for treatment results that can't be achieved today, so we would be referring to novel mechanisms.

Thanks, Mark.

Operator, we will take our next question, please.

Alex Arfaei, BMO Capital Markets.

Regarding HUMIRA, you mentioned you are seeing accelerated market growth in the US -- very impressive US performance, by the way.

Are you seeing increased penetration of biologics in these markets, or is it overall volume growth or both?

And can you provide more color on some of the efficiencies we are seeing, some of the operating efficiencies we are seeing?

Where are you cutting and why?

Thank you.

So Alex, on HUMIRA, if you look at the US, it's really been a remarkable story.

If you look at market growth last year, it was in the 6% range.

That has now moved to about a 13%.

We've held that pretty steady across the quarter.

So what that's a sign of is that the SG&A that we put behind the brand continues to work and it continues to give a positive return.

And the way that that growth is delivered is in fact by penetration, as well as improved patient compliance and a number of other things.

But there's definitely a penetration element.

That is the big growth driver in this market and as you know, all of the immuno -- autoimmune segments are relatively underpenetrated versus what you would expect given the power of a biologic.

So that is a big part of the story.

In terms of efficiencies, look, we've been focused on efficiencies from the very beginning.

Now they shake out in a number of different places.

In manufacturing, they are the traditional efficiencies you would expect, whether it be purchasing, better utilization of plants or in some cases even taking offline nonproductive capacity.

We've done all of those sorts of things.

Across the P&L though, leverage itself presents a different type of efficiency.

We are obviously no longer in a situation where we need to grow expense at the same rate as the top line.

In fact, if you look at our expense growth, particularly on SG&A, it is far, far, far below what the top line is growing and that's pretty much the new model for this business now that we've made the investments we needed to make back in 2013 and 2014 and we are on track to start delivering growth through the introduction of new products in 2015 and beyond.

So there's really two different types of efficiencies in the numbers.

Thank you.

Thanks, Alex.

Next question, please, operator.

Mark Schoenebaum, Evercore ISI.

Thanks a lot for the transparency.

Always the most detailed prepared remarks of any company, any big company.

So thanks for that.

I just want to go back to the central point that others have asked about because the stock is off right now and the consistent feedback I'm getting is that people are just very concerned about the rest of the world HUMIRA number.

So my question is really simple.

One, what was the sequential volume growth for rest of world HUMIRA?

Two, what was the average change in price quarter on quarter in the 2Q, please?

And then my second question, if I may, is you guys I think have mentioned that you might contemplate an analyst meeting where you might provide some long-term financial targets or vision and go over the pipeline.

And you had contemplated this once the PCYC deal is closed.

So I would just like to know what your current thinking is on that.

Thank you and congratulations on a great stock move this quarter.

So Mark, on HUMIRA, the volume growth quarter over quarter was slightly above 10% overall.

Price was 6% on a global basis.

Do you have just rest of world?

Rest of world had negative price of 4.1% and volume was up over 7%.

So volume was up over 7% rest of world?

Yes.

Okay, got it.

People are very confused out there.

Thank you.

Mark, on the analyst meeting, it is something we are still considering.

I think as you indicated maybe in one of your remarks, I think timing-wise if we decide to do it, it probably will be at the beginning of the year, maybe timed with a major meeting where it would be convenient for investors to be able to participate.

We haven't made a final decision yet, but we will communicate something around that at some point here, probably third quarter.

Just to confirm the HUMIRA numbers, those are sequential, correct?

Quarter over quarter 2015 versus 2014.

Do you have the sequential numbers 1Q this year versus 2Q?

And then I will stop.

I don't have them handy because we don't typically look at it that way.

I would say price would be relatively flat quarter to quarter.

Price would be probably down about maybe 2% quarter over quarter, but I don't have a firm volume number for you.

Can we follow up with you on that?

Was it up though?

Was it positive?

Yes.

It was positive.

Okay, thank you.

Was price positive?

He's asking --.

No, price was negative, but volume was positive.

Thank you.

Thanks, Mark.

Next question, please, operator.

Chris Schott, JPMorgan.

Just a couple quick ones here.

First, can you just quantify the impact to gross margins from FX in the quarter and in the annual guidance?

I'm just trying to get a better sense of what type of underlying growth we are seeing on that gross margin line as we are going through the year here.

The second question was on the IL-17.

Just would be interested in your perspective on what those products are going to mean for the psoriasis market and as we think about HUMIRA over time.

And the final one, just to clarify some of the earlier comments on the new HUMIRA formulation and launch dynamics because I just want to make sure I understood the comments.

Should we think about when this product launches it's going to basically fully replace the prior version of HUMIRA in whatever countries it goes out in or is this going to be a conversion type process where you have to go to physicians, get them to select a new version, somewhat of a gradual process?

I just want to try to make sure I understood your earlier comments.

Thanks very much.

So Chris, on gross margin, I am just going to give you some numbers.

So our gross margin was up about 570 basis points.

Pharmacyclics diluted that by about 50 basis points.

So if you exclude Pharmacyclics, we were up 620 basis points.

Just over half of that was exchange.

And then for the year, very similar story, different numbers, but similar story.

Gross margin we are forecasting up around 300 basis points.

Pharmacyclics will have about a 98 to a point -- 90 basis point to a full point impact.

So net-net, excluding Pharmacyclics, you'd expect to see about a 400 basis point improvement of which again just slightly over half is exchange.

I'll take the second component of your question.

With respect to the IL-17s, I think clearly the IL-17s in plaque psoriasis demonstrate very strong efficacy.

There are areas where their profile is not quite as compelling in psoriatic arthritis, for example.

The initial uptake of the 17s has been relatively slow.

We would expect that dermatologists will take some time to become comfortable with the new mechanism before they would adopt it.

So we feel comfortable about the trajectory of HUMIRA in the psoriasis space for quite some time.

Okay.

And on the new formulation, we really can't talk specifically about what the strategy would be because it's somewhat conditioned on the regulatory approval and we don't have the regulatory approval as yet all around the world.

But there probably will be situations where it will be a replacement product.

Meaning it will replace, not over a very short period of time, but over a relatively short period of time.

As inventory runs out of the old product, the new product will replace the old product and we will only maintain the new product in the marketplace.

I would say that will probably be the predominant model that's out there, but it might not be the exclusive model that's out there depending upon the revelatory approvals.

Thanks very much.

Thanks, Chris.

Next question, please.

Robyn Karnauskas, Deutsche Bank.

So two quick questions.

One, you didn't mention anything about celiac disease.

I'm wondering if you could comment on did the program fail or are you still interested in that program.

Second question on HUMIRA-II, the new HUMIRA, do you think we will be able to track that in any way?

Will it be given a different name?

Just wondering how the Street will be able to monitor that as it has an update.

And then the last question, big picture, for your RA franchise given that it looks like you don't have to go through the patent dance and Amgen's filing an IPR, which can speed up the clarity around when they are actually going to launch.

How do you view the timelines for some of your emerging RA drugs and whether it's important to get them on the market sooner, or whether or not you will still be okay if Amgen's biosimilar hits ahead of their launch.

Thanks.

So with respect to celiac disease, we are still evaluating the opportunity and we have not reached a decision point yet.

I'll cover the HUMIRA formulation.

Again, it's consistent with what I described to you before.

It will depend upon the regulatory approval, so we don't know the answer to that yet.

It could be that it has the exact same name as the current product and therefore you wouldn't necessarily have any direct visibility to it.

It could be HUMIRA plus some designation after HUMIRA and therefore, we would be able to track it or you would be able to track it in some separate fashion.

So we're going to have to see how that plays out before I can give you an accurate answer.

And then I would just say, on the big picture piece, I would say the IPR doesn't necessarily change anything that we thought about before from a timing standpoint.

As we've said and as Laura mentioned a moment ago, we have a broad group of or portfolio of IP.

We have some very important patents in this area and we intend to enforce those patents and this IPR process won't affect those timelines as we've assumed it.

Okay, great.

Thank you.

Thanks, Robyn.

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

Steve Scala, Cowen.

Thank you and thanks for the R&D overview.

AbbVie really does have an impressive pipeline.

On the new HUMIRA formulation, what portion of the current patients on HUMIRA have issues with pain and/or volume?

What additional IP protection does it offer?

And then third, it sounds like there's a bit of hedging on the prior VIEKIERA guidance of annualizing at $3 billion exiting 2015.

Am I wrong?

Thank you.

I guess I'll do the last one first.

I was trying to describe to you the elements that will drive our overall performance in VIEKIERA.

If I sounded like I was hedging, I apologize for that.

It is our goal to still hit the number that we described to you.

So I was trying to describe to you the elements associated with it.

As far as the details around percentage of patients, I don't recall it offhand.

I would say there's a fairly substantial percentage of patients that when they first go on the drug do experience or express concern about pain upon injection.

The vast majority of those patients obviously work through it and stay on the drug.

But it's not an insignificant percentage of patients that we see that experience at the beginning of their use of the product.

And as far as volume, it's more of a practical thing.

At the end of the day, if you inject less volume, obviously that helps with the pain as well, assuming it's not more viscous or something -- has some other reason why it would have pain, but as you get less volume in the indications where you have loading doses, there would be a substantial benefit there where you could go from multiple loading doses to one loading dose as an example in certain conditions.

And I think that will be a significant benefit for patients.

And the IP?

Essentially it has IP associated with it.

I would say this is really a strategy to differentiate the product.

Obviously we have IP around this particular formulation.

I think that IP will protect this particular formulation.

As we've described I think a couple of times before, we don't view this as an absolute block.

When you think about our biosimilar strategy, it's a number of things that have all been put together, a very large portfolio of IP.

Some of that IP is very broad and very challenging I think for someone to work around.

New formulations that help differentiate the product, a commercial strategy, when and if biosimilars launch and then our pipeline of new assets to be able to move into this market.

And I would say although we tend not to probably ever get there in any meaningful way, I think one of the exciting things that we see internally is, if you look at the data that we have seen around the JAK1 hypothesis that we have, it's playing out and it's playing out in a very positive way.

And I think it's a profile of a drug that we believe could have a meaningful impact in the marketplace and I think that will be an important product for us to advance and get into the marketplace.

And then also ABT-122, I think as we talked about in IL-17 combined with a TNF, as we see that data, I think that product could have a very meaningful place in the market as well.

And so I think we are gaining a lot of encouragement about de-risking that mid-stage pipeline to ensure that we have some products that will follow on with HUMIRA.

Thank you.

Thanks, Steve.

And that concludes today's conference call.

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That concludes today's conference.

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