Abbvie Inc (ABBV) — Q4 2018 Earnings Call Transcript

Good morning and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Michael Severino, Vice Chairman and President; Bill Chase, Executive Vice President of Finance and Administration; and Rob Michael, Senior Vice President and Chief Financial Officer. Before we get started, I would like to remind you that some statements we make today are or may be considered forward-looking statements for 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 2017 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'll take your questions. So, with that, I'll now turn the call over to Rick.

Thank you, Liz. Good morning, everyone, and thank you for joining us today. This morning, I'll discuss our fourth quarter and full-year 2018 performance as well as our expectations for 2019. Mike will then provide an update on recent advancements across our R&D pipeline, and Bill will discuss the quarter and our 2019 guidance in more detail. Following our remarks, we will take your questions. We delivered another impressive year with results well above initial expectations. Adjusted earnings per share in the fourth quarter were $1.90, representing growth of more than 28% versus last year and once again achieving our guidance for the quarter. Total adjusted operational sales growth of 8.3% exceeded our guidance for the quarter. This growth was driven by a number of products including the hematological oncology portfolio with global operational sales growth of more than 50% and U.S. HUMIRA, which grew by more than 9% versus the last year. Our international HUMIRA sales were down nearly 15%, reflecting the impact of direct biosimilar competition in Europe and other international markets. We also saw a continued strong performance from several other products including MAVYRET, CREON, and DUODOPA. AbbVie has demonstrated an exceptional track record of consistently delivering top-tier financial performance despite any market or competitive challenges and 2018 was another clear example of that performance. We continue to drive strong commercial and operational execution, resulting in full year 2018 global operational sales growth of more than 15% and adjusted earnings per share growth of more than 41%. As we look at the evolution of our business and strategy, we're pleased with the progress that we're making. AbbVie's strategy has contemplated biosimilar competition since day one of the launch of this company. Our focus has been on building a pipeline that would allow us to absorb the impact of biosimilar competition and maintain a strong and growing business. Although our work is never done, we have made tremendous progress, building what we believe is one of the industry's most attractive pipelines. In hematological oncology, we have built a powerhouse franchise with IMBRUVICA and VENCLEXTA. Today, this franchise is roughly $4 billion with more than $1 billion of growth expected in 2019, and significant growth anticipated over our long-range plan. In immunology, HUMIRA in the U.S. will continue to generate strong revenue, driving roughly $1 billion of growth in 2019. Since we became an independent company, our research and development efforts in immunology have focused on identifying and advancing new assets that can deliver efficacy superiority to HUMIRA and other new agents. Given the importance of this growth platform, we understood that in order to maintain and expand our leadership position, the development of highly differentiated assets was absolutely critical. We are now confident that with risankizumab and upadacitinib, we have accomplished our objective. Both of our next-generation immunology therapies have demonstrated across multiple clinical trials superiority versus HUMIRA and other competitive offerings. This efficacy was shown across the broad spectrum of patients, including bio-naïve patients at one end of the treatment paradigm and very difficult to treat patients who would fail one or more therapies at the other end of the spectrum. In our hands, these assets have the ability to become the new standards of care in immunology. We expect to launch both risankizumab and upadacitinib in 2019, and based on their profiles, anticipate broad formulary access. Beyond our new therapies in hematology oncology and immunology, we’ve also developed other assets that represent attractive multibillion-dollar revenue opportunities, such as MAVYRET and ORILISSA. And we have a base business that includes therapies like CREON, DUODOPA, SYNTHROID, and LUPRON, all products we expect will remain durable for many years to come. The event that has for many years concerned investors most has been the loss of exclusivity for HUMIRA. Certainly, the most frequently asked question that we get is what impact will biosimilars have on AbbVie's business. We have long been planning and preparing for the event that is now upon us. We are now facing direct biosimilar competition in Europe and other countries, which represent approximately 75% of our international HUMIRA business or approximately 25% of total global HUMIRA revenues. As we described on our third quarter call, biosimilar competitors have been more aggressive with HUMIRA than previous anti-TNF biosimilar analogs. But, despite the more aggressive discounting, our strategy is working as we had intended. 2019 is a year that should clearly demonstrate to all investors that AbbVie is once again delivering on its commitments. In 2019, we will absorb roughly $2 billion of erosion related to biosimilar competition and roughly $400 million of additional impact following the entry of generic competition for AndroGel 1.62. We're also facing an extremely difficult comparison period due to the outstanding growth we drove in 2018. And in 2019, we’ll also be funding five major product or indication launches. Yet despite all of these challenges, AbbVie expects to deliver positive revenue growth and double-digit earnings per share growth this year. This level of performance demonstrates that the strategy we have in place is working as we planned, and it should reassure all investors of our ability to absorb the impact of direct biosimilar competition while maintaining a strong, growing, and vibrant business. Further to that point, our ability to deliver industry-leading earnings per share growth in 2019, despite the challenges I just outlined, is particularly notable, given that this year many of our key pipeline assets will be at the very early stages of their launch trajectory and therefore providing minimal offset to the biosimilar impact. Given their product profiles, we expect these pipeline assets will grow substantially over the next several years and provide significant offset to the 2023 U.S. biosimilar event. So, as I said, we are pleased with the progress we've made with our strategy, and investors should view 2019 as a real test of that strategy. In summary, this is an important time for AbbVie. The continuing momentum of our U.S. business and our hematological oncology franchise, combined with the launch and ramp of several new products will allow us to grow through biosimilar impact in 2019, just as we have predicted. We've demonstrated a strong track record of managing and overcoming challenges and our expected performance from 2019 is another clear example of that. And while we are certainly proud of what we've accomplished in the first six years as an independent company, I can tell you, we remain focused and committed to delivering our long-term vision for the company, sustained, top-tier performance. With that, I'll turn the call over to Mike for additional comments on our R&D programs. Mike?

Thank you, Rick. 2018 was a very productive year with significant pipeline advancement, including numerous development and regulatory achievements and successful data readouts across our pipeline. We secured regulatory approvals for several programs including VENCLEXTA in the broad relapse/refractory CLL population, and conditional approval for VENCLEXTA in newly diagnosed AML patients ineligible for intensive chemotherapy; approval for IMBRUVICA in combination with Rituxan as the first chemotherapy-free combination treatment for Waldenström's, the 9th FDA approval for IMBRUVICA overall; and for ORILISSA, for the management of moderate-to-severe pain associated with endometriosis. We completed registrational studies and submitted regulatory applications for our two next-generation immunology therapies, risankizumab and its initial indication, psoriasis; and upadacitinib in its first indication, rheumatoid arthritis. Across each of the four Phase 3 studies in the pivotal program for psoriasis, risankizumab showed consistent, high, durable rates of skin clearance. Based on these results, we believe risankizumab has the potential to significantly improve upon current treatment options for both bio-naïve and TNF-inadequate responder patients with moderate-to-severe psoriasis while offering the convenience of quarterly dosing. Our regulatory reviews are well underway with approval decisions expected in the second quarter. With upadacitinib, our goal is to deliver a differentiated treatment to RA patients. We designed a broad and comprehensive set of six pivotal studies in RA, enrolling nearly 5,000 patients across multiple populations, including two studies with biologic comparators. We evaluated upadacitinib head-to-head against the standards of care in RA, including methotrexate and HUMIRA, and in a broad range of patient types within the moderate-to-severe RA segment. This includes monotherapy treatment in patients who are naïve to methotrexate as well as studies in very difficult to treat patients who have failed one or more biologic therapies. Across the select clinical program, both doses of upadacitinib performed extremely well and demonstrated a strong benefit risk profile. Based on our analysis of the data generated across the registrational program, we believe the 15-milligram dose represents the best dose for the RA indication as it delivered maximal efficacy across a wide range of studies, drove strong results on important structural endpoints, and demonstrated superiority to HUMIRA in our head-to-head study. Thus, this does provide the differentiation we were seeking when we designed our program. Our regulatory submissions are currently under review and we expect approval decisions in the second half of this year. In addition to the successful trial readouts for upadacitinib and risankizumab, we also reported positive data from several Phase 3 studies in other areas of our pipeline, including elagolix uterine fibroids, VENCLEXTA in frontline CLL, and data from several important Phase 3 studies in our frontline CLL program for IMBRUVICA, including results from the ECOG, ALLIANCE, and iLLUMINATE trials. Data from these three studies showed treatment with IMBRUVICA alone or in combination significantly prolonged progression-free survival compared to therapies such as FCR, BR GAZYVA plus chlorambucil in previously untreated CLL patients. We also initiated several Phase 3 programs, including studies for upadacitinib in atopic dermatitis and ulcerative colitis. In addition to the progress we made across our late-stage programs, we also advanced a number of early-stage assets in mid-stage development, including our JAK BTK program in RA and our CD40 program in ulcerative colitis. And, we transitioned several preclinical programs into human trials including our novel TNF steroid conjugate and our RORgammaT programs. Clearly, we made tremendous progress, advancing our pipeline in 2018, and we look forward to many important pipeline milestones in 2019 as well. In hematologic oncology, we will see data from several Phase 3 studies for VENCLEXTA this year, including results from the BELLINI trial in relapsed/refractory multiple myeloma and from our two frontline AML studies, as well as the detailed data from CLL14, our Phase 3 study for VENCLEXTA in frontline CLL. These data and subsequent label augmentations will build upon the body of evidence demonstrating VENCLEXTA's potential as a foundational treatment option across a number of hematologic malignancies. Earlier this month, the VENCLEXTA CLL14 data were selected for the FDA’s real-time oncology review program. This program is aimed at expediting the review and approval process for supplemental drug applications. Results from CLL14 have already been shared with the FDA, which is part of the agency's evaluation process, leading to the decision to offer the real-time review. Very soon, we will begin submitting data as part of the review process, and expect approval decisions later this year. We look forward to bringing this new treatment to market in the frontline CLL population. In the area of solid tumors, we’ll see later this year from our Phase 3 study for depatux-m in newly diagnosed glioblastoma multiforme. This is an extremely difficult-to-treat form of brain cancer with a very high unmet need and limited treatment options. We’ve seen encouraging trends in overall survival in our Phase 2 study in second line GBM, and look forward to the results of our frontline Phase 3 study to define the future regulatory path for the program. We also expect several assets from our early-stage solid tumor programs to transition to proof-of-concept studies this year and will share data from these programs as they mature. In the area of immunology, as I previously mentioned, we expect regulatory decisions later this year for upadacitinib in RA and risankizumab in psoriasis. In addition to their lead indications, we continue to make great progress with upadacitinib and risankizumab in a number of other immune-mediated conditions. This year, we’ll report mid-stage data for upadacitinib in axial spondyloarthritis, and we plan to begin Phase 3 development in giant cell arteritis. Overall, this year, we’ll have 10 active ongoing registration-enabling programs for upadacitinib and risankizumab. We’re also making good progress with our early-stage immunology pipeline, which includes programs aimed at redefining the standard of care in autoimmune diseases. We have several promising assets including ABBV-323, our CD40 antagonist; ABBV-3373, our TNF steroid conjugate; and ABBV-599, our combination JAK BTK-inhibitor. And in the area of women's health, following completion of the pivotal trials for elagolix in uterine fibroids, we plan to submit our regulatory application around the middle of the year. So, in summary, in 2018, we made tremendous progress advancing our pipeline, achieving a number of key clinical and regulatory milestones across all of our therapeutic areas. And we expect 2019 to be another very productive year for our R&D organization. We look forward to updating you on our pipeline progress throughout the year. With that, I'll turn the call over to Bill for additional comments on our 2018 performance and our 2019 guidance. Bill?

Thanks, Mike. Today, I'll review the highlights of our performance for the fourth quarter and full-year 2018, and then walk through our 2019 outlook. As Rick mentioned, we have completed another year of outstanding performance, delivering top and bottom line growth that ranks AbbVie among the very top of our industry peers. We reported adjusted earnings per share of $7.91, up more than 40% compared to 2017 and $1.44 above the midpoint of our initial expectations for the year. For the year, adjusted revenues were $32.7 billion, up 15.2% on an operational basis, excluding a nearly 1% favorable impact from foreign exchange. For the fourth quarter, total revenues were $8.3 billion, an increase of 8.3% on an operational basis, excluding a 1% unfavorable impact from foreign exchange. This performance reflects double-digit underlying volume growth offset by approximately 2.5 points of negative price. Global sales of HUMIRA were $4.9 billion in the quarter, up 1.4% operationally. In the U.S., HUMIRA sales increased 9.1% compared to the prior year, reflecting high-single-digit volume growth plus price. Wholesaler inventory levels remained below half a month in the quarter. International HUMIRA sales were $1.3 billion in the quarter, down 14.8% operationally, reflecting the introduction of biosimilar competition across Europe and other international markets. Global HUMIRA sales for the full year 2018 were $19.9 billion, reflecting operational sales growth of 7.4%. Full-year sales of HUMIRA in the U.S. grew by more than 10%, and international HUMIRA sales approached $6.3 billion, performing in line with our expectations. Hematologic oncology global sales were $1.1 billion in the quarter, up 50.3% on an operational basis, driven by the continued strong growth of both IMBRUVICA and VENCLEXTA. In the quarter, IMBRUVICA net revenues were $1 billion, primarily driven by continued uptake in the frontline CLL segment. VENCLEXTA revenues were $124 million in the quarter, driven by continued uptake in the second line plus setting, as a result of our midyear approval in the broad relapsed/refractory CLL segment. For the full year, our hem-onc global revenues were $3.9 billion, up 45.8% on an operational basis. Global HCV sales for the fourth quarter were $862 million. MAVYRET continues to perform well, holding roughly 50% market share globally. For the full year, HCV sales exceeded $3.6 billion and was above our previous communicated guidance. We also saw continued double-digit operational sales growth for both DUODOPA and CREON. Turning now to the P&L profile for the fourth quarter. Adjusted gross margin was 79.8% of sales, up 80 basis points compared to the prior year. This was inclusive of the year-over-year benefit related to the termination of certain royalties with HUMIRA, partially offset by the dilutive impact of partnership accounting. Adjusted R&D was 16.5% of sales, supporting our pipeline programs in oncology, immunology, and other areas. Adjusted SG&A was 21.6% of sales, an increase of 30 basis points versus the prior year, reflecting continued investment in our on-market products as well as investment in advance of several upcoming product launches. The adjusted operating margin was 41.7% of sales in the fourth quarter, an improvement of over 100 basis points versus the prior year. Net interest expense was $319 million and the adjusted tax rate was 9.1% in the quarter. Fourth quarter, adjusted earnings per share, excluding specified items were $1.90, up 28.4% year-over-year. In the quarter, we recorded a net charge of $2.75 per share, related to the partial impairment of intangible assets acquired as part of the Stemcentrx acquisition. The net after-tax impact of this impairment and the related adjustment to contingent consideration liabilities was $4.1 billion. This one-time net charge has been excluded from our adjusted EPS results. As we look ahead to 2019, our full-year adjusted EPS range is $8.65 to $8.75, reflecting growth of 10% at the midpoint. Excluded from this guidance is $1.26 of known intangible amortization and specified items, as well as non-cash charges for contingent consideration adjustments related to the expected approval of risankizumab in the first half of the year. On the topline, in 2019, we expect revenue growth of approximately 1% on an operational basis. At current rates, we would expect foreign exchange to have just less than a 1% unfavorable impact on reported sales growth. Included in our revenue guidance are the following assumptions for our key products. In 2019, we expect U.S. HUMIRA to once again be an important contributor to our performance, with revenue growth of approximately 7%. We expect 2019 international HUMIRA to be down approximately 30% on an operational basis, reflecting the impact of biosimilar competition outside of the U.S. For our hem-onc franchise, we expect global revenues of approximately $5.1 billion, contributing more than $1 billion of growth; this includes IMBRUVICA global revenues to AbbVie approaching $4.4 billion with U.S. sales growth of approximately 21%. For VENCLEXTA, we expect sales of approximately $725 million. We expect global HCV sales of approximately $3.3 billion in 2019, with roughly flat performance in the U.S. and international sales of approximately $1.7 billion. For ORILISSA, we expect sales of approximately $200 million. We are pleased with the early stages of the launch and expect demand to ramp, given recent increased formulary access, which now stands at approximately 70%. For CREON, we expect approximately 10% sales growth; for DUODOPA, we expect revenues approaching $500 million; for LUPRON, SYNTHROID, and SYNERGIST, we expect sales to be roughly flat year-over-year. And for AndroGel, we are forecasting sales of approximately $100 million, following the entry of generic competition for AndroGel 1.62. Finally, we are expecting a regulatory decision for both risankizumab and upadacitinib later this year. We will provide specific guidance for these assets following their respective approvals. Looking at the P&L for 2019. We are forecasting an adjusted gross margin ratio of above 82.5%. This profile reflects a year-over-year benefit of HUMIRA royalty reduction, as well as the impact of partnership accounting. We are forecasting R&D expense of approximately 15.5% of sales, reflecting funding actions supporting all stages of our pipeline. We are forecasting SG&A to be approximately 20.5% of sales in support of five major product or indication launches. For 2019, we are forecasting an operating margin ratio of just above 46.5%, roughly 200 basis points above prior year, inclusive of the required investment on our new product launches. We expect net interest expense approaching $1.3 billion, and we model a non-GAAP tax rate, just above our full-year rate in 2018. Regarding our first quarter outlook, we expect adjusted earnings per share between $2.05 and $2.07, excluding approximately $0.31 of specified items. We anticipate first quarter revenue of approximately $7.7 billion. At current rates, we would expect foreign exchange to have an unfavorable impact on reported sales growth of approximately 2% in the first quarter. For U.S. HUMIRA, we expect sales of approximately $3.2 billion; we expect international HUMIRA sales of approximately $1.2 billion, assuming current exchange rates. And for IMBRUVICA, we expect sales of approximately $1 billion. Moving now to the P&L for the first quarter, we are forecasting an adjusted gross margin ratio in line with full-year guidance and spending levels slightly favorable relative to the full-year profile due to investment timing. We expect an adjusted tax rate, just below 8% in the first quarter, lower than our expected full-year rate, reflecting the fact that the tax impact of equity compensation is most pronounced in the first quarter of each year. In summary, AbbVie has once again delivered excellent quarter and full-year results. We’ve driven top tier revenue and EPS growth while also advancing our strategic priorities and pipeline. And our strong growth prospects have enabled us to position the business for yet another year of double-digit earnings growth in 2019, despite biosimilar dynamics and the required investments to support several major product and indication launches. We are very pleased with AbbVie’s strong performance. And with that, I'll turn the call back over to Liz.

Thanks, Bill. We’ll now open the call for questions. Operator, first question, please?

Thank you very much. In 2019, if HUMIRA grows $1 billion in U.S. but declines $2 billion o-U.S., it would have to grow up 11% in 2020 to hit the $21 billion guidance figure. Is that still your expectation? Secondly, do you anticipate an FDA AdCom for upadacitinib? And then, lastly, perhaps in part due to AbbVie’s openness to do a deal and its desire to have another therapeutic vertical, there's been some speculation that AbbVie might pursue a big deal, even in an unfriendly way. Considering the many moving parts at AbbVie, what is your appetite right now for a big deal and would you consider an unfriendly one? Thank you.

Yes, this is Rick. I'll address points one and three, while Mike will discuss point two. First, regarding HUMIRA, we are still seeing strong growth in the U.S., and the impact of biosimilars is becoming clearer. In our planning for 2019, we anticipated some continued pricing erosion that could be greater than current levels, so we'll need to monitor how that develops. Overall, we remain confident in the long-term targets we've established, regardless of minor variations between products. We are committed to those targets and will uphold that commitment. As for the potential for a major deal, I want to clarify that it is not something we are currently considering.

Okay. So, this is Mike. I'll take number two. With respect to upadacitinib and the potential for an AdCom, I think it's important to keep in mind that we’re in very-early stages of a regulatory review. But, if you look at the practice of this review division, it's common for filings like this for new molecular entities in RA to go to an AdCom. So, it's certainly possible. But, we’ll have a much better idea once we’re further along in the review process.

Thanks, Steve. Operator, next question, please?

Thank you. I'm sorry if I missed the beginning of the call. Could you provide more details regarding your 2019 adjusted earnings guidance for HUMIRA in international markets? Additionally, you recently underwent a management reorganization. Can you discuss that in relation to the company's succession planning? Lastly, you mentioned some negative headlines regarding two Phase 3 veliparib trials from over a year ago. I haven’t seen any data on that yet, but I'm interested in when we might see that data presented. Thank you.

Hi, Andrew. I’ll start with your first question. It’s Bill Chase. Our guidance around HUMIRA for 2019 is in the U.S. strong growth, 7% is what we are recommending to model. Outside of the U.S., obviously with the advent of biosimilars, we are forecasting a decline, and currently we view that as about 30% on an operational basis.

So, Andrew, this is Rick. I'll address number two. We did announce a change in our executive organizational structure. The purpose of this change was to narrow the focus of my direct reports, which will allow us to concentrate and execute at a higher level regarding our future strategy. Additionally, we have a highly skilled executive leadership team, and this change will provide them with more experience in different areas. I've heard rumors about my potential retirement, and I want to clarify that they are not true. As many of you may know, I retired once before and can assure you that I'm much more effective running AbbVie now than I was at that time. Hopefully, that clears things up.

This is Mike. With respect to veliparib data, so, we announced those topline results when we had them. We’re committed to publishing all results and making the data available. I don’t have a specific meeting or a specific timeframe to point to here on the call today. But, we will be making those data publicly available.

Thanks, Andrew. Operator, next question, please?

I have a few questions about HUMIRA. For outside the U.S., are there countries that still need to finalize contracts for 2019? What is your new guidance, Bill? Are there any resets at the end of the year looking into 2020 and beyond? When discussing the U.S., it seems the strategy is to shift HUMIRA to a later stage in the treatment approach across various markets, with upadacitinib and risankizumab positioned earlier. As you approach the launch, how is the contracting process going to facilitate this? Is it primarily about discounts or rebates, or are there other innovative strategies being considered?

This is Rick. I'll address the first two points. There are still some countries where the situation is evolving, particularly in southern Europe and to some extent in Germany. Over the past 60 days, we haven't observed significant price movement. However, we anticipate a slight decline in price, which we've factored into our forecast to ensure we are prepared for potential outcomes. In terms of other countries in 2020, most of the volume is not affected by additional biosimilar exposure this year, with the more significant developments occurring in 2021. Although there is some impact in 2020, the majority will take place the following year. Regarding the contracting dynamics, our go-to-market strategy for these products isn't something we can fully discuss at this moment. However, the data we've gathered on upadacitinib and risankizumab across a variety of indications confirms that these assets are superior to current offerings. We now have sufficient data from numerous clinical trials and diverse patient populations, from treatment-naïve patients to those inadequately responding to TNF therapies, demonstrating that these assets can significantly outperform both HUMIRA and other available medicines. Consequently, our strategy will focus on positioning these products as market leaders. We will implement a contracting strategy that aligns with this approach, planning our launches to effectively promote this in both U.S. and international markets, and we expect the uptake to align with the profiles of these assets.

Operator, next question, please?

I have a question on spending infrastructure over the long-term. So, naturally, the big concern is HUMIRA biosimilars and how that impacts the P&L. And one of the levers you could potentially pull is cutting cost some point in the future. And I know you've given long-term operating margin guidance. But, can you give us kind of more detail on how you see SG&A and R&D evolving over time? I’m wondering if you can call large amounts of spending out of these line items. It seems like that could be challenging in the context of still investing heavily in the INI space with your other assets. So, how much is spending, a major lever that can be pulled in the future? And then, second question just goes back to HUMIRA international. So, in October, you revised down your erosion guidance. And now, just three months later, you’ve revised it down again in terms of international performance for 2019. Can we be confident that you won't have to revise it down yet again at another point in the current year?

I will address most of your questions, and Bill can add anything I miss. Let’s start with the guidance you mentioned and review its history, as it’s important to understand. We initially provided guidance in 2015, based on our observations in the marketplace, primarily focusing on REMICADE and later ENBREL. We updated this guidance in 2017 with our revised thoughts on the situation. At that point, we indicated we needed to assess future trends. During our third-quarter call, we were just a few weeks into the biosimilars market. We made it clear that what we shared was a snapshot of our perspective at that moment and that it shouldn’t be assumed as definitive guidance; we anticipated potential declines. We hope that was clear. Regarding your specific question, we have factored in additional erosion that hasn’t occurred yet. The figure that Bill mentioned, 30% to 31%, is about 5 points higher than previously estimated, incorporating assumed erosion. This outlook is based on our best estimates of future events, influenced by competitor actions, and we cannot predict their behavior with certainty. However, we are confident in achieving the bottom-line performance we outlined, with a strong expectation of double-digit earnings per share. That’s what you can depend on. There may be minor fluctuations, but we are forecasting as accurately as possible, and we believe it's highly likely that these numbers will hold true. Regarding infrastructure spending, we adapt our investments based on market conditions, similar to how we handle any product facing loss of exclusivity, and we are doing this with HUMIRA in international markets. Importantly, over the next 12 months, we are launching four major products with multibillion-dollar potential. VENCLEXTA is in its early stages and has just received a broad label for CLL and AML, so it’s beginning to grow rapidly. We have just launched ORILISSA, and we are preparing to launch upadacitinib and risankizumab. These are significant assets, and we will support them appropriately to drive their potential, which will help mitigate the impact of biosimilars. That is our strategy moving forward.

Yes. The only thing I’d also add is as you look at the 50%, look, the big part of the story from here on out is going to be obviously P&L leverage, given robust sales that we’re expecting once these new products get up to into their ramp. So, 2020 should be a sales expansion year. But, even then, we’re always going to be thoughtful about how we deploy our resources. If you look at this year, on an operational sales increase of 1%, we’re still delivering 200 basis points of operating margin progress. So, I think that's pretty good. And we are appropriately funding those new product launches. The only way you can do that is being thoughtful about your overall book of SG&A and do some prudent reallocation. And obviously, you could infer to that happening in the numbers this year. So, look, we’re always going to be thoughtful on spending. But, the real way to get an improved operating margin is going to be through sales leverage, P&L leverage. And we are going to remain focused on making sure that we appropriately fund new opportunities.

And the only other thing I would add is, I think it’s important to keep in perspective how this business is performing. You have a business here that for six years has delivered top-tier performance. Last year, we grew the bottom line 41% with the top line 15%. If you look at 2019 and you look at that guidance range at the midpoint being 10%, you back out the share repurchase, which is about 3 or 4 points of it, it says that the underlying business, despite taking almost $2.5 billion hit, is growing at 6% or 7% from an EPS standpoint. If you adjusted for the $2.5 billion, the bottom line is growing at 23%. There aren’t many businesses around here that have that kind of performance. Top line is the same thing. If I adjust the top line, which is roughly 1%, if I adjust it for the $2.5 billion, the rest of the business is growing high-single-digits. And so, you certainly want to make sure that you're in a position that you can continue to drive this business in a way that it can continue to perform because that is ultimately the way you’re going to absorb biosimilars. And I would tell you that despite the fact that these biosimilars have been priced more aggressively than we thought or the analogs would have suggested, the business is absorbing them effectively, and that's what the strategy was designed to do.

First, could you just talk a little bit about pricing, Rick? What assumptions about pricing you baked into your guidance for particularly U.S. revenue growth in 2019, and what do you think of the political risks that could affect that outlook? And then, secondly, could you talk a little bit about the launches of upadacitinib and risankizumab in 2019? Could you help us understand what if any ability you have to prepare for those launches in your discussions with payers? Should we be expecting them to launch with the same sort of trajectories as the preceding products in that class or should we push those launches out to 2020, as you get into that payer cycle? Thanks.

I think when it comes to pricing, we have made a commitment to implement one price increase per year, a decision we made a couple of years ago, and it would be below double digits. We have upheld that promise moving forward. The price increase for this year was approximately 6.2%. Therefore, you can anticipate that there will be no further price increase in 2019. Overall, the industry has adapted somewhat to the current pricing environment. However, our business is not heavily influenced by pricing as we are fortunate to offer innovative products, with volume being the primary driver. In 2019, we expect to see an overall negative price impact.

For the entire book of business in the U.S., low single digit.

Yes. So, it’s not heavily reliant upon price, nor last year was it heavily reliant upon price. So, I think we're comfortable with where we are from a pricing standpoint. We don’t see any exposure related to that. As far as upadacitinib and risankizumab, obviously, we will want to get these products on formulary as broadly and as quickly as possible. I would say, that's an area that we have a team that is good at doing that, effective at doing that. And so, obviously, based on the fact that we assume risankizumab is going to be approved here in the not too distant future, we have to be in a position we are in discussions, nothing that we update you here on. But, I would say the operating assumption that is probably a good assumption is that we will end up with broad coverage of these assets. As far as the ramp is concerned, I think I understood your question, and I'm going to answer it in the backdrop of what I thought you asked. What I thought you asked is how would I compare these to prior competitive launches? And I can tell you that we would expect, like other launches that will take a little bit of time in order to ramp. But, I'd say also, with our expertise in this area and the portfolio of assets that we have and the profile of these particular drugs from a clinical standpoint, I would expect that these assets will be able to drive significant share over time, and a significant capture of new patients and switching patients. And that will certainly be the strategy we have in place to drive a significant part of those available patients to these better assets.

Thanks. Operator, next question, please?

Thanks very much for the questions. My first one is just following up on the longer-term international HUMIRA business, so beyond 2019. Do you see 2019 as a peak rate of erosion for that business and then maybe more moderate step downs beyond 2019, or could we see several years of this more severe erosion level as we just think about kind of getting past this year and the outlook for that business? My second question was on capital allocation. And I guess, is the more challenging HUMIRA environment change or alter your priorities at all? I guess, specifically, the Company’s been very active on the share repo front over the past few years. But, how do you balance, I guess that repo with priority with diversification, given some of these HUMIRA dynamics that we’re seeing playing out?

So, I think, I would see that you have gotten the vast majority of the impact from a price erosion standpoint in 2019. But, remember what I described before. We have factored into our plan further erosion as you go throughout. So, there’ll be some annualization impact that you would obviously see in 2020, if that is going to play out the way that we have planned for. And then, you will have some countries that will go biosimilar in ‘21; they have not gone biosimilar today. And then, we obviously have some impact, although I would say most of those countries, it should be a lower impact, but we’re going to have to see how that sorts itself out. So, certainly, I don't think you will see a step down that’s as significant as we’ve seen in the first year because there have been very aggressive pricings in certain countries. And so, we’ll obviously get to the point at which the biosimilar players have gotten to what they believe is the floor where they want to operate. And so, I think you should see it moderate, I guess, is the best way to describe it. As far as capital allocation versus share repo, I’d say, if you look at how we’ve operated this business since day one, we’ve obviously been very vocal about how we view the business and what our mission and what our vision is for the business; and that is to drive long-term, sustainable top-tier performance. And in order to do that, you have to invest in the business appropriately. We have obviously invested significantly in R&D. Since we launched the Company, we grew significantly. We've obviously been very active from a BD standpoint. At the same time, we have a business that generates a tremendous amount of cash flow, and we generated enough cash flow that we had opportunities to be able to also do share repurchase and other methods of being able to returning capital to shareholders, such as the growing dividend. And so, we try to balance those things in a way that is appropriate but never to not strategically invest in the business. That’s always our first priority. If you look at the share repo that we’ve done in 2018, as an example, I think the thing you have to remember, and the numbers I quoted a minute ago I think are reflective of that. Share repo is driving some of the EPS growth, if you look at the midpoint. But, it’s relatively modest, 3 to 4 percentage of that. And it wasn’t driven for the purpose of doing that. Ultimately, we did the share repo and we announced it, I believe, in that first quarter call that we were going to do a significant amount of share repo because of tax reform, and we thought that was fundamentally important to be able return cash and capital back to shareholders. And so, we did it long before we ever knew what the biosimilar pricing would be. So, it wasn’t driven for the purpose of driving the short-term versus the long-term. Having said all that, we continue to be active and looking at opportunities there are out there. We have a very active business development group. We look at things that are small, things that are medium, things that are large, and we certainly have the wherewithal to be able to do things, if we could find something that strategically fit and we could get a good return on that, I can tell you we would act and we would act swiftly in order to do that. I think you’ve seen us do that before. If we could find another IMBRUVICA or we could find another risankizumab out there, I can tell you we would aggressively pursue that. And so, we fundamentally have a pipeline that we believe has the ability to do what we strategically intended it to do, and that is to absorb the impact of biosimilars. Our focus is to ramp that pipeline as rapidly as we possibly can and make sure we're in a position to be able to continue to drive strong growth in the business.

Thanks, Chris. Operator, we’ll take the next question, please?

Thanks for taking my questions. First one, just coming back to U.S. HUMIRA, just curious, the softening of the 2019 number, just sort of curious, to what degree is that cannibalization from the next-generation immunology brands, sort of curious, if that's a factor or if it really is just sort of maybe the moderation of pricing. And then, my second question, I guess, with Jamie no longer on these calls, I'll ask the question. Rick, how are you defining a large M&A deal? That's a question that we’re getting from investors. So, if you can maybe put some parameters around that that would be great.

Last time I defined a large bolt-on, it had an undesirable reaction in the marketplace. The largest transaction that we've done so far has been Pharmacyclics. That's what I view as the size of roughly a large bolt-on kinds of transaction. And when I say a large deal, I'm thinking about a very significant kind of deal, merger type deals; we’re not contemplating anything of that magnitude at all. U.S. HUMIRA, do you want to cover that, Bill?

Yes, sure. So, if you look at U.S. HUMIRA, we're guiding 7% in 2019. That's coming off of a number in ‘18 of 10%, and with, as I thank you pointed out, a lighter price increase on the years. So, if you really factor out the change in pricing year-over-year, you'll see that the business is still performing very, very well; volumes are still pretty much pegged right where they have been historically. You got the law of large numbers here a little bit. But, I wouldn't read much into underlying dynamics on HUMIRA other than continued strong performance in the U.S.

Thanks, Jason. Operator, we have time for one final question.

I'm curious about the hematology-oncology franchise strategy. It seems that IMBRUVICA and VENCLEXTA are performing well. What are your thoughts on expanding that? Additionally, there was the previous case you had with other companies, and there's also the cellular therapy space. I was wondering about your overall strategy in that area.

This is Mike. I’ll take that. With respect to our hem-onc franchise, both IMBRUVICA and VENCLEXTA are performing very well, both from a data perspective and from their trajectories in the marketplace. One of the things that I think is particularly attractive about those two, with respect to our franchise, is that they cover a broad range of hematologic malignancies. They work well together in areas like CLL and mantle cell lymphoma, MCL, and they also have some unique areas, for example, like venetoclax in AML. So, that’s going to be an important area for us going forward. It’s now annualizing over $4 billion; it’s growing at a robust rate. So, I think you can expect to see us continue to work in this area. We’re going to look at how we not only continue to develop those mechanisms in areas like multiple myeloma for VENCLEXTA, but also how from our early pipeline we can add additional mechanisms, so that will further strengthen our position in hem-onc. And there are a lot of things in our early, now approaching mid-stage pipeline work in apoptosis and other areas that could apply there. And of course, we’re looking more broadly than that. You’ve seen us do early-stage deals, but early-stage deals that give us access to interesting technologies. We have some very early plays that could be in toward cellular therapies and to other mechanisms that could further develop that franchise.

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