Abbvie Inc (ABBV) — Q2 2019 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; and Rob Michael, Executive Vice President and Chief Financial Officer. Laura Schumacher, Vice Chairman, External Affairs Chief Legal Officer and Corporate Secretary will join us for the Q&A portion of the call. 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 statement. Additional information about these risks and uncertainties is included in our 2018 annual report on Form 10-K and in our other SEC filings. AbbVie undertakes no obligation to update these forward-looking statements 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. I'll discuss our second quarter performance and highlights as well as our full year guidance which we are raising again this quarter. Mike will then provide an update on recent advancements across our R&D programs and Rob will discuss the quarter in more detail. Following our remarks, we'll take your questions. AbbVie once again delivered an outstanding quarter with adjusted earnings per share of $2.26, representing growth of 13% versus last year exceeding our guidance. Total revenues of more than $8.2 billion was also ahead of our expectations for the quarter with several key products contributing to that growth. We saw excellent performance from our hematological oncology business with global operational sales growth of nearly 40%. IMBRUVICA is performing exceptionally well with robust share growth across multiple lines of therapy in CLL including new patient share of approximately 35% in the frontline setting, up approximately 10 share points over the past year. This strong momentum directly relates to the growing body of clinical evidence, label augmentation, and recently updated treatment guidelines which now position IMBRUVICA as the only preferred therapy in the frontline CLL market. VENCLEXTA also continues to make very good progress in the broad relapsed/refractory CLL setting and has established a strong growth trajectory in the recently approved indications for first-line CLL and AML. U.S. HUMIRA grew more than 7.5% versus last year driven by continued strong volume growth across all segments. And despite a very competitive environment, HUMIRA remains the market leader across each of the three primary categories; rheum, derm, and gastro. During the quarter, we also announced our ninth global settlement agreement resolving all IP-related litigation with BI over their biosimilar HUMIRA. This final settlement agreement reinforces our confidence that we will not see direct biosimilar competition in the U.S. until 2023. International HUMIRA sales were down 31% on an operational basis, reflecting the impact of direct biosimilar competition in Europe and other international markets. The international biosimilar trends and dynamics remain consistent with our expectations. And SKYRIZI, our recently approved treatment for moderate to severe plaque psoriasis is performing significantly above our expectations, contributing nearly $50 million in revenue this quarter. The launch is going extremely well. We are seeing strong prescription volume well above recent launch analogs in the psoriasis category. Through the first 11 weeks of launch, we already have approximately 1,700 prescribing physicians and approximately 3,750 patients have been treated with SKYRIZI including those in our bridge access program. We're extremely encouraged by this uptake which supports our continued confidence in the asset. Commercial access for SKYRIZI is also tracking in line with our expectations. As a result of the launch progress and the momentum, we are increasing our full year guidance for SKYRIZI and now expect full year global sales of approximately $250 million. The outlook for SKYRIZI remains very strong and it represents a significant long-term opportunity for AbbVie with multibillion-dollar peak sales potential. We're also very pleased with our overall commercial performance and financial results for the quarter. We remain well-positioned to deliver double-digit earnings growth once again in 2019. As noted in our earnings release we are raising our full year 2019 EPS guidance and now expect adjusted earnings between $8.82 and $8.92 reflecting growth of 12.1% at the midpoint which is at the very top of the expectations for our peer group. Clearly, this is an extremely exciting time for AbbVie. Before I turn the call over to Mike and Rob, I want to speak briefly about our proposed acquisition of Allergan and the progress we are making. We've had an opportunity to speak with many investors over the past several weeks since the announcement to share the strategic rationale for the transaction and our outreach with investors will continue as we have a number of opportunities to engage with shareholders in the coming months. The integration planning is already underway and we are working to ensure a seamless transition on day one. We've identified individuals within AbbVie that will lead the integration process and there will be dedicated teams to ensure there is no disruption to our strong momentum. And finally, I'll be meeting with the Allergan employees in the coming weeks. I look forward to engaging with and ultimately welcoming this experienced and very talented organization into AbbVie. We remain incredibly excited about the transaction which has significant strategic merit. The acquisition represents a unique opportunity for AbbVie to accelerate our non-HUMIRA business, the AbbVie growth platform by adding highly valuable on-market assets with leadership positions across attractive growth segments. AbbVie's new growth platform will achieve stand-alone scale immediately with sales of more than $30 billion in 2020 and top-tier growth prospects. And it will enable enhanced funding of our innovative R&D platform and provide ample resource for additional pipeline expansion which remains the core focus for AbbVie. The combination of AbbVie and Allergan will also unlock significant value for our shareholders as we've outlined. The transaction delivers immediate robust financial benefits with EPS accretion of 10% in the first full year of combination increasing to above 20% at peak. This is inclusive of more than $2 billion in annual pre-tax synergies and cost savings which is expected in the third year post-closing. This combination also provides significant additional earnings in the period following the loss of HUMIRA exclusivity. And the transaction provides enhanced cash flow to support a strong and growing dividend while rapidly paying down debt and continuing to invest in our innovative pipeline through increased R&D funding and the acquisition of mid to late-stage assets. And finally, we're actively seeking the relevant approvals for the transaction and are working towards our stated goal for closing in the first quarter of 2020. In summary, we're extremely pleased with our outperformance in the quarter and with the continued strong momentum of our business leading to another increase in our expectations for 2019. Since 2013, we have built a strong foundation through outstanding execution and the advancement of our robust pipeline of new innovative medicines. Looking back, we have delivered 16 quarters of double-digit earnings growth and have consistently been among the peer group leaders for revenue and EPS growth. We've launched 13 new products for major indications which have and will continue to contribute considerably to our growth. While this level of consistent performance is truly exceptional, especially given the challenges which inevitably arise in a large complex business like ours, the key to long-term sustainable strong performance has always been forward planning. And Allergan represents another example of our proactive planning to ensure we will continue to deliver top-tier performance into the next decade. Our strong track record of execution combined with the momentum of our business gives us tremendous confidence in our ability to continue to successfully execute on our long-term strategy and deliver outstanding shareholder value going forward. With that I'll turn the call over to Mike for additional comments on our R&D programs.

Thank you, Rick. We had another productive quarter, making progress across all stages of our pipeline. In hematologic oncology, we received FDA approval in May for VENCLEXTA in combination with GAZYVA for previously untreated patients with CLL. This is a significant milestone for the VENCLEXTA program and highlights its increasing utility among CLL patient populations. The frontline CLL indication is the fourth approval for VENCLEXTA and was based on data from the Phase 3 CLL14 study, which was reviewed under the FDA's Real-Time Oncology Review program and led to approval in just over two months following submission. The CLL14 data showed that VENCLEXTA plus GAZYVA significantly increased progression-free survival in patients with previously untreated CLL compared to GAZYVA plus chlorambucil, reducing the risk of disease progression or death by 67%. The VENCLEXTA combination also resulted in higher rates of complete response and minimal residual disease negativity compared to the comparator regimen. At the recent EHA meeting, we presented detailed results from the BELLINI study, which evaluated VENCLEXTA in combination with Velcade and dexamethasone in patients with relapsed/refractory multiple myeloma. In a subgroup of patients with a t (11;14) translocation, treatment with the VENCLEXTA combination showed an 89% reduction in the risk of disease progression or death. Following discussions with the FDA, we recently resumed the CANOVA study, our registration-enabling trial for this biomarker-defined patient population, which makes up roughly 20% of the multiple myeloma population. We anticipate data from the Phase 3 CANOVA trial in 2021. Moving to IMBRUVICA, we are building our evidence base supporting IMBRUVICA across various patient segments in CLL and other blood cancers. Results from the CLL12 study, a placebo-controlled Phase 3 trial evaluating IMBRUVICA versus no treatment in the asymptomatic watch-and-wait population, were presented at the recent EHA meeting. While current practice has been observation, we believe some patients with high-risk features may benefit from IMBRUVICA treatment. Data from the CLL12 trial indicated that IMBRUVICA significantly improved event-free survival, progression-free survival, and time to next treatment in treatment-naive early-stage CLL compared to placebo. Safety results showed that most adverse events were similar between IMBRUVICA and placebo, except for atrial fibrillation, bleeding, and hypertensive disorders, which we consider to be on-target BTK effects. This data encourages us as it highlights IMBRUVICA's potential for patients who typically do not receive treatment. In solid tumors, we recently completed the Phase 3 studies for veliparib in BRCA-mutated breast cancer and in ovarian cancer, the latter in collaboration with the gynecologic oncology group. Both studies met the primary endpoint of progression-free survival, with safety profiles consistent with earlier studies. We are analyzing this data and will discuss the findings with regulators to see if they are sufficient for registration. Detailed results will be presented at an upcoming medical meeting. In immunology, we are progressing well with our late-stage assets SKYRIZI and upadacitinib as well as our early-stage programs. Early in Q2, we received U.S. and European approvals for SKYRIZI in psoriasis, and we expect an FDA decision soon for upadacitinib in rheumatoid arthritis. We believe both therapies are differentiated assets in their initial indications and have the potential to be best-in-category treatments across multiple diseases. We anticipate data from several follow-on indications over the next 12 to 18 months and will provide updates as these programs develop. We also aim to enhance treatment standards through our early-stage programs, including ABBV-599, a JAK-BTK inhibitor, ABBV-323, a CD40 antagonist, and our TNF steroid conjugate program. In women's health, we plan to submit our regulatory application for elagolix in uterine fibroids shortly. Many women with uterine fibroids experience heavy menstrual bleeding and painful periods, and elagolix may provide a new treatment option for this population. This submission represents a significant milestone in our elagolix development program, and we look forward to bringing this innovative treatment to market next year, pending approval. Lastly, regarding neuroscience, we decided to halt the Phase 2 study for ABBV-8E12 in Progressive Supranuclear Palsy after a futility analysis indicated that ABBV-12 did not meet our efficacy expectations in PSP patients. Alzheimer's disease and PSP differ in several key aspects, so we will continue the ongoing Phase II study in Alzheimer's disease as planned. This quarter, we also began the Phase III program to support the registration of ABBV-951, our innovative subcutaneous Levodopa/Carbidopa delivery system. In summary, we’ve made significant progress across our pipeline in the first half of the year and remain on track for further advancements throughout the rest of 2019. Now, I'll turn the call over to Rob for more comments on our second-quarter performance.

Thanks Mike. As Rick mentioned, we had another quarter of strong performance. We reported adjusted earnings per share of $2.26, reflecting growth of 13% compared to prior year and $0.05 above our guidance midpoint. For the second quarter, net revenues were up 1.5% on an operational basis, excluding a 1.5% unfavorable impact from foreign exchange. Strong growth from several key products offset the impact of international biosimilar competition. U.S. HUMIRA sales were $3.8 billion, up 7.7% compared to prior year with volume growth of approximately 7% and a modest positive price impact. Wholesaler inventory levels remained below 0.5 month in the quarter. International HUMIRA sales were approximately $1.1 billion, down 31% operationally, reflecting biosimilar competition across Europe and other international markets and in line with our expectations. As Rick previously mentioned, we are extremely pleased with the performance of SKYRIZI, with sales of $48 million in the quarter. Hematologic oncology global sales were nearly $1.3 billion, up 39.1% on an operational basis, driven by the continued strong growth of both IMBRUVICA and VENCLEXTA. IMBRUVICA global net revenues were $1.1 billion, primarily driven by continued uptake in the frontline CLL segment. In CLL, IMBRUVICA remains the market leader across all lines of therapy with new patient share of approximately 35% in the frontline setting. VENCLEXTA revenues were $169 million, driven by continued progress in the broad relapsed refractory CLL segment and our recent approval for frontline CLL and AML. We've seen market share gains across all approved indications including AML, where the launch is exceeding our expectations. Global HCV revenues were $784 million in the quarter, down approximately 17% on an operational basis, mainly driven by lower treated patient volumes in select international markets. We also saw continued strong operational sales growth for both Duodopa and Creon. Turning now to the P&L profile for the second quarter. Adjusted gross margin was 82.7% of sales, up 220 basis points compared to the prior year including a 290 basis point benefit related to expiration of HUMIRA royalties, partially offset by the impact of partnership accounting. Adjusted R&D investment was 14.9% of sales supporting our pipeline programs in oncology, immunology, and other areas. Adjusted SG&A expense was 19.6% of sales, consistent with our expectations. The adjusted operating margin ratio was 48.2% of sales, an improvement of 290 basis points versus the prior year. Adjusted net interest expense was $302 million and the adjusted tax rate was 8.7%. In the quarter, we recorded a specified charge of $1.55 per share for the contingent consideration increase related to SKYRIZI future milestone and royalty payments. This non-cash charge includes the impact of both a higher risk-adjusted cash flow forecast following the recent regulatory approvals for SKYRIZI as well as lower discount rates. As mentioned earlier, based on our strong performance year-to-date, we are raising our full year adjusted earnings per share guidance to between $8.82 to $8.92, reflecting growth of 12.1% at the midpoint. Excluded from this guidance is $3.13 of known intangible amortization and specified items. We are also increasing our revenue guidance for the full year and now expect growth of approximately 2% on an operational basis. At current rates, we continue to expect foreign exchange to have approximately a 1% unfavorable impact on full year reported sales growth. Included in this guidance are the following assumptions for our key products: We now expect U.S. HUMIRA sales growth approaching 8%. We continue to see robust volume growth and maintain a strong leadership position across all segments. For our hem/onc franchise, we now expect global revenues of approximately $5.3 billion. This includes IMBRUVICA global revenues of approximately $4.6 billion with U.S. sales growth of approximately 27%. For SKYRIZI, as Rick mentioned, we now expect global revenues of approximately $250 million. We're now forecasting global HCV sales approaching $3.1 billion, which we expect to be split evenly between U.S. and international. And for ORILISSA, we now forecast sales to be approximately $100 million. We are still in the early stage of market development. And while the launch ramp is slower than initially expected, we continue to believe ORILISSA will be a significant long-term opportunity for AbbVie. All other full year 2019 forecast assumptions for our key products remain unchanged. Turning now to the P&L for 2019. We now expect adjusted net interest expense of approximately $1.2 billion. All other full year 2019 guidance assumptions remain unchanged. As we look ahead to the third quarter, we expect adjusted earnings per share between $2.28 and $2.30 excluding approximately $0.43 of non-cash amortization and other specified items. We anticipate third quarter adjusted revenue of approximately $8.4 billion. At current rates, we expect a modest unfavorable foreign exchange impact. For U.S. HUMIRA, we expect sales growth of approximately 8%. We expect international HUMIRA sales of approximately $1 billion, assuming current exchange rates. And for IMBRUVICA, we expect global sales of approximately $1.2 billion. Moving now to the P&L for the third quarter, we are forecasting an adjusted operating margin ratio of approximately 48%, and we expect the adjusted tax rate to be in line with our full year guidance, which is just above our 2018 rate. In summary, AbbVie has delivered another excellent quarter with results well ahead of our expectations. We expect this momentum to continue in the second half of 2019 putting us in a strong position to once again deliver top-tier earnings growth. And with that I'll turn the call back over to Liz.

Thanks, Rob. We'll now open the call for questions. Operator, first question please.

Thank you. I have two questions. Rick in Q1 you warned us that SKYRIZI was unlikely to have meaningful sales in Q2 and today you delivered one of the biggest launch numbers in my memory. So what is going on? What has been better than expected? So that's the first question. And the second question is the fact that it appears there will not be upadacitinib AdCom, could be great news or a bit troubling. Great, if approval is going to be an FDA rubber stamp and troubling if it implies the FDA is unlikely to approve the drug on August 19. So any perspective on what's going on with the regulators would be helpful. Thank you.

Okay. All right, Steve. I'll cover the first question and Mike will cover the second one. I would say, we have been extremely pleased with the market reaction to SKYRIZI. I think it's a clear demonstration as to the value of this asset in the marketplace, the higher level of efficacy, and the other attributes of the product. And so I think it has clearly beaten the expectations that we have, and have gotten there much faster than we would've expected it to get to this level of performance. I mean, it's truly outperforming all of the analogs that are out there in this category. I think one of the more impressive numbers from our perspective is, if you look at the in-play share, which we define in-play share to be naive patients plus all switching patients, SKYRIZI after 10 or 11 weeks has already achieved 24% of the in-play share. And to put that in perspective prior to the launch, HUMIRA was at 28%. So it's almost to the level of what HUMIRA was as the market leader in that category. And interestingly enough about 75% or a little more than 75% of that volume is coming from other biologics. We've only seen HUMIRA trend down slightly from that. So it's clear that SKYRIZI is capturing significant competitive opportunities in the marketplace. So, I mean, I think we're obviously pleased with it. It's reinforcing the expectations that we had long-term for the drug and I think we'll get to the ramp much faster than we had expected. So it's great news from our perspective. Mike?

So, this is Mike. I'll take the question on upa. So we submitted upa in late December of last year under a six plus two review clock. So we're pretty far along in the review process. We have said in the past and it continues to be true that we do not expect an Advisory Committee. We feel good about the performance of upa both from an efficacy and a benefit/risk perspective across the program and we do not have any concerns about approvability.

Thanks, Steve. Operator, next question please.

Thank you very much for taking the question. Just a couple of things, Rick, that have come up since the deal was announced. Could you comment on whether AbbVie has any opioid liability flowing through from legacy Abbott? And then secondly, could you talk a little bit about the percentage of your revenue that comes from Part B and Part D and your view on the Grassley-Wyden bill? It seems to be getting bipartisan support. So what effect would that have on your business outlook? Thanks.

Okay. With respect specifically to opioid liability flowing through, we do not have any liability for opioids relating to Abbott's co-promotion with Purdue Pharma.

Let me start by discussing the Senate proposal that has been introduced. We are supportive of measures that reduce patients' out-of-pocket expenses. One of the significant issues we face in the U.S. is that the original design of Part D did not anticipate the amount of specialized medicine that would emerge over time, leading to high out-of-pocket costs that make many drugs unaffordable for average seniors. Therefore, any steps taken to alleviate those costs are beneficial for both the industry and patients. The Senate bill does aim to reduce out-of-pocket costs to some degree, but we need to consider whether it is sufficient. Can patients truly manage the $3,100 average out-of-pocket expense? This is an important topic for discussion. Another key point is that the costs are heavily front-loaded for patients, requiring them to pay the $3,100 early in the year, which can be a challenge for their cash flow. We believe it would be advantageous to advocate for a more even distribution of these costs throughout the year to make payments more manageable on a monthly basis. Additionally, there are elements of the legislation that may be detrimental, particularly for companies focused on innovation, while inadvertently favoring companies without specialty products that enter the catastrophic phase. It seems unlikely that it was the intention of this proposal to allow some companies to pay less than they currently do, but that is how it is structured now, and it is a matter that warrants further discussion. As you know, there is a long process ahead. This legislation is complex and will require time to be worked through, likely resulting in significant changes to the draft. However, pursuing ways to lower out-of-pocket costs for patients is certainly a positive move. At this moment, it is too early to predict how this will affect AbbVie’s business. Any efforts to decrease out-of-pocket expenses are expected to lead to a boost in volume, which needs to be acknowledged, but many factors will be addressed before any implementation occurs. On the percentage of business, I will have Rob provide that information.

Yeah. This is Rob. So Part D is about 20% of our U.S. sales or 14% of our global sales. Part B is very small less than 1% of our sales.

Thanks, Geoff. Operator, next question please.

Hey. Good morning. Thanks for taking my questions. First I just wanted to follow-up on Geoff's question actually. This idea around the Purdue co-promote, because Abbott seems to be saying something different about where that liability could fall. So, is your comment that AbbVie does not have any liability, is it really just on the fact that the issue is just not ripe yet, and it's just premised on so many hypotheticals that you don't want to cause fire or characterize that as a liability? So, just trying to understand if that's really it or if you guys have fundamental differences around the separation agreement when AbbVie spun off in 2013. And then my second question just on upadacitinib. If approved, how quickly do you think that drug could replicate the early commercial success of SKYRIZI that we've seen so far? And if you can frame any of the critical variables in the labeling determination that you think would facilitate that sort of outcome. Thanks.

Okay. Jason, this is Rick. Regarding the first question, what we're sharing is our perspective, which aligns with the agreements on where the liability lies. Like any company, I won't speak on behalf of another company's liability; they should address that themselves. However, I want to emphasize that this is not an AbbVie liability. As for the second question about upadacitinib, this drug is built on a similar premise as SKYRIZI. We aimed for an asset that could outperform HUMIRA and show superiority over it. The oral delivery method is a patient-friendly advantage and it has exhibited excellent efficacy in clinical trials. We anticipate that it will have the potential to mirror SKYRIZI's success. We are extremely confident in our ability to launch products like upadacitinib or SKYRIZI, and we believe we can maximize the performance of this asset. We are very enthusiastic about SKYRIZI's performance, which has met or exceeded our expectations, and I feel similarly about upadacitinib based on its clinical performance and attributes. Our aim is to bring it to the market and launch the product as swiftly as possible.

Thanks, Stephen. Operator, next question please.

Hi, thanks for taking my questions. I have a couple. Rick, could you talk about the potential for international reference pricing proposals that might come from the Trump administration? Could that possibly be applied to Part D, since the focus has primarily been on Part B? Do you think that's feasible? Also, regarding upadacitinib, the data we've seen so far shows strong differentiation in safety compared to other JAK inhibitors. From a regulatory standpoint, how does the agency view the class as a whole? Do they see the JAKs as distinct from one another? The data suggests they are, but I'd like to know how your discussions with regulators are going, especially since just a few minutes ago the agency updated the XELJANZ label to include a black box warning for VTE DVT. Thank you.

Let me address the first question, and then I'll have Mike handle the second one. Regarding the proposed international reference pricing in Part D, it's important to note that our Part D business is quite small, so it doesn't significantly affect us. Implementing a structure like that in Part D would require legislative action based on current laws. However, there may be opportunities for pilot programs or alternative methods to explore this concept. It's hard to predict the outcome. I see potential in the Senate proposal, but it could benefit from some modifications to address existing issues. The proposed framework is promising and could be adjusted to improve out-of-pocket costs and ensure that the distribution of various drugs within Part D is appropriate for all patients. These fundamental adjustments could be worthwhile to consider. Now, Mike?

Okay. I'll take the question on upadacitinib. So we feel very good about the performance of upadacitinib across its program, not only from an efficacy perspective, but from a benefit/risk perspective. With respect to the agency's view, I can't speak for the agency, but that generally will differ across different components of the program. Obviously, there's been a lot of focus on the DVT and PE issue with baricitinib. And then, we just saw this morning that the FDA has announced that they've updated the label for tofacitinib to include a box warning around similar events. What we've said consistently is our program hasn't demonstrated that risk. So if we were to pick up labeling language like that or warnings around this issue, that would have to come from a determination from the FDA that they're going to move from some form of class labeling. And I'm not in a position to speak for them about that, certainly not today. Our review is ongoing so we will update on our label when we have more information.

Thanks, Navin. Operator, next question please.

Hi, thank you. Two questions. Your share price was right at about $80 a share before you announced Allergan. It's now down over 15% since that transaction. You guys have had no setbacks in that time frame. You beat results today. So that says investors aren't enamored with the deal. From investors you've met with what's the biggest pushback on the transaction? And what do you think investors are not appreciating? And second question on ORILISSA. On the market for about a year now did $19 million in the quarter. Your prior guidance is $2 billion in 2025. Is that still realistic? Thank you.

Sure, Tim. This is Rick. I'll address both of those points. Regarding the share price, it's crucial to consider all the larger transactions that have happened over the last several years, such as Bristol-Celgene, Takeda, and Shire. There was a similar initial response to those deals, with stock prices dropping around 10% to 16% at the time of announcement. Following our announcement, however, the stock increased about 3% per day on Wednesday, Thursday, and Friday, and while we were meeting with investors, which indicates that when we explain the strategic rationale and long-term benefits, investors generally leave with a positive impression. There are also technical factors at play, such as increased short selling, which is currently putting pressure on the stock. I believe the stock's performance is in line with expectations and doesn't solely reflect the perception of the transaction. We will truly understand the transaction's perception once it closes, and the shorts exit the stock, allowing it to trade based on its fundamentals. I am optimistic that it will perform well in that regard because this company has demonstrated strong performance over the past five or six years. Strategically, this positions us to maintain high-level performance regardless of what happens with HUMIRA in 2023, which was our goal. As I mentioned earlier, our success stems from our proactive management approach to addressing business risks, which is what investors rightfully expect from us. This approach also safeguards the company and shareholders against various outcomes relating to HUMIRA's loss of exclusivity in 2023. I'm enthusiastic about the Allergan acquisition; it adds valuable assets and enhances our capabilities for future growth. Regarding ORILISSA, our long-term guidance remains unchanged. When we launched, we knew we had to build the market because endometriosis hasn't seen new therapies in over a decade. Raising awareness and instilling confidence in this new treatment is essential for getting patients to consult their physicians. We're continuously refining our launch strategy to accelerate uptake. The drug's profile aligns perfectly with our goals, and we've seen good physician engagement and extensive coverage. However, we need to boost patient activation, as many women typically visit their doctors only once a year. We want them to make additional visits to discuss treatment for their condition. Currently, we're not achieving the level of patient activation we anticipated given their routine visit patterns. Therefore, we're modifying our promotional strategy to encourage more patient discussions about treatment options, which will help us accelerate growth. We will keep adjusting our approach to enhance market engagement as necessary.

Thanks, Tim. Operator, next question please.

Thank you. A couple of questions please. Firstly, could you help us think through the potential impact of biosimilar Enbrel introduction in the U.S. on your HUMIRA business? What's your level of confidence that any usage will impact only treatment-naive RA patients? Or is there risks to your in-built franchise of established patients? So that's the first question. Second with SKYRIZI. In relation to the usage anticipated with the drug how much do you expect to be home administration versus in the physician's office? And are there ready economic incentives for physicians in that to select SKYRIZI as a result of that? And then finally, again on SKYRIZI the drug is not currently approved with psoriatic arthritis unlike some of your competitors. That's about 30% I believe of the current psoriasis market. To what extent is that a disadvantage given it's going to take a while before you get the data? And there may be some questions about the Sharp scores and the comparative nature of that data versus the approved IL-17? Many thanks.

Thank you. Regarding the impact of the biosimilar Enbrel, there is no evidence suggesting it will alter the situation for well-maintained patients. We have the REMICADE biosimilar available in the U.S. currently, which hasn’t shown any significant effect, even though it’s delivered via infusion. In international markets, the introduction of the biosimilar Enbrel did not notably affect HUMIRA sales. Therefore, I don’t anticipate a major impact on Enbrel if it were to become a biosimilar. If there is any effect, it would likely be on new patients, so it isn’t a significant concern for us. As for the distribution between physician offices and self-administered treatments, I don’t have that information at the moment, so we will need to get back to you on that. Mike, could you address the third point?

So this is Mike. With respect to psoriasis in psoriatic arthritis, there is a degree of overlap between those conditions but patients often present with more prominent skin disease or more prominent joint disease. So our strategy is to have a portfolio of options for those patients. Today we have SKYRIZI which has demonstrated outstanding efficacy on the skin disease. HUMIRA we still believe is a gold standard for patients who have primary joint involvement and prominent joint involvement. Going forward, we have Phase 3 programs both for SKYRIZI in psoriatic arthritis and for upadacitinib in psoriatic arthritis. So we think across that range of options we'll have the best treatment option for each of those individual patient profiles.

And the only thing I'd add is you have to look at the data that's coming out today. I said the bulk of the volume that's coming to SKYRIZI today 77% of it is coming from other biologics. And I can tell you a significant portion of that is the IL-17s. And just think about it from this perspective between SKYRIZI now and HUMIRA we really should capture almost 50% of all in-play patients. So I think that gives you some idea of the kind of impact that it's having and the competitiveness of SKYRIZI versus those alternatives that are available whether they're 17s or other 23s or TNFs.

Thanks, Andrew. Operator, next question please.

Hi. Thanks for taking the questions and congrats on the SKYRIZI launch. One question. You mentioned in the past Rick that some smaller divestitures might be required as part of the Allergan deal. I think some investors assume Allergan's IL-23 would be one of those products. So just wondering if that's a fair assumption. And then what's your confidence level in retaining SKYRIZI? And then the second question I had relates to the U.S. HUMIRA erosion curve. Can you give us any sense of how you're thinking about that in the 2023 time frame and where Allergan fits into that? You mentioned managing the business where there's kind of risks and different outcomes but how did you guys think about that 2023 erosion curve with respect to Allergan in the business there? Thank you.

Let me discuss the divestitures. We've addressed queries from investors regarding our interest in divesting any part of our portfolio. Generally, my response would be no. There may be some overlaps from an FTC perspective, and we would handle those accordingly. Laura, do you have any additional thoughts from an FTC perspective?

Yes. I guess I will just say we filed our initial HSR filing. And obviously, we're working with the FTC to the extent that our product overlap. Specifically with respect to SKYRIZI, we do not anticipate that the FTC would require that divestiture at the very least because it's on market for a different non-overlapping indication. And from the standpoint of the FTC's review of the overlap, both the SKYRIZI product and the Allergan IL-23 will be considered pipeline assets. And SKYRIZI is being developed for a number of different indications while the Allergan product is only being developed for a couple. So we really don't believe the FTC would require divestiture of SKYRIZI simply because it's on the market for a different non-overlapping indication.

We are not in a position to discuss the specifics of the HUMIRA erosion curve at this stage, as circumstances can change. When we approach a point where we can provide a reliable erosion curve, we will definitely share that information with the market, but only when we are confident in the accuracy of our figures. We have informed investors that we have established a base case erosion curve, which we revise at least annually, and sometimes more frequently based on ongoing developments. The erosion curve has been updated to reflect our observations from international markets. Specifically, we have adjusted the pace of decline in 2023, noting that the trend has not been gradual over several years but has quickly reached a flattened state similar to where it might have been after one to three years. In numerous countries outside the U.S., the competitive landscape is increasingly aligned with our expectations and appears to be stabilizing. Consequently, we have modified the U.S. erosion curve to resemble the international curve more closely. We also explore downside scenarios to assess potential factors that could lead to increased erosion, including competitor actions, interchangeability, and changes in the U.S. healthcare system, and we utilize various models to analyze these possibilities. The Allergan transaction effectively mitigates the risks associated with these downside scenarios, providing us with a buffer if such situations arise. In the base case scenario, AbbVie significantly benefits from this transaction. Overall, there isn't a downside scenario we can envision that does not strengthen AbbVie through the Allergan deal, which was fundamentally the rationale behind the transaction and is supported by our current understanding.

Thanks, Aaron.

Great. Thanks you.

Operator, we have time for one last question.

Great. Thank you very much. So the results in the quarter were obviously very strong. I just want to understand a little bit better the gross margin. So the sales growth sequentially was over $400 million versus the first quarter, but the gross margin declined from 83.4% to 82.7%. So, if you could just give us some color on that. And then could you talk a little bit about the benefits of leveraging HUMIRA in autoimmune disease with payers? I think that management has discussed in the past that payers appreciate the fact that AbbVie is a major player in autoimmune disease and the company can offer bundled programs to facilitate adoption of SKYRIZI and that should also help upadacitinib as well. So, if you could just talk about leveraging the franchise. And then if there's any way to comment on the math that's involved so how you actually allocate rebates for example between SKYRIZI and HUMIRA that would be helpful. Thank you very much.

David, this is Rob. So I'll take your first question. So, if you look at our gross margin profile through six months, we're right at 83%. That's very much in line with our full year guidance. I mean quarter-to-quarter, you'll see the profile fluctuate due to sales mix impact of foreign exchange and timing of spending, but we feel very good about the progress we've made in gross margin and we're tracking in line with our guidance.

So David, this is Rick. The first thing I want to mention is that we do not use HUMIRA to negotiate with our payers. We have, or will have, a range of assets that we believe will give payers the flexibility to cover the largest number of patients, which is beneficial for them to provide comprehensive coverage for those patients from a clinical perspective. Regarding rebates, we do not publicly disclose those for competitive reasons. However, I've heard some speculation about leveraging HUMIRA to benefit SKYRIZI. To clarify, in this quarter, HUMIRA grew by 7.7% with a slight positive price increase. Therefore, it is clear that we did not significantly leverage HUMIRA to support a position for SKYRIZI. There are advantages for payers when both products are included in their formulary, but there is not a substantial leverage element as the market seems to suggest, particularly since we have a positive price trend. I believe that addresses your other two questions.

Okay. Thanks, David.