Great. Well, thanks for joining us, everybody. I'm Terence Flynn, the U.S. Biopharma Analyst here at Morgan Stanley. Very pleased to be hosting AbbVie this morning for this session. Today, joining us from the company, we have Rob Michael, President and COO, Scott Reents, who's CFO, Jeff Stewart, CCO, and Roopal Thakkar, who is Head of Development and Regulatory Affairs and CMO. But thank you so much, all, for being here. Really appreciate the time.
Thanks for having us.
Before we get started, for disclosures, please see Morgan Stanley's Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that out of the way, maybe, Rob, we'll go over to you. Just in terms of strategy here, you know, I think one of the questions we get from investors more frequently is now that you've delevered here post the Allergan transaction, how are you thinking about capital allocation priorities here, you know, from a high-level perspective? And then, again, we can dig into it a little bit further.
Yeah, look, I, I think, as you know, we've generated a tremendous amount of cash. I think this year, free cash flow, adjusted free cash flow is about $19 billion. We... You know, our primary means of returning capital to shareholders has been the dividend. We've increased it by 270% since inception. We grew it by 5% this year despite declining earnings, so we're committed to continuing to grow the dividend. So I'd say in terms of capital allocation, clearly the dividend is a primary means of returning capital to shareholders. But given the amount of cash we generate, it gives us flexibility to, one, deliver those strong returns to shareholders and invest in the businesses. So given the rate of delivering, you just saw we got an upgrade from Moody's recently. We done a very nice job.
By the end of this year, we'll have essentially paid off all the incremental financing from the Allergan transaction. So we have much more, I'd say, flexibility for BD. That said, we don't need to do anything to deliver on the high single-digit growth expectation for the second half of this decade. So we're really focused more on thinking of it as small to mid-size opportunities that will help drive growth in the next decade, and really focusing on the five key therapeutic areas that will drive that growth. So for example, in immunology, SKYRIZI and RINVOQ, we expect to deliver robust growth into the next decade. And so there, we're really looking for new mechanisms of action that can elevate standards of care and then drive the growth in the next decade.
Sort of what's the follow-on act for SKYRIZI and RINVOQ? Those are the opportunities that we're really focused on in immunology. In aesthetics, we've demonstrated the ability to expand this market. We've done a couple deals. Think of, like, Luminera, Soliton, with cellulite, where the focus there is really bringing, you know, new patients into our providers' practices. So things that can expand the portfolio would be examples of that. In neuroscience and psychiatry, we have a significant footprint. An example would be with Gedeon Richter. We've done a collaboration really focused on D3 selectivity that can really address mood and anxiety disorders, thinking of it as, what's the next act following VRAYLAR? So really focusing there on oncology.
We're very excited about the pipeline we have in ADCs and IO. So anything next generation would be the focus there. And so... And then eye care, a great example, 'cause if we think about the opportunities in retinal disease, glaucoma, Regenxbio is a great example, where we've got the gene therapy now for wet AMD and diabetic retinopathy. That would be an example. So it's really thinking about those, you know, small to mid-size opportunities to help drive growth in the next decade.
Yep. No, it makes sense. And as you think about the opportunity set out there, do you think there's a robust opportunity set? Because that's the other thing I think investors often debate is just, you know, what is the opportunity set right now as we look across the landscape?
You know, our BD group is active and looking at opportunities. I'd say, you know, we're certainly excited about different types of opportunities. I'd say there's enough out there that can contribute to the objectives we're pursuing for the long term.
Okay, great. And kind of the related question is, obviously, the IRA list was published about a week and a half ago or so here. I know, you guys didn't have any initial drugs on that, but just as we think about strategy here, are you making any changes in terms of how you are approaching a post-IRA world, either in terms of, you know, R&D investments internally or how you approach external deals?
Sure. So just to clarify, we did have, IMBRUVICA was on the list.
Oh, that's right.
That wasn't a surprise to us, 'cause it for our modeling, we looked at time on market and essentially the size of the gross Medicare spend. So we weren't surprised at all to see Imbruvica on the list. It was part of our modeling. As we've looked at it, there's no, I'd say fundamental change of strategy, no. But as we think about R&D and the programs we invest in, you know, clearly you have to look at, you know, investing in multiple indications in parallel. That's a little bit of a different approach. I think one of the unfortunate consequences of the legislation, as you very well know, is there's a disincentive now of small molecules versus large molecules, so, do you approach things differently there?
You know, in the past, we've studied in oncology in particular, with, with small molecules, later lines, smaller patient populations. But now, the way the legislation's written, there's a disincentive to starting the clock. And so as you think about, we need to pivot to more of that, you know, earlier lines, larger patient populations, versus what we've done before. So I'd say we've, we've adjusted the way we're thinking, the lens we're using to look at R&D programs.
But fundamental to the strategy, no, and we've highlighted... I believe we were here a year ago, highlighting that, look, as relative to our peers, our Medicare exposure is lower. And we have reiterated the high single digit long-term growth, in light of IRA. Not to say that-- that will have an impact on us and all the players in the industry but we think we're in a position of relative strength. But we're still continuing to study the implications for IRA.
Yep. Okay, great. Maybe one related one, I guess, is just that there's been some debate about if the Medicare negotiation could spill over to the commercial setting. I mean, any thoughts on that? I know it's still early days, but how are you thinking about that?
From, you know, our experience, there are multiple channels right now where you see government pricing. You can Medicaid 340B, you've got best price. We have not seen that spill over in the past, so our working assumption is that we do not expect to see spillover in the commercial channel.
Okay. Okay, great. Maybe now going back to the high single-digit revenue growth, I think consensus is mid-single digits, you know- Yeah -last time I checked, so there's a disconnect there. And I think earlier this year, investors were concerned that maybe it would be low single digits because of some of the, you know, pricing questions around immunology. Now, I think people are back to this mid- single digit mindset. As you think about that, what would you highlight as some of the bigger disconnects between your confidence in getting to that mid-single digit and maybe where, you know, investors are right now?
Yeah, when I look at sell-side consensus from 2024 through 2029, the compound growth is just over 4%.
Yeah
Which is lower than our high single-digit guidance we've provided. And I'd say the lion's share of the difference is SKYRIZI and RINVOQ. I do see a difference also for VRAYLAR and aesthetics, each about $1 billion, where we've said greater than $9 billion for aesthetics. The street's about $1 billion lower. For VRAYLAR, we've said peak approaching $5 billion, the street's about $1 billion lower. But the lion's share of the disconnect is SKYRIZI and RINVOQ.
Not early. I mean, $25 billion right now, actually, the street is slightly higher than the guidance we've given. It's $17.5 billion, $10 billion for SKYRIZI, $7.5 billion for RINVOQ. The street's actually at about $11 billion now, a little bit higher than $11 billion for SKYRIZI. Below the U.S. on RINVOQ, there are $6.5 billion, but, you know, net, and that's about $18 billion. So $25 billion isn't the issue, it's the growth beyond $25 billion.
It's something like low single-digit growth, and we expect much more robust growth from SKYRIZI and RINVOQ for a few reasons. One, we'll continue to see, you know, share gains, and these are large markets that will continue to grow. But also, if you think about the next wave of RINVOQ indications, we will see in the second half of this decade, opportunities like lupus, vitiligo, alopecia, giant cell arteritis. So, so there's another wave of RINVOQ indications. So we would expect robust growth for SKYRIZI and RINVOQ into the next decade, and right now, the street is not modeling that type of growth beyond 25.
Yep, okay. And I guess the other one where, again, at least from my perception, it seems like IBD is the other one that maybe people are modeling a little bit lower. And so I know you guys had some data for SKYRIZI recently in that, the head-to-head setting for Crohn's. So maybe just top down, you know, how you see IBD evolving now with these newer, better targeted agents. You have an oral with RINVOQ. And then the importance of this head-to-head data from SKYRIZI that just came out.
Yeah, maybe I'll start and then Roopal can highlight some of the data that was just released. I mean, if you think about the IBD space, which is before the new RINVOQ mid-decade indications, we were always surprised years ago at how fast IBD grew in favor of HUMIRA. I mean, at some point it was 35%-40% of all revenue. So it's got the highest biological penetration, incredible unmet need. And so when we look at the most recent launches, we're very, very pleased. So we're seeing SKYRIZI today, which has been on the market for about a year, it's right neck and neck in terms of share capture to STELARA.
Okay, so very, very rapid uptake. We also see that RINVOQ, which is approved for later lines in both UC and within the last eight weeks for Crohn's disease, also ramping very, very significantly. So RINVOQ for UC is in the low 20s in terms of overall in-play capture. And RINVOQ CD is ramping even faster than RINVOQ UC did a year ago. So you have two very, very big horses here that are restating the standard of care in IBD. And what's so unique about both of those assets is that we've done modern study design, where we're not only measuring symptom relief and symptom control or so-called remission, but now we're looking at the healing of the bowel, so endoscopic remission.
Those endpoints are very, very significant, and we see the market perceptions moving towards, "If I'm gonna select an agent, I want to relieve the symptoms, I want to do it quickly, but I have to heal for the long term." That's really what we've set with both of those agents. So we are continue to believe that based on the in-market performance, that our IBD franchise is probably still, to your point, underappreciated in terms of how fast that will move. Now, we've contemplated that, but we are super pleased with this data that we released yesterday. We had confidence that we could beat STELARA in a head-to-head trial, but when you see the data, it's super impressive, and it's gonna give us two strategic elements.
First, it's gonna put pressure on the market leader from us, which will be important for share capture. And second, it will help to inoculate SKYRIZI over time from the biosimilar that ultimately comes from STELARA. So with that, maybe I'll let Roopal highlight the data that was released just yesterday, which is, again, very impressive.
Yeah. Thanks, Jeff. The head-to-head in Crohn's disease, one thing to point out, it was all TNFiR, so a relatively challenging population to treat. And it gets back to some of the biosimilar discussion, where in the future, we don't want to double step through. You know, maybe one against anti-TNF, but then quickly move to SKYRIZI rather than a biosimilar STELARA. You know, over 500 patients, so a large study, and even at week 24, we saw almost a 20-point differential, in favor of SKYRIZI in the remission endpoint that, Jeff highlighted. But then at week 48, what we've presented thus far was endoscopic remission, a doubling 32 versus 16%.
More comprehensive data will be released at UEGW come here in a few weeks in October. But I think as you looked at it, physicians would look and say, "Well, okay, it seems like a similar mechanism of action. I got an IV induction, I get a subcutaneous maintenance." So it may not be very clear just looking at cross trial, across trial comparisons, but when you put them head-to-head, then you really see the differences.
Again, we've released two endpoints. Safety is consistent with what we've seen in the past, but a much deeper discussion will occur in October. For SKYRIZI and RINVOQ, IBD represents about, for this year's guidance, about $1.5 billion. If you take a look at the 25 guides we provided, it's $2.5 billion for SKYRIZI, about $1.8 billion for RINVOQ, so greater than $4 billion. So we do expect significant growth over the next couple of years and certainly beyond that.
Okay, great. I guess the other, you know, area in immunology is atopic dermatitis. Obviously, there's been a lot of innovation there, including from RINVOQ. Again, I was—I think I was more of a skeptic there initially, but you guys have proven me wrong, as you've done a great job commercially. And so again, maybe speak to how much more share is left there in AD as, again, this is one of those newer immunology markets, but then the other new entrant coming is lebrikizumab, potentially another injectable. So how is that going to potentially impact the dynamics in atopic derm?
Yeah, great question. No, we're pleased with atopic dermatitis. I mean, obviously in the U.S., we had based on the oral surveillance study, a slightly more restrictive label than you did with, for example, Dupixent. But nonetheless, we've been able to achieve some pretty significant share capture. So we're now in the high teens, so we're a solid number two, obviously behind the market leader, Dupixent, which is impressive. And that level of in-label capture, which is largely in the second line, which is where our indication is largely set, is gonna continue to pull up our market share, which is around 6%. So we have significant momentum still to be able to drive share, TNF share over time.
The U.S. is probably one of our lowest major markets in terms of share capture. It's still impressive, but we have share capture rates in other major markets, Japan, Canada, and other markets across Europe that are in the in-play capture rate of 30%-45%. So very, very meaningful. And when we listen to the derms over what they like about RINVOQ, you get to higher levels of skin clearance. So instead of a PASI for psoriasis, you have an EASI or an eczema score of 90%. It's much more common you see that level of clearance. And perhaps more importantly, when you interview patients, it's the speed and the suppression of the itch, which is a dominant, basically symptom of this disease. So we're in very good, very good shape there.
We continue to study the drug in major trials. We have another ongoing head-to-head trial that's consistent with U.S. label against Dupixent, so we continue to develop data to differentiate against the interleukins. And we also are evaluating the ability to say, to your point on lebrikizumab, given the efficacy profile and the different mechanism, it wouldn't really make a ton of sense to start to sequence interleukins, where you can think about a very powerful and also very safe JAK inhibitor that now has five years of safety data in the market.
So we do think that it'll continue to be a battle in the marketplace, but this is an exceptional market. I mean, this market is still growing at 30%. It's three times bigger in terms of the moderate to severe population than psoriasis. I think it's one of the most attractive markets in the industry, and we're gonna be a significant player.
Okay, great. Maybe coming back to, you know, a couple of high-level ones, for Rob. It's just, you know, the... I think on the, the 2Q call, you guys provided, some increased color around kind of 2024 expectations for HUMIRA that I think, were welcomed by, by investors. But then there has been a more recent announcement around the CVS launch of Cordavis and, you know, contract with Sandoz for their HUMIRA biosimilar. So maybe just give us a mark-to-market and kind of, you know, does the commentary from 2Q still hold, or have there been any other developments that have, have changed your view of 2024 HUMIRA?
No, things are playing out as we expected. There's been no surprises. I mean, Jeff and his team are going through the negotiations now. That's typical. It happens this time of year, so we'll see that play through over the next few months. But nothing really on the HUMIRA biosimilar front that I would say changes our view. We feel very good about the, certainly the performance we've seen this year with less volume erosion. We did improve the guidance for this year by $400 million, but more importantly, we took up the growth platform up by $1 billion between the Q1 and Q2 guides. You know, we've seen very nice performance from SKYRIZI and psoriatic and IBD.
Aesthetics has performed better than we expect in terms of a faster recovery in China, as well as, you know, I'd say, overall BOTOX momentum. Still, I'd say, slowing, the slowdown in fillers, we haven't quite seen release yet. So that, you know, we're keeping an eye on that, but certainly toxins, the momentum has been there. But then also neuroscience. I mean, VRAYLAR, with the adjunctive MDD indication, we saw a very nice lift there. And our migraine portfolio between, chronic migraine with BOTOX therapeutic, as well as you think about the oral CGRP, QULIPTA and UBRELVY, really strong performance. As we, you know, look at the performance coming out of the Q2 call, while clearly nothing's really changed on the biosimilar front-... We'll continue to see very nice momentum from our growth platform, which gives us a lot of confidence going forward.
Yep. And is that just a segue, and is that what's giving you the confidence in terms of potentially upgrading this trough EPS guidance of $10.70 that you mentioned on the 2Q call?
Yeah, we've got a lot of questions on, you know, would we update the floor? When will we update the floor? Clearly, as you, you know, think about, we gave that floor guidance that was during the Q4 call in advance of these last two quarters, where we've actually, you know, raised our revenue guidance. So given the momentum of the business, and in particular, the growth platform gives us a lot of confidence on the floor, and we've been contemplating whether on the Q3 call, we actually, you know, update that upwards. So we'll, you know, stay tuned, but it's something we're talking through. We're feeling very good about the performance of the business this year.
Okay. Okay, great. And then maybe this might be one for Scott, just as we think through. I know previously you guys have talked about trough margins and that 46%-47%. Just wondering, you know, does that still hold true here? Again, given Rob's comments and kind of momentum of the business, how should we think about that? Or again, I'm not sure if you guys want to tag team that.
Yeah, maybe I'll start. I mean, you're right. Just like the trough earnings, we offered a 46%-47% range on the operating margin. And that's, you know, really, when you think about it, you've got the mix coming down from the HUMIRA erosion this year, but that'll probably stabilize around 80%-84% where we are now. Because as HUMIRA will decrease, we'll have a strong margin contribution at the gross margin level from SKYRIZI and RINVOQ. On the operating margin side, you know, as we went down that trough, it's important to note that we, you know, continued to invest in the business, even in the light of a decline on the top line and the earnings, we've continued to invest in the business.
So what Rob went through, the kind of fundamentals, that's what really will drive, you know, any discussion we have. On the operating margin, we see it kind of continuing that 46%-47% through 2024 and then expanding thereafter. I think it is important to note, though, that 46%-47% is really still top tier within the industry. As we see the ability in 2025 and beyond to expand, that still does offer some nice capacity to continue to invest in a growing business.
Yeah, well, we factored into that. You saw this, this year, even though we've got, you know, gross margin, gross profit dropping about $5 billion, we're increasing the R&D investment by $400 million, right? So we did contemplate that in the operating margin guidance, is that we want to continue to invest in R&D. We will continue to expect that R&D investment to continue to increase as we think about driving that long-term growth. And so, you know, we haven't sacrificed investing in the business to deliver on that operating margin commitment.
And so we're thinking about it as a, you know, trough level for the next two years. But as Scott mentioned, we return to robust revenue growth, and we've demonstrated the ability to drive operating margin expansion by really leveraging the expense lines. So I would expect to see us return to that, but not by sacrificing investment in the business. We're fully committed to investing both in R&D and SG&A to drive our growth brands.
Okay, great. Maybe Roopal, one more for you. Teliso-V, another, you know, one of the, the pipeline assets that's advancing here. I think we're gonna get the, the phase two data later this year. Maybe just remind us, what, what are you looking for to think about possibility for an early filing, accelerated approval here based on that data set versus maybe just needing a, a fuller phase three study?
Yeah. So Teliso-V, that's our c-Met antibody, ADC with an MMAE warhead. Early data that we've seen in high expressers of c-Met in the EGFR wild-type subset was above 50%, and that's where FDA gave us breakthrough therapy designation. So we have overexpressers that include intermediate and high. Roughly 150 or so by the end of this year will have completed a minimum of six months of therapy.
So with that, we'll see what the response rates are, if they're consistent with what we saw earlier, and we'll get a better idea of the duration of that effect. And if we're still seeing the same high levels and strong duration, that's something that we would definitely approach agencies for accelerated approval. Even before that, we've already initiated the phase three program, that's randomized and comparator. So you'll have both of those ongoing in a readout later this year.
Remind us, so maybe what percentage of patients are falling to the high expressor category?
Yeah. So I would say the overexpressers in that wild-type category are roughly 25%. I could probably split them down the middle, which are intermediate and which are high, so 12.5, 12.5.
Okay. And I guess the other one is on navitoclax. Just what other data from that phase III trial could help swing the risk-benefit profile here? I know that was the other one you gave an incremental update-
That's right
- on the 2Q call.
Yep. We reported out the spleen volume reduction rate, which was double of the control versus the combo with the JAK2, 60% versus roughly 30%. So very strong data. We didn't see the movement on symptoms as we would have wanted to. That's an agency expectation for the dual. However, in our early-stage datas, data and certain publications, we see that spleen volume reduction and changes in bone marrow morphology, improvements in fibrosis seem to correlate well with harder outcomes like survival.
So as we continue to follow that data from what we reported earlier this year through the end of this year, we'd be looking for the maintaining of the spleen volume reduction. We'll take another look at symptoms, but then bone marrow fibrosis, to see if there's a greater improvement there. We'll have an idea, since we follow up longer, what the harder events look like. If we start seeing a separation there, then I think it's clearly worth that conversation to see what we can do with that asset to bring it to patients.
When that would be, at what, first half 2024 event?
Yeah. We'll get the read later this year. If it looks good, then, first half of next year, start those discussions and potentially moving forward from that.
Okay. Okay, great. Maybe just pivoting back to aesthetics. You know, Rob, you, you'd mentioned some of the trends you're seeing. I guess I was looking at our Google Trends data. It looks like, you know, BOTOX is tracking above for the quarter, fillers also slightly above consensus. Maybe just talk through, you know, and again, it's on a global, but again, I know there's some U.S. versus ex-U.S. dynamics there.
Sure.
As you think through kind of the puts and takes here, going to not just third quarter, but back half of the year on, on the aesthetics side.
Yeah. So, I'll start with China first. What we saw was a much faster recovery in China, very robust growth in the first half of the year. That exceeded our expectations, which just drove part of the guidance update that we provided for aesthetics. So that, I'd say, was a positive. But we've seen recently, while the China market is still growing nicely, it has moderated somewhat given the macroeconomic headwinds, so we're keeping an eye on that. You know, it's still growing nicely, but I'd say, moderated somewhat. In the U.S., we're seeing a similar dynamic we saw last year, which a differential between the toxins market and fillers, where, you know, we saw less of an impact in toxins than fillers, and sometimes due to price point and the procedure.
We're now at a point now, we've lapped the event. We're seeing the U.S. toxins market return to growth. Low single-digit growth, but return to growth. So I'd say, you know, Botox is performing nicely. With fillers, we're seeing it, it's taking a little bit longer to see that recovery. It's not... You know, we've lapped the slowdown, so we're not looking at the same type of market decline we were talking about in the first and second quarter, but we're still, even in the third quarter, seeing so year over year, you know, market's still down.
So that I'd say the recovery is taking a little bit longer than we expected. Net-net, we feel good about the performance of the aesthetics business. We've taken up a collective $200 million for the year, in each quarter, $100 million. So the performance is still strong, but I'd say, you know, the market, you know, it's something you have to keep a close eye on, given the dynamics in China, what we're seeing in the fillers market. But we're encouraged, particularly by what's happening on toxins.
Okay. And I guess the other one, you know, I know we talked about this earlier this year, is the innovation maybe, you know, how the company is thinking, specifically on the toxin side. I know there's a competitor out there with a longer acting, but again, when we last spoke, it sounded like the company was focused more on shorter acting as maybe like a way to continue to build this market. So again, maybe just kinda, you know, square that for us in terms of what we're hearing from the competitor about what the kind of needs are out there, versus why you guys are going with a shorter acting.
I can start off. So we do have a program in place for long-acting, and I think there's a segment of the population that really wants a truly long-acting. However, much of the conversation with patients is they do tend to come into the office two, three, four times a year. The clinics certainly like that because they'll come in for more than just one procedure. And for something like BOTOX, that has multiple indications and more to come, that's a huge advantage. Now, getting back to the short term, that is an ask. They. There's a couple of questions, right? One is: I'm thinking about the toxin now because I have an event. We talk about weddings or reunions, and these toxins, because of the longer half-life, take long to have that peak effect.
So if you're thinking and you want it now, the short acting that we're developing offers a solution right away. Now, the other question we get is: Well, I don't know if I want to commit to the toxin because I'm gonna get a, a look that I may not be comfortable with for 90 days or longer. So the other benefit of the short acting is a rapid onset and a rapid offset. So then someone can come in and say, "Well, let me see how I'm gonna look." They see that and they're like, "Okay, I like it." And then they can move on to a BOTOX and, for maybe a, a smaller segment in the future as we develop the long acting, then move on to a long acting.
That's a very interesting opportunity. If you think about what's gonna drive our ability to deliver on that greater than $9 billion, it's like a high single-digit growth in aesthetics. It's about expanding the market. This is a great opportunity for us to drive that market expansion with, if you think about it, as a trial toxin to bring new co-consumers into providers' practices.
Yep. And maybe can you elaborate at all on kind of what you said in 2Q about competitive dynamics out there? Again, it sounds like there's not much of an impact, but again, I know there's still some debate about how this plays out over the medium to long term.
We do believe there's a place for long acting. I think there's a question whether or not Daxxify is truly providing the duration that's being spoken about. In terms of the share capture, we had assumed in our guidance there would be some level of share capture from Daxxify. We've seen very little impact so far. I'd say from our intelligence, looks like they've gained a low, I'd say, a low single-digit share position. Not all coming from BOTOX, but low single-digit share capture. So, a little bit lower than we had expected, but something obviously we're monitoring carefully.
Yep. Okay, well, I think we're up against time, but, thank you all so much for the time today. Really appreciate it.
Thanks. [audio distortion]