Earnings Call: Q3 2014

Oct 31, 2014

Good morning and thank you for standing by. Welcome to the AbbVie Third Quarter 2014 Earnings Conference Call. This call is being recorded by AbbVie. I would now like to introduce Mr. Larry Pippo, Vice President of Investor Relations. Good morning and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer and Bill Chase, Executive Vice President of Finance and Chief Financial Officer. Joining us for the Q and A portion of the call are Laura Schumacher, Executive Vice President, Business Development, External Affairs and General Counsel and Mike Severino, Executive Vice President of R and D and Chief Scientific Officer. Before we get started, I remind you that some statements we make today 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 2013 Annual Report comes from the line of the call. 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, Larry. Good morning, everyone, and thank you for joining us. During today's call, I'll spend a few minutes on our strong results in the quarter as well as our performance since we launched as an independent company. I'll also discuss our pipeline advancement, including forthcoming data and other milestones. I'll then turn the call over to Bill, We'll provide additional color regarding the quarter and our outlook for the remainder of the year. We'll also make sure we leave enough time for your questions. Line to drive future growth. To that end, we have delivered a total shareholder return of more than 90%, Representing $40,000,000,000 of shareholder value creation. Today, we reported robust 3rd quarter results with adjusted earnings per share including HUMIRA, Synagis, Symthroid, Duodopa and Creon. In the quarter, we also delivered improvements in gross margin and continue to invest in the business for future growth. And for the second time this year, we significantly raised our full year EPS guidance range Despite the headwinds created by the loss of exclusivity in our lipids franchise, our results demonstrate the strength and sustainability of our portfolio and they underscore our continued focus and execution. Our 3rd quarter results were led by HUMIRA, including continued market growth resulting from increasing penetration across therapeutic categories and geographies. As we've indicated in the past, HUMIRA's broad label and new indications are a competitive advantage. We recently reported positive results from our Phase 3 studies of HUMIRA in HS, a chronic inflammatory skin disease It currently has no approved treatment options. We're on track to submit our U. S. And European regulatory applications for HS this year. As a result, we are confident in our strategies to defend our position across our immunology categories. Our interferon free HCV therapy represents another exciting vehicle for strong growth. We are on the cusp of approval With the regulatory reviews progressing very well, we are actively engaged with regulators on various fronts and have completed our pre approval manufacturing and clinical inspections. As we said at a healthcare conference last month, We do not expect that an advisory committee meeting will be required prior to U. S. Approval. In anticipation of U. S. Commercialization by year end And European approval in early 2015, we've built the appropriate infrastructure and are fully prepared for our launch. Comes from the line of promising development programs. These programs span specialty therapeutic areas and include both biologics and small molecules. All told, we have more than 40 active clinical development programs underway. This includes 12 products in Phase 3 development We have a high level of enthusiasm in our oncology pipeline, which includes 10 new molecular entities being studied in more than 55 clinical trials. In collaboration with Roche, We will present additional data on ABT199 at an upcoming medical meeting, including Phase 1 data on AML Single agent study in relapsed refractory CLL patients with 17p deletion in early 2015. As a reminder, if the data warrant and regulatory authorities agree that ABT199 addresses an unmet medical need in this patient population, These data have the potential to support an early pathway to registration. Oliparib is our PARP Inhibitor in development for a wide range of solid tumors. Over the past year, we have initiated 4 pivotal studies. This includes Phase 3 trials in neoadjuvant breast cancer, BRCA breast cancer and most recently two studies in non small cell lung cancer That include patients with squamous and non squamous cancers. We are also excited about ABT-four fourteen, Our anti EGFR monoclonal antibody drug conjugate being evaluated in combination with chemotherapy for glioblastoma Multipharma, the most common and most aggressive type of malignant primary brain tumor. We were recently granted orphan drug designation question comes from the pivotal trial in relapsed refractory multiple myeloma patients Taclizumab is in development for the treatment of multiple sclerosis. Despite advances in the MS category, There continues to be a significant need for novel, high efficacy agents with favorable benefit risk profiles. And we believe tucluzumab has the potential to be an important therapy in this large and growing market. We presented promising pivotal trial data earlier this year, Which demonstrated patients treated with teclizumab had a statistically significant 45% reduction in annualized relapse rates versus Avanox. We have begun to engage with global regulatory authorities and are working with our partner to complete our regulatory applications in the first half of twenty fifteen. DUOPA is AbbVie's novel therapy for advanced Parkinson's disease. It is currently under regulatory review in the U. S. With an FDA action expected in early 2015. Elagolix is our compound in Phase 3 development for endometriosis and Phase 2b for uterine fibroids. We continue to expect to see initial data from the first of 2 pivotal studies in endometriosis later this year and plan to report top line data shortly thereafter. We'll also see data from the mid stage program in uterine fibroids next year as well. As I mentioned, we have a number of promising immunology assets in development, including oral selective JAK1 inhibitors, question comes from several biologics currently in mid stage trials. We expect to see data from the selective JAK1 inhibitors next year, Allowing us to make a decision regarding Phase 3 development. In summary, we delivered excellent performance in the quarter and our pipeline continues to evolve. We're on the verge of a number of important milestones including the commercialization question of our interferon free HCP combination and we're prepared for a successful launch. AbbVie is poised to deliver top tier performance, With that, I'll turn the call over to Bill for a more detailed view of our results. Bill? Thank you, Rick. This morning, I'll review our Q3 performance and provide an update on our outlook for the remainder of 2014. This was another very strong quarter for AbbVie comes from the line of John. As we exceeded our guidance on both the top and the bottom line. Total sales increased 8.3% on an operational basis, excluding a 0.5% unfavorable impact from foreign exchange. HUMIRA delivered global sales of more than $3,200,000,000 Up 17.8 percent operationally and up 17.5% on a reported basis. In the United States, HUMIRA sales increased 25.3%, driven by continued market expansion, strong prescription trends and share gains, Partially offset by a reduction in retail buying patterns. Internationally, HUMIRA sales grew 10.3% on an operational basis, Excluding a 0.6% unfavorable impact from exchange. International growth was driven by strong underlying trends including the uptake of new indications and share gains, but was partially offset by the timing of shipments in international markets. We continue to see double digit market growth for HUMIRA in most international markets. Certainly, we are well on track And benefited somewhat from favorable pricing trends. U. S. Sales of Synthroid were $200,000,000 up 24.3 percent year over year. Synthroid maintains strong brand loyalty and market leadership despite the entry of generics into the market many years ago. The overall market has experienced low single digit growth with Synthroid growth outpacing the market including pricing trends. Global Lupron sales were $196,000,000 in the quarter, up 0.4% on an operational basis. Lupron continues to hold a leadership position and maintain significant share of the market. U. S. Creon sales were $148,000,000 in the quarter, up 47.6%. Creon maintains its leadership position in the pancreatic enzyme market, where the product continues to capture the vast majority of new prescription starts. Growth in the quarter benefited from a favorable comparison to the prior year quarter. Sales of Synagis were $109,000,000 in the 3rd quarter, up 18.3% on an operational basis. Synagis, which protects At risk infants from severe respiratory disease is a seasonal product with the majority of sales in the first and fourth quarters of the year. Growth in the quarter was driven by continued product uptake and strong commercial execution. Sales of duodopa, Our therapy for advanced Parkinson's disease approved in Europe and other international markets were $56,000,000 up 20.8 percent on an operational basis due to generic competition. We expect these trends to continue for the remainder of 2014. I'll turn now to the P and L profile for the Q3. The adjusted gross margin ratio was 81.1%, somewhat above our expectations and up 140 basis points year over year. This reflects the loss of exclusivity in our lipid franchise offset More than 14% versus the prior year quarter. As expected, our absolute R and D investment was up sequentially over the 2nd quarter Adjusted net interest expense was $53,000,000 and the adjusted tax rate was 22.4% in the quarter. 3rd quarter adjusted earnings per share excluding non cash intangible amortization expense and specified items were $0.89 well above our previous guidance range of $0.77 to $0.79 On a GAAP basis, earnings per share were $0.31 You will recall that in early September, we updated our Q3 and full year GAAP EPS guidance to reflect upfront payments related to the Infinity and Calico agreements, which were treated as specified items. Also in accordance with the final regulations issued to pharmaceutical industry in the Q3 by the IRS, AbbVie has booked an additional year of its branded prescription drug fee, which we have treated as a specified subscription drugs sold to the U. S. Government. During the Q3 of this year, the IRS issued final regulations, As a result, the industry is now required from an accounting perspective to recognize in 2014, one additional year of the fee. There is no cash flow impact of this one time adjustment. Due to the timing of the termination of the Shire transaction, the majority of one time costs related to that event will be reflected in our 4th quarter results. Moving on to our outlook for the remainder of the year. This morning, we significantly raised our adjusted EPS guidance for 20.14. As a reminder, our 2014 outlook continues to exclude any potential revenue from the expected 2014 U. S. Launch of our HCV therapy. Our revised GAAP guidance for the year includes the full impact of the Shire transaction costs. Given our strong product performance, we now expect sales to exceed $19,500,000,000 in 2014. We're forecasting an adjusted gross margin ratio of approximately 79% for the year, reflecting product mix questions and actions we've taken to further improve our margin profile. We expect full year R and D expense to be somewhat above 16% of sales as we continue to advance our late stage pipeline and we expect SG and A expense of around 27% of sales in 20 the tax rate just above 22%. As you know, our business generates significant cash flow and we expect this to grow in 20 15 and beyond with new product introductions. As a result, we announced last week that AbbVie's quarterly dividend will be increased by more than 16% to $0.49 beginning with the dividend payable in February 2015. We intend to maintain our strong commitment to a growing dividend going forward. And we disclosed a new $5,000,000,000 share buyback program comes to be executed over the next several years, further reflecting our commitment to return cash to shareholders. So overall, we are very pleased with our strong Q3 performance as well as our outlook for the remainder of 2014. And with that, I'll turn it back over to Larry. Thanks, Bill. We'll now open the call for questions. Ilan, we'll take our first question please. Thank you. Our first question is from Chris Schott from JPMC. Great. Thanks very much for the I guess first one here just for Rick. Operationally AbbVie seems to be obviously firing on cylinders here, but with the Shire deal, you highlighted the potential for greater access to your cash flow as well as the diversification that deal would bring. So on those two topics, 1st, can you talk about your access to cash flow and your ability to deploy capital on an ongoing basis with your current tax structure and the recent dividend increase? Question. And then second on the business development side, what is the sense of urgency at this point to further diversify AbbVie? And can you give us any color On the range of M and A options you're considering, I guess, specifically, should we think of Shire as a one off or would the company still consider Pursuing large cap acquisitions. Thanks very much. Okay. Hi, Chris. It's Rick. I think this question has come up a couple of times now Since the termination of the Shire agreement and in the backdrop of the Shire agreement. And so I think it's important to put it in perspective and important to acknowledge At the outset, there are certain attributes of the Shire transaction that made it unique and out of the normal course of our M and A strategy. I'd say specifically the potential for inversion is only offered with target selections of very significant size and the benefit of inversion Allowed for an acquisition price that was obviously higher. So I think one of the things that you must remember As we approached the opportunity with Shire, it was against the backdrop of where was AbbVie overall because I think that's an important perspective to keep in mind. And if you think about the prospects of our business, they were never brighter than they were when we approached the Shire transaction. We've cleared most of our significant LOE events. Our growth brands are exhibiting extremely strong growth, particularly HUMIRA. We've built a deep mid and late stage pipeline with several potential block HEV is a good example of that. 199 is a good example of that. Ticlizumab is a good example of that and there are many more. And while I think it's fair To ask the question, has our strategy, our M and A strategy changed following the Shire affair, I think it's also important to acknowledge We're a company that's in even stronger position today than we were before we announced this deal. Today's earnings show that very clearly. The base business is running stronger than our guidance at the beginning of the year suggested to us. We have a much better idea of the size of the TV market and our potential to stake out a significant position in that market. We've had positive data readouts on DACC 888-199 continues to perform well and we've continued to be active in the L and A front. So there are no developments really that have question to our business. In fact, any development that's happened has actually been a positive development. But don't leave us with a tremendous amount of confidence that we can drive the level of performance that Which brings me to M and A. If you look at our cash flow and our ability to access that cash flow, we clearly have the wherewithal to be active in the M and A front. What's more is we have a track record in our ability and our willingness to pursue and acquire attractive assets, Assuming two things. It makes strategic sense and they have a good financial return. That's essentially the criteria that we use. We've always said that our highest priority for our cash is to deploy it to further grow the business and make the business more and more healthy going forward. And I think you can expect us to continue to do exactly that deploying cash to acquire attractive on market and pipeline assets to further enhance our growth. But what I don't think is that we absolutely have an imperative to run out and do another $50,000,000,000 deal. In fact, I would tell you we don't based on a number of different factors, some of which don't exist in the same way as they did before. So the underlying growth prospects for AbbVie don't require us to do a transaction of that size. I'd also say we're not going to limit ourselves question to what we do. We look at individual products. We look at midsized companies and we look at larger companies and we're going to continue to do that And continue to look for those opportunities that strategically fit and give us a strong financial return. And we'll deploy our capital accordingly. The other thing I'd say is, we have always committed that we'll return cash to shareholders and that's a commitment that we've made as part of our cash. You saw us do that here recently with the dividend increase and the buyback program. And those are the two priorities for the cash. The cash is entrapped. Obviously, we have access to the cash for offshore acquisitions. We have access to the cash if we choose to repatriate it. Obviously, we have an incentive to look outside the U. S. First if we choose to, but we have total flexibility as it relates to our cash. Thanks, Chris. Gilan, we'll take our next question please. Thank you. Our next question is from Jamie Rubin from Goldman Sachs. Thank you. Could you all hear me all right? We sure can. Okay. Great. Thank you. Congratulations on a terrific quarter. Maybe Rick this is either for Rick or Bill. But clearly 2015 is shaping up to be a huge year. I think 2014 turns out to be a much bigger year than you or anybody else anticipated just given the profitability of the base business. But 2015 is really shaping up to be a very big year with the hep C launch. But as we move out beyond 2015 post the HCV launch, can you comment on the pace Obviously, with biosimilar competition towards the end of the decade for HUMIRA that's going to have an impact on your earnings growth. But will 2015 be a one off year? Or how question. How should we think about the pace of earnings growth going forward? And then a second question for you Rick. We have a lot more question now about the hep C market. We now know the pricing of the new Gilead combo. We've seen the spectacular initial launches of question 20% share market share in this massive market. Can you refresh us on your expectations questions just given how much more information we have now. Thanks very much. Thanks. Well, Jamie, this is Rick. So, first, I'd say on The expectations for 2015 and beyond, obviously, we're not going to give guidance out multiple years. But I think I can frame it this way for you. If you look at what we expect to be able to deliver out of our pipeline, including HCV and other assets like 199, We have a high level of confidence that we can continue to drive strong growth over the long term. As far as the biosimilar impact is question comes from the line of John. Obviously, that's something we have looked at and we have carefully analyzed and we've had now a number of years to put a strategy in place that we believe will protect Qumira through that period of time. And so, we've obviously modeled what that looks like and I can tell you we have confidence in what we can do in that area. I'm I'm not going to give you a lot more specifics on that at this point. We've described in detail what it looks like. It's a combination of 3 major areas, product enhancements, both formulation as well as device, intellectual property and commercial strategies. And this is a market we understand well. And as I said, I think we have planned this out very well and I think we have a high level of confidence in our ability to be able to execute that strategy in the face Biosimilar Competition. There will be a time where we can give you more color. I know this isn't very satisfying to you. There There'll be a time where we can give you more color. This just is not the time to be able to do that. We have to make sure that we plan this out appropriately. And so in the future, we will be able to give you a little more detail around that. As it relates to hepatitis C, What I would tell you is this, if you look at the hep C market and HCV for us, it's a very exciting opportunity. And I will tell you, it's a very important opportunity for AbbVie. So, let me say in the backdrop of we're getting very close to entering the U. S. Market once we're approved, question Well, what I can do is I think frame for you how we think about the competition in the marketplace, how we think about the marketplace. I'm not going to provide an expectation at this point, but I'll give you some perspective, I think. As we've said many times before, we believe the clinical performance of our product Across all patient types is very strong and it's especially strong in the cirrhotics and difficult to treat patients. And we believe that will be an important factor in how we compete in the marketplace. We believe relapse rates and SBRs are important. We still don't believe that minor differences in pill count or shorter duration of therapy in certain patients will significantly change the competitive dynamics in this marketplace. In fact, I tell you in our interactions with many KOLs, they indicate that they're going to go with 12 weeks question therapy in patients to minimize the risk of relapse in those patients. As far as the market is concerned, to the point you made, We see the market as being even more attractive than we thought about it a year ago. It's certainly bigger than we thought. It's far more receptive to I curate therapies that are highly tolerable and the market wants alternatives. That's clear. So I can tell you, we feel very good about our ability to compete in this market And create meaningful share for our product. But as I said, I'm not going to go through a lot of specifics around the commercial strategy until we've launched. Last thing I'd say is, as you know, the 2014 guidance we provided excludes any HCV revenues. So it's not counting on any HCV revenues. Whatever we get in HCV will obviously be upside. But certainly, when we provide question comes from the line of John. J. Rice:] Thank you. J. Rice:] Thanks, Thanks, Jamie. Our next question please, Elon. Thank you. Our next question is from David Risinger from Morgan Stanley. Yes. Thanks very much. So I missed a little bit of the call. I just wanted to ask a Couple of questions about some of the Select product upside. I guess specifically, maybe you could just make an overall comment Whether inventory levels changed at AbbVie between the end of the second quarter and the end of the third quarter, I. E. Were there any was there a buy in or buy out for the company overall? And then second, were there any buy ins for any select products question And then 3rd, with respect to CALITRA ex U. S, I don't know if you commented, but that was unusually strong. Could you just explain that revenue number in the quarter and what we should Thank you. David, it's Bill Chase. So inventory I'll discuss in really Two different pieces. You've got inventory at wholesalers and then obviously you've got inventory in the retail chain. At the wholesaler level, our Inventories across all products in the U. S. Was roughly consistent between quarter 2 and quarter 3. The retail channel is a little tougher to call as you know. In Q2, we did see some speculative buying and advance of a price increase Around HUMIRA. We think some of that buying came out in Q3, although obviously it didn't I'll mute the overall performance of the brand to a meaningful extent. But in general at the wholesale level everything was consistent quarter to quarter. From a CALITRA ex U. S. Standpoint, that product is subject to some volatility based on tender timing and you saw call that in the Q3. I think the long term outlook for this brand is probably somewhat negative from a single digit standpoint. So I think what you're really seeing in Q3 was the anomaly of tenders internationally. Got it. Thank you. Thanks, David. Ylan, next question please. Thank you. Our next question is from Mark Goodman from UBS. Yes. I was hoping you could give us a flavor for how much of the pre spend for the HCV launch is already showing up in the quarter here and how much additional we should be expecting in the Q4 and the Q1? And then second, if you could just go through what data we will be seeing at ASH? So Mark, Bill Chase. We're not going to get into specific Details on how much of the HCV investment we put in. Suffice to say, we have obviously begun spending this year And you should expect that spending to increase sequentially in the Q4 and that's been reflected in the profile guidance we've given. Change in sales force, is that started already or? Excuse me? Sales force? We are All ready to go on HCV. We're just waiting approval. So that's already reflected in the Q3? It is. On your question regarding ash. This is Mike Severino. I'll take the question regarding ash. There's going to be a number of important presentations on ABT199, our BCL2 inhibitor. This includes initial single agent data in AML. And we'll also provide a number of updates on our ongoing earlier studies, And we're going to have first data on a chemo combination study of bendamustine plus rituxan plus 199 in non Hodgkin's lymphoma in DLBCL. And there'll be a number of other updates including 199 and question GA-one hundred and one and CLL from early phase studies. Thanks, Mark. Milan, we'll take our next question please. Thank you. Our next question is from Jeff Holford from Jefferies. Hi. Thanks very much for taking my question. So just on your HCV program that you mentioned, Do you expect to bring a nuke at all at any point into your next generation program? And give Give us any updates on how you think you might go about that if that's the case. Secondly, around margins, as a result of some of the cost savings you would have looked As part of the Shire transaction going forward, did you see any opportunities in the base business going forward that you can look at for further margin enhancement? And then just lastly, this will be for Rick of course. Are you concerned that by highlighting your underlying tax situation question You could have potentially made the company vulnerable to a takeover by a foreign company going forward. Thank you. So Mike, why don't you cover the first question? Sure. This is Mike Severino. With respect to our plans for hep C, we feel very good About both our current generation hep C program and our next generation hep C program, which is advancing very nicely through That combines our next generation protease inhibitor and our next generation NS5a inhibitor. Things are progressing very We're going to continue to evaluate these data as they roll out and we'll be providing updates in appropriate scientific settings over the course of the next year. We're always promising mechanisms in our early discovery efforts and we'll continue to evaluate those efforts in light of the clinical results I described as well. Question. Overall though, I feel very good about the progress we're making in hep C. And I think we're going to have a compelling offering with 1st generation And it's an area that we're committed to and it's an area that we will remain active in. Jeff, on cost savings, yes, I can tell you this is an organization that has always been focused on driving cost out I think you can see that to an extent on the progress we've made on gross margin. And certainly, we keep our eye open for those things all the time. I think in 2015, if you look at some drivers behind the business, the dynamics trend favorably for operating margin expansion. Yes. Obviously, the TRICORE, TRICOLO event is fully behind us at that point. You're seeing the efficiency efforts play out on gross margin. Question And we would obviously expect a strong positive impact of the HCV launch, which offers both a high gross question is margin as well as SG and A profile improvement. So too early to get into a specific operating margin number for you for next year, but I'm Confident we're going to have a nice story to tell on this when we get into it next year. And on your question about potentially being question Let me address it this way. If you look at our situation about offshore cash, we're certainly not unique in our industry. In fact, I'd say we're pretty consistent with how our industry tends to operate. So I don't know that we flagged anything in the process. But Essentially, I'd tell you that our goal as a company is to stay a strong, sustainable, independent company. We've demonstrated that we can drive Strong shareholder value. You see that in the TSR that we've delivered. You see that in our market cap. So, I can tell you my focus is on driving the business at top tier performance, Building out a robust pipeline and delivering strong returns for shareholders. My philosophy is if you do that well, The market rewards you both in your PE as well as your market cap and that's the focus that we have for the business and that's what we pay attention to going forward. Thanks very much. Thanks, Jeff. Bill on, next question please. Thank you. Our next question is from Collin Bristow from Bank of America. Good morning and congrats on the quarter. Just on hep C, arguably your most competitive versus HARVINI in the treatment experience cirrhosis With the Turquoise II data, given you excluded prior protease inhibitor patients, how should we be thinking about this from a labeling perspective? And can you just help us question and then just a little more on the label. I know it's hard, but how confident are you that you can get a 12 week label in the treatment experience cirrhotic And how important is this for you from a commercial perspective? It seems like the FDA has got a very high bar for the SVR sacrifice versus duration of therapy. Thanks. We're in the midst right now of dialogue with the agency over labeling. So we're not going to it's just not appropriate to talk about a lot of the specifics that we're talking through with them. I can tell you we feel comfortable with our data set in cirrhotics and across all the other patients. We certainly feel comfortable when we look at our 12 week and 24 week data in cirrhotics. Both have excellent SVR performance. And so we don't feel at all uncomfortable with the direction that our labeling is going in. PI failures? Treatment, this is Mike Severino. Treatment regimens are obviously evolving considerably. I think I Point to the overall breadth of our data both in Surratix and outside of Surratix. We feel very good with our profile. We have very high SVR, very high cure rates. And again, we feel very good about the profile that we see. I think that's probably Yes. Okay. Thanks, Colin. Next question, Elon. Thank you. Our next question is from Alex Arfaei from BMO Capital Good morning and thank you for taking the questions. Bill, could you please build on your earlier comments about gross Margins, what specifically are these margin enhancing initiatives that you're referring to? And is this what we can expect going forward because we would only expect gross question going up with hep C. And a follow-up, could you please give us an update about your efforts to simplify your current hep C regimen with fewer pills Thank you. So, yes, Alex, regarding the gross margin line, a couple of things are at play on that line. 1st and foremost, as you know, we have obviously lost TRICORE and Trilympics, which had a higher than average gross question margin than the corporate rate. So that's some headwind we've actually been facing over the last couple of years and you can see we've negotiated that nicely. Offsetting that There's been a couple of things. First of all, there is an impact of product mix and pricing. But equally important, there have been efforts that we put in place To reduce cost and that could be manufacturing cost, supply chain cost as well as of course to address some of our royalty burden on HUMIRA as well. And you're seeing some of that play out this year. Next year, obviously, with HCV coming online, we would expect that to have a gross margin that would be higher than the corporate mix. And HUMIRA obviously has been performing very, very nicely as well and that ought question comes from the line item. Alex, this is Rick. You kind of broke off when you said the last question. But I think what you asked was what are we doing to work on simplifying the regimen for HCV? Is that what you asked? That's correct. Yes. Okay. Well, let me start with what I've commented on before. We don't believe the difference question is going to be a competitive disadvantage. So, 1st and foremost, I'd tell you that. The second thing is we are working on some ways to be able to simplify question comes from the line of John. He has significant simplification associated with it as well and that will be an advancement as well. So, we have an active program in both areas to move it forward. We're not at a point where we're going to talk a lot about it beyond that, but we are working on ways to simplify the regimen and continue to make sure that we're advancing the regimen. This is a market I can tell you, we're absolutely committed to for the long term. And obviously, we're investing in a way to be able to continue to Our next question is from Mark Schoenbaum from ISI Group. Hey, guys. Thanks a lot for taking the question. Sure. Number 1, If I may, do you guys happen to have data out there in the hep C market around how many patients are actually under the active care of a treating question Specialist, that's a data point that one of your competitors historically has provided and declined to provide in the most recent quarter. Just wondering if you have a view on that? And then number 2 on question Have you generated yet any data for your regimen in VICTRELLIS or in CEVAC failures? And then finally on HUMIRA, could you just give us the year on year As far as the data of the number of patients under active care with specialists, I'm assuming you're talking about hepatologists and infectious disease specialists. Our people know that, but to be honest with you, I don't know that number. Does anybody else in the room know that number? Yes. I don't think we have that one for you, Mark. So maybe as a follow-up, we'll try to provide that. I can tell you that as we've geared up commercially, We obviously believe that it's important and I've seen the numbers that a significant percentage of the patients are under the care of specialists. But I'd also tell you that they're based on the massive number of GI specialists, that's also an important commercial channel to cover And we have scaled our sales force to cover both aspects of it, both specialists as well as GI physicians as well. But I don't remember, Mark, the actual split between the 2. Mark, on HUMIRA, you really have a tale of really 2 different In the U. S, we have typically been able to take some price along with the category. And if you really look at Volume trends, script trends, which this quarter were very, very strong, you can pretty much get back to the 25.3% growth on the quarter by looking at that strong TRx and really reconciling it back to the price increases we've taken this year. Ex U. S, we typically see negative price. So X U. S. Is primarily more than 100% volume. On a total brand basis, I think you can think of price this quarter netting out In the mid single digits and the rest being volume. And the PI failures? This is Mike Sabrina, with respect to data on PAI failures, those aren't data that we've generated yet. It's something that we would look at and maybe doing in the future. Thanks a lot. Questions. And our next question is from Steve Scala from Cowen. Thank you. I have two questions. First on hep C, EPI would appear to have a potential competitive advantage in the sickest patients where treatment to 12 weeks might be necessary. And I know that AbbVie isn't going to reveal pricing today, but given this possible competitive advantage, What are reasons that AbbVie would not price at a premium? Maybe you can provide at least one reason why AbbVie wouldn't question And then second, a bit of a broader issue. AbbVie has done a terrific job maintaining HUMIRA is positioned as the leading TNF despite very similar competitive products and very high price points. It seems that your competitors that sell basal and inhaled asthma products could have learned from your strategies. But as managed care seems to be rotating among the big therapeutic categories and Okay. This is Rick. I'll try to answer your 2 questions. Although I'd say your first question basically asked me about our pricing strategy, which I'm not going to go into any detail. But what I would say to you is, we look very carefully at the overall market, How our product would be positioned in that market, our ability to be able to take share and we've come up with a strategy that we believe optimizes our ability to take A meaningful share position. We've looked at alternatives that were different, some of which similar to what you described And some of which weren't similar to what you described. And so we've come up with what our commercial strategy will be and we're going to execute that upon launch of the product and approval of the product. And at that point, we'll provide you more color. On HUMIRA and payer actions, what I would tell you is this. We have competed in this market for a long, long time. Obviously, in the U. S. Market, the payer component is a very critical component. It's an area where we have good relationships with payers. There have been lots of competitive entrants into this market. And I'd say predictions of HUMIRA's market share erosion and that hasn't occurred. And it's partially because if you look at the product and its ability to be able to perform clinically, if you look at the breadth of the menu of applications questions and indications that it has. That plays a very important role. And so, I don't see the payer dynamic changing significantly Larry that we certainly feel good about how 2015 settled out for us with payers on HUMIRA. Thank you. All right. Thanks, Steve. Next question, please. Thank Thank you. Our next question is from Vamil Divan from Credit Suisse. Yes. Thanks for taking the questions. Just one, you recently announced this $5,000,000,000 buyback program. Can you just let us know if you've already started executing on that program? And if so, how many how much buybacks I guess specifically I'm just wondering in terms of your what your share count expectations might be that are baked into your new 2014 earnings guidance question Very different number from what we saw at the end of the Q3. And then the second one kind of following up on Chris' question Earlier on M and A, you talked about size. Can you talk a little bit about maybe therapeutic areas that might be of a priority now? For example, rare diseases where Shire is obviously strong. Is that an area in particular that you may wish to invest more? Any thoughts around areas of investment will be helpful. Thanks. So, Vamil, obviously, the quarter is not done yet, the Q4 that is. We do intend to when the year finishes. You'll see that we have repurchased shares, but I can't give you exact guidance on what that number is going to be at this point in time. Ma'am, on the M and A strategy, this is Rick. I mean, I think if you look at what our strategy is for AbbVie, we want to build leadership positions in specialty focused areas. If you look at what we're good at, what we're really good And the decision making process is driven around clinical data and being able to go out and commercialize that Effectively. And so we really have 2 primary goals when we look at M and A. 1 is to build out those areas Where we currently have leadership positions like immunology as an example and other areas where we have a leadership position, our goal is to try to restate standard of care In those segments, and in many cases, we're looking at multiple different mechanisms of action to be able to try to do that standard of care restatement in the areas that we have leadership positions in. And then we have areas where we have emerging strengths, where we want to build out leadership positions And expand more aggressively. Oncology is a good example. 199, we believe, will create a good anchor position for us in that market. 888-four fourteen, we have a number of assets coming behind that. Certainly, we would be interested in looking for more oncology assets. If there was the right kind of opportunity with on market products in oncology and add some commercial infrastructure in place, That would be attractive to us moving forward. Rare diseases is certainly a profile of the specialty market that's consistent with what we look at. And I'd say hepatology is the other area that would be of strong interest. I'm not giving you a complete list, but I'm giving you sort of top of mind areas that we focus on. Bill Chase again. Just in the event that you are inferring something to your question, our increase in the guidance for the year is purely based on the business fundamentals as we see them. We're not anticipating that being significantly moved Buy our buyback activity. Just wanted to be clear on that. Okay. That's helpful. Thank you. Thanks, Vamil. And Ilan, we have time for one more question, please. Thank you. Our final question today is from Mark Purcell from Barclays. Yes. Thanks for taking my question. On HUMIRA, can You help us understand the benefit from the royalty roll off in Q3 following the cessation of payments to Merck KJ, I think it was in June And how that schedule of roll off changes going forward through the pan expiries in both the U. S. And Europe? Secondly, could you help us understand the size of the international shipment timing effect on tomorrow in terms of how much growth it took off the ex U. S. Sales? 3rd, the IL-seventeen is about to launch in psoriasis, I think it's about 15% of Humira sales. Could you help us understand the impact you feel those will have or question or otherwise on your business for next year. And then lastly on debt, dollars 9,000,000,000 of long term debt. Can you help us understand your plans to restructure that? Question And obviously that's with respect to potential capital employment going forward. So Mark on the Dynamics in gross margin, I guess this is the simple way to think of it. We in the quarter had about a one point headwind from related to TRICORE, TRILIPEX LOE event. Obviously, we made that up and then some. Our ability to make that up was driven specifics on how much that royalty stack impacted it. What I can tell you though is, it's not all royalty stack. We have a lot of activities going on Right now to streamline our supply chain and our overall manufacturing base. In terms of as this thing plays out over the LRP, we've never been specific on what the exact royalty stack is. Some have admitted had estimated it's between 5% 10%. We've said those are good estimates. And one of the benefits of that royalty stack is It's an important upside for the product when we come to that point in time. In terms of the impact of international shipments on HUMIRA, Obviously that puts some volatility quarter to quarter in the ex U. S. HUMIRA number. This quarter it was about 1 It wasn't huge. Debt question? From a debt perspective, what I would tell you is we're pretty happy with our balance sheet right now. Obviously, we're building cash. We're looking at ways to deploy that cash whether it be Through M and A or giving it back to the shareholders as you've seen in our recent announcements. I don't think there's any compelling reason question to necessarily reduce the amount of debt on our balance sheet. So as those maturities come up, obviously, we're looking to I'll turn those things out. But as a whole, we think we've got a very, very strong balance sheet. This is Rick. On the IL-seventeen, Obviously, we study every new mechanism that comes into this market and develop a strategy to deal with that mechanism going forward. We understand the IL-seventeen very well and the data that we've seen so far. What I'd tell you is, If you look at many other mechanisms that have come into all the different categories we compete in, whether it's RA or GI or psoriasis, question This is a tough market to break into and gain significant share, because there is a reluctance to ultimately go to a new mechanism Very quickly, these are very potent drugs. It has sometimes unknown side effect profiles until they're in large populations And that tends to make physicians more reluctant to switch in mass patients. And so, we view IL-seventeen as a good mechanism. There's no question it's a good mechanism. And but we view it early on. It will be like other mechanisms that have come into this market. It will probably be more failures, TNF failures and eliminate some of that rotation that would have occurred. But we don't assume that it's going to have a dramatic impact on our psoriasis share going forward. Thank you. All right. Thanks, Mark. And that concludes today's conference call. If you'd like to listen to a replay of the call, visit our website or call 800 The audio replay will be available until midnight on Friday, November 14. Thanks again for joining us today.