Earnings Call: Q1 2015

Apr 23, 2015

Quarterly report

Good morning and thank you for standing by. Welcome to the AbbVie First Quarter 2015 Earnings Conference Call. All participants will be able to listen only until the question and answer portion of this call. 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 of the call are Laura Schumacher, Executive Vice President, Business Development, External Affairs and General Counsel and Mike Severino, Executive Vice President of R&D and Chief Scientific Officer. Before we get started, I remind you that some statements we make today may be considered forward looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward looking statements. Additional information about the factors that may affect AbbVie's operations is included in our 2014 Annual Report on Form 10 ks and in our other SEC filings. AbbVie undertakes no obligation to release publicly any revisions to forward looking statements as a result of subsequent events or developments except as required by law. On today's conference call, as in the past, non GAAP financial measures will be used to help investors understand AbbVie's ongoing business performance. These non GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll now turn the call over to Rick. Thank you, Larry. Good morning, everyone, and thank you for joining us for our Q1 2015 earnings conference call. Today, we're pleased to report strong results with adjusted earnings per share of $0.94 up more than 32% from the Q1 of 20 14 and significantly exceeding our guidance range for the quarter. Our performance included strong operational sales growth of nearly 18%. We delivered these results with growth across a number of products in our portfolio, including uptake of our new HCV therapy, VICARA, as well as strong growth from HUMIRA, SYNAGIST, Synthroid, Creon and DUADOPA. We continue to see strong underlying demand for HUMIRA with accelerating U. S. Prescription growth and continued market share gains. We also saw improvement in gross margin to 82.9% and we continue to see our investment in the business deliver strong results. Based on our outperformance, we've raised our full year EPS guidance range for 20.15 by $0.05 reflecting our strong underlying business performance year to date and the expected continued positive trends through the remainder of the year and we've also done this despite the negative impact of foreign exchange. In addition to our strong financial results, we also have advanced several of our most important strategic priorities during the quarter. Since the start of the year, we've achieved a number of important regulatory and development milestones, including the EMA approval of our interferon free HCV treatment the regulatory submission and priority review of our 2 DAA ribavirin free once daily combination for genotype 1b HCV patients in Japan the U. S. Regulatory approval for DUOPA, our therapy for advanced Parkinson disease and the U. S. And EMA regulatory submissions for ZYNBRICA, our novel treatment for relapsing remitting multiple sclerosis. We also reported positive top line efficacy data results from the first edagolix pivotal trial in endometriosis. And recently, our partner Galapagos reported positive on our partnered selective JAK1 compound. Each of these milestones continue to underscore the advancement and the robust nature of our mid and late stage pipeline. Importantly, we recently announced the acquisition of Pharmacyclics, a strategic addition to our business that will provide significant benefit for our shareholders and the patients which we serve. Pharmacyclics acquisition will add another compelling growth platform to AbbVie's existing strong prospects in immunology and virology. It will accelerate AbbVie's clinical and commercial presence in oncology, broadening our portfolio in hematological oncology, an attractive and rapidly growing market and a segment where we have several other assets in mid and late stage development. While strategically important, this acquisition will also drive strong financial benefits. It further diversifies our revenue base and significantly enhances our revenue growth across our long range plan. We expect the transaction will be accretive beginning in 2017 and significantly accretive in the years that follow. Specifically, as we have outlined, we expect accretion in excess of $0.60 per share in 2019, ramping to more than $1 per share by 2021. The addition of Pharmacyclics will augment AbbVie's already strong position and growth prospects. We remain on track to complete the acquisition in the Q2. When we launched AbbVie as an independent company nearly 2.5 years ago, it was our stated goal to build an innovation driven patient focused biopharmaceutical company, which could deliver strong sustainable performance over the long term. Our efforts have been focused on developing a culture of innovation and building a strong and talented team, driving strong performance from our current portfolio and building a robust pipeline of innovative new drugs and enhancing our efficiency and delivering outstanding returns for our shareholders. As we look back at our performance, we're pleased to say that we have made significant progress towards all of these objectives. Our 2015 guidance underscores our goal of driving industry leading growth this year. As we expect earnings per share growth of nearly 27% at the midpoint of our guidance range. Our strong first quarter performance certainly supports our ability to deliver on this objective and we expect to be among the top performers over our long range plan. In fact, given our execution across a number of fronts and the strategic actions that we have taken in the business and now the addition of Pharmacyclics, we're well positioned to generate top tier growth through the rest of this decade and beyond. As we look at our business following the acquisition, we are strategically positioned with a number of compelling growth platforms. Clearly, we're enthusiastic about our oncology franchise. The acquisition of Pharmacyclics is highly complementary with our existing oncology pipeline, which is comprised of 5 late stage assets poised to launch over the next few years. This includes our BCL-two inhibitor venetoclax and our dual PI3 kinase inhibitor duvelaceb both being investigated for the treatment of a wide range of blood cancers. So our portfolio will include 3 novel and promising mechanisms for the treatment of hematological malignancies BTK inhibition, BCL2 inhibition and PI3 kinase inhibition. We intend to move quickly to explore combination therapies that have the potential to significantly elevate the standard of care and improve efficacy in hematological cancers. The combinations have the potential to reduce or eliminate the toxic chemotherapeutic agents currently being used in the management of these conditions. Our oncology pipeline also includes voliparib, our PARP inhibitor being investigated for a wide range of solid tumors and ABT-four fourteen, our antibody drug conjugate for glioblastoma multiforme, both of which have demonstrated promising signals of efficacy. We are also partnered with Bristol Myers Squibb on elotuzumab in late stage development for frontline and relapsedrefractory multiple myeloma. We'll see data from a number of our oncology programs as the year progresses, including data from Venetoclabs and relapsedrefractory and relapsedrefractory CLL patients with 17p deletion as well as mid stage data on voliparib in non small cell lung cancer and Phase 3 data on elotuzumab in relapsedrefractory multiple myeloma. We also anticipate numerous readouts on IMBRUVICA, including data from the RESONATE-two study in CLL, Phase 3 monotherapy data in relapsedrefractory mantle cell lymphoma and additional details from the Phase 3 trial in relapsedrefractory CLL. Our combined late stage oncology franchise will represent a significant source of growth for AbbVie in the coming years with peak year sales estimated to exceed $15,000,000,000 Our virology franchise will also be a growth driver for AbbVie going forward. With the launch of VICARA, we have established a meaningful position in HCV, another large and growing category. Our global launch of VICARA, which has been underway all the sources of prescription data for Vucara, including certain managed care organizations and a number of government entities. When all sources are considered, Ocara weekly prescriptions are tracking well ahead of reported levels. Our international launch is progressing faster than anticipated and discussions with government payers in various countries are underway and advancing rapidly. We're pleased with the pace of our progress internationally, which is tracking ahead of our planning assumptions. This will lead to a higher level of international sales this year than we originally expected. VUKERAL will be a significant product for us and we continue to expect an annualized run rate of more than $3,000,000,000 in global sales by the end of 2015. Our current position will serve as a strong base from which we will launch further enhancements and innovations. Our next generation HCV program continues to progress well. It is our goal with this program to bring to market ariboviran free once daily pan genotypic combination. Our next generation HCV program is generating promising early SVR data. Earlier this month, we disclosed preliminary results from a 79 patient Phase 2b study of our next generation protease inhibitor ABT493 and our next generation NS5a inhibitor, ABT530. The interim data showed that treatment with the 2 compounds in non cirrhotic genotype 1a and 1b patients receiving the ribovirim free therapy for 12 weeks resulted in SDR4 rates of 99%. Full data from the Phase 2 studies will be presented at future medical Evaluation in other genotypes continues to progress with encouraging results. We're also evaluating shorter durations of therapy with this combination with data expected later this year and we remain on track to advance our next generation HCV program into Phase 3 later this year with commercialization expected in 2017. The HCV market is significant and we expect it will remain a large and attractive opportunity for many years to come. Our immunology franchise represents another compelling growth platform for AbbVie. Clearly, we have established a strong leadership position in the immunology market with HUMIRA, the world's leading anti TNF. Behind HUMIRA, we have a rich pipeline of mid and late stage immunology assets in clinical development. This includes our 2 selective JAK1 inhibitors currently in mid stage development. As I mentioned, our partner Galapagos recently announced promising top line 12 week data from the first of 2 Phase 2b studies in RA, supporting our thesis that JAK1 specificity can drive high levels of efficacy, while maintaining an appropriate safety profile. We look forward to seeing additional data from the ongoing trials as well as results from a mid stage study of our internal JAK1 inhibitor ABT-four ninety four as the year progresses. We're also working to advance several other mid stage immunology programs including ABT-one hundred and twenty two, our anti IL-seventeen TNF combination and an anti IL-six antibody among others. All of our R and D efforts are focused on advancing the standard of care in each of our areas of immunology leadership. As we have said, we expect HUMIRA to continue to drive strong growth and significant cash flow generation for many years. We have a multifaceted strategy in place, which we believe will allow us to protect and grow our immunology position. We have 2 new indications in late stage development as well as a new formulation currently under regulatory review in the U. S. And in Europe. We have a robust portfolio of intellectual property protecting HUMIRA, which we intend to enforce if infringed by a biosimilar applicant. We have hundreds of patents globally covering the formulation, manufacturing and indications for which HUMIRA is approved. As the first fully human monoclonal antibody approved, the extensive clinical trial work, development and investment we undertook led us to many important inventions with HUMIRA. We have important intellectual property covering these innovations and we intend to enforce this intellectual property. And we recently received a commission decision in Europe regarding compliance with the pediatric investigation plan for HUMIRA. With this decision, we will now apply for a 6 month extension to our composition of matter Beyond the pipeline assets I've already mentioned, we have a number of other compelling pipeline programs that have potential to deliver significant peak tier sales. All told, we have more than 40 active development programs underway, spanning large and growing specialty categories. And our late stage pipeline has been significantly derisked as a result of our ongoing clinical work already demonstrating safety and efficacy. This includes Zimbryta, which as I mentioned is currently under U. S. And EMA regulatory review for relapsing remitting multiple sclerosis. Elagolix, which is our compound in Phase 3 development for endometriosis and Phase 2b for uterine fibroids atrasentan, our internally discovered compound in late stage development for diabetic kidney disease and a number of other attractive assets in mid to late stage clinical trials. We have a number of attractive growth platforms, which sit within the context of a company that consistently generates strong financial results and consistently meets financial commitments. We believe AbbVie has a unique investment identity as we offer promising pipeline prospects along with strong growth and compelling shareholder returns. Our business significant cash flow, which we expect will grow in 2015 and beyond with new product introductions. To that end, earlier this year, we increased our quarterly dividend to $0.51 beginning with the dividend payable in May. This increase follows an increase of nearly 17% late last year. Since our inception as an independent company in 2013, we've increased the dividend nearly 28%. We intend to maintain our strong commitment to a growing dividend going forward. Additionally, we've utilized our strong cash flow to enhance our pipeline through licensing and partnering activities. We view these activities as an important component of our R and D strategy and we expect to continue to augment our pipeline in the coming years. And finally, operating margin expansion is a key priority for AbbVie. We have initiatives in place to improve efficiency across our operations and we have delivered significant improvements in our operating margin profile since we launched in January 2013 to the current level today of just over 40%. We're forecasting additional improvements in operating margin profile in 2015 reflecting these efforts as well as favorable leverage across our income statement. And we remain committed to improving this metric across our long range plan. In closing, since AbbVie became an independent company, we've been focused on executing our key strategic priorities. We've established a strong track record, consistently exceeding our financial commitments, generating strong shareholder returns and driving medium performance of HUMIRA and other products in our portfolio. We've also built a promising late stage pipeline, which will fuel our future growth. And we gained regulatory approval on several important products and advanced many more. We've set a strong foundation for the company. The addition of Pharmacyclics significantly strengthens our long term growth prospects, positioning AbbVie for top tier growth through the rest of the decade and beyond. With that, I'll turn the call over to Bill for some additional comments on the Q1 performance as well as our Q2 outlook. Bill? Thank you, Rick. This morning, I'll review our Q1 performance and provide an update on our outlook for the remainder of 2015. As Rick said, we're very pleased with the strong quarter we delivered. Reported sales were up 10.5% despite a challenging foreign exchange environment. Operational growth on the top line was a very strong 17.8%. HUMIRA delivered global sales of more than $3,100,000,000 up 26% on an operational basis. We continue to see strong momentum from HUMIRA with growth across categories driving all time high market share for the brand. U. S. HUMIRA sales increased 39.6% driven primarily by prescription volume increases in excess of 20% and favorable pricing impacts. Wholesale inventory remained constant at 4th quarter 2014 levels of less than half a month. International HUMIRA sales grew 14.8% on an operational basis, excluding a 14.6% unfavorable impact from foreign exchange. As occurs periodically, the Q1 was favorably impacted by the timing of shipments in select markets. For the full year 2015, we continue to expect global HUMIRA sales growth in the mid teens on an operational basis. International sales of Synagis were $335,000,000 in the quarter, up 8% 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 1st and 4th quarters. We continue to expect 2015 Synagis sales growth to be similar to 2014 performance. Global VICARA sales in the Q1 were $231,000,000 In the U. S, many of our contracts have start dates in the April May timeframe and we expect those to begin to ramp in the 2nd and third quarters and build for the remainder of the year. Our commercial efforts are focused on driving strong penetration in the AbbVie exclusive accounts. We've been successful in this regard with our largest contract, which has been in place since the beginning of the year. Internationally, we've been able to secure reimbursement in many markets faster than we had originally anticipated. As a result, as Rick indicated, we expect a higher mix of international sales this year than originally forecasted. Globally, we continue to expect an annualized run rate of more than $3,000,000,000 in sales by the end of 2015. Global Lupron sales were $192,000,000 in the quarter, up 3.8% on an operational basis. For the full year 2015, we expect Lupron sales to be roughly in line with 2014 sales. U. S. Sales of Synthroid were $186,000,000 up 18.8% versus the prior year quarter. For the full year 2015, we expect Synthroid sales to be roughly flat from 20 14 levels in line with market trends. Androgel sales were $153,000,000 down significantly due to continued market declines and the entry of generic competition for the 1% formulation. As we've said previously, we expect Androgel sales of less than $500,000,000 for the full year 2015. U. S. Creon sales were $127,000,000 in the quarter, up 18.8%. We continue to capture the vast majority of new prescription starts in the pancreatic enzyme market and we expect double digit sales growth for Creon in 2015. Sales of duodopa, our therapy for advanced Parkinson's disease grew 19.5% on an operational basis in the quarter. We expect continued double digit growth for duodopa with a modest level of U. S. Sales in 2015. Our U. S. Launch will be getting underway in the 2nd and third quarters. And as we've said previously, we anticipate a gradual ramp for product sales in the U. S. This year as physicians grow familiar with the product. The foreign exchange environment has clearly been been challenging for our industry over the last few quarters and like our peers, we saw a negative impact on our top line in the quarter as a result. While we are to deliver our bottom line commitments despite foreign exchange headwinds and protect shareholders from the negative impact. As a result of this mitigation, we will see a favorable effect on our margin profile. We showed continued improvement in gross margin as a percentage of sales in the Q1. The adjusted gross margin ratio was 82.9%, up 4 50 basis points from the prior year quarter, driven by the effects of exchange, product mix and operational efficiencies. Adjusted R and D was 16.1% of sales, reflecting funding actions in support of our mid and late stage pipeline assets. Adjusted SG and A was 26.7 percent of sales in the Q1, down from the prior year contributing to continued improvement in operating margin leverage. The adjusted operating margin in the first quarter was 40.1% of sales, up 6 20 basis points versus the prior year quarter. The majority of this improvement was driven by product mix and efficiencies. We are on track to deliver an operating margin profile in excess of 40% in 2015. Adjusted net interest expense was $67,000,000 and the adjusted tax rate was 22.3% in the quarter. 1st quarter adjusted earnings per share excluding non cash amortization expense and specified items were $0.94 up 32.4 percent year over year and exceeding our previous guidance range. On a GAAP basis, earnings per share were $0.63 As Rick communicated, this morning we increased our adjusted earnings per share guidance range for 20.15 by $0.05 Our adjusted EPS guidance range is now $4.10 to 4 point $3.0 This range reflects EPS growth of 23% to nearly 30%. The increase in guidance is reflective of the strong underlying performance of the business that we see playing out this year and we have raised our outlook despite the increasingly negative impact from foreign exchange. We are now forecasting roughly 7% negative top line impact from currency this year, which we have covered in our guidance increase. Our 2015 adjusted guidance range includes the previous communicated $0.20 dilutive impact of the Pharmacyclics acquisition. It excludes $0.53 of amortization and specified costs, including Pharmacyclics transaction costs booked in the Q1. We plan to communicate specific profile guidance for the combined company as well as the 2015 earnings per share of $1.04 to $1.06 This excludes roughly $0.09 of specified items in non cash amortization and includes a modest amount of Pharmacyclics dilution based on a partial quarter impact. So in conclusion, we are very pleased with our outperformance in the Q1 and its impact on our full year projection. We have driven strong top and bottom line growth and delivered operating margin expansion, while also advancing on our strategic priorities. This puts us in a strong position to deliver industry leading growth this year. 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 today is from Mark Schoenbaum from Evercore ISI. Hey, guys. Thanks a lot for taking the question. Congratulations on fantastic P and L management this quarter. I Rick, I heard during your opening comments you talked a little bit about your long range plans kind of qualitatively about operating margin improvement as part of your long range plans. What I'd like to know perhaps is can you are you willing or can you yet quantify where you see operating communicate a long range plan to investors? Or some other venue at which you might communicate a long range plan to investors? And then also can you comment on whether or not your assumption for operating margin improvement over the medium to long term is or is not dependent on revenue? In other words, can you commit to your investor base that AbbVie can and will expand its operating margin even if the top line were to come in below your internal expectations? And obviously, there the focus would be the HUMIRA biosimilar erosion curve. Thanks so much. Okay. Good morning, Mark. This is Rick. Thanks for the question. I think probably the best way to answer your question is to maybe talk for a few moments about the philosophy by which we manage the business and how we think about investment and how we think about revenue and ultimately how we try to deal with changes in those dynamics. So let me start by saying, I'm sure you understand that our business strategy is really designed to maximize both short and long term profitability of the business, giving shareholders strong returns and strong value over that long period of time. That philosophy really plays out in how we look at investment decisions, whether we're increasing investment or we're decreasing investment. And what I'd say is this management team at AbbVie that came out of Abbott has always been disciplined in our approach to resourcing opportunities as well as overall P and L management. We manage the business with the objective of driving robust growth in both revenue and EPS, but at the same time improving operational efficiencies and I think you've seen some of that and I'll talk more that in a moment and costs in order to maximize shareholder returns, but again short term and long term. And the examples I would give you is this. I mean just take a look at what you've seen play out since we launched as a new company. For example, our gross margin profile has improved from 76.2% in the Q1 of 2014 to 82.9% this quarter. Additionally, if you look at despite building the infrastructure that was necessary to be an independent public company, operating margin profile has improved from 33.7% in Q1 of 2014 to 40.1% in the most current quarter. So we have delivered significant improvement in both of those metrics and we're committed to continuing to do that. And importantly, we've delivered 6 points of operating margin profile improvement in the last 4 quarters. The other thing I'd say is, we've recently seen a number of comparisons to various peer groups as it relates to AbbVie. And I think it's important to recognize that no two companies are identical when it comes to product mix, geographic coverage, the size of the market that they operate in, the brand's responsiveness to investment and many other factors. I realize it is tempting to do these macro comparisons and I would even agree to some extent that it's instructive at some level. But I'd also tell you there are limitations and flaws in doing it. I can tell you that we benchmark and compare ourselves to many companies and we believe that we compare favorably to most of our peers. I'm going to give you a couple of examples here. When you compare AbbVie to the other large cap pharma peers Bristol, Lilly, Merck, Pfizer, what you would see is the following. Our gross margin profile is on average approximately 6 points higher. Our R and D profile on average is 5 points lower. Our SG and A profile on average is 3 points lower. And our operating margin profile is about 13 points higher. Our geographic footprint is similar to many of those peers, but our product mix is different. They have more primary care. Then when you compare AbbVie to the pure biotech peers, specifically Amgen, Biogen, Celgene, What you see is that our gross margin profile is on average 6 points lower and that's due to differences in the product mix. Our R and D profile is approximately 4 points lower. Our SG and A profile is approximately 5 points higher and that's driven by geographic distribution of our revenues, especially the percentage of revenues that come from international sales. You probably know, it's about 45% for us. And many biotech companies have 70% of their revenues coming from the U. S. And there are other anomalies that you have to be careful, such as some biotech companies have a definition of adjusted SG and A that excludes the impact of equity based compensation, which we include and there are other accounting differences as well. So finally, when you compare to this group and you look at our operating margin profile, it's approximately 7 points lower as it exists today. But the conclusion of assuming that that's related to investment spending is not accurate. In fact, I would tell you it's misleading. If you look at our total investment spending, R and D and SG and A, our investment spending on a profile basis is slightly below those peer companies. The entire difference is in the gross margin profile, because of the product mix. And we've shown significant improvement there with more to come and we're committed to deliver more, but that's the fundamental difference between those two peer groups. And again, as we look at this data, it is instructive. And on balance, I'd tell you that based on the geographic footprint that we have that's larger than many biotech companies, the product mix and the investment in R and D and SG and A, the analysis shows us that we're favorable to both of those peer groups. But in the end what really matters is what investment decisions do you make in the business and what's the return that you ultimately get for them? Can you maximize the short and the long term value for the shareholder? And our philosophy is we invest in businesses and the brands to maximize that value. Meaning, we increase investment when we can drive a strong return and we reduce investment when we can't or a product gets to the end of its life cycle. And I would tell you that I believe we do both very well. And I'm going to give you an example of each. If you think about the last 2 years, we have protected shareholder profitability the last 2 years as our $2,500,000,000 lipid franchise went generic. And we did it by drastically reducing costs in that brand and other parts of the business. We're doing the same thing right now on AndroGel. It's the obvious decision for us. I would just tell you it's the culture that we have here. Now let's take the opposite example of that HUMIRA. HUMIRA is a complex business model. HUMIRA sales and profit contributions come from a broad geographic footprint with about 40% of its sales coming from outside the United States. HUMIRA has an unparalleled breadth of indications and we use a unique selling model for HUMIRA to utilize specialized and dedicated sales organizations for all major indications. We manage and invest in HUMIRA to maximize its short and its long term value to the company and to our shareholders. And I think it's pretty hard to argue with our success. When we took the company public a little over 2 years ago, HUMIRA was a $9,000,000,000 product. Today, in 2015, HUMIRA is a $14,000,000,000 product. $5,000,000,000 of growth in 2.5 years despite the foreign exchange headwinds. The brand is 55% larger. If you take Emeril and REMICADE together over that same period of time, HUMIRA grew almost twice as much. So we think the performance speaks for itself. And I can tell you that based on the performance, the strong potential for future continued growth, accelerating script trends in the U. S. And strong international growth, cutting HUMIRA spending today is not a prudent long term strategy for us. And finally, I'd make 2 last points. We've been very clear that we're committed to driving strong continued improvement in operating margin profile. You saw that this quarter and we're going to drive further improvements in 2015 and across the long range plan. Our goal is to drive strong growth and operate as efficiently as we possibly can to maximize profitability. We're not going to make a prediction right now because we've just made a significant acquisition and we need to start to integrate that acquisition and we will be in position to be able to communicate things after that. 2nd, I'll get to the final part of your question, because I think what you're really trying to ask me is, if there were some unforeseen surprise around HUMIRA, would we react to that? So, let me begin by saying the following. We do not in any way expect that type of event to happen. In fact, I tell you quite the contrary. We anticipate HUMIRA will be a growth driver for us for many years. And our investment in new indications like HS and uveitis speak volumes for our confidence. However, to answer your question, if the bear scenario played out and threatened to materially impact the profit contribution of HUMIRA, we would apply our investment philosophy in an appropriate manner. We would take prompt and appropriate action to reduce our expense base accordingly with an eye to minimize the impact for the investors. To us, as I said before, that's the obvious strategy. It's part of our responsibility to shareholders as management. As a new company, we have met or exceeded expectations in every quarter of our existence, including this quarter. We take our responsibility to deliver on our commitments and our performance to shareholders very seriously. If we saw any unforeseen event impact the business, we'd aggressively pursue actions to preserve profitability. That's part of the culture and the commitment that we have. And in fact, I tell you we're doing that right now. We're protecting shareholders against significant foreign exchange impact. And so that's the philosophy we run the business and hopefully that's answered the question that you asked. Thanks for the very thorough answer. I really appreciate it, Rick. Look forward to more communication after PCYC closes. Thank you. Great. Thanks, Mark. Thank you. Our next question is from Jamie Rubin from Goldman Sachs. Thank you. And I don't want to beat a dead horse. Obviously, there's been a lot of focus on operating margins. But Rick or Bill, maybe you can just comment on our math here. I mean, clearly, we see the improvements in gross margins and much of that will come from royalties going away on HUMIRA as R and D seems to be in line with other large biotech peers. But SG and A seems to be where things appear to be a bit out of kilter. If I do a bottoms up analysis on HUMIRA, it would seem that it would be difficult to spend more than $1,000,000,000 maybe $1,500,000,000 if you really stretch it. So that leaves about $4,000,000,000 to $4,500,000,000 for the rest of the portfolio. And when I look at the rest of the portfolio, I mean Synagis, Lupron, Synthroid, these are drugs that I don't think require active promotion and I can't imagine requires the multi $1,000,000,000 in expenses. Obviously, there's other stuff thrown in there. But when I sort of bring it all back to where we started out here, it seems that there's about $2,000,000,000 in excess spending. Can you comment on this? And is there anything structural that would prevent you from eliminating that without really touching the HUMIRA spend? And just maybe another way to go about this is that, is there anything structural that would impede you from achieving large cap biotech operating margins, which in the next couple of years are forecasted to be in the low 50% range? Thanks. Well, first Jamie, I disagree with your analysis on the investment expense, because if I take your own report and I add together the SG and A and the R and D spend for those 3 companies that I mentioned, we're slightly below the total investment when you include SG and A and R and D. So it's a question of how you distribute your investments. I'd say the second thing is in many cases, we have a broader portfolio of products and a broader geographic spread of our products than some of those companies do. Is there anything structural? No. There's nothing structural. I Obviously, we have a geographic footprint that's much larger than many of those other companies. We believe that's a competitive advantage. As far as HUMIRA spending is concerned, we obviously do bottoms up budgeting every single year. We justify what we're going to spend. I would tell you that the selling model that we have is somewhat unique in the industry, but it also tells you that the performance that it's delivering is unique as well. And products don't sell themselves. And so at the end of the day, we believe we're getting a good return out of the investment that we're making. And we're balancing our ability to be able to And we make tweaks all the time. I'd also say that when you look at And we make tweaks all the time. I'd also say that when you look at some of those brands, the broad conclusion that they don't require promotion is not an accurate conclusion. Lupron has promotional activities associated as an example with it. And so, generally speaking, what I would say is that there's nothing structural that would cause us not to be able to make significant changes. And as I mentioned in my comments to Mark, if we were in a situation where ultimately that was something that we believe was in the best long term interest of shareholders then we would make that change. But we're certainly not in that position now. If you look at our performance this quarter, we're growing rapidly. We expect to continue to grow. Have a number of pipeline drugs that we believe will be approved over the course of the next 2 years. We're certainly going to put ourselves in a position to be able to launch those drugs and be effective. And we're going to balance the investment we're making in other areas against that investment to try to be as efficient as possible. And we believe that is the appropriate way to run the business. And we don't believe it is appropriate to try to hit some margin target of whatever the number is by cutting R and D or productive SG and A. We don't think that's in the long term interest of the shareholders. Okay. Thank you. Thanks, Jamie. Thank you. Our next question is from Jeff Holford from Jefferies. Thanks very much. I've got three questions. The first is a very short one. Just wonder if you can comment a bit more in terms of the gross margin uplift you've had there. Just give us a bit more breakdown in terms of what was mix, what was efficiency and what was FX? 2nd, I wonder if you could just maybe comment around there have been quite a few experts speaking around on HEMEO really focusing on dosing and formulation patents specifically and potential weaknesses there. Would you say that that's the key area of the IP portfolio to focus on or are there potentially other stronger areas that aren't being discussed? And then lastly also on IP, I wonder if you can talk to any of the IP that you have in the areas of Alzheimer's, A beta antibodies? Just tell us a little bit more around that. Thanks very much. So Jeff, it's Bill Chase. I'll start with your gross margin question. I'm actually going to expand it to operating margin as well, because exchange impacts those profile metrics differently. So on the gross margin basis, exchange made up a little bit over half of the improvement in the quarter. The remainder was product mix and efficiency. And I'd say you could split those the remainder 2 thirds, 1 third. On the operating margin line where exchange has less of an effect and what we saw was about a 1 third of exchange and the rest being leverage on the P and L product mix and efficiencies. Thank you. This is Laura. I'll take the question on IP. As we've said before, we have a robust portfolio of IP that covers a wide variety of patents, including manufacturing patents, formulation patents, process patents, and patents that cover virtually every indication for which HUMIRA is currently approved. We think these patents have a very broad applicability to any biosimilar application and the HUMIRA was the first fully human monoclonal antibody. As such, little was known about how to use fully human prosecution in the Patent and Trademark Office over nearly a decade, and we think given the innovative nature of our work and the rigorous prosecution that patents are strong and will withstand challenge. And who wants to talk about the Alzheimer's IP? So with respect to IP this is Mike Severino. With respect to IP in Alzheimer's disease, we're active from a research perspective in a wide range of areas and we're active in neuroscience as well and that work generates IP. It's done so in the past and it will continue to do so in the future. So I think you'll see us continue to pursue research activities in this area over time. Yes. We just haven't provided a lot of detail there yet, Jeff. Okay. Thanks very much. Thank you. Our next question is from Mark Goodman from UBS. Yes. On the VICIRA overseas, can you give us a sense of what countries the growth came seas, can you give us a sense of what countries the growth came from? And just what new countries are coming on, so we can get a sense of just the geographical mix there? And then you mentioned atrasentan. Can you just give us an update on that product? We haven't talked about that in a while. Where is it? When are we going to see data? And then, third question is, why are there still such significant separation costs that you're excluding from the numbers given that we're a couple of years out from the separation from Abbott? Thanks. Okay. This is Rick. So I'll talk a little bit about the international rollout. Obviously, we've launched in a number of European countries and a number other select countries outside of Europe. Germany is a good example of one that has gotten significant uptake. But you'll see Italy coming online. Spain has come online. A number of other ones have come online. So it's the major European countries that you'd expect to be the greatest value. And then assume we're assuming Japan we'll see in the Q4 as well. This is Mike Severino. With respect to atrasentan status, that's our molecule that's being studied in diabetic nephropathy. That is progressing well. It's in a Phase 3 study. That's an outcome study and it's event driven. So it's hard to make exact predictions about when it will read out. But I think those data will continue to mature over the next few years. And so, I think you can expect to hear more from it in that timeframe. I think it is fair to say though because it's an outcome driven trial. This trial will take a significant period of time to hit the number of events based on the endpoint that we've assumed. Yeah. That's correct. Yeah, several years. And then Mark on separation expenses, when we separated from Abbott, we operated under a number of transition service agreements that generally had a 2 to 3 year timeline. The majority of those were off of with the exception of 2 large ones and that has to do with the rollout of the existing back office in Abbott and how quickly we could create a new back office. And we've made great progress on that rolling out a very efficient shared outsourced model, but we're not completely done with that. We'll be done at midpoint of this year. The other major initiative as you can imagine is disentangling the IT environment and infrastructure in general is extremely complex and that will be done by the Q3. And those are the majority of the costs you're still seeing coming through. Thanks, Mark. Thank you. Our next question is from Alex Herve from BMO. Good morning, folks and congratulations on a good quarter. Rick or Loric, the intellectual property the Hemar intellectual property that you referred to, will that protect you against biosimilars manufactured outside the U. S? In other words, are there ways for biosimilar companies to circumvent those patents with ex U. S. Manufacturing? And second question on Humira. The U. S. Growth is truly impressive. You mentioned, I think, all time peak market shares. Could you put some numbers around those market shares in major indications? And then finally on hep C, why did you exclude cirrhotics in your Phase 2? And will you have cirrhotic data later this year? Thank you. I'll take the IP question first. With respect to the IP, the patents that I'm talking about broadly are global patents. So we have global patents covering manufacturing and process. The specific indication patents that I referenced are U. S. Patents. We have patents pending outside the U. S. Right now. Those patents have not issued yet. But we think the portfolio we have is very broad and we think that we will have some protection outside the United States as far as certainly right now manufacturing process and formulations. In terms of market share, Alex, let me give you just a quick snapshot. Rheumatology, we've got a roughly 25% share right now. In dermatology, it's approaching a 40% share. And in the gastro space, it's kind of around 45% market share for us. So very strong market share. So this is Mike Svetrani. With respect to our next generation HCV program, I think you're referring to comments we made about a 99% SVR for response rate in genotype 1 non cirrhotic patients. Those are simply the first data that we have available. We have not excluded cirrhotic patients from our Phase 2 program. You'll see our Phase 2 program continue to mature over the course of this year and we'll be providing updates as appropriate. Thank you. All right. Thanks, Alex. Next question please. Thank you. Our next question is from Vamil Divan from Credit Suisse. Yes. Thanks for taking the questions. So just a couple more on the hep C side. One, can you just share your internal sense of the market share breakdown right now? It's obviously a tougher market than usual for us to see from the outside. So between yourselves and Gilead, any color there in terms of the breakdown would be helpful. And then in terms of the next gen, we're seeing some good data over here at EASL, especially from competitors. How do you think about the duration there? Does yours need to be an 8 week regimen? Are you looking maybe even potentially shorter than that? How do you think about that given what the competitors are showing over here? Okay. This is Rick. I'll cover the market share piece. So we're obviously still pretty early on into the launch. We're 3 or 4 months into the launch. And maybe the easiest way to characterize it is this. If you actually look, I'm going to give you a slightly different number than we've given you in the past because it will relate better to the overall market share. So if you look at what we have under contract now in preferred or exclusive contracts, total. In other words, there's still a percentage of covered lives that have not contracted yet. And that percentage actually has stayed pretty constant for the last 30 or 45 days. So that's why I'm going to give you a total market share. You'd say that we have about 21% of the market that's under contract as a preferred where we're a preferred agent within those accounts. The vast majority of those have come online roughly in the March time and and we've now demonstrated within the exclusives that we've been in for 90 days that we're able to achieve high share. But ultimately what will deliver the overall share in the U. S. Market will be ramping up in these other preferred or exclusive accounts and we're not going to be able to see that data probably for another 90 days or so as they come online and we ramp. So I think the best way to think about the U. S. Just qualitatively would be that you'll see this essentially this lighter ramp in the first half of the year for the U. S. And a faster ramp in the second half of the year. And then the parity accounts, obviously, we've had a number of those under contract and we're ramping there. They're not ramping as high as the exclusive accounts did. And so the blended share will be determined. It's really too early I think to give you a prediction yet. But within 90 days or so, I think we'll be in a better position to be able to predict that. But it will be a blended share between what we're able to drive in these preferred accounts, the level we get in parity accounts and then obviously in the areas where Harvoni is contraindicated, we're getting some share out of their exclusive accounts and it will be the blend of all of those. But now I'd say, you should be thinking about it in the teens right now, on the low end of the teens, but should ramp from there. All right. This is Mike Sabrina. With respect to data coming out of EASL and short course therapy in the future for hep C, I think it's still a bit early to say where various regimens around the industry are going to sort out with respect to treatment duration. We've seen hints that 6 weeks may be possible, but those have sort of come and gone in the past. And I think we're going to need more data to know where treatment durations will really sort out over the next few years. What we do know is that it's very important to have high response rates, very high cure rates. And I don't personally believe that people will be willing to sacrifice a lot in terms of cure rates to shave for example 2 weeks off of treatment duration and that's certainly the philosophy that we're taking. So I think those data will continue to evolve and we'll keep a close eye on them. With respect to our next generation program, we are going to study 8 weeks and we'll go where the data take us. We'll go as short as we think the data support again while maintaining those very high cure rates. So I think when I look at all the data coming out of EASL, I still see our regimen is very, very competitive. And I think treatment durations that we are exploring are going to be appropriate for the landscape that we see out there in 3 to 5 years and beyond. Thanks, Vamil. And we'll take our next question, please. Thank you. Our next question is from Steve Scala from Cowen. Thank you. I have a few questions. On the January call, AbbVie said it would provide more specific guidance on 2015 Vicarious sales expectations as the year unfolds. What uncertainties still exist such that a single point full year guidance number is not being provided now? So that's the first question. Second question is, I thought both the ABT19917p deletion and elituzumab readouts were supposed to be in early 2015. What does it imply that the data is not yet available? And then lastly, what has been the tone and the substance of your conversations with partners J and J with Ibrutinib and Roche with ABT199 post the news of the Pharmacyclics acquisition. It would seem that there could be some issues and or concerns and I'm just wondering if that's the case. Thank you. Okay. This is Rick. I'll take the guidance question. It's specifically two things. It's what I just mentioned a moment ago that many of these exclusive accounts are just now coming on. And if we look at our experience in earlier ones, it has taken us about 90 days to get to peak share. And so we need to make sure that we can demonstrate that level of share in those accounts to be able to give you an accurate prediction because obviously that drives a significant part of the share and the volume. And then the second thing is, it's this issue that we described before and that is clearly we are having greater success than we had planned in the international markets. And so the mix is different than what we expected in our original planning process. And so we need more time to see that roll out and that's gated based on how you get reimbursement in those countries. So we don't want to give you an inaccurate number and we want to see it play out a little bit longer. But what we do know is, we feel confident that we should be able to hit the greater than $3,000,000,000 running rate by the end of the year. And we've looked at that carefully and we've re communicated that. When we're at a point that we feel comfortable that we can give you a full year estimate, we'll provide that to you. So this is Mike Severino. With respect to elotizumab and AVT199 specifically the 17p dell data the question if I can paraphrase is are we on track and when can we see more data from these programs? We are on track with both programs. Eletuzumab you'll see an update at ASCO. So that's in the very near future. With ABT199 and 17 PDL, we're on track. We are working with the data. Recall that this is an open label study. So we're working with the data. And what we see is consistent with our expectations. We'll look for an appropriate venue and time frame to share details of those data externally. But we continue to have confidence in that molecule and have a view towards a regulatory submission later on this year. The partner aspect of it, I mean, first let me start with J and J. Obviously, Pharmacyclics is an independent company right now and I think we I think we've worked with J&J in other aspects of relationships that we've had. In our prior experience with Abbott and the refined company, I think the relationship will work extremely well. I'd make similar comments about Roche. I think Roche, Genentech, we've had very good relationships with and we don't anticipate any challenges in managing our way through this relationship between the two partners. Thank you. Thanks. And we'll take our next question please. Thank you. Our next question is from Robin Karnauskas from Deutsche Bank. Hi guys. Thanks for slipping me in. Sure. I guess two questions I guess for Rick. So first of all, I guess are you opposed to an Analyst Day just to help us understand in greater depth your rationale behind the confidence in Humira, how you run your business? And the second question is, Nate, I appreciate that you're confident in your Humira business. But when you talk about a disaster scenario, what is that for you? Is that a launch of a biosimilar? Or is that massive share loss? And do you run your business like that is the possibility? Or do you run your business like we are so confident in HUMIRA that it's something we're not really worried about? Just trying to understand how you run your business versus your confidence? Thanks. Okay. Two good questions. Thank you. So the Analyst Day, we had kicked around the idea of an Analyst Day. We may do something post closing Pharmacyclics. So it's obviously something we need to plan for and not only be able to talk about the other aspects of the business, but talk about our oncology strategy in more detail. So I would stay tuned on that and we think there are a number of things that we could communicate kind of the summer or fall kind of timeframe, I think would be the most appropriate time and others have suggested similar suggestions to us about doing an Analyst Day. So that is something we're considering. What I would tell you on the HUMIRA situation, it is not the launch of a biosimilar. Obviously, we have a strategy in place that we believe allow us to continue to drive strong performance out of HUMIRA post the launch of a biosimilar. But what I would tell you is we obviously have contingency plans that we have in place that we would pull the trigger on. Remember, it's going to be not just one single launch, right? Because HUMIRA is sold all around the world, so there'll be different countries. Obviously, the U. S. Is a a significant part of that and the major European countries are another significant part of it. But we would be evaluating every single country on an ongoing basis and we would make a determination. And I'd say the disaster scenario for us would be that ultimately we were significantly unable to achieve the objective that we built into our long range plan. We've obviously built into the plan expectations of how we would deal with any price erosion that might occur, any share erosion that might occur. And then we have a contingency plan that basically would be built around missing that particular set of assumptions. And you wouldn't pull it all at once. You'd basically start to titrate if you were missing in a way to be able to offset or mitigate any financial impact versus what you had planned for. And so I think that's the way to think about it. That's really helpful. Thank you. Thanks, Robin. Our next question please. Thank you. Our next question is from Chris Schott from JPMorgan. Great. Thanks for the questions. First one was just on HUMIRA. I was just interested in your perspective and how you're thinking about the bio if a if a biosimilar HUMIRA was to enter the market in Europe, let's say, in late 2018, is the REMICADE biosimilar ramp something that we should think about as a reasonable comparison there? Second question was on leverage and business development priorities post PCYC. What is the sense of urgency at this point to add or build upon existing growth verticals with further in market product acquisitions post this deal? Is that still a priority? Or should we think about AbbVie kind of coming back to focusing on some of these earlier stage more R and D focused transactions going forward? Thanks very much. Okay. Thank you. So on HUMIRA and the biosimilar launch in the REMICADE biosimilar launch expanding beyond the countries that it's been in now for a couple of years. What I'd say is, we've been watching these launches carefully in the countries that they've been in for some period of time. If you look at those countries, relatively modest share has been achieved by the biosimilar product in most of those countries And it's well within the expectations of what we would have assumed. We're watching the competitive response and learning from how that competitive response works. And I'd say so far that's been consistent with what we would have expected from a pricing standpoint and a strategy standpoint. And so within the countries we're in now where we're seeing these launches, I can tell you HUMIRA is not impacted. We're continuing to grow patient share within those countries. And so, there certainly isn't any direct impact on HUMIRA within those countries where we see it today. Is it a good metric in order to measure what we could expect with HUMIRA? I think that's probably a little bit difficult to judge, because again it all boils down to your position in the marketplace. And I'd also say that the European market and international markets are different than the U. S. Market for a number of different reasons. And so if you were to assume that a HUMIRA biosimilar would be in the U. S. Prior to the international markets, then I'd say it's not a good surrogate at all to look at, because I think the U. S. Will be a very different kind of competitive situation. And again, I think even in the European markets, each product is positioned a little bit differently within the market. And it boils down to how does the competitive response handle the launch of that product. So that one's a little tougher for me to answer. But I'd say for right now, it's tracking the way we would have expected it to be. On the BD Priorities post deal, if I understand the question correctly, are we looking to go out and find another large growth platform? The answer is no. We've obviously made a significant commitment here with the acquisition of Pharmacyclics and it positions us well in this sector. And ultimately, it was a platform play for us and it's the platform play that we would assume that we needed or wanted going forward. So now, I think you will see us go back to a similar kind of strategy that we had before, which is more looking for individual products that we can build out the areas that we have specific therapeutic interest in like immunology, like virology, like oncology and continuing to add on to that potentially some tuck in kinds of acquisitions, smaller acquisitions to add to it, but more of what you've seen from us in the past. Great. Thanks very much. Thanks, Chris. And operator, we have time for one more question please. Thank you. Our final question today is from Colin Bristow from Bank of America. Hey, guys. Thanks for squeezing me in. So just to piggyback on Wamil's question, we're seeing new data sets from Mirth and Gilead at EASL. I was just curious how do you see VateraPAT competitively positioned as we move into 2016 given this intensifying competitive landscape? And there's another one on hep C. There's been some discussion in the hep C community that real world realized cure rates for the Keyera Pack could be a greater delta to those seen in clinical trials versus HARVEY given the complex regimen? I'd love to get your feedback here based on your experience so far. And then just one quick one on IMBRUVICA. One of your peers recently entered in a partnership with a BTK inhibitor for autoimmune conditions including RA. Is this something you plan to pursue with IMBRUVICA? Thanks. Okay. So with respect to EASL, we continue to feel confident that the Cara pack will provide competitive efficacy in the timeframe that you're 2016 time frame and beyond. Recall that cure rates with ACURA are very high and that the regimen has been well tolerated. And we don't see major shifts for example in duration of therapy in the timeframe that you're describing that would change that picture in any meaningful way. Of course, over the longer term, we have our own next generation program, which I talked about a little bit earlier in this call, which will continue to drive innovation in this space. And so we feel good about our presence in hemp seed today and we'll continue to do so over the years that follow. With respect to real world cure rates with the Cure pack that doesn't match our experience. And so I really can't comment on that report. Our real world experience is actually quite good with respect to adherence to the regimen and therefore realizing the sort of cure rates that have been demonstrated in clinical trials. With respect to IMBRUVICO or BTK inhibition in autoimmune disorders, obviously that's something that has been a focus of research for a number of companies, including ourselves. It's something we'll continue to investigate. I think we will be positioned very well to pursue that aggressively given our extensive experience in immunology and post close given PCY IC's experience in BTK inhibition. So it's certainly something that we would keep a close eye on something that we would pursue. Thank you. Thanks, Colin. And that concludes today's earnings conference call. If you'd like to listen to a replay of the call, please visit our website at abbeyinvestor.com. And thanks again for joining us today. Thank you. And this does conclude today's conference. You may disconnect at this time.