AbbVie Inc. (NYSE:ABBV)
Q3 2013 Results Earnings Call
October 25, 2013 9:00 AM ET
Larry Peepo - Vice President of Investor Relations
Rick Gonzalez - Chief Executive Officer
Bill Chase - Executive Vice President, Finance and CFO
Laura Schumacher - Executive Vice President, Business Development, External Affairs and General Counsel
Scott Brun - Vice President, Clinical Development
David Risinger - Morgan Stanley
Jeff Holford - Jefferies
Steve Scala - Cowen
Vamil Divan - Credit Suisse
Chris Shad - JP Morgan
Marc Goodman - UBS
Tony Butler - Barclays Capital
Good morning and thank you for standing by. Welcome to the AbbVie Third Quarter 2013 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer portion of this call. (Operator Instructions)
Should you become disconnected throughout this conference call, please dial 1 (877) 918-6633 and reference the AbbVei call. This call is being recorded by AbbVie. With the exception of any participants’ questions asked during the question-and-answer session, the entire call including the question-and-answer session is material copyrighted by AbbVie. It cannot be recorded or rebroadcast without AbbVie’s express written permission.
I would now like to introduce Mr. Larry Peepo, 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; Bill Chase, Executive Vice President of Finance and Chief Financial Officer. Joining us for the question-and-answer portion of the call are Laura Schumacher, Executive Vice President of Business Development, External Affairs and General Counsel; and Scott Brun, Vice President of Clinical Development.
Rick will begin by discussing AbbVie’s results from the third quarter, as well as highlights from our commercial portfolio and upcoming pipeline milestones. Following Rick’s comments, Bill will give a more detailed review of our third quarter performance and then give an update to our outlook for the remainder of 2013. Following our comments we’ll take your questions.
Before we get started, I remind you that some statements we make today maybe 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 2012 annual report on Form 10-K and in our other SEC filings. AbbVie undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments except as required by law.
On today’s conference call, as in the past, non-GAAP financial measures will be used to help investors understand AbbVie’s ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today which can be found on our website at www.abbvieinvestor.com.
So, with that, I’ll now turn the call over to Rick.
Yes. We are offline. Thank you, Larry Peepo. Good morning everyone and thank you for joining us. Today, we reported strong third quarter results with adjusted earnings per share of $0.82 exceeding our guidance range for the quarter. Our performance demonstrates the strength and durability of our portfolio, as we deliver these results despite the continued impact of generic competition on our lipid franchise. Today, we also raised our full year EPS guidance for 2013 reflecting the high level of execution we’ve demonstrated this year. As we embarked on this year, we set forth several key priorities for our business, including, a seamless transition to operating as an independent entity, maximizing the performance of our current product portfolio, advancing our pipeline including our late-stage HCV program and other key assets and delivering operations efficiencies.
As we assess our progress, I believe we have met or exceeded expectations on our strategic objectives. I’m pleased with the performance of our product portfolio including HUMIRA, which delivered more than 19% global operational growth in the quarter. This strong growth was driven by several factors including continued robust market growth resulting from increasing penetration across therapeutic categories and geographies. Market share gains particularly in the GI segment where our UC launch is progressing ahead of our expectations. And we delivered this performance despite the entry of new competitors into the category.
As we’ve indicated in the past, HUMIRA's broad label and new indications are a competitive advantage and UC is the latest example of that. We’ve launched UC indication in a number of key countries and it quickly gained meaningful market share and we’re working to secure market access and reimbursement in a number of additional markets in the coming months. Today, in Western Europe, we’re currently capturing roughly 25% of the UC market. And in the U.S. the UC indication has contributed significantly to our strong performance in the IBD market as HUMIRA is now the market leading biologic in the GI category. We continue to pursue HUMIRA in several other indications which are currently in late-stage developments.
Earlier this month, we presented Phase 2 data in patients with HS, a chronic inflammatory skin condition. Our Phase 3 trials are fully enrolled and we’re targeting commercialization of this indication in the 2015 timeframe. Given the lack of effective treatment options, we believe HS could represent a several hundred million dollar peak year opportunity for us. HUMIRA continues to gain or hold market share across all indications. As I mentioned earlier, our strong UC launch has helped us attain the number one position in the GI category. We also hold the number one market share position in dermatology. And we continue to hold steady share in rheumatology despite the entry of new competitors.
We’ve been very pleased with HUMIRA's exceptional performance this year and we’re well on track to achieve our 2013 guidance for the product. Beyond HUMIRA, we also saw a strong performance from several other products including CREON, Synthroid, Zemplar, Synagis and Duodopa. Though certainly not as high profile as HUMIRA, we’ve been pleased with the performance of these durable and growing brands. In the quarter, we also made good progress on other key strategic objectives. We continue to drive operational efficiencies including gross margin improvement, which Bill will discuss in more detail in his remarks. And we’ve begun the process of creating our own efficient back office infrastructure that is more appropriate for an independent biopharmaceutical company.
In addition to our strong commercial and operational performance, we’ve also made significant progress on our pipeline, where we have placed a tremendous amount of focus. As we evaluate our pipe line prospects including the number and potential of the opportunities, we believe our pipeline is the healthiest it has ever been. In addition to assets currently in late-stage such as HCV, daclizumab, elagolix, (inaudible) and elotuzumab were on the cusp of transitioning several additional programs in the Phase 3 development, including but not limited to ABT-199 per CLL and ABT-888 per select solid tumors. And we expect continued pipeline advancement between now and the end of 2014 including late-stage trial completions, regulatory filings and new product approvals.
Let me now provide you with an overview of some of the key highlights in our pipeline.
We expect numerous HCV data milestones to be achieved, including the results from our six Phase 3 interferon-free combination studies starting later this year and into early 2014. We also present data from these studies at EASL in April and other medical meetings throughout the course of 2014.
We remain on track with our U.S. and EMEA regulatory submissions in the second quarter of 2014, an anticipation of early 2015 commercialization, we are actively building the appropriate infrastructure, including medical care personnel and our sales organizations.
We’ll present data from our Phase 2 HCV program in Asia and plan to start our Phase 3 program in Japan in the first half of 2014. Japan represents the second largest HCV market globally and we believe we’re well-positioned relative to competitive offerings.
Given the prevalence of genotype 1b in the region, we plan to advance our 12-week two DDA treatment in this area. We also have a strong commercial presence in Japan which we’ve has been in place for a number of years.
We remain on track to start our Phase 2 studies of our next-generation HCV compounds by the end of this year. As a reminder, our next-generation assets include a potent protease inhibitor, ABT-493 and our new NS5A inhibitor ABT-530.
In preclinical studies, these promising assets have shown pan-genotypic activity and excellent activity against key resistant mutants. These assets also support once-daily dosing, as well as the ability to co-formulate. Commercialization of our next-generation compounds could occur in the 2017 timeframe.
Now moving to our oncology pipeline, we’ll see continued dataflow from our Bcl-2 inhibitor ABT-199. The Phase 2 single-agent study in previously treated CLO patients with 17p deletion, will likely read out at the end of 2014.
Additionally, the Phase 3 comparative study of ABT-199 plus Rituxan versus Rituxan plus chemotherapy in patients with relapsed/refractory CLL will begin in early 2014. The ongoing studies of ABT-199 will continue to collect data and in 2014 we’ll present data demonstrating the durability of the treatment effect. We also expect to present combination treatment data, as well as results from some of our ongoing studies in other cancer types.
A number of our mid-stage studies of our PARP inhibitor ABT-888 will also read out in the coming months and throughout 2014, beginning with data that will be presented at the San Antonio Breast Cancer Symposium this December.
From our neuroscience pipeline, in 2014 we will present data from our Alpha-7 NNR agonist ABT-126, which is currently being studied in Alzheimer’s disease and cognitive impairment associated with schizophrenia.
We also see data from the second of our two registrational studies for daclizumab in mid 2014. As a reminder, that study the DECIDE trial is somewhat unique and that is designed to show reduction of annualized relapse rates and disability progression in patients with the relapsing/remitting multiple sclerosis versus an active comparator.
Assuming favorable results, we plan to submit the regulatory application for daclizumab in the second half of 2014. We will also see initial data from the first of two pivotal studies of the Elagolix in the endometriosis in the second half of 2014. And finally, we look forward to seeing Phase 2b data in RA from our partnered selective JAK1 inhibitor late next year.
We continue to augment our pipeline through a conservative focused effort on strategic licensing, acquisitions and partnering activity. We have targeted large and growing specialty focused therapeutic areas that enhance our current franchises and our emerging pipelines.
In the recent years, we have added more than a dozen promising assets to our portfolio. Last month, we announced two new collaborations. First, we entered into a global licensing agreement with Ablynx to develop and commercialize an anti-IL-6 Nanobody for autoimmune diseases including rheumatoid arthritis and lupus. Early clinical work in RA shown promise and given the molecule’s unique characteristics, we believe there is room for therapeutic differentiation there.
In addition, we entered into a global alliance with Galapagos to discover and develop novel therapies for cystic fibrosis, but there is still a significant unmet need.
In closing, as we approach the end of our first year as an independent company, we feel very good about the progress we’ve made, executing our key strategic priorities. We’re pleased with our performance this quarter, while we saw strength across our portfolio including double-digit growth from HUMIRA and growth from a number of other products. We’re taking the necessary steps to build a more efficient organization, as we move to a fully independent operating environment beginning in 2015 and we have made significant progress advancing our pipeline and look forward to a number of key milestones in the months ahead. 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 start with an overview of our third quarter performance and then I’ll provide an update to our 2013 outlook. In addition to delivering strong topline growth in the third quarter, we again exceeded our earnings per share guidance. Third quarter adjusted EPS was $0.82, excluding non-cash intangible amortization expense and specified items. On a GAAP basis, earnings per share were $0.60. Total sales in the third quarter increased 3.6% on an operational basis which excludes an unfavorable 0.3% impact from foreign exchange. Excluding TriCor and Trilipix, which are experiencing a loss of exclusivity, total sales increased 10.9% on an operational basis.
Third quarter growth was led by HUMIRA, which had global sales of nearly $2.8 billion up 19.1%. As Rick mentioned, we continue to see a positive impact from a launch of UC indication, which has helped us gain significant share in the global gastro market. In the U.S. HUMIRA sales increased 22.3% reflecting continued robust market expansion as well as share gains in dermatology and gastroenterology. Internationally, HUMIRA sales grew 16% on an operational basis with many markets continuing to grow strong double-digits. Share gains and continued uptake of new indications are contributing to the growth. International sales in the quarter also benefited to some extent from the timing of tenders. As a result, we’re forecasting slower international HUMIRA growth in the fourth quarter.
AndroGel sales were $248 million in the third quarter, down 11.1% versus the prior year, reflecting continued moderating of market growth, rebating actions from the second half of last year and certain account loses in early 2013. AndroGel remains the testosterone replacement market leader with more than 60% share and achieved share gains in the last quarter. As expected, all the products in our lipid franchise are now experiencing generic competition. U.S. sales of Niaspan were $201 million, down 13.4% due to the launch of a generic Niaspan in mid-September. TriCor and Trilipix sales were $39 million down 88.3% versus the third quarter of 2012. Though sales across the lipid franchise declined in the third quarter, they did performed better than we had forecast. We continue to expect full-year 2013 sales of less than $1 billion for our combined lipid portfolio, reflecting a decline of roughly $1.2 billion. As we've said previously, this decline will be most pronounced in the fourth quarter when the full impact of Niaspan's loss of exclusivity will be felt.
Global Lupron sales were nearly $196 million in the quarter, up 4.2% on an operational basis. Lupron continues to hold a leadership position and maintain significant share of the market. U.S. sales of Synthroid were $161 million in the quarter, up 22.9%. Snythroid maintains strong brand loyalty and market leadership despite the entry of generics into the market many years ago. For the full-year, we expect to see Synthroid sales growth in the mid-single digits.
U.S. CREON sales were $101 million in the third quarter up 9.8%. The launch of our 36,000-lipage unit dose earlier this year continues to positively impact sales performance. CREON maintains its leadership position in the pancreatic enzyme market where we continue to capture the vast majority of new prescription starts. We expect double digit sales growth for Creon in 2013. Sales of Duodopa, our therapy for advanced Parkinson’s disease, grew 18.9% on an operational basis this quarter. Duodopa is currently approved in Europe and other international markets.
Moving on to our P&L profile. Third quarter adjusted gross margin ratio was 79.7% excluding intangible asset amortization and other specified items. This was above our expectations for the quarter, driven by operational efficiencies and product mix across our portfolio including HUMIRA and better than expected performance of our high-margin lipid franchise.
Adjusted SG&A was 26.1% of sales in the third quarter in line with our expectations and reflecting heightened investment of our growth brands. Adjusted R&D was 15.2% of sales in the quarter driven by increased funding of our emerging mid and late stage pipeline assets and the continued pursuit of additional HUMIRA indications. Net interest expense was 79 -- $69 million in the quarter and the adjusted tax rate was 22.3%.
Turning now to our full year 2013 outlook. We are razing our adjusted earnings per share guidance range to $3.11 to $3.13. This updated guidance contemplates sales somewhat above $80.5 billion, reflecting strong balanced performance across our portfolio offsetting the decline in lipids from generic competition. Included in our sales guidance is an estimated negative impact from exchange of somewhat less than 1% for the full year.
We are now forecasting a gross margin ratio of around 78% for the year, excluding non-cash amortization and specified items. This reflects our efforts to improve operational efficiencies as well as product mix including the better-than-expected sales of our lipid franchise in the first three quarters.
In addition to raising our EPS guidance, our performance this year has also allowed us to increase the level of investment behind both our pipeline opportunities and marketed products. As a result, we now expect R&D expense to be somewhat above 15% of sales, reflecting funding actions in support of our pipeline.
And we now expect SG&A expense to be approximately 27% of sales in 2013 reflecting increased investment in our key brands including HUMIRA where we are pursuing opportunities to further increase penetration rates across indications.
We are forecasting net interest expense of about $280 million for the full year. And we continue to expect an adjusted tax rate of approximately 22% in 2013. Our adjusted earnings per share guidance range for the year excludes $0.57 per share related to amortization expense, acquired IP R&D and ongoing separation and restructuring costs. We expect that earnings per share will be $2.54 to $2.56 on a GAAP basis.
Regarding the fourth quarter, we expect sales approaching $5 billion reflecting a mid-single digit decline on a reported basis which includes a negative impact from exchange of approximately 0.5%. Our sales guidance for the fourth quarter includes continued impact of the loss of exclusivity for TriCor and TRILIPIX as well as the full impact of Niaspan going generic since this occurred late in the third quarter.
We expect the adjusted gross margin ratio for the quarter to be around 77%. We are forecasting fourth quarter SG&A somewhat below our full year estimate and we expect R&D to be somewhat above our revised full year guidance.
So, in conclusion, we are very pleased with AbbVie’s performance again this quarter as well as our outlook for the remainder of the first year as an independent company.
And with that, I will turn it back over to Larry.
Thanks, Bill. We’ll now open the call up for questions. Wendy, we’ll take our first question now, please.
(Operator Instructions) The first question today is from David Risinger with Morgan Stanley.
David Risinger - Morgan Stanley
Yes, hi. Can you hear me?
Can hear you David. How are you?
David Risinger - Morgan Stanley
Great. Good morning. So I have a couple of questions. First of all, on Hepatitis B, could you just update us on the topline press release strategy and potential timing, so what studies we’re likely to see topline releases on the frontend of the schedule versus for example, in early 2014? That’s my first question. Second, could you talk about the FC pill burden from payer and physician perspectives? It’s not clear to me that payers and physicians will care about the number of pills for twelve week treatments and I’m guessing that’s your view point as well, but just wanted to hear your perspective on what's your hearing about pill burden for short duration treatments and whether payers and physicians will care or not. And then third, with respect to ABT-126 as an add-on for both Alzheimer's and schizophrenia, could you just remind us when we should expect topline press releases in both Alzheimer's and schizophrenia. Thanks very much.
David, good morning, it’s Scott Brun. So why don’t I go ahead and take those. Again, with regard to the Phase III Hepatitis C program, all 6 studies as you know are fully enrolled and we’re very pleased with the progress that we’re making there. We will be releasing data as topline press releases later this year and moving into early 2014. I don’t want to get into the specifics with regard to which studies are going to be released, but certainly when you look at all 6, each of them is quite large involving several hundred patients. Again, looking at a variety of different contacts from treatment, naïve treatment experience, cirrhotic patients, so I think certainly each study or set of studies that we release will certainly help to provide some very solid evidence with regard to the performance of the regimen. But again look for us to start those releases later this year.
With regard to the pill burden, I think as you noted David -- with regard to the payers as well as clinicians that we’ve spoken to, cure or sustain virologic response is really keen here. And when you consider a short term regimen whether or not you’re talking 1pill, 4 pills, really what’s going to trump everything is, how well is it going to perform with regard to eliminating the virus. And certainly with regard to the performance that we’ve seen so far of our regimen in Aviator, involve treatment naïve and treatment experience patients , SVR 12 rates ranging from the mid-to-high 90% range as well as tolerability reflected by discontinuation rates for adverse events less than 2%. We really don’t feel that the pill burden is going to be material to clinicians, the payers or for that matter to patients who’re really looking to eliminate this virus.
Finally, with regard to ABT-126, the Alpha-7 NNR, we are looking in Alzheimer's disease both as a mono therapy treatment as well as an add-on to donepezil and then in cognitive impairment associated with schizophrenia, we are looking -- we are evaluating the drug as a mono therapy. We will begin to see data in Alzheimer’s very late this year and certainly releases would probably be expected sometime within the first part of 2014, the schizophrenia's data likely coming a bit later within 2014.
David Risinger - Morgan Stanley
Thank you. The next is from Jeff Holford with Jefferies.
Jeff Holford - Jefferies
Hi, thanks for taking my question. Just firstly, I wonder if you can just give us a bit more color on the HUMIRA sales potentially splitting them by the main indications if you can for the quarter. Secondly on ABT-199, I was interested just the way you put it in the press release today, it’s a large single agent study you described it as a -- with ABT-199 in the 17p deletion patients. Now that’s likely to read out by the end of next year, could that potentially be an early filing for that specific population, that’s my question. And then just lastly, I noticed that share count was down more than expected during the quarter, can you just talk a little bit about capital allocation and just how you are thinking about share repurchases going forward. Thank you.
Okay. Thanks Jeff. Let me start with the HUMIRA sales breakdown. Scott will cover the 199 question and Bill can talk about capital allocation at the end with Rick, if necessary. In terms of our mix right now, it’s interesting that in U.S., RA is now in the high 30% range. It’s a little below 40% of our total U.S. sales.
Gastro is about a quarter of our sales. Psoriasis right now is about 15% or so of sales and the remainder is kind of in the spondo area of psoriatic arthritis and ankylosing spondylitis, those types of indications. It’s similar ex-US. I’d say RA is probably in the mid 30% of the ex-US franchise. Psoriasis again is down in that 14%, 15% range.
SPA ex-U.S. is protein 30% and again gastro is probably about a quarter of our sales. So hopefully that gives you a pretty good feel of how the sales mix up today. So I would characterize it as a pretty diverse basket of sales across those four different categories.
Jeff, I want to go ahead and take your question on ABT-199, our first-in-class BCL-2 inhibitor. So you’re right, we’re currently enrolling a large study in relapsed refractory CLL patients with the 17P deletion mutation, certainly a very hard to treat population. And if the results from this study looks similar to results in this population that we presented before with a overall response rate above 80%, complete response rate of 18%, we certainly think that there is the potential to be able to move forward with a filing on the basis of addressing an unmet medical need.
Certainly, as Rick noted though, we’re also beginning a -- in collaboration with our partner a large Phase 3 traditional study that will compare 199 with Rituxan and a chemotherapy free regimen to a more standard chemo containing regimen.
Jeff, it’s Bill Chase. We’ve been pretty consistent on our capital allocations story this year. First and foremost, this is a business that generates very, very healthy cash flow. The first thing we’re going to do with that cash flow is make sure that we reinvest in the business.
You’ve seen some good progress on the deal front this year with a number of compounds announced. And certainly we continue to build out our infrastructure with capital expense that sort of thing. So that’s first and foremost.
Second, the dividend is a very, very important piece of our investor identity. We have set the dividend in a very competitive payout ratio relative to our peers. And we've been pretty clear that we intend to grow that dividend over time probably more modestly in 2014, given some of the challenges with the lipid business but growing it nonetheless. And I think you can expect to see that payout ratio creep up as a result.
After that, we like -- try to pay down a little bit of debt. We think that would be the right thing to do, given our balance sheet. And then above and beyond that, capital cash will build and that will be a valuable source of liquidity and flexibility for the company.
Jeff Holford - Jefferies
We do have a buyback program, Jeff, but that is primarily geared to offset dilution of competition programs.
Jeff Holford - Jefferies
Thanks very much.
The next question is from Steve Scala with Cowen.
Steve Scala - Cowen
Well, thank you. I have two questions. I appreciate that you’re not giving guidance for 2014 but when we think about this spending levels in 2014, given the need to develop and rollout the pipeline, how would you compare spending in 2014 to 2013 on a percent of sales basis?
And secondly, you’ve done a good job of downplaying the 250,000 pending patents around HUMIRA. Is that how you want us to view the patent stated as of limited ability to blunt potential biosimilars as patents expire in 2017 or ’18? I must admit I’m surprised that your state has no patents which could provide obstacles for biosimilars when they come around? Thank you very much.
Okay. So this is Rick, Steve. So let me start with your investment question. We’re obviously going through our planning process right now. So we haven’t finalized any investment decisions yet as to how we’re going to proceed forward in 2014. But what I would say is you should think about it from this perspective.
One, as I indicated in my remarks, we’re going to prepare to have a very effective launch of HCV and we need to build that infrastructure in 2014 to be prepared to launch in the early part of 2015 and that’s going to require incremental investment. The second thing is, we could have as many as seven or eight assets in Phase 3 development during 2014 and we’re obviously going to fund those Phase 3 assets to be able to get them to the market as quickly as possible. So I think there will be some increased investment, but we’re just not in a position yet to be able to tell you what that looks like. And so I think that’s how you’ve got to be thinking about it and we’ll give more guidance in the fourth quarter as to what that looks like.
The second thing is -- maybe I’d answer your question a little bit differently. As you look at how we think about bio-similars, maybe let me walk you through our thought process around, because I think it helps answer your question. We certainly feel good about the patent portfolio that we have and I would not interpret it as we don’t believe that it provides a level of protection. Quite the contrary, I believe it does and will provide a significant level of protection. And we certainly intend to enforce our patents and make sure no one violates those patents. But we’re not going to talk a lot about specific patents.
But more importantly, I think you have to look at the whole bio-similar situation in a broader perspective. And I tell you that we fundamentally don’t view the bio-similar market as a very attractive market. And frankly, we could get into the bio-similar market easily. We looked at it actually a couple of times as to whether or not we wanted to get into. We certainly have the capabilities for an R&D standpoint as well as a manufacturing standpoint. And we decided not to get into it for three fundamental reasons. If you look at bio-similars and you really analyze the ability of bio-similar to perform in this market, I think it raises a lot of questions, patents are only one of those.
There are three basic areas that we had looked at and made a determination that it’s not a very attractive business. Number one is the predictability of commercial success. Number two is the return on the investment versus other pipeline opportunities that we have. And number three is the risk around patents and other things as well as the fact that you don’t control your own destiny. So let me walk you through each one to at least give you our view of it. If you think about the predictability of commercial success in bio-similars, you take the anti-TNF market as an example.
It’s a difficult market even for differentiated innovative products to carve out much share. I mean literally, six or seven products have been introduced into that market in the last six or seven years and they’ve all gotten 2% or 3% market share. So it’s a tough market to break your way into. And these are differentiated products. Bio-similars have no differentiation at all from an efficacy or safety standpoint. In fact, I could argue with using bio-similar because they don’t have a long safety database. They’re at some disadvantage from a safety standpoint.
And if they ran non-inferiority trials, they can basically say, they is no worse than X versus the innovator product. And so they really have no differentiation. The only way they can compete for market share is on price and if the innovator chooses to respond to that in some form or fashion, it’s very difficult to build models that suggest that you’re going to get any significant share in this market. So that really brings you to the second part of the analysis and that is the return on investment. So if you think about modest share gains and what kind of pricing you would have to go at with the bio-similar strategy, in our analysis, it says you have to make six or eight different bio-similars to have a meaningful impact on the business.
When you develop six or eight bio-similars, the investment to be able to do that is more than a single innovative product and it approaches pretty close to two innovative products. So I guess if the only thing you had in your pipeline was this, you might invest in it. But frankly when we stack it up against the things that we have, we wouldn’t trade off six to eight bio-similars for a couple of our innovative products. And so we just don’t see a good return on investment there.
And then, frankly, then there is the last part that you pointed out and that’s risk in controlling your own destiny. If you’re going to do six or eight bio-similar products, you’re going to be walking your way through an absolute mine field of IP, thousands of patents around all of these products. And you have to make sure that you don’t step on any one of them along the way because that’s going to create a big problem for you because I can assure you just like us, every innovator is going to protect their patent position.
The second thing is, you’re at the mercy of the innovator that if they change the formulation or they change the device, so they somehow innovate the product along the way, then you’re at a disadvantage. And so as we look at all these things, we ultimately don’t believe that it is a good place to be and frankly it probably gives you some picture into how we view some of our defense strategies as well as how we view how we compete in this marketplace. So hopefully, that gives you some perspective on it.
Steve Scala - Cowen
That’s great. Thank you.
The next question is from Vamil Divan with Credit Suisse.
Vamil Divan - Credit Suisse
Yeah. Thanks for taking the questions.
Vamil Divan - Credit Suisse
One on the HUMIRA, again I appreciate the color you gave on the quarter. Can you talk a little bit about the payor dynamics there, if there is anything specific in the quarter? We saw some stuff from the (inaudible) around formula decisions, anything that impact in the quarter and also maybe more looking out near to medium term, how do you see that changing?
And then second one just on 199 if I could. Appreciate the comments around the studies that are ongoing. Just wondering, when we might start thinking about you looking at other non-CLL indications and from only potentially moving this product in general. And in an all over the 199 question for you so you are ongoing in non-CLL indications, which seems to make segment from, while this is about potentially moving this about potentially moving this product into those areas. Thanks.
I will start with the 199 question. Scott Brun, again. So we already have some studies ongoing in non-CLL indications such as non-Hodgkin's lymphoma diffuse large B cell lymphoma and certainly you will be seeing some more of those data next year. And we continued to look at other opportunities within hematologic malignancies for things like potentially AML as well as looking at multiple myeloma, plus we are assessing the potential for the Bcl-2 mechanism, do have applicability in solid tumors. So all of that work, some of that is already ongoing and much to be initiated in the not-too-distant future.
Okay. And this is Rick. I will take the HUMIRA payer dynamics. I think if you look at one of the strengths of HUMIRA, it has been the payors and governments around the world recognized the value of this product. And so I would say, we've been in the fortunate position that we have a very strong position in the standpoint of payors. In fact, in the U.S. managed care environment, the number is around 70% preferred status, meaning they have to go through HUMIRA first as your first anti-TNF. That dynamic hasn’t been changing it all. In fact, if anything I would say is probably improving a little bit over time but we don’t see any negative dynamics occurring in that area if that’s what you were looking at. Thanks.
Thank you. The next question is from Arial Herman with Goldman Sachs.
Hi. This is [Ayan] in for Jami Rubin. I just have two pipeline questions. The first on ABT-199, how should we think about the potential to do some additional combo studies with GA101 or something like ibrutinib and then also with Elagolix, can you just help us understand the market dynamics and the potential size for this product? Thank you.
Right. I’ll go ahead and I will start with 199. So with regard to additional combos, we are working with Roche. As you said first of all, looking at combinations with Rituxan as well as with GA101. With regard to ibrutinib and other new agents on the horizon, we are certainly interested in those types of combinations and we are talking about how best to pursue that with regard to the timing of availability of ibrutinib. Certainly with combinations like 199 in other agents or even a single agents, those are the potential that really changed the way CLL is treated, moving it from something that requires chronic therapy to a situation where you could have a well-tolerated combination that perhaps result in drug free remissions or even functional tumors.
With regard to Elagolix, the opportunities, so certainly we are in Phase 3 in assessing patients with endometriosis, a very common condition affecting millions of women in the developed world. Certainly, the current treatment options available have limitations with regard to tolerability because of the very dense estrogens suppression, they result in you get menopausal-type symptoms like hot flash and bone loss and with Elagolix’s mechanism you get a more guided or partial suppression sof estrogen, which through Phase 2 studies we've seen reduced impact on symptoms such as hot flash or certainly bone loss. So we think that combination of the efficacy and tolerability profile will provide a very nice option for women when you consider you have the types of surgical alternatives such as hysterectomy which are quite extreme. We’re also in Phase II for uterine fibroids, a condition that can lead to very heavy marked bleeding as well as other symptomatology and again with regard to the type of estrogen suppression we’re seeing, we feel very confident in the ability to markedly impact that rate of bleeding and provide women an alternative to hysterectomy, which again represents the majority of surgical solutions for this condition.
Certainly from a commercial perspective, we’ve talked about the endometriosis indication being a potential greater than a $1 billion opportunity and certainly fibroids could be a significant opportunity as well as for us if you’re looking from a modeling perspective.
This is Rick. I think the key here and what we’re working towards is, if you get sufficient pain suppression in endometriosis and a strong safety profile where this can be used as a long term and more chronic kind of therapy, it's a very big opportunity and that is why we designed the trial the way we designed it where we have two doses that were running to Phase II to determine which one of those doses best fits that profile long-term.
Thanks all of you.
Thank you the next question is from Chris Shad with JP Morgan.
Chris Shad - JP Morgan
Great, thanks very much, just had a few here. First, coming back on the question about longer term spend. As I think about growth initiative over a next few years and this is pretty more qualitative question, but can you just tell me understand how significant this spend associated with the roll out of HCV is going to be, I guess, my question is how much of this can you leverage existing infrastructure as compared to incremental spend?
The second question was on HUMIRA, you mentioned higher spending due to some of -- accelerating some promotion programs there, could you elaborate a little more of specifically what those efforts are going to focus on? Is there any particular indication that's more promotion sensitive or you’re seeing opportunities to accelerate share gains. And then the final question is in HCV-1, I know it's early, but can you just elaborate a little bit on the confidence you have and you’d be able to maintain the initial share you’re going to take in this market.
I think example -- as an example, we look what is like some interesting [Merck]] early stage data in the AASLD abstracts and if we end up with several players with all oral highly efficacious combos. Is that translate to a relatively fragmented market in your opinion or it's the first more advantage here just to significant that it's hard to displace that the initial share you take, thanks very much.
Okay, this is Rick. I’ll cover the questions so. If you look at the building out the infrastructures associated with HCV I’d say for the most part it's incremental. There is -- there are certainly areas around the world where we’ll have an opportunity to be able to add some synergies with our existing structures, but I’d say for the bulk of it, you’re going to -- you should be thinking about it as incremental build. And as I said we’re going through our planning process right now, we literally have not finalized again, probably won't finalize it for another month or so, but we’re going to make sure that we’re in a position to be highly effective in that area.
As you talk about HUMIRA spend, one of the things I’d say to you is, as we approach the beginning of this year one other things that we knew is that we were going to face some new competitive challenges and in anticipation of that, we did some things from an investment standpoint that we thought would put us in a position to be able to defend and still grow our share and I’d say if I look at the results nine or ten months into it, we’re pretty happy with the investment that we made there because it's given us back a pretty healthy return and it's really -- it has allowed us from a competitive standpoint to really deal with new competition in a very effective way.
As far as HCV is concerned, I think as Scott pointed out, a significant part of this is really built around the performance of the product, We’ve done a lot of market research. And when you look at prescribing preference of physicians, the first five, six attributes are all related to performance of the product, cure rates in different populations. And so as the competitive environment rose out and as we get to our second generation product, I think we will then take another incremental step in this particular disease treatment paradigm there will be difficult to beat. I think it's incredibly difficult to get performance that’s better than this or at least what we anticipate and then it will be all about how you built through infrastructure, how well establish it is, that will make it difficult. You look again at the (inaudible), think out difficult it is for a new competitor break into that market. And it’s because of both the performance of the product and the value that it provide and the established infrastructure that in place that has a lot of experience have been able to drive those products.
And so, I think HCV will play out the same way and I don’t think there’s enough head room left that anybody can truly have a very differentiated product after second generation. So, that’s how we view it.
Thank you. The next question is from Marc Goodman with UBS.
Marc Goodman - UBS
Yeah. Good morning. First, can you talk about the cystic fibrosis product and what exited about that, what’s the hope there, obviously that’s interesting market. Second, HUMIRA in the emerging markets, just give us a little color there, you had mentioned something about tenders, if you can quote that a little more. And then third, I know you are working on some early stage HUMIRA combos, for like next gen technology, life cycle strategies. Can you update us on where you are there? Thanks.
Sure. I want to go ahead and start around with the cystic fibrosis Galapagos collaboration. So, I mean, certainly, with regard to the genetic understanding of cystic fibrosis in the mutation that lead dysfunction in the ion channel, the cystic fibrosis transmembrane receptor lead to the symptomatology. We have seen introduction of a therapy like (inaudible) that can have marked impact on patients. But really is only applicable to small minority of patients.
What we are exited about is, can we go ahead and take this even further by addressing patients with the much more common F-fiber weight nutrition. Really looking at combinations of two drugs, a so called the potentiator that helps the malfunctioning channel, ion channel to both proper way, as well as the corrector that helps to affect the defolding in the transport of the receptor to the cell surface.
And so, we feel that Galapagos, it’s got some very, very interesting science and even though there is a timing element here, we won’t be entering clinical trials until late next year.
We are using analogy of Hepatitis C, where certainly we did not begin in the lead but by leveraging certain scientific insights and taking full advantage of the ability to combine different mechanisms to get where we are now. So again I think, that’s really what excites us, the ability to make a remarkable impact on a very devastating disease and to follow on the science that -- that is already out for the minority of patients.
With regard to, we’ll say, HUMIRA next generation, certainly we built a very, very strong foundation with HUMIRA and rheumatology, dermatology and gastroenterology. And the question is what can you do as a leader in these areas to improve upon what the anti-TNF HUMIRA specifically have been able to achieve. And so we are looking at the potential to improve efficacy, power ability, convenience across the whole patient journey within those various diseases.
And we are approaching it strategically with the combination of both internal and external innovations, small molecules and biologics. So for example, we have a selective JAK1 platform. You’re certainly familiar with that, Tofacitinib which non-selective JAK. It’s consequence has limitations in its ability to dose to really get significant efficacy before you start running and decide effects.
With our Galapagos collaboration, we’ve got a selective JAK1 inhibitor in currently dosing in Phase 2b in rheumatoid arthritis as well as Crohn's disease. And we feel that the ability to be able to dose these molecules higher without running in the JAK2-3 related side effects provides the potential for significant improvement in efficacy in these diseases.
We also have our own internal JAK ABT-494 that’s recently entered Phase 2 studies and we think that with these two JAK mechanisms, we have the ability to have a portfolio of compounds that can address multiple disease states in -- again patients who have various stages of treatment experience. Moving on, we’ve got other external collaborations, other mechanisms like our Biotest work in Phase II with anti-CD4 mechanism. We’re very excited about the Ablynx deal that’s an Anti-IL-6R Nanobody. These Nanobodies, because of their size, have the potential for improve that tissue penetration, also the Ablynx Nanobody binds the serum albumin, which is present during information which will help the traffic to the tissues where you want it to go. So again, we think the potential for differentiation (inaudible) currently available IL-6 based therapies. And then certainly, we’re extremely excited about our Dual Variable Domain technology, DVDs which allows us really to buy specifically target two biologic mediators in disease. We’ve got ABT-122, which targets both TNF as well IL-17, which is -- have been shown probably significant role in various auto immune diseases. And so again the idea is, can we improve upon anti-TNFs with this molecule that’s currently in early development in Rheumatoid Arthritis patients, so really a wide portfolio of various approaches to build upon our current strength in auto-immune disease.
Mark, its Bill Chase. As you acknowledge, we did have some tender activity in the third quarter and that did lift our international HUMIRA results a bit. The way you got to look at that, it does occur from time to time in certain markets. When it occurs, it’s generally about a 2% to 3% lift. That’s certainly what we saw in Q3 and what we’ll try to do and we have been doing is to be transparent, so let you know when that’s occurring to a way, to better understand both the quarter that’s occurring as well as the next.
Thanks Mark. Operator, we have time for one more question please.
Thank you. Our final question today is from Tony Butler with Barclays Capital.
Tony Butler - Barclays Capital
Thanks, very much. Rick, you outlined very nicely on HUMIRA and the various indications, you guys have done a phenomenal job in growing the [x-RA] indications in particular, but I wanted to just focus on RA only. Is that a market that continues to grow in volume or has it ever really reached a negative. Two very small questions for you Scott, one is what’s the strategy around other genotypes, genotype 2, 3 in particular and then lastly is ABT-493, is that boosted or non-boosted. Thanks very much.
Okay, maybe quickly on the RA market. RA market has penetration rates that is still under 30%, so there’s still clearly an opportunity to grow and we continue to see in most markets around the world that the RA market is continuing to grow. So it’s not growing as fast as some of the other markets like the GI market as an example, but it is continuing to grow.
Tony, its Scott. With regard to our strategy on other genotypes, we are currently doing work with ABT-450 and ABT-267, which we do have activity beyond genotype 1, in genotypes 2, 3 as well as 4. So we’re currently in Phase II with those genotypes and we’ll continue to move forward, but it’s really our pan-genotypic ABT-493, ABT-530 combination that we think has the most balanced pan-genotypic activity. To your question, neither ABT-493 nor ABT-530 in the next generation requires return of your boosting. From what we’ve seen in ongoing clinical development there, pharmacologic profiles are both conducive to QD, once daily dosing without boosting.
Tony Butler - Barclays Capital
Thanks, very much.
Thanks, Tony. And that concludes today’s conference call. If you’d like to listen to a replay of the call after 11:00 a.m. Central Time today, go to AbbVie Investor Relations website at www.abbvieinvestor.com, or call 866-415-2341, passcode 102513. The audio replay will be available until midnight, Friday, November 8th. Thanks again for joining us today.
Thank you. That concludes today’s conference. Thank you very much for joining. You may disconnect at this time.
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