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AbbVie Inc. (NYSE:ABBV)

Cowen Health Care Conference Call

March 5, 2014 08:40 ET

Executives

Bill Chase - Executive Vice President and Chief Financial Officer

Scott Brun - Vice President, Development

Analysts

Steve Scala - Cowen & Company

Steve Scala - Cowen & Company

Welcome to the AbbVie presentation. Very happy to have with us two members of top management of AbbVie, Bill Chase, who is Executive Vice President and CFO and Scott Brun, who is Vice President of Development. We at Cowen think you should absolutely own AbbVie shares. When you stop to think about which companies you have confidence will deliver in earnings not this year or next, but this year, next year and maybe for the next three to four years, what companies come to mind. And we think one that comes to our mind of course is AbbVie. And not obviously that’s largely driven by the tremendous asset in HUMIRA, but there is plenty of other things going on at this company. In fact, in our pulse report, we have a list of all the upcoming events just in 2014 for this company and there is ‘14. So lots going on, lots of good things. And I would like to perhaps post the first question.

So you have had an extraordinarily successful first year as a independent public company. Maybe you can talk about what you saw or experienced as the most significant surprises both positives and what risks or challenges emerged in your first year? So I will leave that. That’s the first question.

Bill Chase - Executive Vice President and Chief Financial Officer

Sure. Well, Steve, thank you for having us and thank you for the very kind introduction. It has been an exciting year for AbbVie in 2013. If you really look at what the business has done, we have exceeded expectation against any goal that we set coming into the spin. Our sales, we have delivered meaningful growth on our key growth brands, mostly notably HUMIRA, where we logged another year of increasing that overall brand size of $1 billion. We have revamped the pipeline. We have got a nice return of cash story for the investor, where we have increased our dividend 5%. And the stock overall has enjoyed a 60% total return on the year. So that’s not a bad first 12 months.

In terms of, I wouldn’t say we have had surprises either negative or positive, but the one thing that we have really enjoyed seeing play out is one of the logics of the split of AbbVie and Abbott was that AbbVie would be more capable of allocating its capital in a fashion that was really in the interest of a pure pharma company. And you have seen us make those changes. Since we have spun, we have invested more heavily in R&D. We have continued to bring in assets into our overall pipeline. And those are things that is questionable to what have been doing had we have been part of Abbott. So that’s been the most meaningful change. And this is a business that just two or three years ago, we only had about 13% of sales in R&D. We have now raised to 16%. And that’s really a testament of the opportunities that we have in our pipeline. And we are going to certainly fund our pipeline to the extent that we have got exciting opportunities. And we have a lot of exciting opportunities as Scott will share with you.

I think the other thing will be and it’s interesting from our perspective is the ability as an independent company to make decisions faster and we were originally part of a conglomerate Abbott that was ultimately evaluating pharma opportunities relative to other businesses. With a pure-play pharma, we are able to evaluate decisions, make decisions much quicker, and you have seen that play out in 2013 as well. Yes.

Steve Scala - Cowen & Company

So couple of questions about HUMIRA, so some companies said these hugely successful franchises that have some risks in the future have given some comfort in the out years and well in the lines of we believe we will be selling substantial balance of our drive in say 2020 or whatever, what kind of comfort can you give us about HUMIRA’s sales base say six, seven years from now and it would be obviously only qualitative. But what comfort can you give us that you would still be selling tremendous amounts of HUMIRA in that timeframe? And secondly, are there any when patent goes off are there any substantial royalties, which you will cease paying despite maybe no biosimilars arriving?

Bill Chase - Executive Vice President and Chief Financial Officer

Yes, sure. And that’s a great question particularly given the importance of HUMIRA to AbbVie. And I think you began with the growth prospects of HUMIRA. HUMIRA has grown 15% in the last year. Over the last five to six years we have added $1 billion to the brand every year. HUMIRA even though it’s an old product from a standpoint of when it was launched there are still tremendous growth opportunities. And that’s largely driven by new indications and the fact that the indications where we compete in are largely underpenetrated to biologics. So we anticipate significant growth in the future certainly leading into ‘17, ‘18, ‘19 if you look at those dynamics.

Your question specifically around 6 to 7 years from now has to do with more how biosimilars will actually play out. And there is things, that we definitively know about biosimilars and there is some uncertainty. What I can tell you is we had a lot of people at AbbVie focused on biosimilars and the biosimilars thread and we are confident when we look at everything that we know and the dynamics of what makes HUMIRA successful product, that we can manage the biosimilar event without that actually having a negative impact on our long range business objectives, which ideally are about continued significant growth from 2015 and beyond in earnings.

The reason we are going to do that and the reason we feel confident have to do with both the intellectual property position we have around HUMIRA, while the comp system matter patents go off patent in late 2016 in the U.S., 2018 in the EU, we have a variety of other patents process, manufacturing patents that are designed to protect the integrity of HUMIRA and make it more difficult for a biosimilar to come up – a biosimilar competitor to come up with an exact replica. And the reason that’s important is this is a therapy where we know it’s not necessarily good medicine to be switching well controlled patients to a different agent that’s been proven out in the marketplace and in physician practices.

Additionally, when we look at the strength that HUMIRA has in the physician’s eyes, this is a product by the time the biosimilars come to market, it will have 19, 20 years of known safety experience which is going to make the prescriber really think twice about switching out a well controlled patient to a biosimilar. The result is the biosimilars will be competing for naïve patients in all likelihood. We don’t expect broad extrapolation of indications. We don’t expect interchangeability. And when they complete against those naïve or fill those naïve patients, they are going to be competing with a label that is essentially based on non-inferiority without that safety record. And we think that’s going to be difficult.

In fact what they are going to be doing is bringing a completely non-differentiated product into a marketplace that has shown it’s very difficult to get a toehold even with the differentiated product. And so although be able to compete on it’s price, at that point in time HUMIRA will be much larger than it is today at least that’s how we forecasted. We will have the breadth of all indications. We don’t think a biosimilar competitor will. And we will be able to have responses with the payers that ultimately we think will protect the HUMIRA position. And so the result would be we certainly don’t anticipate HUMIRA growing significantly after 6 to 7 years, right. That’s probably a little overoptimistic.

However, we also don’t think this is a brand that’s going to be experiencing the type of generic curve that you see with a small molecule. In fact, we think it will be a relatively slow controlled degradation. And the reality is when you look at the size of HUMIRA out at that point in time, it’s going to be generating meaningful, meaningful cash to AbbVie much more than it is today. The royalties are also a nice hedge that we have built in. We pay a royalty stack on HUMIRA anywhere between 5% to 10%, that royalty stack will be essentially eliminated just about the time the compositional matter expires. And so that represents a nice hedge on the overall brand for any pricing pressures that we happen to see as the biosimilars compete. Yes.

Steve Scala - Cowen & Company

(Question Inaudible)

Bill Chase - Executive Vice President and Chief Financial Officer

So the question for those on the webcast was given the payer environment, given austerity measures, how are we confident that the payers couldn’t in theory just force the biosimilar to the frontal line, right? And I think it’s a good question. I think the reality is, I think let’s look at how a biosimilar has to compete when it comes to market with the way things work today. If you are in EU country, where prices are referenced, they are going to come to market and they will obviously compete on price right. A lot of those markets as soon as they lower their price, we are going to have to actually buy the way the payer system works, have to lower our prices well, right. It’s going to make in those markets it extremely difficult for the biosimilars to get meaningful share. And when you look at the expense that the biosimilar competitor has had to put into developing that drug, it’s not an overly attractive business model. So I think even in those markets, we will be obligated to react on price, which means the biosimilar won’t really be controlling its own destiny, difficult to gain a foothold. In the U.S., it’s a little bit of a different situation given the managed care network.

If you look at our position with managed care and you look at the size of this product and you look at the fact that we have got broad use across a number of different indications that we don’t expect the biosimilar to have at least not at the outset. The managed care payers going to have a difficult decision to make when the biosimilar comes and says here is some price. And that decision will be in order to capture the benefit of that price that the biosimilar competitors offering, we are going to need to convert the entire HUMIRA base, because we are in fact paying rebates for our position, our preferred position right. That’s a tough economic decision, particularly when we have got indications that we don’t expect the biosimilars to have as well as it’s just bad medicine to be switching people out. And so we think that the more likely case will be that the managed care payer will come and negotiate price with us and will be in our interest to negotiate some price to maintain that position. And that price that we negotiate goes back to this royalty hedge, it’s a nice offset on the bottom line that will give more profitability of the brand at that point in time in order to manage that negotiation a little bit better. Yes.

Steve Scala - Cowen & Company

Maybe a couple of questions for Scott.

Bill Chase - Executive Vice President and Chief Financial Officer

Sure.

Steve Scala - Cowen & Company

So, we are awaiting the daclizumab data I guess around mid year, so what’s the unmet need that you see daclizumab filling? And secondly, unfortunately investors haven’t had a lot of experience with acute or chronic renal failure, because there has been no drugs and haven’t visited endometriosis recently, so we need to kind of lay out the opportunity that have we had in those markets?

Scott Brun - Vice President, Development

Sure. So to repeat the question, the first one relating to the unmet medical need that daclizumab, our monoclonal antibody partner with Biogen for the treatment of relapsing-remitting multiple sclerosis will address and then touching on similar considerations for our pipeline related to chronic kidney disease as well as endometriosis. So starting out with daclizumab, so as I said this is a monoclonal antibody that’s given once a month. We have previously presented Phase 2b studies in relapsing-remitting multiple sclerosis that demonstrated on the order of a more than 50% reduction in the annualized relapsed rate relative to placebo as well as even more interesting over a 50% reduction in chronic – progression of chronic disability.

When you are treating an MS patient, which is a disease of the young, you want to take both of these aspects into consideration, the acute relapse, which is because of immediate onset of inflammation as well as that inexorable decline of oral function that’s measured by disability. Unfortunately, when you look at the current armamentarium, patients will cycle through. They may only last on given medication for four or five years. So there is definitely the need for new agents with novel mechanisms and this works through the IL-2 receptor pathway. In order to make sure that there is a full stock of medications ready for patients who may relapse on existing therapy.

In addition, when you stack up daclizumab in terms of how it does on relapsed reduction it is within spitting distance of the most potent agent such as TYSABRI, which certainly has it’s own set of safety considerations with regard to the JC virus and development of debilitating PML. But perhaps again even more interesting is the fact that if in Phase 3 which will be reading out the middle of this year. We recreate this disability benefit. This would put it at the top of the pack and would certainly provide for significant differentiation for the agent. So we’re very excited about it and potentially on track for a filing at the end of this year.

Moving on to chronic kidney disease. When you consider the epidemics of hypertension, obesity, diabetes, chronic kidney disease continues to go up affecting 100s of millions of patients around the globe. There are not a lot of options in order to stave off the progression of chronic kidney disease which can ultimately end up in the need for dialysis or renal transplant. When you look at our pipeline devoted to chronic kidney disease we have atrasentan that’s currently in Phase 3 trial in order to demonstrate that, adding it to standard of care will allow us to reduce the rate of progression to dialysis or to the need for renal transplantation.

We’ve demonstrated in Phase 2 that atrasentan can markedly reduce the amount of protein in the urine on the order of 30% to 40%. None of us with healthy kidneys should have protein in the urine, it’s a marker of ongoing kidney damage and the degree of proteinuria is actually a prognostic indicator of the rate of progression to more severe forms of kidney disease.

The ACE inhibitors which are the current renal protective standard of care have demonstrated effects on proteinuria and consequently effects in reducing these types of hard renal outcomes. And what’s particularly interesting about atrasentan is we’re seeing these marked effects on proteinuria when you add it on to renal protective ACE inhibition. And we think that, that proteinuria reduction is going to translate into reduction in hard outcomes because atrasentan acts on a somewhat similar hemodynamic fashion to the filtration system of the kidney as ACE inhibitors do. So, again lot of excitement there. It’s a large outcome trial. So we’re probably thinking more of 2017 entry for atrasentan.

Finally, moving on to endometriosis, again a very common gynecologic condition, the abnormal growth of the lining of the uterus and other parts of the body that can lead to infertility, pain, discomfort, abnormal bleeding. Elagolix is currently in Phase 3 for endometriosis. Current treatments for endometriosis include off-label use of oral contraceptives or Lupron. So what Lupron does is it essentially shuts off estrogen altogether.

Estrogen is the driving signal for growth of the endometrial tissue. The problem with Lupron is by shutting off estrogen entirely you’ve created an artificial menopause with all the symptomatology like hot flashes, bone loss, plus when you stop injectable Lupron, it can take over six months before fertility, the ability to conceive returns and considering that endometriosis again tends to be a disease of young women that can be an issue.

Elagolix is an oral medication that leads to a more partial suppression of estrogen which allows you to control the pain related with endometriosis but with a much more preferable side-effect profile, lower rates of hot flash and lower rates of any change in bone mass. So we’re looking to confirm that profile in our ongoing Phase 3 studies. We’re also in Phase 2b for uterine fibroids, benign tumors of the uterus that again can lead to significant bleeding, significant discomfort as well as infertility.

Steve Scala - Cowen & Company

(Question Inaudible)

Bill Chase - Executive Vice President and Chief Financial Officer

We are going to be seeing the data from one of our first pivotals in endometriosis later this year. With regard to external disclosures, there is a number of considerations we have to take into account there. We will have a second pivotal trial that’s going to be ongoing. And since these trials use a subjective pain endpoint, we want to make sure that we have discussions with regulatory agencies because we don’t want to bias the conduct of these other ongoing blinded study through the introduction of the results from the Phase 3 study. We also have a partner, Neurocrine and so certainly we have to discuss materiality and disclosure indications as well, considerations as well.

Question-and-Answer Session

Unidentified Analyst

(Question Inaudible)

Bill Chase

Yes, so the question and I will paraphrase, the question specifically was how do we view SG&A with HUMIRA, in that period of time where there is biosimilar competition six to seven years from now. And I think the reality is one thing we are certain of is biosimilar competition is not going to look like small molecule competition. And that’s going to result in probably different behaviors with the brands when they lose exclusivity than you would happen to see in a small molecule environment where you are absolutely right. The first thing you do is pull away that SG&A resource. We will want to be out in the market detailing it. That said, I don’t think it will require the SG&A investment that you are seeing on the brand right now. A lot of what you are seeing on the brand right now is actually driving the growth of the brand. What we have been able to establish over the last couple of years is that HUMIRA is indeed promotionally responsive and so we have made measured investments for the brand and they have paid off remarkably well, again 15% growth this past year, probably the fifth or sixth year of $1 dollar growth. And so we are happy with those investments. When you get out in the biosimilar timeframe, we are going to be managing the P&L a little differently. But that doesn’t mean we will pull all support off the product. Does that help?

Unidentified Analyst

(Question Inaudible)

Bill Chase

Yes, I don’t want to get specifically on what our marketing programs are, but they are geared primarily at the penetration in the marketplace, right. Again, this is the market that if you look at those patients that would benefit from a biologic. Even if you go back to rheumatology where we have been competing the longest in the anti-TNF class has been competing the longest. Those penetration rates when you look at patients that wouldn’t benefit from a biologic they are in the high 20%. If you get out to gastro you are probably talking high-single digits, maybe 10%. You get in derm you are talking 5% to 6% penetration of those patients that would benefit from a biologic, right. We are not talking total patients. And so we see tremendous growth opportunities on the brand just in penetration alone. And we have come up with very specific marketing programs that help drive that penetration. The other nice effect of those marketing programs are we have been able to actually grow HUMIRA quicker than the market, we are taking share. And that’s really a testament to the strength of the brand, to our marketing execution and to the broad halo of indications we have.

And then on top of that in terms of HUMIRA growth drivers, we are rolling out additional indications. We have the broadest indication suite of any anti-TNF and we expect that to be broader in the next couple of years. And then the other beautiful thing about the brand is if you get out of the developed markets and look at maybe less developed markets those penetration rates are still yet lower. And so there is an interesting geographic expansion angle on the brand as well. And all of those things add up to pretty impressive growth potentials.

Unidentified Analyst

(Question Inaudible)

Bill Chase

So, the question for those listening is can we provide a sense of where we are in the lead preferred position for anti-TNF? It varies from plan to plan and managed care organization to plan at managed care organization. What I can tell you though is if you look at new scripts in anti-TNF actually in biologics altogether we get a substantially greater share of new scripts across the board than our competitors do. And it’s by an impressive order of magnitude. And then we have got very, very strong managed care position that do ensure that we have the first option preferred position. But it’s tough to give you exact numbers. But you will see it in the fact that our volume growth on these brands are more impressive than the competitors.

Unidentified Analyst

(Question Inaudible)

Bill Chase

Well, it’s both. I mean, look we – when you look at the size of the brand and you look at the importance of this brand, you can be absolutely sure that we are going to be pulling every lever you possible can. So certainly we have outstanding payer strategies. I think if you look at the experience in 2013 of the oral JAKs that entered into the market and the fact that couldn’t get traction that is – that’s a great example of our position what our payers, right. That said we got very, very innovative marketing programs. When we rollout a new indication, we make sure that we staff our sales organization to push and get the full potential of that new indication. We have got great medical programs and development programs as well. We are investing at every lever. And the beauty of the brand, the size of HUMIRA is it provides the cash and the P&L opportunity to invest appropriately. So the worst thing we can do is move into harvest mode on HUMIRA right now. Yes.

Unidentified Analyst

Yeah, so what does being perceived, it’s competitive advantage to be in Hepatitis C. So we know it’s a big market, we know you have phenomenal data, but where are you better than the company?

Bill Chase

Why don’t Scott jump on clinical side on that?

Scott Brun

I wonder when that liver tropic virus is going to come up. Yes, so what we presented part of our story and I think the competition has presented part of theirs. We said out to pursuing the interferon free therapies several years ago. We said our goal is going to be to maximize cure rates across the broadest swatch of genotype one patient populations with a convenient well-tolerated regimen. And I certainly feel that our six Phase 3 studies have demonstrated that we have accomplished that.

We are well north of 90% with regard to our SBR-12 rates across populations, PB naïve is a genotype 1A or BILLION if they have got cirrhosis or if they are no responders. And so well we again, both we and others have demonstrated top line results from clinical trial programs. I think it’s going to be very important to understand what exactly do those cure rates look like in those hardest to treat patients, okay. If you have got a genotype 1A no responder cirrhotic patient that is a clinician is going to be the type of patient that is going to be facing. And I think you need to know exactly what type of response can you expect. I think the patient is going to want to know that, the clinician is going to want to know that and the payer is certainly is going to want to have strong level with regard to certainty of care regardless of where the ultimate price of these regimens end up, because it’s going to be not in consequential in that regard.

And again from what we have shown to you, a dedicated study in cirrhotic patients with over 400 patients with again cure rates certainly over 90% that’s not the sort of thing that we have seen before. And so I think we need to a see little bit more on the story, but our view is there has been a lot of attention that’s been placed on things like convenience, pill count and frankly whether or not Ribavirin is needed.

If you can secure cure rate at 95% or above neither our - anyone else’s studies have shown that the use of Ribavirin or a few more pills over an 84-day period is having any negative impact on response. So again I think clinicians, patients and payers are going to want to have confidence that they can secure a cure and that’s the proposition that we are providing. And I think others need to demonstrate in those hard to treat patients that they can do so. I think the gentlemen light shirt back there.

Unidentified Analyst

(Question Inaudible)

Bill Chase

Yes. So the question specifically was our view on potential price elasticity around demand in this marketplace. I think it’s an interesting market you have got a lot of patients, you have got a significant number of patients that are ultimately going to need treatment. You have got therapies that are coming to market that for the first time ever are showing certainly of cure, right. And I think typically when you have that sort of a situation the way that the industry prices these and the way that we look at the pricing issue is you price based on the value that the drug brings, right. And if you look at the value of certainty of a cure relative to standard of care even two years ago, certainly you can justify real value even at a higher price point. I think that’s the discussion you see playing out in the marketplace today.

In terms of where price ultimately goes, this is a market that we feel is not going to be everybody rushes to get cured and then the market disappears. We think this is a market that is going to have some sustainability and that sustainability is going to be driven by two different things. First of all – three different things, first of all, everybody doesn’t need to necessarily run out get cured immediately right, this is a very, very slow progressing disease.

The people that are likely going to be in need of greatest need of treatment are the sickest. We think they are going to get prioritized first. Second of all, there is capacity constraints within the overall market, those capacity constraints could be physician constraints, it could be payer constraints. And we again don’t think that that will result and everybody de-warehousing rapidly in the market evaporating overnight. When you have a market that is sustainable – the type of behavior that drives in the marketplace is one that’s probably a little bit more rational from a pricing standpoint. We think we expect to see that play out in this marketplace. Ultimately, you get out five, six, seven years is price a factor perhaps, but certainly at the outset given the dynamics in the marketplace we wouldn’t see that. Yes.

Unidentified Analyst

(Question Inaudible)

Scott Brun

Sure. So, 199 our first in class BCL-2 inhibitor that’s being studied in a variety of hematological malignancies, the vanguard indication being CLL, so TLS is the consequence of the very exquisite potency of 199. 199 allows natural pathways of cell death tumors evade to be turned back on and you see very rapid tumor clearance. You give some patients a dose of 199. You can see 50% to 90% reduction in the circulating CLL cells over the course of eight hours. What happens when you kill cells rapidly is they spill contents, potassium, so on that can be toxic to organs.

Unfortunately, when we first started the program in the exploratory phase we had two deaths from tumor lysis syndrome just because we are killing the tumor too rapidly. We put the program on the partial clinical hold, evaluated the data and what we done as we started off patients at a lower dose. We have ramped the dose more slow rate. As a precaution we have been hospitalizing during dose escalation which also has allowed us to collect more data with regard to how quickly cells are being killed, how quickly they are releasing their recent contents.

What I can say is since we have reinitiated the program with this new protocol, which is almost going on a year we have dosed dozens and dozens and dozens of patients. We have had no clinically concerning cases of TLS. We are putting that information together. It will be presented at a conference later this year. We are also discussing with regulatory agencies about our ability to widen up and not require hospitalization in a significant number of the patient segments. So I think the agent continues to show a significant promise. We have started a Phase 3 trial in relapsed refractory CLL in combination with Rituxan with our partner Genentech. We have a large cohort study ongoing in relapsed refractory patients who had the negative prognostic 17p deletion mutation that is looking at 199 as a single agent if we are able to recapitulate the kind of results we have seen in that population in earlier studies, there is a potential pathway for early registration on that unmet medical need. And we are planning to start a first line CLL study with GA101 later this year, Phase 3 I should say. Also ongoing studies in AML non-Hodgkin’s lymphoma diffused large B-cell lymphoma to name a few. So thank you.

Steve Scala - Cowen & Company

And we need to conclude.

Bill Chase - Executive Vice President and Chief Financial Officer

Thank you very much.

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