AbbVie Inc. (NYSE:ABBV)
Q2 2014 Earnings Conference Call
July 25, 2014 9:00 AM ET
Larry Peepo – VP, IR
Richard Gonzalez – Chairman and CEO
William Chase – EVP and CFO
Good morning and thank you for standing by. Welcome to the AbbVie Second 2014 Earnings Conference Call. All participants will be able to listen-only. This conference is being recorded by AbbVie.
I would now like to introduce Mr. Larry Peepo, Vice President of Investor Relations. You may begin sir.
Thank you. Good morning and thanks for joining us. 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.
Rick will begin by discussing AbbVie’s results from the second quarter and then provide an update on our pipeline and some of the key milestones we expect this year. Bill will give a more detailed review of our quarterly performance and then provide an overview of our 2014 outlook.
As a reminder we are currently operating under the UK takeover code and will be until the Shire transaction is completed. The UK takeover code governs what we are able to disclose regarding the specifics of the transaction as well as the various aspects of AbbVie’s underlying business, including operating performance, product details and pipeline milestones.
To help investors we have added a Q&A section to our earnings news release today which addresses a number of typical questions we receive. Due to the UK takeover code we will only be providing prepared remarks during our conference call today. There will not be a question-and-answer portion of today’s call.
Before I turn the call over to Rick 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 2013 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 regulatory filings which can be found on our website.
And with that I’ll now turn the call over to Rick.
Thank you, Larry. Good morning and thank you for joining us this morning. We’re pleased to report a strong second quarter result with adjusted earnings per share of $0.82, exceeding our guidance range for the quarter. This included sales growth of nearly 5% also ahead of our outlook for the quarter despite the positive impact from loss of exclusivity in our lipid franchise.
Sales growth was led by continued robust performance from HUMIRA and other key products including Synthroid, Sevoflurane and Duodopa. We have been pleased with our performance in the first-half of the year and as a reminder last month we raised our full year 2014 earnings per share guidance range to $3.06 to $3.16 on an adjusted basis, reflecting strong underlying business performance.
Beyond our strong financial performance we had a very productive second quarter with a number of important pipeline advancements, clinical trial results and other strategic activities. We submitted our U.S. and EU regulatory applications for interferon-free HCV combination. Both applications are currently under active priority review. We continue to anticipate U.S. approval later this year and EMA authorization in early 2015. We are also working to advance our Next-Generation HCV assets which are currently in Phase 2 development. We expect data from the Phase 2/b program in 2015 and plan to start Phase 3 development next year as well.
We have also made progress with several assets in our oncology pipeline. At the recent ASCO and EHA meetings we presented interim-results from our Phase 1 clinical trial of ABT-199 our BCL-2 inhibitor in combination with Rituxan in relapsed refractory CLL patients. The data showed an overall response rate of 84% and a complete response of 36% which compares favorably to trial results from other therapies in this patient population. This combination is being investigated in an ongoing Phase 3 clinical trial for the treatment of relapsed refractory CLL.
We are also evaluating ABT-199 in a variety of other cancer types including AML. We expect to present data from the AML study at an upcoming medical meeting. Also at ASCO AbbVie released preliminary results from an ongoing Phase 1 study of ABT-414 an anti-EGFR monoclonal antibody drug conjugate used in combination with chemotherapy. The study showed a level of response not typically seen in patients with recurrent or unresectable GBM. GBM is the most common and most aggressive type of malignant primary brain tumor. Patients currently have few treatment options and the five year survival rate for this type of cancer is less than 3%. We are working quickly to advance ABT-414.
We recently announce the initiation of a Phase 3 study of our PARP inhibitor ABT-888 in patients with HER2 negative breast cancer containing BRCA gene mutations. The start of this trial follows initiation of Phase 3 clinical work in two other settings; non-small cell cancer and neoadjuvant treatment of triple negative breast cancer. This fall we will present data from the mid-stage trial on lung cancer that supported our decision to advance the Phase 3 development. We have a number of other mid-stage trials that we expect to read out in the coming months.
In June we announced positive top line results from our Phase 3 daclizumab study. It demonstrated that patients treated with daclizumab had a statistically significant 45% reduction in annualized relapsed rates versus on active comparator. We are excited about these results and we are in the process of working with our partner to complete our global regulatory application.
In our immunology pipeline we recently advanced two bispecific DVDs in to Phase 2 development; ABT-122 for RA and ABT-981 for OA. Additionally, we continue to make progress on our selective JAK-1 inhibitor programs. We recently initiated a second Phase 2 trial in RA with our internal JAK-1 compound ABT-494 and we look forward to seeing data from the Phase 2/b Galapagos collaboration early next year.
Since becoming an independent company 18 months ago AbbVie has built a strong and sustainable strategy for the business. Last week we announced an important step in taking that strategy to the next level, the proposed merger with Shire. The combination of AbbVie and Shire represent a compelling opportunity to create a new world-class biopharmaceutical company. The combined company would have leadership positions within multiple important areas of medicine, a deeper and broader pipeline and greater access to its global cash flows. This transaction offers significant strategic and financial benefits for our respective shareholders and companies as well as the patients that we serve. The combined company would be larger more diversified company with significant financial capacity for future strategic investment.
Additionally the proposed combination offers an opportunity for enhanced shareholder return of capital and shareholder value creation. We’re currently seeking the relevant approvals for the transaction and are working towards our stated goal of closing in the fourth quarter of 2014.
In summary we’re very pleased with the strong performance we’ve had in the first half of 2014. In the second quarter we saw strong performance across our portfolio, including double-digit growth from Humira, We made significant progress advancing our pipeline and expect a number of additional milestones over the next six to nine months. And with the recent agreement to merge with Shire I believe we’ve taken an important strategic action to enhance our position as a world class biopharmaceutical company.
With that I’ll turn the call over to Bill. Bill?
Thank you Rick. This morning I’ll review our second quarter performance and provide an update on our outlook for the remainder of 2014. As Rick said we are very pleased with our results this quarter. We exceeded our guidance on both the top and bottom line. Total sales increased 4.8% on an operational basis, excluding 0.2% favorable impact from foreign exchange.
Excluding sales from our lipid franchise, due to loss of exclusivity total sales increased 12.3% on an operational basis. Humira delivered global sales of nearly $3.3 billion, up 25.4% on an operational basis and 26.2% on a reported basis. In the United States Humira sales increased 35.6% driven by continued market expansion, share gains and particularly strong growth in the gastro segment.
Growth in the second quarter also benefited from retail buying patterns and a favorable comparison to the prior year. Second quarter wholesaler inventory levels remain at roughly two weeks consistent with the first quarter. We expect third quarter Humira sales growth in the U.S. to be reflective of underlying product demand and pricing trends, partially offset by a reduction in retail buying patterns. As a result we are forecasting high teens growth in the U.S. for Humira in the third quarter.
Internationally Humira sales grew 16.2% on an operational basis and 17.8% on a reported basis. International growth continues to be driven by the uptake of new indications, share gains and double digit market growth in most markets. Performance in the quarter also benefited modestly from the timing of international shipments. We are forecasting low double digit growth for Humira internationally in the third quarter driven by strong underlying trends, partially offset by the timing of shipments in international markets. On a global basis we continue to expect double digit sales growth for Humira in 2014.
AndroGel sales were $218 million, down 15.6% from the prior year quarter. We continue to see a notable slowdown in the market with overall prescriptions down more than 20% in recent months. We expect these market trends to continue.
U.S. sales of Synthroid were $166 million, up 8.7% year-over-year. Synthroid maintain strong brand loyalty and market leadership despite the entry of generics into the market many years ago. The overall market has experienced low-single digit growth with Synthroid growth outpacing the market including product pricing trends.
U.S. CREON sales were $110 million in the quarter, up 4.1%. CREON maintains its leadership position in the pancreatic enzyme market where the product continues to capture the vast majority of new prescription starts. Global Lupron sales were $186 million in the quarter, down 5.2% on an operational basis. Lupron continues to hold a leadership position and maintain significant share of the market. Performance this quarter is roughly in line with our full year expectation and is also consistent with recent market trends.
Sales of Synagis were $74 million in the second quarter up 16.3% on an operational basis. Synagis which protects at risk infants from severe respiratory disease is a seasonal product with the majority of sales in the first and fourth quarters of the year. Growth in the quarter was driven by continued product uptake and strong commercial execution. Sales of Duodopa our therapy for advanced Parkinson’s disease approved in Europe and other international markets were $56 million, up 24.2% on an operational basis this quarter. Performance in the quarter is in line with recent trends as well as our full year outlook for the product.
And sales of Niaspan and TriCor /Trilipix were both down significantly due to generic competition. We expect these trends to continue for the remainder of 2014.
I will now turn to the P&L profile for the second quarter. The adjusted gross margin ratio was 79.6% in line with our expectations. This reflects loss of exclusivity in our lipid franchise offset by favorable mix impacts across the portfolio and margin enhancing initiatives we’ve implemented. Adjusted R&D was 16.1% of sales in the second quarter. R&D spending was up sequentially over the first quarter as we increased funding of our mid and late stage pipeline assets and additional Humira indications.
Adjusted SG&A was 27.1% of sales in the second quarter. As expected SG&A spending increased from the first quarter, reflecting continued investment on our growth brands and preparations for our upcoming HCV launch. Net interest expense was $69 million and the adjusted tax rate was 22.2% in the quarter. Second quarter adjusted earnings per share, excluding non-cash amortization expense and specified items were $0.82 exceeding our previous guidance range of $0.75 to $0.77. On a GAAP basis earnings per share were $0.68.
Moving on to our outlook for the remainder of 2014, for the full year we are confirming our recently increased adjusted earnings per share guidance of $3.06 to $3.16. For the third quarter we expect adjusted earnings per share of $0.77 to $0.79. We are forecasting low to mid-single digit operational sales growth in both the third and fourth quarters of 2014. As a reminder our 2014 outlook excludes any potential revenue from the expected 2014 U.S. launch of our HCV therapy.
We expect the third quarter gross margin ratio to be approximately 79%. For the fourth quarter the ratio is expected to be somewhat lower than the third quarter driven by product mix particularly an increase in lower margin Synagis sales.
As noted on our fourth quarter earnings call in January we are forecasting a higher level of SG&A expense in 2014 driven primarily by investments we are making for the upcoming launch of our HCV regimen in the U.S. and Europe. For the third quarter we expect a modest sequential increase in absolute SG&A expense from the second quarter.
For the fourth quarter given the proximity of the U.S. HCV launch we’d expect a more meaningful sequential increase in absolute SG&A expense from the third quarter level. This has been reflected in our recently increased adjusted earnings per share guidance. We currently have a significant number of Phase 3 programs in active development including exciting opportunities in oncology, HCV immunology and other areas that warrant investment. As a result we expect R&D expense to be above 16% of sales for the full year 2014 reflecting a meaningful increase in the spending over the prior year.
For the third quarter we expect a sequential increase in absolute R&D investment from the second quarter level. For the fourth quarter we are forecasting a more modest sequential increase from the third quarter level. This has been reflected in our recently increased adjusted earnings per share guidance. So overall we’re pleased with our strong quarter performance in the second quarter as well as our outlook for the remainder of 2014. And with that I’ll turn it back over to Larry.
Thanks Bill. And that concludes today’s conference call. As a reminder we will not be opening the line for question but there is comprehensive Q&A in this morning’s earnings news release which can be found on our website, abbvieinvestor.com. Thanks again for joining us today.
Thank you. And this does conclude today’s conference. We thank you for your participation. At this time you may disconnect your lines.
[No Q&A Session for this event]
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