AbbVie Inc. (NYSE:ABBV) Q4 2022 Earnings Call Transcript

AbbVie Inc. (NYSE:ABBV) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Good morning. Thank you for standing by. Welcome to the AbbVie Fourth Quarter 2022 Earnings Conference Call. I would now like to turn — introduce the call to Ms. Liz Shea, Senior Vice President of Investor Relations. You may proceed.

Liz Shea: 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; Rob Michael, Vice Chairman and President; Jeff Stewart, Executive Vice President, Chief Commercial Officer; Carrie Strom, Senior Vice President and President, Allergan Aesthetics; and Tom Hudson, Senior Vice President, R&D and Chief Scientific Officer. Joining us for the Q&A portion of the call are Scott Reents, Senior Vice President and Chief Financial Officer; and Roopal Thakkar, Vice President, Global Regulatory Affairs. Before we get started, I’ll note that some statements we make today may be considered forward-looking statements based on our current expectations. 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 these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements, except as required by law. On today’s conference call, non-GAAP financial measures will be used to help investors understand AbbVie’s business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings release and regulatory filings from today which can be found on our website. Following our prepared remarks, we’ll take your questions. So with that, I’ll now turn the call over to Rick.

Rick Gonzalez: Thank you, Liz. Good morning, everyone and thank you for joining us today. I’ll provide perspective on our overall performance and outlook and then Jeff, Carrie, Tom and Rob, who will review our business highlights pipeline progress financial results and 2023 guidance in more detail. Today, we reported another strong quarter and a highly productive year for AbbVie. We delivered full year 2022 adjusted earnings per share of $13.77 reflecting double-digit growth. Total net revenues of more than $58 billion were up by 5.1% on an operational basis, driven by impressive growth from SKYRIZI and RINVOQ which generated nearly $7.7 billion of combined sales in 2022. As I reflect on our 10 years as an independent company, we have made excellent progress evolving AbbVie into a leading biopharmaceutical company.

We have successfully created a well-diversified portfolio with multiple growth platforms in attractive and sustainable markets. This includes the rapid development and launch of SKYRIZI and RINVOQ across all of HUMIRA’s major indications, plus a distinct new indication, atopic dermatitis. We anticipate these 2 products will collectively exceed the peak revenues achieved by HUMIRA by 2027 with significant growth expected through the end of the decade. We are also building a substantial portfolio of novel, heme and solid tumor assays for oncology. The anticipated launches and indication ramp of several new products like venetoclax in multiple myeloma and MDS, epacritumab across B-cell malignancies and Teliso-V, a new treatment option in non-small cell lung cancer will collectively support growth in the middle of the decade.

We expect continued robust performance in neuroscience with our leading on-market portfolio to address migraine and psychiatric conditions as well as a promising pipeline for neurodegenerative diseases. And we see significant long-term growth potential for aesthetics, an extremely attractive market which is underpenetrated, where we have the leading position in toxins with BOTOX cosmetic and Fillers Rejuvido . Second, we’ve established a productive innovation-driven R&D organization with a robust pipeline. Our R&D engine has discovered and developed Five major billion-plus medicines over the past decade. We are committed to pursuing new ways to address patients’ most serious health issues and have more than doubled our annual R&D investment since our inception.

The breadth and the depth of our pipeline which now includes more than 80 programs across all development stages, further supports our long-term growth outlook. Lastly, we have maintained a strong financial position. to fully invest in innovative science and commercial initiatives across our therapeutic categories to drive long-term growth. We’ve also used that financial position to support a robust and growing dividend which we have increased by 270% since our inception. And we have also used it as capacity to pursue value-enhancing business development to augment our existing portfolio and pipeline. With these strong operating characteristics, we remain well positioned to absorb the impact of the HUMIRA LLE and quickly return to robust sales growth in 2025.

As it pertains to AbbVie’s near-term outlook, we anticipate 2023 adjusted earnings per share of $10.70 to $11.10. This guidance range contemplates, we expected headwind from direct biosimilar competition with U.S. HUMIRA sales down approximately 37% which is at the lower end of our previous erosion projection of 35% to 55%. Robust performance from SKYRIZI and RINVOQ which we expect will collectively generate $11.1 billion of revenue, reflecting year-over-year growth of nearly 45%. Revenue pressure in with recent challenging market and share dynamics impacting IMBLUVICA, partially offset by strong sales growth of venetoclax. Double-digit revenue growth of neuroscience including accelerating sales of Vraylar with our recent MDD approval. Our guidance also contemplates the transient economic impact primarily in the U.S. on aesthetic procedure growth, affecting near-term performance for toxins, fillers and body contouring.

Given that it’s difficult to predict the duration of economic and inflationary pressures, we have not assumed the recovery in 2023. And finally, this guidance reflects increasing investments in both R&D and SG&A to support our long-term growth opportunities. It’s also important to note that while it is possible 2023 could outperform our guidance, depending upon the shape of the HUMIRA erosion curve. We don’t anticipate that 2024 earnings will be lower than the $10.70 for of the 2023 adjusted earnings per share guidance which we are issuing today. In summary, we are executing well across our business and see numerous opportunities for our diverse portfolio to drive long-term growth. With that, I’ll turn the call over to Jeff. Jeff?

Jeff Stewart: Thank you, Rick. I’ll start with the quarterly results for immunology which delivered total revenues of more than $7.9 billion, up 19.5% on an operational basis. SKYRIZI and RINVOQ are performing exceptionally well, contributing more than $2.3 billion in combined sales this quarter, reflecting operational growth of 70%. SKYRIZI continues to exceed our expectations, outperforming our initial full year guidance by more than $750 million. Global revenues this quarter were nearly $1.6 billion, up 12.8% on a sequential basis. SKYRIZI is achieving strong market share momentum globally with in-play psoriatic disease leadership in 24 countries and total market share leadership in more than a dozen key markets. In psoriasis, SKYRIZI’s total prescription share of the U.S. biologic psoriasis market has increased to more than 28%.

And there is substantial room for continued growth in psoriasis based on SKYRIZI’s leading in-play share of new and switching patients which remains at nearly 50%. Psoriatic arthritis is also providing a nice inflection to SKYRIZI sales, especially in the U.S. Dermatology segment, where we have achieved approximately 10% share of the total biologic market. And we are also seeing encouraging SKYRIZI new patient starts in the U.S. room segment as well which accounts for more than 80% of all PSA treatments. SKYRIZI is being co-positioned with RINVO to rheumatologists where these 2 products combined have already achieved a leading in-play PSA room share of approximately 16%. In Crohn’s disease, we are making excellent progress with the U.S. launch.

Feedback from gastroenterologists has been very positive, especially as it relates to SKYRIZI’s novel dosing and overall clinical profile. We recently started DTC promotion for this indication and are already achieving a total in-play patient share of more than 15%. Turning now to invoke which delivered global sales of $770 million, representing double-digit sequential growth. In rheumatology, global prescriptions are ramping nicely across RINVOQ’s 4 approved indications, RA, PSA, ankylosing spondylitis and non-radiographic axial SpA. We continue to see positive market share momentum in both the U.S. and across key international geographies. In atopic dermatitis, RINVOQ is demonstrating strong uptake in both treatment naive and second-line patients globally.

Feedback from the global derm community supports the importance of RINVOQ as a long-term chronic therapy to control atopic dermatitis, especially as it relates to skin clearance and rapid itch relief. RINVOQ AD prescriptions are trending up globally with 20% to 35% in-place shares across our major international markets and a mid-teens in-place share in the U.S. which are both tracking in line with our expectations. In gastroenterology, the launch trends for RINVOQ in ulcerative colitis are very strong. Physicians have been pleased with RINVOQ’s high rates of endoscopic healing as well as the speed of onset which has quickly resulted in RINVOQ achieving approximately 20% in-play share in the U.S. second line plus setting. Internationally, RINVOQ UC is now approved in 50 countries with reimbursement discussions progressing in line with our expectations.

This strong adoption in UC amongst gastroenterologists is very encouraging for RINVOQ’s potential in Crohn’s disease as well. We are on track for U.S. and EMA regulatory decisions in the second quarter and are preparing for the commercial launch. Global HUMIRA sales were approximately $5.6 billion, up 6% on an operational basis with 9.9% growth in the U.S. partially offset by international, where revenues were down 16.9% operationally due to biosimilar competition. In the U.S., we have secured broad formulary access for HUMIRA encompassing more than 90% of all covered lives which enables us to compete for patient volume at parity to biosimilars. Turning now to hematologic oncology, where total revenues were $1.6 billion, down 11.2% on an operational basis.

Imbruvica global revenues were approximately $1.1 billion, down 19.5%. The U.S. performance continues to be impacted by challenging market and share dynamics attributed to the pace of COVID recovery as well as increasing competition. Venclexta global sales were $56 million, up 12.2% on an operational basis, with continued strong demand in both AML and CLL. We are particularly pleased with the international performance driven by robust share gains in the EU and across Asia. In neuroscience, revenues were $1.7 billion, up 5.1% on an operational basis. Vraylar continues to demonstrate robust growth. Sales of $565 million were up 15.5% on an operational basis, reflecting increasing market share, primarily in bipolar 1 disorder. Vraylar was also recently approved as an adjunctive treatment for major depressive disorder, marking its fourth approved indication and adding a new substantial opportunity for long-term growth.

We are very pleased with the AMDD label which confirms Vraylar’s strong benefit risk profile, dosing flexibility with positive efficacy results for both the 1.5 and 3-milligram dose and the ability to reduce depressive symptoms as an add-on for the partial responders who present and this is important, with or without symptoms of anxiety. The AMDD launch is off to a strong start and we are already seeing a nice inflection in total new prescriptions in the marketplace. Within migraine, our leading oral CGRP portfolio contributed $249 million in combined sales this quarter, reflecting growth of nearly 30% as we continue to see strong prescription demand for both Ubrelvy and QULIPTA. We are also pursuing in the U.S. commercial approval for QULIPTA as a preventative treatment for patients with chronic migraine which would further strengthen our competitive profile and uniquely position QULIPTA as the only oral CGRP available as a preventative treatment for patients with both chronic and episodic migraine.

Rounding out the migraine portfolio is BOTOX Therapeutic, a unique treatment with a dozen approved therapeutic indications and the clear branded leader in chronic migraine prevention. Total BOTOX Therapeutic sales were $728 million, up 10.7% on an operational basis. And last, we continue to prepare for the launch of ABBV-951 in both the U.S., Europe and Japan later this year. 951 represents a potentially transformative next-generation therapy for advanced Parkinson’s disease and a $1 billion-plus peak sales opportunity. So overall, I’m pleased with the performance and the momentum across the therapeutic portfolio. And with that, I’ll turn the call over to Carrie for additional comments on aesthetics. Carrie?

Carrie Strom: Thank you, Jeff. Full year 2022, global aesthetic sales were approximately $5.3 billion, reflecting growth of 5% on an operational basis. Global Botox cosmetic sales were approximately $2.6 billion, up nearly 21% operationally and global Juvederm sales were approximately $1.4 billion, down roughly 2% operationally. Our global aesthetics portfolio grew in 2022 despite several headwinds, most notably inflationary dynamics in the U.S., COVID-related lockdowns in China and suspension of our operations in Russia. In the U.S. we began to see a slowdown in aesthetic procedures in the second quarter of last year which coincided with the softening in economic metrics. These trends continued through the end of the year with the most significant impact on higher priced more deferrable procedures, including fillers and body contouring.

Despite these economic pressures, U.S. Botox cosmetic sales grew approximately 16% in 2022, driven by strong first half sales with growth moderating over the remainder of the year. Similarly, U.S. Juvederm saw strong growth in the first quarter of the year but filler market declines throughout the second half of the year resulted in full year sales being down approximately 17% versus a robust 2021. We continue to track a number of key external economic metrics, including real personal consumption and the U.S. Consumer Confidence Index. While we have not seen major improvements in these metrics, data over the course of the last several months has shown stabilization. It remains difficult to predict the duration of these economic headwinds. But as Rick noted, we have modeled them to persist through the end of 2023.

Our international aesthetics portfolio continued to demonstrate robust growth with the strong performance in most major markets, offsetting impacts from China and Russia. International Botox cosmetic sales of nearly $1 billion were up approximately 29% operationally and international Juvederm sales grew approximately 9% on an operational basis. We delivered this performance despite the significant headwinds we faced last year in our 2 largest international filler market, China and Russia. While our aesthetics portfolio in China continues to be impacted by COVID-related headwinds — the current wave appears to have peaked. We expect the situation to improve through the first half of 2023 with full recovery in China beginning in the third quarter.

Despite the transitory challenges we’re facing, we remain confident in the long-term outlook for our aesthetics portfolio. Consumers continue to be very interested in the aesthetics category and in our brands. We see substantial room for further market penetration across each of our aesthetics categories and are continuing to invest to support long-term growth. Our promotional efforts are focused on driving more consumers into our customers’ offices while increasing retention and productivity of existing patients. We have built a best-in-class commercial technology team known for developing our consumer loyalty program, Eli. We have over 5 million consumers who use Eli and more than 20,000 of our customers’ offices. We have a series of new technology products launching this year to drive growth in the aesthetics market and support our customers and consumers.

Internationally, we are focused on markets with significant growth potential. We have increased investments in injector training and expanded our field force in China which is our second largest market. Latin America which is very aesthetically oriented and Japan which is growing rapidly and is expected to be one of our fastest-growing markets in 2023. Additionally, we are focused on delivering new product innovation. This year, we’re launching 2 new fillers in the U.S., VOLUX for improvement of jawline which was approved late last year and Skin Vive for enhanced skin quality attributes, including hydration which is expected to be approved in the first half of 2023. We’re also continuing to launch Harmonica, our hybrid bio-stimulatory HA filler in several international markets.

The investments we’re making to support long-term growth for our aesthetics portfolio, along with the stabilizing economic outlook and improving tobidynamics in China, leave us well positioned for future growth. With that, I’ll turn the call over to Tom.

Tom Hudson: Thank you, Carrie. We expect significant program advancement across all stages of our pipeline this year. In immunology, we continue to make very good progress with programs in our core diseases as well as in adjacent areas of rheumatology and dermatology, where we are expanding our portfolio. We’re nearing completion of SKYRIZI’s registrational program in ulcerative colitis which is the last major indication expansion program for SKYRIZI. In the first half of this year, we’ll see data from the Phase III induction and maintenance studies for SKYRIZI in ulcerative colitis with our regulatory submissions anticipated later this year. We’ll also see data this year from our head-to-head comparison studies evaluating SKYRIZI versus other commonly used agents which we expect will further distinguish its profile from competitive offerings.

These studies include our Phase III trial in Crohn’s disease versus STELARA and our Phase III trial in psoriasis versus Otezla. Results from these studies will add to the body of evidence supporting SKARIZI as a best-in-category agent in these indications. We’re also nearing completion of the core indication expansion programs for RINVOQ. Our regulatory applications for RINVOQ and Crohn’s disease are under review and we anticipate approval decisions in the second quarter. RINVOQ demonstrated very strong rates of remission and endoscopic improvement in our Phase III induction and maintenance studies and we believe RINVOQ will be an important new treatment option once approved in Crohn’s disease. This is a market where approximately 80% of bioexperience patients have used the TNF inhibitor and there remains considerable unmet need for therapies that can deliver high rates of response and long-term remission.

Beyond our core immunology indications, we’re developing RINVOQ in several diseases where we’ve seen strong evidence that our JAK inhibitor has the potential to become a highly effective therapy. Our Phase III program is already underway in 1 of these indications, giant cell arteritis. And later this year, we plan to begin Phase III studies for 4 additional diseases, systemic lupus, hidradenitis suppurativa, vitiligo and alopecia areata. Moving now to our oncology portfolio, where we expect several important regulatory and clinical milestones this year. In the area of hematology oncology, we’ll see data from several Phase III studies, including results from Venclexta’s event-driven de novo trial in relapsed/refractory multiple myeloma patients with a T114 mutation and Navitoclax’ TRANSFORM-1 trial in frontline myelofibrosis.

Results from these studies are expected to support regulatory submissions in the second half of the year for Venclexta and navitoclax in their respective indications. We also anticipate regulatory approval this year for epcoritamab in relapsed/refractory large B-cell lymphoma in several major geographies, including the U.S. in the second quarter and in Europe and Japan in the second half of the year. Based on the very deep and drillable responses demonstrated thus far in our clinical program, we believe that epcoritamab has the potential to significantly improve upon treatment options for these patients. We believe that epcoritamab has the potential to become a core therapy for B-cell malignancies. And we continue to make very good progress, expanding our development programs for epcoritamab across several indications.

Over the course of 2023, we expect to begin several new studies, including a Phase III study in frontline DLBCL in combination with R-CHOP and multiple Phase II studies in CLL and MCL. We remain very excited about epcroritumab’s potential to become a best-in-class therapy across multiple B-cell malignancies and look forward to providing updates on these programs as the data mature. Now moving our solid tumor pipeline. We remain on track to see data later this year from our Phase II study evaluating Teliso-V in second-line plus advanced non-squamous non-small cell lung cancer. As a reminder, we received a breakthrough therapy designation for Teliso-V, our c-Met ADC, based on the encouraging results from Stage 1 of this Phase II study and the data we’ll see later this year has the potential to support an accelerated approval.

Our Phase III confirmatory study in patients with overexpressed c-MET is also ongoing. Treatment options for these cancer patients who have exhausted platinum-based chemotherapy, immunotherapy and targeted therapy are very limited and prognosis for these patients is extremely poor. As a targeted therapy for patients with overexpressed cement which represents approximately 25% of the non-squamous non-small cell lung cancer population, we believe Teliso-V has the potential to become an important new treatment option for these patients. We’re also making good progress with our next-generation c-MET ADC, ABBV-400 which utilizes a more potent topoisomerase inhibitor payload, to potentially drive deeper tumor responses as well as broaden the range of solid tumors where c-MET therapies can be used such as gastroesophageal and colorectal tumors.

We expect to see early data from our Phase I program in 2024. Elsewhere in the solid tumor pipeline, we have begun to see encouraging data from several programs which we plan to advance into Phase II studies this year. Our anti-GARP antibody, ABBV-151 is showing strong signals of activity, including deep responses with prolonged durability. Based on this preliminary efficacy, we plan to initiate Phase II studies in several tumor types. We also plan to advance ABBV-647 into Phase II dose optimizing studies this year based on the promising results from our early stage program. This ADC targets PTK7 which is a subset of non-squamous non-small cell lung cancer and represents approximately 25% of patients and has little overlap with c-MetSo our c-Met ADCs and PTK7 ADC combined will target approximately 45% of non-squamous non-small cell lung cancer patients.

Now moving to neuroscience, where we recently received FDA approval for Vraylar as an adjunctive treatment for major depressive disorder which marks its fourth indication approval. We’re very excited by this approval and pleased with the label which highlights Real or strong benefit risk profile in this indication. Vraylar is an important new treatment option for patients who are currently taking an antidepressant but continue to have unresolved depression symptoms. We also recently received approval in Japan for ABBV-951, our novel subcutaneous levodopa carbidopa delivery system for treatment of advanced Parkinson’s disease. This innovative approach to delivering DUOPA-LIKE efficacy through a subcutaneous delivery system represents a potentially transformative improvement to current treatment options.

With a less invasive, nonsurgical delivery system, it also has the potential to significantly expand the patient population currently addressed by DUOPA or other more invasive therapies for advanced PD patients such as deep brain stimulation. We remain on track for approval decisions this year in both the U.S. and Europe. In the U.S., we anticipate approval in the first half of the year, with product launch expected in the second half after we secured reimbursement. And in Europe, we anticipate approval in the fourth quarter of this year. And in the area of migraine, we remain on track for an FDA approval decision in the second quarter of this year for QULIPTA as a preventive treatment for patients with chronic migraine. In Europe, we anticipate an approval decision in the third quarter for atogepant as a preventive treatment for patients with both chronic and episodic migraine.

If approved, this would be another differentiating feature for Lipa as it would be the only oral CGRP approved for prevention in patients with chronic migraine. This is a common and debilitating disease that significantly impacts quality of life and we look forward to make this new oral treatment option available to patients once approved. And in our aesthetics pipeline, we expect to see results this year from several toxin programs including data from our Phase III study for Botox in platysma prominence with regulatory submission in the U.S. expected near the end of 2023 as well as data from our Phase III study for BOTOX in masseter muscle prominence, where we expect to submit regulatory applications in certain international markets in the second half of the year, including China and Canada.

These 2 novel indications for prominent neck and jaw muscles will help to further build our portfolio in the lower phase segment. We’ll also see data from our Phase III trial for Bot-AE or short-acting toxin in glabellar lines near the end of this year with regulatory applications plan for 2024. So in summary, we continue to demonstrate significant progress across all stages of our pipeline and anticipate numerous important regulatory and clinical milestones again in 2023. With that, I’ll turn the call over to Rob for additional comments on our fourth quarter performance and our 2023 financial outlook. Rob?

Rob Michael: Thank you, Tom. AbbVie’s performance and financial foundation remains strong with our leadership positions across a diverse portfolio, we are well positioned to return to robust growth by 2025. Starting with fourth quarter results, we reported adjusted earnings per share of $3.60 which is $0.07 above our guidance midpoint. These results include a $0.13 unfavorable impact from acquired IPR&D expense. Total net revenues were $15.1 billion, up 3.8% on an operational basis, excluding a 2.2% unfavorable impact from foreign exchange. The adjusted operating margin ratio was 52.1% of sales. This includes adjusted gross margin of 86% of sales, adjusted R&D investment of 11.5% of sales, acquired IPR&D expense of 1.6% of sales and adjusted SG&A expense of 20.8% of sales.

Net interest expense was $476 million and the adjusted tax rate was 13.4%. Turning to our financial outlook for 2023. Our full year adjusted earnings per share guidance is between $10.70 and $11.10. This earnings per share guidance does not include an estimate for acquired IPR&D expense that may be incurred throughout the year. We expect net revenues of approximately $52 billion. At current rates, we expect foreign exchange to have a neutral impact on full year sales growth. This revenue forecast comprehends the following approximate assumptions for our key products and therapeutic areas. We expect immunology sales of $24.8 billion, including SKYRIZI sales of $7.4 billion, reflecting growth of more than $2.2 billion due to strong market share performance across all approved indications.

RINVOQ revenue of $3.7 billion, reflecting growth of more than 45% with continued indication expansion and HUMIRA sales of $13.7 billion, including U.S. erosion of 37% and following a loss of exclusivity in late January. With 1 biosimilar currently in the market and potentially 9 more biosimilars available in the middle of the year, we anticipate that sales erosion will be more heavily weighted towards the second half of 2023. In hematologic oncology, we expect VENCLEXTA sales of $2.2 billion and revenue of $3.5 billion. For aesthetics, we expect sales of $5.2 billion, including $2.5 billion from Botox Cosmetic and $1.4 billion from Juvederm, with growth rates expected to improve when we lap the market slowdown in the middle of the year. For neuroscience, we expect revenue of $7.2 billion representing growth of more than 10%, including Botox Therapeutic sales of $2.8 billion, Vraylar sales of $2.5 billion and total oral CGRP revenue of $1.1 billion, including Ubrelvy growth of approximately 17.5%.

For eye care, we expect sales of $2.2 billion and we expect Mavyret revenue of $1.4 billion. Moving to the P&L for 2023. We are forecasting full year adjusted gross margin of 84% of sales, adjusted R&D investment of $6.8 billion and adjusted SG&A expense of $12.4 billion. We forecast an adjusted operating margin ratio of 47% of sales. This profile includes a 70 basis point benefit that is fully offset in tax expense given the transition of Puerto Rico’s excise tax to an income tax effective at the beginning of this year. We expect adjusted net interest expense of $1.8 billion and we forecast our non-GAAP tax rate to be 15.3%, including an impact of 1.3 points from the Puerto Rico tax transition. Finally, we expect our share count to be roughly flat to 2022.

Turning to the first quarter. We anticipate net revenues of $11.8 billion. At current rates, we expect foreign exchange to have a 1% unfavorable impact on sales growth. This revenue forecast comprehends the following approximate assumptions for our key therapeutic areas. Immunology sales of $5.5 billion which includes U.S. HUMIRA erosion of 27%, Oncology revenue of $1.4 billion. Aesthetic sales approaching $1.2 billion; Neuroscience revenue of $1.5 billion; and eye care sales approaching $600 million. We are forecasting an adjusted operating margin ratio of 46% of sales and we model a non-GAAP tax rate of 13.3%. We expect adjusted earnings per share between $2.39 and $2.49. This guidance does not include acquired IPR&D expense that may be incurred in the quarter.

Finally, AbbVie’s strong business performance and outlook continues to support our capital allocation priorities. We expect to generate adjusted free cash flow of nearly $19 billion in 2023 which is net of $1.4 billion in SKYRIZI royalty payments. This cash flow will fully support a strong and growing dividend which we have increased by 270% since inception, continued debt repayment, where we expect to pay down $4 billion in maturities this year bringing our cumulative debt reduction to $34 billion. Our strong cash flow also provides capacity for continued business development to further augment our portfolio. In closing, we are very pleased with AbbVie’s strong results in 2022. And with our diverse portfolio, we continue to be well positioned to deliver long-term growth.

With that, I’ll turn the call back over to Liz.

Liz Shea: Thanks, Rob. We will now open the call for questions. Operator?

Q&A Session

Operator: Our first question comes from Mohit Bansal with Wells Fargo.

Mohit Bansal: And so maybe a question — a bigger question for Rick. So AbbVie — when we talk to investors, AbbVie has always been 1 of those. The R&D as a percent of sales has always been low. And right now, even it is still less than 15% and that’s the pushback we get that the company cannot grow organically. And in some ways, you have always been playing defensive given that since inception, HUMIRA has always been an issue. Now that you’re beginning to get past that, do you think something you’ll change — you want to change fundamentally with the company and the way you allocate internal versus external R&D spend? That would be very helpful.

Rick Gonzalez: Okay. This is Rick. So it’s a good question. We’ve obviously heard that question. I think there’s a number of dynamics that play into it. when you look at our R&D expense as a profile. One is, obviously, we have a large volume of HUMIRA revenue that requires relatively little R&D support. And so that obviously dilutes out the profile of the business. As we see biosimilar impact, obviously, there will be some impact on that as you know, our revenues were to go down. The second thing is the aesthetics business, we’re funding it aggressively to grow it. But by definition, it’s not that expensive to be able to fund many of those programs. So it has a much lower profile. So some of it is mix when you think about it.

The second thing I’d say is we obviously fund R&D at a level that we believe we can drive productivity. And I think if you look at our productivity over the last 10 years, the data I’ve seen suggests we are 1 of the most productive R&D engines in the industry. Certainly, when you look at products like SKYRIZI and RINVOQ, the return on those assets is tremendous. The third thing I’d say is, look, what drives R&D expense to the greatest extent is when you have large volumes of Phase III programs. And we’re coming into a phase as we move forward over the next 3 or 4 years, where we have a number of programs that if they are successful, they will create a scenario where we will increase R&D. So an example of that would be our GARP program. We’ve seen some incredibly encouraging data out of that program thus far to next-generation immuno-oncology program.

That combines with checkpoint inhibitors. And if that program continues to advance the way we see it now, we would want to expand our as our Phase II and then Phase III trials in that program significantly across the relatively broad range of solid tumors. That will require a significant increase in investment to be able to do that. So we tend to drive R&D based on programs that we have a high level of confidence can be productive and can be successful. And we don’t constrain R&D in any way from that perspective. Another program will be our AbbVie program. If that program proves to deliver high rates of amyloid reduction and low REA. That will be another program that we want to rapidly move into Phase III. And so I can tell you, I’m very comfortable with the productivity we’re getting out of R&D.

Certainly, we will want to continue to increase that and that’s 1 of our objectives. We always look at programs on the outside to bring them in. And in fact, I’d say over the last couple of years, we brought in a number of programs that are earlier stage programs. And we’re fortunate from the standpoint that we have the ability to drive very strong growth, as we’ve indicated to investors between now and the end of this decade. We can drive high single-digit growth. We’re going to return to robust growth in ’25. So we’re looking mostly for assets that will allow us to drive growth in that late 20s and early 30s time frame. So again, as those mature and they’re successful and they go into later-stage development programs, they will drive further need for investment.

Rob Michael: Mohit, this is Rob. I’ll just add that. If you look at this year’s guide, it’s a great example of our willingness to increase R&D investment where it’s needed. So if you look at we’re increasing it from $6.4 billion to $6.8 billion. Those increases are focused on epcoritamab as well as midstage assets such as GARP and PTK7. We also have several new Phase III studies for additional RINVOQ indications which could contribute several billion dollars of revenue in the latter half of the decade. So even in the year where we’re seeing a decline in the top line, we’re increasing R&D investments. We’re very committed to increasing innovation investment, whether it’s internal or external.

Operator: Our next question is from Terence Flynn with Morgan Stanley.

Terence Flynn: I guess, I just wondered, high level, if there was anything different, Rick, or Rob, about your approach to guidance on the revenue side this year versus last year. I think last year, performance was choppy across a number of different franchises. So as you thought about the guidance this year, anything different as you approached it? And then my second question is any other details you can provide on how you’re thinking about HUMIRA in 2024. Obviously, I appreciate the color this year but how should we think about 2024 dynamics in the U.S.

Rick Gonzalez: Okay. So maybe I’ll start and then Rob can fill in anything that I might miss. I think whenever we look at guidance, we look at it and I think this has been our historical practice. We obviously look at guidance as something that we have a very high level that we can execute against that guidance. I would say this year, you’ve seen that the range is a little bit wider than what we normally project. And we did that based on the fact that as HUMIRA goes biosimilar, obviously, very small changes in the assumptions we’re making on erosion for HUMIRA can have a fairly significant impact. So we’re right in the range by about $0.10. and that’s reflected in this guidance. And so I would say that as we have in historically, we have a high level of confidence we’re going to deliver on this guidance.

As it relates to 2024, we have provided as part of this guidance, what we are projecting to be a floor because we’ve gotten a lot of requests from investors about when will we hit the trough and will it be ’23 or will it be ’24? So maybe to give you a little color around how we think about that. One, the $10.70 is a floor. That doesn’t mean that we will go down to $10.70 but it means that we would say to investors that, that’s what you should assume is the absolute floor. Now when will that or if it were to occur, when we occur? Will we see the drop in 2023? Or will we see the trough in 2024. And I would tell you that our expectations would be based on this plan, the trough should occur in 2023. But what I would tell you is if we significantly overachieved this plan into 2023 and there’s obviously somewhat greater risk it could move into ’24.

The reason why it is in ’23 versus ’24 based on our current planning assumptions, is because the strength of the growth platform has the ability between where it will grow in ’23 and where we’re growing 24% to offset what will obviously be further erosion of HUMIRA in 2024. 2024, you will basically have to impacts on HUMIRA. You will have the annualization of this year. And as Rob said in his remarks, we expect more of an impact in the second half of ’23. So when you annualize that, you’re going to have an impact that flows through to ’24. And then we would expect further erosion of HUMIRA, both price and probably to a greater extent, volume in 2024. But the growth platform has the ability to grow through that based on those assumptions. And so that’s the philosophy that we operate with on the guidance.

Rob, anything you’d add?

Rob Michael: I think if you reflect back on the history of AbbVie, we’ve had a long track record at delivering exceeding our guidance. I think 2022 is an exception. And if you look at on the top line now, we didn’t make earnings. So that’s important to highlight. If you look at the top line, the 2 biggest factors that drove the miss versus original guidance in 2022 were with Imbruvica and Venclexta, the CLO market, we did not anticipate that, that market would actually not recover. I mean that’s — it’s down 20% versus pre-pandemic levels. And then we did see some additional share impact on IMBRUVICA. And then aesthetics, we saw, obviously, in the month of May, we started to see a slowdown in the economy. We had a very strong first quarter.

So both of those things really are what drove the top line miss, we made earnings. Now we have factored both those things in the 2023 guidance to give investors confidence that we said it appropriately. But we always look to set the most responsible guidance we can and we feel good about where we set 2023.

Operator: Our next question comes from Chris Schott with JPMorgan.

Chris Schott: Just 2 for me. Maybe just following up on the 2023 guidance being a trough number. It seems like you’re still going to have about a $12 billion U.S. HUMIRA franchise here. So can you just provide maybe a little bit more color of what you’re envisioning 2024 to look like for HUMIRA? Like is it reasonable to think about the down 35% to 40% year as we look out to ’24. I think we just turn your hands around just the how much growth in that core platform and how much of a headwind, I guess, HUMIRA is going to be facing at the same time. My second question was just on aesthetics trends as we move through this year. You’ve talked about some signs of at least sequential stability the last few quarters. You’re talking about stepping up investments. You’ve got a couple of new products launching. I guess why shouldn’t we think about some recovery in this business as we look out to the second half of the year?

Rick Gonzalez: Chris, this is Rick. Let me talk a little bit about HUMIRA and the trough. We’re 2 weeks into the biosimilar activity. So it’s a little difficult to give you precise predictions or 2024. I think the way to think about HUMIRA going forward is what we would expect is the most significant impact on HUMIRA is going to be price. And obviously, we’re trying to predict going forward what that price will look like. Certainly, as we look at this year, the most significant impact is clearly price. So that’s more predictable because we obviously know what the pricing is in the contracts that we’ve put together. And so I think that’s something that we have a high level of confidence. There will be further pressure on price as we move into ’24 and there’ll probably be further pressure on volume in ’24d.

But I would say, at the end of ’24, I would expect HUMIRA to start to develop a more stable tail of revenue. It will still have some pressure as we move in ’25 but ’25 and ’26 is where we should see that more stable tail for HUMIRA emerge. And that’s 1 of the things that allows us to be able to see the underlying growth from the growth platform. So a number of things happen between ’23 and ’24 and then ’25 as we move forward. As you mentioned in your second comment, we would certainly expect that the U.S. economy will start to recover in ’24. It may recover earlier than that. And if it does, that would be great. We don’t want to put a plan together to assume that because obviously, that’s difficult for us to predict. But I think we would all expect that 24 will see a recovery in the U.S. economy.

And we would fully expect for the aesthetics business to return back to historical growth rates very quickly when that happens. And so that will be another opportunity for that business to be able to grow. And then I would say Imbruvica is the other key issue for us. as we move forward. We would expect the majority of the erosion that we see on Imbruvica will occur this year and there will be less downward pressure as we move to ’24. So that’s what allows the growth to be able to come up. What I would tell you even though I don’t want to make a; prediction in ’24 of what HUMIRA will look like. I think we have a high level of confidence that we have the ability if the erosion curve looks like how we’ve modeled it now between ’23 and ’24 that we have the ability to be able to have the growth platform and go through that.

So we can absorb that impact. And so far, like I said, it’s early on but I’d say so far, we’re comfortable with how things are playing out. Rob, anything you want to add on the first question and Carrie, maybe you can give a little more color.

Rob Michael: I think you characterized it well, Rick. I mean the thing to highlight for this year for ’23, the way you think about HUMIRA really in the first half of the year, the vast majority of that erosion will be priced. In the second half, you’ll see because we’ve contracted rebates, you’ll see a step-up in the price erosion, although you also will see more volume with biosimilars coming in the market in the middle of the year, we would expect more volume erosion. I think as we think about ’24, we would expect, based on the contract to see a step up in price but albeit not at the same level as we see in ’23 but ’24 would be more volume. It’s probably the best way to think about it right now. We’re not going to give you guidance but if you think about how to model HUMIRA ’23, ’24, that’s the way to think through it.

Rick Gonzalez: Okay. Carrie, anything you want to add on aesthetics?

Carrie Strom: Yes. This is Carrie. The — in terms of the aesthetics market and how we’re thinking about it for 2023, I mean, first, I’d say, yes, this is still a very strong fundamental market with consumers who are very interested in entering the category. And so that remains a strong opportunity the now and in the future. But what we saw as we exited 2022 is as these economic metrics were softening, we also saw that reflected in demand for aesthetic procedures. And in our conversations with customers, we saw that reflected in their practices, market research with consumers, where they said, yes, we’re interested in the category but we want to see what’s going on with the economy, perhaps before a new patient might want to enter the category.

And based on that, we are modeling for those trends to continue in 2023. And what that means for U.S. toxin market is the market growth would be around a mid-single-digit decline for U.S. filler market around a 10% decline. And like we said, those growth rates would be different by quarter as we lap a strong first part of the year. Now of course, if there is a scenario like a deep recession, where unemployment skyrockets, that is not something that we’ve contemplated. Or on the other hand, if the macroeconomic environment stabilizes or improve that would represent favorability to our plan.

Operator: Our next question is from Gary Nachman with BMO Capital Markets.

Gary Nachman: First question is on neuro in the quarter. It’s actually weaker than we thought. So was there any additional pressure on gross to net, maybe for the oral CGRPs? And what sort of inflection are you expecting for Vraylar and MDD, how rapid do you think that adoption might be this year? And then, Rick, you recently said that you would be in an article that you would be lifting the self-imposed $2 billion annual cap on business development that you have more capacity to do deals. So how much capacity do you guys have what areas are you looking to be most aggressive? And how important is it to add sizable marketed products into the mix? Or would it be mostly focused on pipeline?

Jeff Stewart: Yes. I’ll take the first one, it’s Jeff. Thanks for the question. No, we did not see material incremental pressure on the gross to net — we did see a little softening versus our expectation on the overall preventative marketplace but it was quite modest. So no, fairly consistent trending. I mean if you look at our new prescription capture and the oral market, it’s basically a 50-50 shared capture rate between ourselves and the major competitor. In terms of the Vraylar adoption trend, we had discussed previously because we really have very, very strong access for Vraylar that we would anticipate a pretty rapid inflection in adoption for the depression indication, the adjunctive depression indication. As I mentioned in my remarks, that’s what we’ve seen.

So we’re quite encouraged. I mean we can see a significant trend break on the new prescription adoption versus what was already a very nice growth rate for the bipolar 1 indication. So I think the early dynamics and again, it’s only really been a month here in January where our sales force has been out promoting the new indication. We’re quite encouraged in terms of the market response, both from the metrics in terms of IQVIA, the scripts we see but also the qualitative feedback from the customers.

Rick Gonzalez: And on deal capacity, we obviously look at business development based on what we believe are — we’re trying to accomplish strategically in each of the therapeutic areas that we’re operating in. we identify areas that we think would be good opportunities for us and then we look to see if we can find those kinds of assets. As I mentioned before, I think we’re in the fortune of a position that we can drive very strong growth. with the assets that we have on the market today as well as what’s coming out of our pipeline over the next 3 or 4 years. That gives us the ability to be able to return to growth and then drive that high single-digit growth through the end of the decade. And we’re also fortunate that after HUMIRA, we have a — relative to our peers, we have a very low LOE exposure.

So we don’t have a lot of downward pressure on the business. Now having said that, we’ve done an excellent job of paying down the incremental debt from the Allergan transaction, we put that $2 billion cap in place when we did the Allergan acquisition that allowed us to focus again on some earlier-stage assets. And I’d remind everyone that was about 4x what our historical practice has been for those kinds of assets. So there was plenty of capacity to do that. But we’re certainly in a position now that if the right thing were to come along, we could do a transaction that would be much larger. We certainly have the financial wherewithal to be able to do that. And we’ve certainly shown that we were able to do that and create value in the assets that we bring in.

The areas that we typically look at are aligned with our therapeutic growth areas. So immunology, oncology, certain areas of neuroscience and eye care, I would say, are the predominant areas as well as aesthetics. We obviously continue to look for opportunities in the states. They tend to be smaller acquisitions, though. And so at the end of the day, I feel good about where we are and we’ve been quite active. We have a very active business development group. And we’ll continue to look at those. And like I said, we find something that’s of interest and it could really help us round out a category that we’re in, then you should expect us to act on that.

Operator: It comes from Carter Gould with Barclays.

Carter Gould: Maybe to come back to aesthetics. It does sound like you built in conservatism on a number of fronts. I wanted to also — you didn’t touch much around sort of China reopening and how you expect that sort of business to — as it comes back, if you expect it to sort of return to how it was? Or if that will evolve differently. And then in the — I guess as we think then around the guidance for ’23 and the link you’ve drawn to as you sort of maybe if the guidance potentially evolves over ’23, should we think about that link remaining intact? Or is that sort of a near-term phenomenon and that will sort of, I guess, disappear going forward.

Rick Gonzalez: Carrie, why don’t you touch on the aesthetics question.

Carrie Strom: Yes. So your question around China and I’d say China is our second largest global business. It has demonstrated significant growth in the past few years and proven to be very responsive to the increased promotion that we’re putting into that market. Of course, in 2022, China COVID-related issues did impact the aesthetics market, especially in the second and fourth quarters. Now, as we look at the year beginning in China and as everyone is returning from the Chinese New Year, it does look like the current wave has peaked. And that the situation is beginning to improve and will continue to improve through the first half of 2023 and we’re expecting a full recovery in the market in Q3 and for the second half the year. So despite the challenges in 2022, China still posted positive growth and we will definitely be continuing our investments in China in 2023 and beyond.

Rob Michael: And Carter, this is Rob. I’ll try to answer your second question. I think the way to think about ’24 — clearly, as we go through the year, we always look at the trends and contemplate what that could mean for flow through in ’24. But the reason we gave you that guidance range, we mentioned the $10.70 being the way to think about it as a floor for ’24 is because of the dynamics around the HUMIRA erosion. So if we do better in ’23 and more of it happens in ’24, then you can at least anchor back to we’re not going to fall below that $10.70 EPS floor in our guidance range. So we always would factor in trends but that’s the way to think about it. If it’s just the erosion on HUMIRA is better this year than we have in this guidance. We want to make sure you understood that what it means potentially for ’24. So that’s again, always factor in trends. But as we sit here today, that’s the best way to think about it.

Rick Gonzalez: Maybe just let me add 1 thing that might help clarify it. I think you should think about HUMIRA in ’24. We believe we’re going to get to a certain level of price and volume in ’24, almost regardless of what happens in 2013 because of the competitive dynamic. And so when we talk about the shift, what we’re really talking about is inflating ’23. If you anchor ’24 is a solid point that we have a high level of confidence of where HUMIRA’s tail will be in ’24. And the only thing that happens to shift it between ’23 and ’24 is that we do much better in ’23 than we expected, right? So that inflates but it still anchors against the ’24 point . That’s the way to think about this.

Operator: It comes from Steve Scala with Cowen.

Steve Scala: The low end of 2023 guidance implies 22% EPS erosion, the high end of Q1 guidance assumes 21% EPS erosion. How is it possible that Q1 could be in line with the full year and not appreciably better? It seems as though the Q1 guide is low? Or is that because AbbVie believes the floor on HUMIRA price is already reached? Maybe another way to restate the question. What should be our anticipation for the quarterly cadence of EPS as we go through the year?

Rob Michael: So Steve, so I think the best way is 1 anchor on the guidance we gave you on U.S. HUMIRA today. So we said for the first quarter, we said it would be 27% erosion. And so — and that’s going to — the vast majority of that will be priced. And we said because there’ll be 9 biosimilars coming to market in the middle of the year, we would expect more of the erosion to come in the second half of the year. So you have to factor that dynamic into the way you look at the quarters that there’ll be more erosion in the second half of the year for HUMIRA versus the first half of the year. Then you also have to factor in that you’ve got things like aesthetics, we haven’t quite lapped the economic impact yet, right? So in the first quarter, you have a dynamic where you will see aesthetics still down, right?

But when we get into the middle of the year, when we lap it, that also affects your year-over-year growth rates. And then, the underlying performance of the growth platform as we continue to drive those brands, you’ll see those growth rates accelerate. So those are all the things that would factor as you look at the quarterly — really, we’ve given you Q1 and then full year. We haven’t given you Q2, 3 and 4. But that — those are the variables I would look at. There’s not really a whole lot in terms of if you look at investment, for example, that you have to flex. We do tend to see some higher levels typically in the fourth quarter. So, you could — you could look at historically our investment patterns and use that as a proxy. But those are the variables to consider as you think about the first quarter versus the rest of the year.

Operator: It will come from Tim Anderson with Wolfe Research.

Tim Anderson: I’m going to torch you with a couple more questions on the same subject as others. The U.S. HUMIRA erosion guidance of minus 37% in ’23. How much of that is price versus volume? If I look at what your Q1 U.S. HUMIRA erosion is, so the guidance is minus 27%. Given that volumes for HUMIRA are, call it, 5% positive, that would suggest the price cuts may be in the 30% to 35% range. So can we triangulate off of the Q1 guidance to understand what percent of that minus 37% comes from price? And then the second question, again, goes back to 2024. I know there’s lots of uncertainty on the exact rate of erosion for HUMIRA ’23. But if you hit that minus 37% right on the nose, would 2024 erosion likely be slower or faster than net minus 37%.

Rob Michael: So Tim, on your question related to price and volume. The way to think about it is in the first half of the year, the 27% in the first quarter, is the vast majority of that is price, right? So there is some volume impact but not very much. it’s in the second half, what you’ll see is in the second half, the overall erosion will step up and think of it as equivalent between price and volume because you’re going to have — we know we’ll have rebate rates in some cases, increasing as well as the biosimilars coming to market, we expect to see more volume erosion. So as you think about — as you’re trying to triangulate the price volume with the guidance you’ve given, 27% vast majority’s price, second half of the year, you’ll have some more volume kicking in. That’s I think the best way to think about the price volume split. And then your question on ’24, is your question in terms of the percentage or the absolute percentage ?

Tim Anderson: So, if you hit the minus 37% this year which is your guidance for U.S. HUMIRA, the rate of erosion in ’24 would be greater or less than that 37%?

Rob Michael: So we’re not going to give you a 2024 guidance, Tim. I think the way to think about ’24 is we would expect to see additional price but albeit not at the same level as ’23 and more volume coming through because you’re going to have up to 10 biosimilars in the market for the full year. So we would expect to see more of a volume impact in ’24 that we would expect to see in ’23.

Operator: It comes from Chris Shibutani with Goldman Sachs.

Chris Shibutani: You previously commented about the operating margin trajectory of ’23 into ’24. I believe characterizing them is basically flattish. Is that still the case? And then across the immunology category broadly, we’re seeing some — a lot of cross-currency mix dynamics, clearly, with your portfolio being part of that. What is your expectation about the potential for some of the newer mechanisms that are emerging with clinical data. Are you keen to figure out whether you want to invoke those as part of your portfolio? What do you see the outlook for novel mechanisms, given that we’re going to have some biosimilars to some of the most standard of care approaches PNSIL-23.

Rob Michael: Chris, this is Rob. I’ll take your first question. I think for modeling purposes, I would expect operating margins stay roughly at this level in ’24 and then begin expanding again in with our return to robust sales growth. I think the pace of that expansion will depend on investment needs as we will always prioritize R&D and SG&A investment to drive long-term growth but that’s the best way to think through ’24 and then what the operating margin will look like in ’25 and beyond.

Jeff Stewart: And Chris, it’s Jeff. I’ll maybe kick off on your immunology question and then ask Tom to comment on some dynamics as well. So it is very, very clear that certainly in the midterm, the most excitement across these immunology categories are for SKYRIZI and RINVOQ. It’s quite striking. And I think Tom mentioned there’s still incredible interest in a next wave of dermatologic indications that follow on for atopic dermatitis that he highlighted. And really, as I noted in my remarks, I mean, the amount of excitement around the IL-23 and particularly our IL-23 across these indications is really profound. Now having said that, we are watching the competitive landscape for some maybe potentially some novel orals. We don’t see them as major players.

As we look deeper in the pipeline, we can see that there is the possibility for combination use of novel biologics or biomarker-driven approaches, particularly in IBD. And we monitor those very carefully as we look at our long-range plan. And Tom, I don’t know if you want to address some of the things that are back in our pipeline in terms of immunology.

Tom Hudson: Sure. I mean I think the — I just want to start saying that with SKYRIZI and RINVOQ really raised the bar in terms of efficacy and you see it in mucosal healing, for example. So the bar is getting higher and we will continue to do that. But even to show that we’re raising the bar, we’re also going to do — we’re going to read out head-to-head studies this year with STELARA and Otezla. So another way to kind of show that what we have is really very profound in terms of responses we’re seeing with patients. And we continue — I mean, honestly, we look at the field. We look at competitors. We’re hearing data of S1P1 inhibitors but the data appears to be less effective based on a number of patients which are discontinuing treatment and the signals that we see cardiovascular and others that are similar to what we’ve seen with previous ones.

So I mean, again, without having seen the data, it’s all difficult to kind of predict how they’ll be able to do accept that our data with RINVOQ and SKYRIZI are very strong, durable and again, very strong at the level of endoscopy also. So we think we have already a competitive edge. We continue we’ll see PMR data later this year. We have talked about our RIPK1 inhibitor, again, from the coal healing that’s in the clinic right now. We’re looking at additional indications. So over time, obviously, we’re going to look at additional mechanisms. But not necessarily just pushing down on the same cytokines as JAKs but looking at other target pathways of things that happen in the scan or in GI, again, mucosal healing being an tool pathway. And this is where we think a combination of our immunomodulators like RINVOQ and SKYRIZI with other mechanisms will combine well to give even more profound responses.

Operator: It comes from Colin Bristow with UBS.

Colin Bristow: For all the helpful color so far. So maybe a broader question just with regards to HUMIRA biosimilars. I just I’m curious like, what is the broader impact you anticipate on the I&I market just in terms of net price has been sort of a question we’ve been getting a lot of people are trying to wrap their heads around — and then maybe just one on your CF triple. I know that the trial is ongoing. Can you give us an update here? How is the progress? Should we still expect data later this year?

Jeff Stewart: Yes, I’ll take the one on the immunology marketplace. I think that the impact overall in the category for net price would be modest. And I think a lot of it has to do what Tom and I’ve discussed before which is the — just the pure profile of some of these agents particularly SKYRIZI and RINVOQ and either others in the pipeline that are coming. I mean they really are setting different standards of care versus what they’ve seen in the past. And certainly, the physicians and the payers are recognizing this. I’ll give a really quick example on 1 of our major products which is RINVOQ. I mean RINVOQ, based on the label changes that have taken place is already a post-TNF type of dynamic. And so the pricing is going to be the pricing there’s no incremental ability to step it, for example.

The other thing I would note is on SKYRIZI, we have 4 head-to-head trials against all the major competitors and another one coming with Otezla, as Tom noted. So you start to see that level of performance, whether it’s against STELARA, multiple TNFs. Otezla, as I said, that’s pending here. And it just becomes very clear that you’re just going to achieve much higher levels of clearance and relief. So we feel pretty confident that the pricing impact over time, particularly in the U.S. market will be very modest. And certainly, we can navigate that based on the power of the performance of the portfolio.

Tom Hudson: This is Tom. I’ll just answer about the cystic fibrosis program. Again, this program continues. And just to remind you, we’re working on a triplet and where we believe that 2 of the 3 components of — for this drug, this triplet, we have best-in-class assets. But we were looking for another part of the triple called the C2 corrector, where last year, the previous ones basically didn’t give the meaningful improvement we were expecting in FEV1 sweat chloride. So we’ve actually, in our discovery groups, continue to develop new ones. In the last year, we’ve moved our ABBV-576 forward. in SAD in Phase I studies. We continue to see these, again, safety, high exposures, good PK, things that with — if you combine with our preclinical data, makes us think it will, it has a potential to be best-in-class — and that’s triplet again with — is — first of all, to being tested, we’ll have data this year to actually show how they behave together.

And later at this part of this year, I’ll be able to give an update.

Operator: Our next question is from with Credit Suisse.

Unidentified Analyst: Trung from Credit Suisse. Two, if I may. So I was just wondering on your thoughts more broadly on the pricing dynamics in the EU and U.S. So in the EU, you recently exited the U.K. pricing agreement. In Europe, it does feel like there’s — it’s just becoming an increasingly complicated pricing environment. There are a number of reforms being proposed in Europe. So I guess my first question is, is do you see these changes being material or any headwinds to you in your growth ex U.S.? And then secondly, can you just perhaps talk about your reasons you decided not to renew your membership for pharma and bio. How are you going to remain engaged in D.C. and have a voice when it comes to things like IRA and pricing controls.

Jeff Stewart: Yes. Thanks for the question. I’ll take the first one there in terms of the EU. We do see some movement there, particularly in the, let’s say, industry tax and I’ll comment on the so-called VPaaS in the U.K. In some ways, whether or not we were in that voluntary program or outside of the voluntary program, the impact is about the same. And frankly, it was a policy decision because we really think that the U.K. government needs to reform that VPaaS. They didn’t plan properly for how things might dynamically evolve in the U.K. and it’s a very substantial part of the revenue now that is causing problems, I think, across all of the company. So it was a position of policy position, net neutral. It didn’t matter, frankly, whether we were in or not and the U.K. is a relatively modest business for us.

We are seeing perhaps more importantly, some changes in the German law, as you’re probably aware of. And that is, I think, a modest net pressure that will come in Europe in Germany, in particular, because there’s the move, as you may know, from 1 year of free pricing to 6 months. There’s a modest increase in rebates, for example. So we do see some austerity impact. But on the bigger scheme, it’s — I wouldn’t say it’s material to our growth platform that we’ve been discussing.

Rob Michael: And Trung , this is Rob. In terms of international prices, I mean, typically, we see year-over-year decline of low to mid-single digits and that’s the way we’re modeling it for ’23 as well.

Rick Gonzalez: And then on pharma, this is Rick. Obviously, every year, we evaluate any kind of significant investment that we’re going to make. And we make a decision as to whether or not we believe that investment is appropriate and is going to have the right level of return at that point in time. And ultimately, we made the decision around pharma based on that. We have a very significant government affairs group that’s been active and been in place ever since we came into existence. Back in 2013, we’ve grown that organization. We did grow it somewhat this year as well in anticipation of not being part of pharma. We plan on being active as we have been in the past to try to appropriately advocate for things that we think are appropriate for patients.

And I think that group is quite capable of being able to do that. And I would tell you that at a point in the future, we might decide to go back into pharma. But at this point, we’ve made the decision that we think that investment could be used elsewhere to be more effective. It’s as simple as that.

Operator: Our next question is from Geoff Meacham with Bank of America.

Geoffrey Meacham: I appreciate all the perspective on guidance. I just had a follow-up on it. Rick, on your comments on the HUMIRA scale for starting next year in the U.S. I think when you look at other geographies, international revenues, you’re still seeing double-digit declines after 4 years or so. Maybe just give us some context for what you’re seeing there broadly versus what we could expect for the U.S. And just to be clear, when you see next year the impact from all the HUMIRA biosimilars, how much do you think that biosimilar STELARA may play a role here when you look at your assumptions for HUMIRA erosion? And then second question, just on the BD front, you guys talked about some of the therapeutic categories that you’re interested in.

But with the appetite to expand to expand the menu here and to say more orphan indications, I think across the landscape, some companies in the I&I space are getting into more niche indication. I wasn’t sure if that was something that you guys would consider?

Rick Gonzalez: So I think on the HUMIRA tail, just to maybe clarify what I said is I would expect that as we move through 2024 then in 2025 and 2026, we would start to see a more stable tail for HUMIRA. In other words, we’re going to see erosion in 2024. I want to make sure I didn’t somehow communicate that, that wasn’t the case. So if you look at OUS, I think what’s probably deceiving to you is you had different countries going biosimilar at different periods in time. So you can’t necessarily look at that as an analog because it’s so heterogeneous in the year that those countries went biosimilars. So you are correct. Yes, it is still experiencing double-digit decline but it’s been driven by the fact that those countries have not — some of those countries haven’t reached stability yet.

But typically — and the U.S. market is a little different because you have all a large number — you have a small number of large payers who drive the bulk of the activity in this market. So, it’s more like some of the countries that did other kinds of government-wide activity, like in Germany as an example. And there, we do see after a couple of years, we’ve seen stability. So I think what’s misleading you is you’re looking at the overall number but you’re not factoring into that, the fact that these countries went biosimilar across a number of years.

Rob Michael: Jeff, this is Rob. Just to add to that. So if you just look at this year, so about half of the erosion is going to come from newer markets like Puerto Rico, Canada and Mexico. So that, as Rick mentioned, we have different waves. And so you’re still seeing some of those waves come through. You also have some volume going to new agents like SKYRIZI and RINVOQ, right? So that’s something to keep in mind that that’s a dynamic that’s also playing out for HUMIRA in those markets. And then you typically see negative price trends in international markets, again, low to mid-single digits. So you’re going to see some level of pressure there. So those are all factoring into the year-over-year on international HUMIRA something to make sure you’re keeping in mind.

Jeff Stewart: And if you look at the STELARA dynamic with the biosimilar, I think there’s a couple of dynamics that we’re watching. And it does go back to my prior comments over the clinical differentiation. The first is that there will be less biosimilar competitive intensity against STELARA. Certainly, we’ve not seen anything like the 9 that we were — 9 or 10 that we’re going to see on HUMIRA. And so — and that price point is quite high actually. If you look at where Stellar is now with the branded program. Now I think maybe more importantly, as we’ve highlighted before, we’ve anticipated that entry. And certainly, in Crohn’s, we have an ongoing head-to-head trial against STELARA that will read out towards the end of the year.

We plan on putting that into promotion if and we believe it will be positive, particularly what we’re studying which is that endoscopic endpoint which is really becoming the standard in the gastroenterology space. So we think we can carry quite well with the ultimate arrival of that IL — the 12/23 versus our Pure ’23. So I hope that helps.

Rick Gonzalez: I think on your third question, again, what tends to drive our BD strategy is the long-term strategic road map that we put in place across the branch. So if you think about it, you mentioned immunology as an example. I would say in immunology, we have 2 fundamental objectives that we’re trying to drive. There are still areas within immunology, where we believe we can significantly raise the effectiveness of the therapies that are used on patients to drive higher levels of remission or higher levels of endoscopic healing. In other words, better clinical outcomes within the areas that we’re in. And so we have a tremendous amount of effort in those areas to bring next-generation assets or as Tom mentioned in his comments, there are opportunities to potentially combine 2 mechanisms together to achieve that level of therapeutic benefit.

But then we look outside those areas at the adjacencies. And we look for where are the opportunities for us to be able to bring in either an existing mechanism or something we can either develop within our own discovery group or something that we can acquire on the outside as a mechanism that we don’t currently have. But we tend to look for where there are areas of large unmet needs and relatively significant patient populations. So, I use 2 examples to illustrate. Vitiligo. Vitiligo is a disease that’s very prevalent. There aren’t good therapeutic options in it today at all. We do believe there are mechanisms that will allow you to effectively treat vitiligo. If those are effective, that could be a very significant opportunity overtime. Alopecia is another good example of that.

So that’s how we focus BD in these areas. That’s not to say we would never look at a more much opportunity or an orphan opportunity but I wouldn’t say orphan is something that is core to our strategy.

Operator: It comes from Robyn Karnauskas with Truist.

Robyn Karnauskas: It was great with all the color you’ve given. I just had some — I want to follow up on, you mentioned Vitiligo. With the competition with topical rux which might have a first mover advantage and then they have an oral as well in Pfizer. How do you see the opportunity for you in vitiligo for RINVOQ? Can it compete? And then my second question last earnings call, you highlighted your GARP TGF beta. So that’s 151. And I know there’s been a lot of cardio-tox in the space. So what gives you some confidence what features and what indications, like how do you focus on this? And how do you view the competition profile?

Rick Gonzalez: On vitiligo, maybe Jeff and I will tag team on it. I would certainly say a topical has a place but it is difficult for people that have large areas of their bodies that are impacted by something like vitiligo for a topical to be a manageable therapy for those patients. So an oral for those patients that have more severe disease typically has greater benefit and frankly, better compliance among those patients which ultimately gives you better clinical outcomes. So I think the RINVOQ will stack up against whoever the competitive alternatives are based on the data. Based on how we’ve seen RINVOQ perform in other areas, I think we feel pretty good about what the potential is. But the data will speak for itself, see what the data looks like Jeff and Tom, would you add anything?

Jeff Stewart: Just to build on that. When we look at the valuation of, for example, that indication or HS or alopecia which again are those derm oriented indications that will follow on pretty quickly in the middle of the decade on top of atopic dermatitis. We do exactly what Rick highlighted. We will segment the patients based on the body surface area. We know that the topicals will be important for a certain percentage of population. For example, if it’s maybe highly located to the face, that might be more appropriate, at least as the first course of action. But we do believe that in almost all indications that we’ve looked at for RINVOQ, it just performs exceptionally well in the clinic. And we would anticipate that as well above a base case scenario.

Perfect example is Crohn’s disease. There will not be another JAK inhibitor in Crohn’s disease for the United States just because they just don’t work. And you have spectacular results with the selective JAK with RINVOQ. So We take that all into that competitive context all into our calculations as we look forward to return for those future derm indications.

Tom Hudson: If I can just continue with. I mean, we will have readouts for our Phase II study this year and we’ve mostly been looking at those cases where there’s more extensive body coverage disease — or the face. So I think it would be a different — it’s a much better to take an oral than a cream when you actually have significant body coverage. Again, we’ll see the data, we will report on another quarter call. Thank you, Robin, for the second question. Yes, TGF-beta is a known tumor suppressive pathway and people have tried to drug it to increase the response to immunotherapies. The first-generation TGF-beta because the target is so many parts of the body, you actually have effects, the cardiovascular effects having related to the TGF-beta activity in some of the endothelial cells in the valves and so on of the heart.

Here, we’re using GARP as our target. GARP is actually a receptor for TGF-beta that’s called latent inactive that GARP sound only on Treg cells, a little bit on some fiber some store sales but it’s not some in the heart or other tissues. That’s what gives us our safety profile and the ability to causing a suppression on Treg cells found in tumor cells as opposed to other places in the body. So that we felt from the beginning was the attribute we needed to go to target this pathway would be something that will be tumor selective and that’s what we’ve been able to see so far.

Rick Gonzalez: She asked about what tumors potentially.

Tom Hudson: Tumors. So in our — initially, we focused on tumors. So this pathway is found on almost every solid tumor has some subset tumors which express TGF-beta and GARP. We started off thinking that we’d do a Phase I SAC study which we did well that we will expand. And we had picked liver and bladder because we saw a lot of TGF-beta pathway in those indications. And we also — although we knew there was 7 CRC, we saw in patients in our Phase I study which were unselected in terms of tumor type. We saw responses. So we’ve actually continued expanding studying CRC but we did see responses in liver cancer where we expected to see it based on expression of TGF-beta. We did see it in bladder cancer and we’re expanding in those indications at this point.

Given the fact that I said earlier that we TGF-beta in all types of tumors, both tumors called hot or cold, we’re actually expanding in other tumors to get signals right now. And again, we have we’ll have baskets to actually continue to explore its indication space. But right now, we’re expanding when we’re going to Phase II dose rating studies that’s indications where we’ve actually seen data in our Phase I study.

Operator: It comes from Simon Baker with Redburn.

Simon Baker: Two, if I may, please. Just going back to U.S. HUMIRA. Giving us the expected erosion is extremely helpful. It’s also extremely impressive that you confident enough to give a point estimate for the percentage erosion in ’23. So notwithstanding that, I wonder if you could give us what the likely pushes and pulls are. Is this something where we should be thinking more about the being upside risk due to inability of those additional generics biosimilars to supply the market. So any color pushes and pulls there and also into 2024 and your confidence around the erosion curve in ’24? And then a question on tax. One question topic that’s been raised by some of your peers has been an impact from the OECD minimum global tax rate initiatives in ’23. Your guidance would suggest that isn’t a factor for you. I just wonder if you could give us any color on when and if you expect those initiatives to impact your tax rate?

Rob Michael: Simon, this is Rob. I’ll take your first question. So when we give guidance, we typically give approximate assumptions and we do use point estimates. We don’t typically give product level range. So it has been our practice. So we said approximately 37% erosion for U.S. HUMIRA. We have confidence in that number, obviously. But I think in terms of the pushes and pulls, it’s really going to be about volume erosion, right? I think that’s — if you think over the course of the year, we made assumptions around volume erosion. We have good visibility of the price. Now it’s a question of what will the volume erosion look like? And obviously, as we go through the year, we’ll update you on that.

Scott Reents: This is Scott. I’ll give you some thoughts on the OECD question that you asked regarding tax. So you’re right. For 2023, we do not see any impact from this. In our view, there’s a lot of things to be worked out with respect to the global minimum tax you mentioned. We have, in the U.S., as you know, a minimum tax we see ultimately this OECD tax being a top-up on that if that does occur but there’s a lot of details to be worked out and we wouldn’t anticipate any impact there until 2025, if there is an impact.

Operator: It comes from Navann Ty with BNP Parabas.

Navann Ty: I have 3 quick follow-ups, please. The first 1 on aesthetics, in addition to the macro impact. Are you seeing or do you expect increasing competition from your smaller competitors, DTC campaigns and new products? The second question is on HUMIRA. Was AMGEVITA in line with your expectation. And the third follow-up is on capital allocation. So can we think of 2x as a soft net leverage target which is relevant for AbbVie to consider material business development.

Rick Gonzalez: Carrie?

Carrie Strom: I’ll take that first question on aesthetic competition. So in terms of U.S. BOTOX Cosmetics, this is a product that’s around for 20 years and has based increased competition and still commands market-leading market share in the high 60s. And we know though that the competitive market will expand as new entrants are coming and have entered and in terms of a revamped toxin at the end of last year. What we’ve seen in the aesthetics market is that, of course, customers are going to try these new products. It’s highly kind of newness driven and there’s a novelty factor and trial and competitive trial is to be expected. And what we see is that these products and past aesthetic launches that we’ve watched, the share ramps for the first 12 to 18 months and then tends to stabilize.

And so, of course, we don’t underestimate any of our competitors. And so in 2023, we are modeling what we think is a competitive amount of share erosion in terms of our Botox business. And we’d expect that in ’23 and beyond that U.S. BOTOX cosmetic will continue to be the clear number 1 market leader. And the new toxins that enter the market will be competing for their position number 2, 3 or 4 in our customers’ offices.

Jeff Stewart: And it’s Jeff. On your comment on AMGEVITA, the range of pricings that were released were not really a surprise. There’s been some external thoughts that this is of interest where there were 2 different AMGEVITAs, 1 high WACC and on low WACC. But again, we’ve seen this across very different categories and studied it very carefully, as you would expect. So we’ve seen variably priced WACC products in our own HCV market with authorized generics from competitors. We’ve seen it in the diabetes space across multiple competitors, including biosimilar competitors. And certainly, with the — with Amgen and the other segments of their own business. They were often moving around the list prices as well. So all in all, within the range that we would expect from Amgen. Yes.

Rob Michael: This is Rob. I’ll take the question on net leverage. So the 2x is — think about it as our sustainable target. So as long as there’s a path back to net leverage of 2x, could take us in some cases, it could take 2 to 3 years to get back to that. But as long as there’s a path, a very clear path to get back to net leverage of 2x, that’s the best way to think about how we would evaluate it.

Operator: Our final question will come from Gavin Clark-Gartner with Evercore ISI.

Gavin Clark-Gartner: Wanted to confirm if you were planning to submit the Imbruvica plus Venclexta frontline CLL combination to the FDA following the ASH this year? And then on 951 in Parkinson’s, we saw top line data from competitors from last month. I don’t have the full data yet. One thing that sticks out is that they have lower discontinuation rates. So just wondering if there’s any insight on devices or trial design that may explain this.

Rob Michael: It’s Roopal. I’ll take those. So for the ISV that you referenced, we have that in Europe and I think you’re talking about the ASH data, overall survival. There as it clears couple of years is 0.5% or less and the PFS still stays low. At this time, we’re not submitting here at the FDA. They would like to see a little more prospective data in another trial setting. So that’s the hype. On 951, this is interesting on the competitors you bring up. So the when you run these patients in, you could have discontinuation rates. And if you include them or not include them, it’s going to impact what happens post run in. So for example, when you see our data set, we count the run-in discontinuation and post run-in as you get into the main part of the trial.

So you see that in the 20 percentile range or so. And that’s fairly consistent with what you would see with a subcutaneous infusion. And it’s not clear to us how that data, as you’re speaking about is reported. Also, we don’t know if that’s more than 1 injection is that 2 injections and is it rotated daily. I can tell you about 951. We have dosing exposure that gets up to DUOPA unique from DUOPA to 24 hours. It’s a single injection and you can leave it in for 72 hours.

Liz Shea: Thanks, Gavin. That concludes today’s conference call. If you’d like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us.

Operator: This does conclude today’s conference call. We thank you all for participating. You may now disconnect and have a great rest of your day.