AbbVie's Gonzalez Calls Break-Up Proposal Rational, But Premature

CEO says the idea of forming one company around Humira and its earnings and another around the R&D pipeline holds merit but he wants to wait to see the outcome of US tax reform, which could address some of AbbVie's issues.

Every AbbVie Inc. earnings call since its inception in 2013 has included a significant focus on the maturing autoimmune mega-blockbuster Humira (adalimumab), far and away its top-seller, and what the firm would do next. During its first quarter earnings call April 27, Chairman and CEO Richard Gonzalez both acknowledged and swatted away a suggestion that the company split into two – one for the commercial Humira business and another for its R&D pipeline.

Itself a spinout of Abbott Laboratories Inc., AbbVie was built around the pharma business – with Humira and a few other commercial products to offset the costs of developing a significant pipeline – while Abbott focused on the medtech and consumer businesses. Among its big pharma brethren, AbbVie has seen Pfizer Inc., in particular, juggle the possibility of a split-up or divestment of certain businesses.

During the call, Jami Rubin of Goldman Sachs asked Gonzalez to ponder whether separating out Humira, which presents a double-edged sword of huge revenues but near-term biosimilar competition, might allow a possibly undervalued pipeline to be viewed on its own merits. During the first quarter, Humira accounted for 63% of AbbVie's net revenues with global sales exceeding $4.1bn, down about 4% from nearly $4.3bn the prior quarter, but still a 15.1% increase year-over-year, including a 22.8% increase in the US. (Also see "AbbVie’s Cancer Expansion Is Paying Off" - Scrip, 27 Jan, 2017.)

Amgen Inc.'s ABP-501 obtained FDA approval last September as Amjevita, and was granted a positive opinion by the EU's Committee for Medicinal Products for Human Use (CHMP). (Also see "Amgen’s Biosimilar Adalimumab First To EU Nod But No Launch" - Scrip, 27 Jan, 2017.) But the product has not been launched yet in either market due to ongoing patent litigation by AbbVie. Biomedtracker lists 20 sponsors currently working to develop biosimilar versions of adalimumab. Germany's Boehringer Ingelheim GMBH has a biosimilar BI 695501 under review at FDA.

Gonzalez said emerging tax reform policies from the Trump administration could mean that AbbVie would enjoy better access to its significant offshore cash, which would put it on a more competitive footing with peer companies, especially those based outside the US. (Also see "Promise Of US Tax Reform Simmers, But On The Backburner" - Scrip, 12 Apr, 2017.) "It would certainly give us a lot more encouragement to invest in the US and create US jobs," he said. "So, I find the discussion encouraging, and I think it would be extremely beneficial for companies, certainly in our industry and across other industries."

He called Rubin's proposal "well done" and said he agrees with her thesis "wholeheartedly."

"We have a business that generates tremendous cash flow, and we anticipate that that cash flow is sustainable over the long term," Gonzalez replied. "That cash flow certainly, as it is generated, far outweighs what we would envision … is required for us to reinvest back in the business. We're certainly going to reinvest back in the business as we have historically. But I'd say as we project forward, we would be building cash offshore."

He also asserted that AbbVie is undervalued by the market, both for the contribution of Humira and for the potential of its pipeline. AbbVie expects data readouts from a dozen pivotal studies this year, including JAK inhibitor ABT-494, risankizumab in psoriasis and ABT-414 in brain cancer. Phase III data for '494 in rheumatoid arthritis are anticipated in the next few months, Gonzalez added, and AbbVie also is advancing label-expansion efforts for Venclexta (venetoclax) for broader use in relapsed/refractory chronic lymphocytic leukemia.

In an April 27 note, BMO Capital Markets analyst Alex Arfaei said that despite his growing confidence in AbbVie's strategy to hold down commercial losses to Humira biosimilar competition, he does not think the pipeline offers sufficient potential to offset the eventual losses that will be sustained.

"While we have become more comfortable with AbbVie's IP defenses for Humira, we expect rapid erosion during the biosimilar years," the analyst wrote. "Moreover, we believe that AbbVie can't offset declining Humira sales during the biosimilar years. Therefore, AbbVie will likely trade at a discount to its growth."

Taking an opposing view, however, is Damien Conover of Morningstar, who said AbbVie boasts a "strong late-stage pipeline that should enable stable cash flows over the long term." In his April 27 note, Conover named Venclexta, ABT-494 and risankizumab all as future blockbuster sellers.

Major M&A Not Needed, Gonzalez Says

If tax reform beneficial to AbbVie was enacted in 2017 or 2018, one of AbbVie's areas of focus beyond R&D spend would be accessing its ex-US cash to return more of Humira's proceeds to investors, whether by a special dividend or some other method, Gonzalez said.

Rubin followed up by asking if AbbVie would need to undertake further M&A activity to make its pipeline viable as the foundation for a spinout or if bolt-on acquisitions to bolster current pipeline areas would be necessary. Gonzalez indicated no major M&A is upcoming for AbbVie but added that its business development strategy always looks for ways to enhance existing franchises.

"For the most part, I'd say we have the major platforms that we need, so we don't envision the need for large platforms," the exec explained. "We did that work with both Pharmacyclics Inc.[See Deal] and with Stemcentrx Inc.[See Deal], and think we're well positioned for that. There's certainly additional assets that we'd look for, but I'd say they look more like … individual kinds of products or smaller groups of products, would be a higher priority for us going forward." (Also see "Oncology Deal Spree To Continue For AbbVie – Early Cancer Pipeline Outweighs Other Disease R&D" - Scrip, 23 Sep, 2016.)

Later on in the call, asked specifically about non-alcoholic steatohepatitis (NASH), an area of expanded deal-making activity in recent years, Gonzalez said it is on AbbVie's priority list for possible business development.

"What we do from a business development or licensing-and-acquisition standpoint is we have a strategic roadmap within each franchise of what we're looking for," he explained. "I can tell you NASH is on that roadmap. We haven't … found anything yet that has met the criteria that we're looking for that gives us enough confidence for us to pursue an asset. We've looked at a number of different things, and we'll continue to look. We have some internal efforts at an early discovery level, looking at some different mechanisms as well, but those are fairly early on."

In oncology, another growth field for AbbVie, Gonzalez highlighted the ongoing successful launch of Venclexta, while suggesting that recent Phase III failures with velaparib in squamous non-small cell lung cancer and triple-negative breast cancer would not prove a major setback for AbbVie's ambitions in cancer. Nonetheless, the company will not continue with development of the PARP inhibitor in those two indications. (Also see "Veliparib Phase III Failures Strike Blow To AbbVie's Oncology Strategy" - Scrip, 20 Apr, 2017.)

"This program carried a higher degree of risk because we were testing a new hypothesis, that hypothesis being whether PARP inhibition enhances chemotherapy-induced DNA damage," Gonzalez pointed out. "While the outcome was not what we hoped for, we have not considered veliparib one of our near-term growth drivers."

Hematology stalwart Imbruvica (ibrutinib) brought in $551m in the first quarter, up 45% year-over-year, and showed strong continued uptake in the first-line CLL setting, the CEO said.

"The most recent market share data indicate that we now hold the leading position in new patient starts in the front-line segment, with more than 21% of patients starting Imbruvica as front-line CLL therapy," Gonzalez said. "And given Imbruvica's duration of therapy, more than 30% of total treated frontline patients now use Imbruvica."

It was another tough quarter for AbbVie's HCV combination therapy, Viekira Pak (ombitasvir/paritaprevir/ritonavir tablets with dasabuvir), which netted global sales of $263m, down 22% from a year earlier, including domestic revenues of just $38m, a 70% decline. But AbbVie holds out hope for its next-generation combo regimen of glecaprevir and pibrentasvir, being evaluated for approval currently in the US, EU and Japan. (Also see "AbbVie Next-Gen Combo Data Further Goal To Target Hard-To-Cure HCV Patients" - Scrip, 20 Apr, 2017.)