Earnings Call Transcript
AbbVie Inc. (ABBV)
Earnings Call Transcript - ABBV Q3 2023
Liz Shea, Senior Vice President, Investor Relations
Good morning and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Rob Michael, President and Chief Operating Officer; Jeff Stewart, Executive Vice President and Chief Commercial Officer; Scott Reents, Executive Vice President and Chief Financial Officer; Carrie Strom, Senior Vice President, AbbVie and President, Global Allergan aesthetics; and Tom Hudson, Senior Vice President, R&D and Chief Scientific Officer. Joining us for the Q&A portion of the call is Roopal Thakkar, Senior Vice President, Development and Regulatory Affairs and Chief Medical Officer. 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 our 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 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 will take your questions. So with that, I will turn the call over to Rick.
Rick Gonzalez, Chairman and CEO
Thank you, Liz. Good morning, everyone, and thank you for joining us today. AbbVie continues to perform exceptionally well. We once again delivered an excellent quarter with results ahead of our expectations. We are now several quarters into the U.S. biosimilar event for Humira and continue to effectively manage erosion. We have been able to maintain significant volume with the majority of the impact to date driven by lower price. Importantly, our growth platform, the base business excluding Humira, which includes a well-diversified portfolio with multiple leading products in highly attractive markets across immunology, neuroscience, oncology, and aesthetics continues to demonstrate robust performance and outperform expectations. This platform, which is the critical driver in our return to rapid growth in 2025 and beyond, delivered strong double-digit revenue growth this quarter, a considerable acceleration from the first half of this year. We anticipate this platform, which is led by Skyrizi, Rinvoq, Vraylar, and Botox will continue to drive significant revenue growth going forward. At the same time, we have several promising R&D programs with the potential to contribute meaningfully in the latter part of this decade and into the 2030s. This includes next-generation approaches in immunology, a focus on bispecifics, ADCs, and novel I-O in oncology, as well as innovative therapies to potentially treat a range of neuropsychiatric and neurodegenerative disorders. In summary, I'm extremely pleased with the continued strong momentum and execution across our business. The growth platform is substantially outperforming our expectations, giving us the confidence to once again raise our financial outlook, including upgraded guidance for floor earnings, which Rob will share momentarily. And further underscoring our confidence in AbbVie's long-term outlook, today, we also announced an increase in our quarterly dividend, which we have grown by more than 285% since our inception. With that, I'll turn the call over to Rob for additional comments on our business performance.
Rob Michael, President and COO
Thank you, Rick. Our results once again demonstrate the strength of our broad portfolio and support AbbVie's long-term growth outlook. We reported adjusted earnings per share of $2.95, which is $0.14 above our guidance midpoint. Total net revenues were $13.9 billion, roughly $225 million ahead of our guidance. The performance of our ex-Humira growth platform continues to be very strong with revenue growth above 12% this quarter, including more than 50% growth from both Skyrizi and Rinvoq, our best in category immunology medicines. We continue to anticipate that these two products will collectively exceed Humira peak revenues by 2027 with robust growth expected into the next decade. Neuroscience also delivered strong performance with operational sales growth of more than 20% this quarter, driven by our leading portfolio for migraine and psychiatric conditions. And lastly, aesthetics performance was highlighted by the return to growth of the U.S. toxin market. This outstanding execution across our well-diversified portfolio gives us the confidence to once again raise our near-term financial outlook. We are increasing our full year revenue guidance by $600 million and have now raised total revenue by $2 billion since our initial guidance in February, including more than $1.4 billion from our ex-Humira growth platform. As a result, we are also raising our full year adjusted earnings per share guidance by $0.25, and now expect adjusted EPS between $11.19 and $11.23. Given the strong momentum of our growth platform, which is significantly outperforming our expectations this year, we are now raising the floor guidance for 2024 adjusted EPS to $11, which is $0.30 better than our previous expectations. This floor guidance continues to exclude any impact from IPR&D expense. As is our typical practice, we'll provide our formal EPS guidance range for 2024 on the fourth quarter call. Finally, today, we are announcing a 4.7% increase in our quarterly cash dividend from $1.48 to $1.55, beginning with a dividend payable in February 2024. Since inception, we have grown our quarterly dividend by more than 285%. In summary, I'm very pleased with the strong execution across our portfolio. We remain confident in our long-term outlook, including a return to robust revenue growth in 2025 with a high single-digit CAGR to the end of the decade. With that, I'll turn the call over to Jeff for additional comments on our commercial highlights.
Jeff Stewart, Executive Vice President and Chief Commercial Officer
Thank you, Rob. We once again delivered strong results across our therapeutic portfolio this quarter. I'll start with immunology, which delivered total revenues of nearly $6.8 billion exceeding our expectations. Skyrizi and Rinvoq continue to demonstrate impressive growth and are now on pace to deliver approximately $11.6 billion in combined sales this year. This performance is especially encouraging, recognizing that we are still in the early launch phase for both assets and IBD, an area of high unmet need where we are very competitively positioned with two complementary assets, each having generated strong response rates and durable remission across our development programs. Skyrizi total sales were $2.1 billion, reflecting operational growth of more than 50%. This robust performance includes further share gains in psoriasis, where we remain the clear market leader, capturing roughly one-third of the total prescriptions in the U.S. biologic market, and approximately 50% of in-play patients who are either new to therapy or switching. Increasing momentum in psoriatic arthritis, where Skyrizi is now the leading in-play biologic therapy in the U.S. dermatology segment, as well as continued rapid uptake in Crohn's disease where we are capturing roughly one out of every four in-play patients. Importantly, we recently announced positive results from SEQUENCE, the ninth and perhaps the most impactful head-to-head study across our development program for Skyrizi and Rinvoq. SEQUENCE is a Phase 3 head-to-head study in Crohn's, which demonstrated Skyrizi's superiority versus Stelara across key efficacy parameters, including impressive, statistically significant differences in both clinical and endoscopic remission. The detailed data from this trial were presented earlier this month, and we plan to share the findings more broadly via our medical personnel and representatives in the field. We anticipate these strong head-to-head results will clearly support Skyrizi as the best in category therapy for Crohn's, which is important for continued rapid share capture. So based on this very positive data as well as our continued momentum, we will be once again raising the full year sales outlook for Skyrizi. Moving now to Rinvoq, which delivered global sales of $1.1 billion, reflecting operational growth of nearly 60% with increasing prescriptions across each of the approved indications. In particular, I am very excited about Rinvoq's growth potential in gastroenterology, where uptake is exceeding our expectations. In ulcerative colitis, Rinvoq is now capturing more than 25% total in-play patient share in the U.S. second-line plus setting, nearly at parity to the current market-leading therapy. And in Crohn's disease, Rinvoq is ramping very significantly. The inflection we are seeing is even faster when compared to our time-aligned launch in UC just last year. Given this impressive momentum in IBD, we will now be raising our full year sales outlook for Rinvoq. Global Humira sales were more than $3.5 billion, down 36.2% due to biosimilar competition. The erosion impact in the U.S. played out largely in line with our expectations this quarter, while performance across our international markets is trending better than expected. Turning now to oncology, where total revenues were $1.5 billion. Imbruvica global revenues were $908 million down 20% and consistent with our expectations. Venclexta global sales were $590 million, up 14% on an operational basis with strong demand for CLL and AML across our key countries. The U.S. launch of epkinly in third line plus DLBCL is also tracking well with commercialization also now underway in Europe and Japan, following the recent respective approvals. In neuroscience, total revenues were more than $2 billion, up 22% on an operational basis. Vraylar continues to demonstrate robust growth. Global sales of $751 million were up 35.4% and we have seen a significant uplift in new prescriptions across all indications, following the approval as an adjunctive treatment for major depressive disorder late last year. Our leading oral CGRP portfolio for migraine contributed $365 million in combined sales this quarter, reflecting growth of nearly 65%, as we continue to see strong demand for both Ubrelvy and Qulipta. Atogepant was also recently approved as a new therapy in Europe branded as Aquipta, where it is the only once-daily oral CGRP for prevention of both episodic and chronic migraine, further strengthening our competitive product profile and long-term growth opportunity. Lastly, total Botox Therapeutic global sales were $748 million, up 7.4% on an operational basis, reflecting momentum in chronic migraine as well as other approved indications. So overall, I am extremely pleased with commercial execution across the therapeutic portfolio, especially with our growth platform, which is demonstrating strong revenue growth. And with that, I'll turn the call over to Carrie for additional comments on aesthetics.
Carrie Strom, Senior Vice President, AbbVie and President, Global Allergan Aesthetics
Thank you, Jeff. Third quarter global aesthetics sales were approximately $1.2 billion, an operational decline of 4%. In the U.S., aesthetic sales of $759 million were roughly flat to last year as growth for Botox Cosmetic was offset by declines in other brands that continue to be impacted by lower consumer spending related to inflationary pressures. U.S. Botox Cosmetic sales were $388 million, an increase of 5%. We are beginning to see a recovery in the U.S. toxin market, which posted positive year-over-year growth in the third quarter following three consecutive quarters of declines due to economic pressures. Botox continues to perform very well despite increasing competition. It remains the clear market leader with a strong and stable share, and we have seen little to no share impact from new competitive entrants. U.S. Juvederm sales were $116 million in the third quarter, a decline of 6.4% versus prior year as recovery in the facial filler market continues to lag the cosmetic toxin market. The filler market is improving, however, as a higher-priced, more deferrable procedure relative to toxins. The segment of the aesthetics market continues to be suppressed by lower consumer spending. In the third quarter, the U.S. facial filler market was down low teens percentage compared to the prior year. Juvederm remains the market-leading facial seller in the U.S. and share was stable in the quarter. While the U.S. facial injectable markets continue to be impacted by lower consumer spending in this inflationary environment, we are seeing signs of stabilization and even a return to growth in the cosmetic toxin segment. This gives us confidence in a stable to improving outlook in the U.S. as we end this year and enter 2024. Internationally, third quarter aesthetic sales were $480 million, representing an operational decline of 9.7%. As anticipated, year-over-year performance in the quarter was impacted by a shipment timing benefit we experienced in the third quarter of last year. Results were also impacted by softening economic conditions across major international aesthetic markets, primarily China. Despite the economic pressures that are currently impacting our aesthetics portfolio, we remain very confident in its long-term growth outlook. In September, we began launching Skin Vive in the U.S., and in the next few years, we plan to launch new indications for Botox in the lower face segment, and our novel fast-onset, short-duration toxin BoNT/E. In addition to our R&D programs, we have a robust Alle technology pipeline, which will bring new tech products into the U.S. market to help our customers acquire, retain and cross-sell more aesthetic patients. Our strong leadership positions in both cosmetic toxins and facial fillers combined with the significant investments we're making to drive market acceleration will position us for strong growth going forward. With that, I'll turn the call over to Tom.
Tom Hudson, Senior Vice President, R&D and Chief Scientific Officer
Thank you, Carrie. In immunology, we had two important milestones in the third quarter for Skyrizi in inflammatory bowel disease. Following completion of the Phase 3 maintenance trial in ulcerative colitis, we submitted our regulatory applications for Skyrizi in this indication in the U.S. and Europe with approvals anticipated in 2024. We also recently presented results from the SEQUENCE head-to-head trial comparing Skyrizi to Stelara in patients with moderate to severe Crohn's disease. We're extremely pleased with how Skyrizi performed in this study, which enrolled very difficult-to-treat patients who all failed anti-TNF therapy. Skyrizi met the primary and all secondary endpoints in the trial, demonstrating clear superiority to Stelara on all endpoints at week 48 and with a more than doubling of effect in endoscopic remission at 32% for Skyrizi versus 16% for Stelara and endoscopic response at 45% versus 22% for Stelara. Furthermore, steroid-free clinical remission was 61% for Skyrizi versus 40% for Stelara. So these compelling head-to-head Crohn's data combined with the additional indication approval for ulcerative colitis expected next year will further position Skyrizi as a highly effective, durable, safe, and well-tolerated treatment option for patients with moderate to severe inflammatory bowel disease. We continue to make very good progress with the second wave of Rinvoq development programs as well in addition to the ongoing Phase 3 programs in GCA, lupus, and HS. We recently began the Phase 3 program for Rinvoq in Alopecia Areata. We also recently announced positive top line results from a Phase 2 study for Rinvoq in vitiligo. In this study, Rinvoq met the primary and all secondary endpoints at week 24 and demonstrated a significant improvement in both facial and total body vitiligo scoring measures compared to placebo. Importantly, these results continued to improve through week 52 of the study illustrating Rinvoq's potential to provide significant skin repigmentation to patients suffering from vitiligo. Based on these results, we're advancing Rinvoq to Phase 3 in this indication with studies expected to begin soon. Moving to oncology, where in the quarter, we received approval in Europe and Japan for epcoritamab as a monotherapy treatment for patients with relapsed or refractory DLBCL, having received two or more systemic therapies. These approvals represent important regulatory milestones for EPCO, and we look forward to bringing this new subcutaneous treatment option to patients in these international markets. We also continue to make good progress with the development programs in earlier lines of DLBCL and follicular lymphoma and we look forward to providing updates on these programs as the data mature. In our Venclexta multiple myeloma program, we recently announced top line results of a Phase 3 CANOVA trial evaluating Venclexta plus dexamethasone compared to PomDex in relapsed/refractory patients with a T114 mutation. In this study, the primary endpoint of IR CSS PFS was longer with VenDex versus PomDex but did not meet statistical significance. Accommodation also resulted in numerically higher response rates and longer overall survival compared to PomDex. While the differences in efficacy measures were not statistically significant, we believe the totality of the data shows a benefit with the Venclexta combination and we plan to discuss the results with regulatory agencies. We'll provide updates on the program as they become available. Behind Venclexta, we have several exciting multiple myeloma programs emerging from our earlier stage pipeline. We continue to make good progress with our BCMA CD3 bispecific ABBV-383 and we are nearing completion of the dose optimization work and are on track to begin Phase 3 studies in the first half of next year. At an upcoming medical meeting, we plan to present updated Phase 1 efficacy and safety results as well as monthly administration dose data. We're also making good progress with our next-generation BCL2 inhibitor, ABBV-53, which is currently in Phase 1 studies, and we'll provide updates as the data become available. Now moving to neuroscience, where in the quarter, we received approval for Aquipta in Europe, which is now the only oral CGRP antagonist approved in Europe for prevention of both episodic and chronic migraine. And lastly, in our aesthetics pipeline, we recently announced top line results from a second Phase 3 study evaluating Botox in platysma prominence, similar to results from the first Phase 3 study, all primary and secondary endpoints were met with Botox demonstrating a significant reduction in platysma prominence and vertical neckband. We anticipate a regulatory submission in the U.S. here at the end of the year. In addition to indication expansion for Botox, we continue to advance our novel toxin pipeline. We recently announced positive top line results from two Phase 3 trials evaluating BoNT/E, our rapid onset, short-acting novel toxin in glabellar lines. BoNT/E performed very well in both studies, meeting the primary and all secondary endpoints compared to placebo. BoNT/E was well tolerated, and no safety concerns were identified. We're very pleased with these results, which demonstrate this toxin's rapid onset of action and short duration of effect. Patients treated with BoNT/E showed an improvement in glabellar lines as early as 8 hours following injection and a duration of effect of 2 to 3 weeks. This highly differentiated clinical profile could offer patients a novel option compared to current available neurotoxins. We plan to complete the remaining development work over the course of the next few quarters and anticipate submitting our regulatory applications in the second half of next year. So in summary, we continue to make good progress across all stages and therapeutic areas of our pipeline, and we look forward to several more important milestones in the remainder of this year, including Phase 2 data for Teliso-V in second line plus advanced non-squamous non-small cell lung cancer, which has the potential to support an accelerated approval. Phase 2 proof-of-concept data for our anti-IL-1 alpha beta bispecific antibody, lutikizumab in hidradenitis suprativa, and regulatory approval in Europe for ABBV-951, our novel subcutaneous levodopa carbidopa delivery system for advanced Parkinson's disease. We also plan to submit updated 951 data in the U.S. near the end of the year. With that, I'll turn the call over to Scott.
Scott Reents, Executive Vice President and Chief Financial Officer
Thank you, Tom. I'm very pleased with the momentum of our business. The strong performance we are demonstrating from our ex-Humira growth platform continues to support AbbVie's long-term growth outlook. Starting with our third quarter results. We reported adjusted earnings per share of $2.95, which is $0.14 above our guidance midpoint. These results include a $0.04 unfavorable impact from acquired IP R&D expense. Total net revenues were $13.9 billion, roughly $225 million ahead of our guidance and down 5.8% on an operational basis excluding a 0.2% unfavorable impact from foreign exchange. Importantly, these results reflect double-digit sales growth from our ex-Humira growth platform. The adjusted operating margin ratio was 46.7% of sales. This includes adjusted gross margin of 83.5% of sales, adjusted R&D investment of 12.4% of sales, acquired IP R&D expense of 0.5% of sales, and adjusted SG&A expense of 23.9% of sales. Net interest expense was $398 million. The adjusted tax rate was 15.7%. Turning to our financial outlook. We are raising the midpoint of our full year adjusted earnings per share guidance by $0.25 and now expect adjusted earnings per share between $11.19 and $11.23. This guidance does not include an estimate for acquired IP R&D expense that may be incurred in the fourth quarter. We now expect total net revenues of approximately $54 billion, an increase of $600 million. At current rates, we expect foreign exchange to have a 0.5% unfavorable impact on full-year sales growth. The updated revenue forecast contemplates a full-year sales increase of $300 million roughly split evenly between Skyrizi and Rinvoq, reflecting strong uptake in IBD. The remaining $300 million full-year sales increase is primarily attributed to better-than-expected performance of international Humira and Restasis. Moving to the P&L, we continue to forecast an adjusted operating margin ratio of approximately 46.5% of sales. We now expect adjusted net interest expense of roughly $1.7 billion. And we forecast our non-GAAP tax rate to be approximately 15.5%, reflecting IP R&D incurred through the third quarter. Turning to the fourth quarter, we anticipate net revenues of approximately $14 billion. At current rates, we expect foreign exchange to have a modest unfavorable impact on sales growth. We expect adjusted earnings per share between $2.87 and $2.91. This guidance does not include acquired IP R&D expense that may be incurred in the quarter. Finally, AbbVie's strong business performance continues to support our capital allocation priorities. We generated more than $16.5 billion of adjusted free cash flow, which is net of approximately $1.1 billion of Skyrizi royalty payments in the first nine months of the year. And our cash balance at the end of September was approximately $13.3 billion. Underscoring our confidence in AbbVie's long-term outlook, today we announced a 4.7% increase in our quarterly cash dividend, beginning with the dividend payment in February of 2024, and we remain on track to achieve by the end of this year, $34 billion of cumulative debt paydown since the Allergan transaction, maintaining a net leverage ratio around 1.8x. In closing, AbbVie has once again delivered outstanding results and our financial outlook remains very strong. With that, I'll turn the call over to Liz.
Liz Shea, Senior Vice President, Investor Relations
Thanks, Scott. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, we'll take the first question, please.
Operator, Operator
First question comes from Chris Shibutani with Goldman Sachs.
Chris Shibutani, Analyst
The 2024 earnings guidance, it seems as if you were quite confident heading in that $11 floor. As we await further details from top line and other margin structures, can you maybe identify some of the key push pulls that actually gave you that conviction to go to above and where directionally we should be thinking about the source of further growth on the forward?
Rob Michael, President and COO
Chris, it's Rob. I'll take that question. So since we provided that guidance in February, recall we gave a $10.70 EPS floor to really help investors model earnings regardless of whether the trough recurred in '23 or '24 we've raised growth platform sales by $1.4 billion covering immunology, neuroscience and aesthetics. We're seeing the IBD indications for Skyrizi and Rinvoq very nicely, and we continue to capture more share in their other indications, both Vraylar and our migraine portfolio have outperformed our share forecast and the strong recovery of Botox has led us to raise guidance for aesthetics twice this year. So given the clear over-performance of the growth platform, we decided to raise the floor to $11 ex IPR&D. We hope this provides investors the view of the low end of the 2024 guidance range and also confirms that '24 will indeed be the trough year. And given that we expect to deliver a high single-digit CAGR from '24 to the end of the decade, it should allow investors to value the company with a better growth multiple.
Operator, Operator
Our next question comes from Mohit Banse with Wells Fargo.
Mohit Bansal, Analyst
And I have a question regarding aesthetics. So it seems like you are keeping the guidance here. So the first part of the question is it seems like across the board, there is a 10% quarter-over-quarter decline on all the products. Can you help us understand what's happening sequentially? And then if you are keeping the guidance, it seems like there would be quite a bump in fourth quarter. So how should we think about that?
Rob Michael, President and COO
Maybe I'll start with your question. One thing to remember is that we mentioned in the last call that there were some dynamics in the international market regarding growth rates, where we faced tougher comparisons due to some stocking that happened in the previous year. Additionally, we experience a degree of seasonality in our U.S. business. Keeping these factors in mind, we are very encouraged by the U.S. toxin market's return to growth. Botox is performing well, and we are successfully maintaining our market share despite competitive pressures. On the fillers side, we are noticing a lag in recovery, which can often happen as the price points for fillers are generally higher than for toxins. It’s expected that recovery will take a bit longer in this market. However, we are very encouraged by the trends we observe, especially with the new fillers we've launched, SkinVive and Volux, which are generating positive share momentum. Regarding China, we experienced a strong recovery in the first half of the year, but we have noticed it moderate, and we are closely monitoring this situation. Overall, the rest of our international business is growing nicely. As I reflect on the guidance for this year, we feel we're in a good position and are not overly concerned. We do not adjust guidance for fluctuations of $100 million or less, but should it exceed that, it would prompt consideration. The long-term outlook for this business remains positive; the U.S. toxin market has historically grown in the mid-teens and is still underpenetrated. Market growth is essential to achieving our long-term goals. We have seen the market rebound strongly after economic pressures, and our promotional efforts have proven effective in attracting new patients. Additionally, we have several innovations poised to accelerate growth, such as the master and platysma indications for Botox, which could contribute significantly to revenue. Our novel short-acting toxin BoNT/E has the potential to attract new patients who may have concerns about unnatural appearances, which could greatly stimulate market growth. Furthermore, our pipeline of regenerative fillers is designed to offer both short- and long-term treatment benefits. With these developments, we are confident in delivering substantial growth and achieving our expectation of over $9 billion by 2029.
Rick Gonzalez, Chairman and CEO
Lee, this is Rick. The other thing that you're looking at sequentially, you have to keep in mind is we do Botox today in the fourth quarter. So that elevates revenue in the fourth quarter, and that occurs every year. So if you're looking at third quarter to fourth quarter and trying to understand why is there a big step up, part of that step-up is that.
Liz Shea, Senior Vice President, Investor Relations
Operator next question please.
Operator, Operator
Our next question comes from Chris Schott with JPMorgan.
Christopher Schott, Analyst
Just maybe a two-parter really focused on immunology for 2024. So maybe first on Skyrizi and Rinvoq, I guess, with more of the '24 formula discussions complete, we're seeing some great volume trends. But are you still comfortable that we should expect more normalized price erosion for those two products versus the high single digits we're seeing this year? And then the second one was on Humira for 2024. And I think, Rob, you might have commented last quarter of your comfort with where consensus sits. And again, maybe a similar question with maybe more color about formulary for next year. Is that something you're still comfortable? And just how should we think about dynamics there?
Jeff Stewart, Executive Vice President and Chief Commercial Officer
Yes, it's Jeff. I'll take the first question. We feel very confident as we approach 2024. Given the seven indications we've had over the past 18 months and the nine head-to-head trials I mentioned, we're in an excellent position for Skyrizi and Rinvoq as we move into next year and maintain the strong momentum we're currently experiencing. Regarding pricing, we do not expect a repeat of the concessions we encountered this year, which were primarily due to those seven rapidly introduced indications. Next year, we anticipate just one significant indication for Skyrizi, as highlighted by Tom, which should lead to a more normalized price erosion aligned with industry standards, rather than the high single-digit changes we've observed this year.
Rob Michael, President and COO
And then, Chris, this is Rob. On HUMIRA, I think if you think about the annualization rebates that given the rest increase in the second half of this year, so you have an annualization impact, and the additional rebates to secure parity access next year, really price should be the main driver of the erosion in '24. I mean volume will have an impact, particularly in wax sensitive accounts, but price will make up the vast majority of the erosion next year. And while we're not giving '24 guidance today, as you've mentioned, Chris, I've highlighted the average, it was about $7 billion when I mentioned that was a reasonable expectation for U.S. Humira next year. Now there are a few animals who have forecasted U.S. Humira above $8 billion next year, which is just not a reasonable expectation given the price dynamics.
Operator, Operator
Next question comes from Terence Flynn with Morgan Stanley.
Terence Flynn, Analyst
Obviously, you guys are very well positioned coming out of the Humira LOE in terms of the growth franchise. But I think there's focus from investors on maybe bolstering the pipeline. So as you guys think about M&A and business development, maybe you could just walk us through your latest thoughts and anything in terms of therapeutic areas of interest and stated development.
Rick Gonzalez, Chairman and CEO
Okay, Terence, this is Rick. I'll take that question. Yes, as we evaluate the business, as Rob mentioned, we are very confident in the performance of our growth platform and how we are addressing the biosimilar impact, which bolsters our belief that we can achieve high single-digit growth going forward. From 2025 through the end of the decade, we are in a fortunate position. Unlike many companies in our sector that need to pursue extensive business development to drive their growth, we are not in that situation. Our primary focus is on adding assets that can provide incremental pipeline and revenue growth as we move towards the end of this decade and into the 2030s. Looking at AbbVie's track record, business development has been essential to our growth over the past 11 years. Generally, we have been successful in acquiring assets and making them perform well. A great example is Skyrizi, as well as our acquisition of Allergan, among others. We view business development as a critical tool for expanding our business and solidifying our leadership in these franchises. Our focus remains within our existing franchises. For instance, in immunology, we aim to incorporate additional mechanisms, particularly those suitable for combination therapies, to achieve greater clinical responses in conditions like IBD, rheumatology, and more. We are actively seeking such options and currently have several in development, including Luti and RIPK1, while continuing to explore more assets. We are particularly focused on combination therapy, as we believe it can significantly enhance clinical remission for patients who do not respond to treatments like Skyrizi and Rinvoq, which have performed remarkably well. Oncology is another significant area of interest for us. We are keen on next-generation CAR-T technology and T cell engagers beyond our existing BCMA product. We are very optimistic about this asset's development as it appears to have a best-in-class profile, demonstrating that T cell engagers can be highly effective and more manageable than current CAR-T therapies. In psychiatry, we are looking into additional assets for anxiety and mood disorders and others. We are well-positioned financially to pursue transactions, and it is crucial to find the right opportunities that will enhance the company's value. When suitable assets are identified, we will act swiftly.
Operator, Operator
Next question comes from Tim Anderson with Wolfe Research.
Alice Nettleton, Analyst
This is Alice Nettleton on for Tim Anderson. A question on obesity and its interface with I&I and a lot of other drug categories, frankly, our views that payers have to cover OBD medicines. And if that's correct, it's a big expense, and payers will be looking for offsets. One-off that would be for payers to squeeze other therapeutic areas as hard as they can. An example could be I&I, where there's now a really good product, your own HUMIRA at a much lower price. So we're wondering how much payers might start to force a step edit for products like Skyrizi? It's a relevant question because yesterday, one of the issues Bristol noted with its TYK2 product is step edits and they cite biosimilar Humira as the reason.
Jeff Stewart, Executive Vice President and Chief Commercial Officer
Thank you for the question. It's Jeff. I think it's important to take a step back and consider our overall strategy, which is centered on fundamental distinction, regardless of the obesity issues. Referring to the head-to-head trials, there are nine of them. For instance, when we compare Skyrizi in the context of psoriasis, we demonstrate gross superiority against all other mechanisms in the category. This includes head-to-head comparisons with Humira, the leading IL-17 COSENTYX, the oral Otezla, and Stelara. When payers assess whether to step up or not, there is a medical aspect to our distinctiveness that plays a critical role in influencing their formulary decisions. In contrast, if another product isn't significantly different or matches Humira's efficacy, it may struggle on formularies. Therefore, it's crucial to recognize the unique advantages we possess with both Skyrizi and Rinvoq. Lastly, considering Rinvoq, which is experiencing rapid growth at 60%, all of that growth is taking place in the second-line plus setting, indicating that it has already stepped up. Given these dynamics, we remain very confident that by raising the standard of care, we can effectively navigate any scenarios that arise, whether related to obesity or otherwise.
Operator, Operator
Next question comes from Vamil Divan with Guggenheim Securities.
Vamil Divan, Analyst
I have a couple of questions. First, building on Terence's inquiry about the business development base in your pipeline, can you comment on some of the underappreciated assets that others might be overlooking? Are there any specific assets that you believe have potential upside? Second, regarding the charge you took for Imbruvica related to the Medicare drug pricing program, I'm curious about the amount and the timing of this decision. Why is it happening now? I'm interested in understanding how you expect the losses to unfold and how negotiations may affect this. Additionally, what assumptions can you share regarding the competitive landscape and its potential impact on Imbruvica's pricing?
Rick Gonzalez, Chairman and CEO
Divan, this is Rick. I'll answer the first question, followed by Scott who will address the second question. Regarding the pipeline, as I review it and its development, I wouldn’t necessarily say it’s underappreciated since you may not have access to the same data we do on certain programs. However, we have invested significantly over the past few years to quickly advance the indications for Rinvoq and Skyrizi, which has been our primary focus. At the same time, we have been progressing several other programs. The returns from our investments in Skyrizi and Rinvoq are evident, with their phenomenal growth rates. In fact, in the near future, the combined sales of these products will exceed those of Humira, illustrating their rapid ascent and size. If I turn to our pipeline, we have several substantial programs that are currently progressing and could be significant drivers for the company. We're particularly confident in our 400 program, which uses our topo warhead platform with a c-Met version. The data we’re seeing in colorectal cancer is very promising, followed by exploration in non-small cell lung cancer. This platform shows broad potential for expansion into additional areas, representing a significant opportunity moving forward, particularly around 2027 and 2028. The second program of note is our 383 bispecific targeting BCMA. As previously mentioned, we’re obtaining increasingly favorable data that suggests it has a best-in-class profile with high efficacy, strong safety, and convenient dosing, positioning it well for entering a large market like multiple myeloma. Additionally, our $16 million investment and some of our therapeutic area programs are generating excitement and we expect to receive further data on those next year. The third program worth mentioning is our REGENXBIO initiative in the eye care sector for wet AMD and diabetic retinopathy, which is also yielding very promising data. As this continues to progress, there will be a number of important programs that we expect to share more data on through 2024 and into 2025, allowing the market to better evaluate them.
Scott Reents, Executive Vice President and Chief Financial Officer
Vam, this is Scott. With respect to your question on the Imbruvica charge. So I think a couple of things. As we have signaled in some of our regulatory filings, our last 10-Q, for instance, we had indicated that if we were to be selected in the negotiation process under the Inflation Reduction Act, that there would likely trigger an impairment. And so we had anticipated that this would happen. And so the timing really relates to the fact that under the rules, you have to look at the fair value of that intangible asset with respect to future cash flows. And so the accounting rules would require that we would make that analysis upon selection as we had kind of previewed in our filings. And so we went through the process under that triggering event to determine what the impairment should be. And I would say that when you look at that impairment, the magnitude of the impairment is driven by a number of factors, but really, one of the biggest factors that you're seeing there is it requires you to discount the future cash flow. So as we calculate the future cash flows, looked at what we had assumed was a reasonable assumption on the price, you discount those back. And so that creates part of the magnitude of this adjustment. In terms of the negotiated price that we assumed, I think we're in the middle of these negotiations, and it really wouldn't be appropriate for us to talk about what that is. But we looked at a number of factors, and we think that process is going to play out. Certainly, we will see on February 1 in a private conversation with CMS what they anticipate at least an initial thought on price, but it won't be finalized until September 1 of next year. And so we will see what that price is as the process plays out.
Operator, Operator
Next question comes from Steve Scala with TD Cowen.
Steve Scala, Analyst
I have two questions and one clarification. First, can you confirm what the base year is for the high single-digit revenue growth projected through the end of the decade? Is it 2023, 2024, or 2025? I think it’s 2025, but I would appreciate your clarification on that. Secondly, given AbbVie’s interest in expanding its oncology business, I assume that AbbVie thoroughly evaluated the ADC deal that Merck signed with Daiichi. Can you share what aspects of that deal you found unappealing? Was it related to the product profiles, the pricing, or do you believe you already possess everything you need? Lastly, I want to ask about another company that has adjusted its tax rate guidance following a recent IRS document on Section 174 tax legislation. Do you have any insights on this update and how it does not affect AbbVie?
Rob Michael, President and COO
Steve, this is Rob. I'll take your first question. So the base year is '24. And if you think about it, we signaled that we expect to return to robust growth in '25. And so that high single-digit CAGR really would pick up that first year of robust growth of 25%. If you start in '25, you miss that your growth. So our intention has always been '24 is a base year and that high single-digit CAGR starts from '24 to the end of the decade.
Rick Gonzalez, Chairman and CEO
Steve, this is Rick. I'll take the second question. Obviously, I'm not going to comment on whether we looked at that same transaction and that probably wouldn't be appropriate. But what I can tell you is we knew it was there. So maybe that gives you some idea of our perspective on it. But the reality is, we believe we have what we need with 400. We believe that platform, and we own that platform, we developed it internally. We give us everything that we need in that area. And so it wasn't something that we were looking at. Scott?
Scott Reents, Executive Vice President and Chief Financial Officer
Yes, it's Scott. Regarding the tax legislation, I can discuss our situation. The results are a continuation of the tax reform legislation from a few years ago. The tax rules always carry some uncertainty. This quarter, new guidance clarified certain treatment approaches. Before that guidance, there was some differing opinions among advisors and ourselves on how to implement things. However, we were already aligning with the eventual guidance, which is why there's been no impact on our tax rate.
Operator, Operator
The next question comes from Gary Nachman with Raymond James.
Gary Nachman, Analyst
So first, back to the trough raise in 2024. How are you thinking about spending levels for both SG&A and R&D into the trough year next year to set up for growth in '21 and beyond? Do you have a better sense of where the operating margin might end up next year? And then secondly, Scares and Rinvoq have been doing very well in the IBD indications talk about how much headroom you see for those products in UC and Crohn's with that landscape likely getting more competitive in the coming years? And any updated thoughts on 2025 guidance for those products?
Scott Reents, Executive Vice President and Chief Financial Officer
Gary, it's Scott. I'll start with your question regarding operating margin. So when we've looked at the operating margins we talked about in the past, for '23 and '24, we talked about those being very, very similar. So when you think about the operating margin that we've talked about for this year and next year, it's really about 46% to 47% range. This year, our guidance is 46.5%, and we would expect operating margin in '24 to be very similar to what we're seeing this year. And then I think as a result, roughly the gross margin is going to be in line in '24 with what we're seeing this year as well as the expense profile. So very consistent with this year. And of course, we'll refine that when we come out with guidance.
Jeff Stewart, Executive Vice President and Chief Commercial Officer
Yes. This is Jeff. I want to emphasize your comment about the head space and IBD. The IBD market is very attractive. Historically, we were surprised at how quickly Humira grew when we achieved the UC and Crohn's indications. We're very encouraged about the significant momentum we see. There is a lot of headroom. Contrary to what you might think, patients don’t typically want to switch medications because of the severity of the disease. Physicians have not been able to shift the market much over the years due to the risks associated with moving to another drug that hasn't shown improved benefits for patients. Our confidence is strengthened by our two complementary assets — in the U.S., Skyrizi is positioned in the early treatment lines, while Rinvoq is for later lines, and both have excellent performance metrics compared to the market. We believe our profiles will hold up very well even with future competition. Additionally, our commercial execution is strong as we have dual sales teams in many countries promoting two products with four major indications. Therefore, our ability to maintain market share, even as competition increases, will remain robust. There is significant headroom and unmet need in the market, and we believe we hold the best position for the foreseeable future.
Rob Michael, President and COO
And Gary, this is Rob. Regarding your question about the 2025 guidance, we do regularly update our long-term guidance for our portfolio. We are very pleased with the momentum we are seeing from Skyrizi and Rinvoq. When we last provided guidance for Skyrizi, we projected about $2.5 billion in revenue for IBD in 2025, and $1.8 billion for Rinvoq. Both are showing very positive growth. We are confident in this progress. We will find the right moment to provide a comprehensive update to our long-term guidance. The momentum is evident, and the market reflects it as well. For Skyrizi, consensus estimates are around $11 billion, which is $1 billion higher than our 2025 guidance. This shows the market recognizes our strong momentum, and we will update our long-term guidance at the appropriate time.
Operator, Operator
Next question comes from Luisa Hector with Berenberg.
Luisa Hector, Analyst
To continue with IBD, I just wondered if you could talk a little bit more about the AbbVie pipeline emerging behind Skyrizi and Rinvoq and how we think about that and maybe potential combinations with Skyrizi? And with the recent competitor launch in psoriasis with a label where the FDA has asked to mention anti-TNF safety warnings. I wondered whether the FDA has mentioned anything to you about the review of labor in that regard.
Roopal Thakkar, Senior Vice President, Development and Regulatory Affairs and Chief Medical Officer
It's Roopal. I'll address the question about IBD. We've previously discussed Lutikizumab, our in-house bispecific antibody targeting IL-1 alpha and beta. We've seen data indicating resistance in patients with IL-1 beta signaling to anti-TNF and other biologics. We're planning to explore ulcerative colitis with a potential biomarker approach and consider various combination therapies, including Lutikizumab with Skyrizi, along with other agents and partnerships. We'll also be evaluating an IL-2 mutein. Our strategy involves either identifying a biomarker that indicates high efficacy or pursuing a combination approach for substantial transformative effects. Now, regarding the question about depression and suicidal ideation with an IL-17 class agent that was recently approved, we've noticed similar warnings previously with the IL-17 class, where one asset had a REMS. In contrast, Skyrizi targets IL-23 and we haven't identified any such signals across the data compiled for various indications, nor is that reflected in our label. Our physicians indicate there hasn't been much uptake of the IL-17 agent mentioned, while Skyrizi continues to perform strongly. Additionally, our label does not indicate a high rate of fungal infections, unlike the new IL-17 class. We've also noted that Skyrizi does not lead to IBD, another concern with the IL-17 class. Our dosing schedule entails administration at week 0 and week 4, followed by quarterly doses, whereas the new agent requires five initial doses and potentially more frequent dosing. We're very confident in Skyrizi's position across multiple indications, particularly in psoriasis.
Operator, Operator
Our next question comes from David Risinger with Leerink Partners.
David Risinger, Analyst
Upon your vision for oncology, clearly, the company has compelling assets. But in light of an increasingly complex and competitive oncology landscape, could you just paint a picture of how you see your portfolio evolving and opportunities to acquire assets when it may be difficult to see what's around the corner from, let's say, an emerging oncology competitor in 3 to 4 years?
Tom Hudson, Senior Vice President, R&D and Chief Scientific Officer
This is Tom Hudson. When we refer to 400, we are also considering entering areas beyond lung and breast cancers, where competition is intense, such as colon cancer, gastric cancer, and pancreatic cancer. c-Met is a target present in various tumors, which is why we've developed it with a topo warhead to address a wider range of tumors. We are observing promising data with ABBV-400, even among unselected patient populations in later treatment lines, achieving a 22% response rate compared to the typical 2% to 3%. It's noteworthy that this applies not only to colon cancer; many chemotherapies and treatments for gastrointestinal tumors come with significant toxicity, including high rates of diarrhea. Clinicians are particularly excited about our program due to the low incidence of diarrhea. This not only indicates some efficacy in later lines of treatment but also suggests potential for earlier intervention combined with other therapies to improve effectiveness. There is a significant unmet need in gastrointestinal tumors, and we expect to present more data from our next patient cohort at the end of this year. In colorectal cancer, we will explore different dosages and possible biomarker cutoffs. We are advancing well in this expansive area of gastrointestinal tumors, and our GARP program has shown excellent results in liver cancer, where c-Met is also involved. We have opportunities to explore areas with substantial unmet needs and less competition. Additionally, we are working on other targets such as 706, which is currently in clinical trials, and next year we plan to address two more indications with reduced competition in the antibody-drug conjugate space. Our strategy is to expand our offerings to benefit a larger number of cancer patients. I'll stop there.
Roopal Thakkar, Senior Vice President, Development and Regulatory Affairs and Chief Medical Officer
It's Roopal. Let me add a bit more. You may be reflecting on some of the ESMO data that was presented. I want to mention that we still see potential with Teliso-V, and we expect to have data later this year. What we've already noticed is 50% overall response rates in a biomarker-selected population with EGFR wild type. In contrast, the overall response rates from some of the recent data are around 20% to 30%. We don’t have all the specifics on the various lung subtypes yet, but one strategy is to utilize a biomarker to select the patient population instead of taking a broader approach as seen at ESMO. Additionally, looking at the data, for EGFR mutants in lung cancer, there's higher efficacy in both frontline and second-line treatments, but this comes with a cost, presenting a chemo-like adverse event profile including nausea, vomiting, stomatitis, alopecia, and fatigue. These slight increases in efficacy aren't what patients want. As Tom pointed out with our platform, including Teliso-V, we see an opportunity to combine it with osimertinib, which has a favorable profile. When mutant patients progress, about half of them highly express c-Met, making this combination promising. We're also observing a 50% overall response rate in that segment and plan to initiate Phase 3 next year. Regarding hematology, we discussed 383, which shows best-in-class potential with high efficacy rates and a reduction in adverse effects beyond grade 3 and now targeting grade 2. This could potentially reduce the need for hospitalization. Currently, BCMA dual engagers not only require hospitalization but also a Risk Evaluation and Mitigation Strategy. We are also considering dose spacing potentially every other month. This treatment demonstrates a very favorable profile, and we’re advancing it to Phase 3. We continue to explore various combinations to advance into earlier lines of therapy in multiple myeloma. We are moving towards earlier lines in Phase 3s with EPKINLY in hematology, which is another dual engager. Additionally, we have an asset called 453, our next-generation BCL2 blocker, and a BTK degrader named 101 that is also in clinical trials. We have a comprehensive approach across oncology.
Operator, Operator
Our next question comes from Geoff Meacham with Bank of America.
Geoff Meacham, Analyst
Just have a couple of quick ones, one on immunology. So you guys have evaluated the impact from Humira biosimilars beyond even 25%, is it your view that tail revenues are likely to be better than you initially modeled? And what, if anything, do Stelara, the delay in Stelara biosimilars impact this? And the second question, just on capital deployment. Just given your higher guidance, I know you guys just raised the dividend, but would you also say that the deal capacity is higher? I know you recently raised kind of M&A range and wondering if that's even going higher.
Jeff Stewart, Executive Vice President and Chief Commercial Officer
Yes, Geoff, it's Jeff here. We continue to analyze the tail, and we believe that the Humira tail will become evident around '25 or '26. This assessment is based on international comparisons and our expectations regarding pricing trends. We expect that some patients will remain on Humira, though this will be a small segment, characterized by either low prices or low volume, existing even in a market with interchangeable options. Our strong volume performance in '23 does not alter our outlook on the tail at this time. Regarding Stelara, we anticipate that its biosimilars will not enter the U.S. market until sometime in '25, as recently confirmed. Overall, we see this as a modest net positive for AbbVie, but it is not the main focus of our strategy. Our main strategy centers on the distinctiveness of Skyrizi compared to Stelara, which I have already pointed out.
Rob Michael, President and COO
And Geoff, this is Rob. You're right. We did lift the cap. We had put that 2 billion dollar BD cap in place, although we are rapidly paying down debt. We lifted that at the beginning of this year because by the end of this year, we'll have paid off all the incremental financing from the Allergan transaction. As Scott mentioned, our net leverage ratio is around 1.8 times. I have previously stated that as long as we manage to return to a leverage of 2 times in 2 to 3 years, that's how we're considering our balance sheet capacity. Evaluating the situation, there's nothing in terms of balance sheet capacity that would limit us today from pursuing the opportunities we're interested in. So that's not a limiting factor. Moreover, if we continue to raise guidance and perform more strongly, that just indicates there’s even more capacity. However, at this point, that's not a rate limiter for the types of opportunities we would consider.
Operator, Operator
Our next question comes from Evan Seigerman with BMO Capital Markets.
Evan Seigerman, Analyst
Congrats on the progress. I just wanted to touch on the dividend growth. So at first line, it seems that your dividend growth, while impressive, is slowing a bit relative to other recent periods. Maybe you could help us understand kind of what's driving this dynamic at play? Is it concerns around near-term performance of key products, your Humira erosion continuing next year? Or are you preserving capital for you to help further? Maybe some color on that would be very helpful.
Rob Michael, President and COO
So Evan, it's Rob. We're providing dividend growth in both 2023 and 2024, even though earnings are not increasing. Currently, our payout ratio is in the mid-50s. Over the long term, a good target for the industry is around the mid- to high 40% payout ratio. This means that as our payout ratio increases in the future, we are very committed to growing the dividend. We will continue to grow the dividend, but we expect earnings to grow at a faster rate than dividend increases. For the past couple of years, we've managed to deliver solid dividend growth despite declining earnings. We're committed to growing that dividend, and we anticipate it will increase from here, although not at the same rate as earnings growth because of our current payout ratio. In the long term, we want to provide a healthy, sustainable, growing dividend and are focused on delivering that growth to investors. We're currently in a period where earnings aren't growing, but we expect to return to strong growth and will increase the dividend accordingly, while balancing these dynamics.
Operator, Operator
Our last question comes from Jon Hung with UBS.
Unidentified Analyst, Analyst
I have two questions. First, can you confirm whether the trough in 2024 will be related to sales rather than just costs, given that you mentioned the margins will be the same in 2024 as in 2023? Second, there seems to be a lot of chatter about GLP-1s affecting aesthetics. You've previously discussed fillers and Ozempic face, but I'm curious whether you're noticing any impact on body scope and if this trend is ultimately a positive or negative for your sales.
Rob Michael, President and COO
This is Rob. So clearly, we've communicated a floor for earnings. And Scott previously mentioned that I expect a similar level of operating margin year-over-year. And so you can model the sales accordingly. It should be fairly clear.
Carrie Strom, Senior Vice President, AbbVie and President, Global Allergan Aesthetics
And this is Carrie. For your question around the weight loss products and the impact on the aesthetics business, I mean as we look at the long-term view of this market, we continue to think that anything that gets a subset of patients engaged in their appearance, which these weight loss products can do, that is a positive tailwind for our business. And we hear that from our customers and many of our customers are bringing these GLP-1s into their practice, and they see it as a natural opportunity to cross-sell. Now that said, in the short term, especially in an environment where discretionary spending is pressured and there could be trade-offs for higher-priced products such as fillers or body contouring. Now we're not necessarily seeing that as a driver. Right now, what we're seeing is the broader macroeconomic dynamics. But in the short term, that could be a trade-off in terms of share of wallet. But absolutely long term, this is something that is going to help patients get engaged in aesthetics and be an opportunity for cross-selling.
Liz Shea, Senior Vice President, Investor Relations
And 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, Operator
Thank you, and that concludes today's conference. You may all disconnect at this time.