Abbott Investor Day 2011 – Management discusses company division; interesting bardoxolone Q&A – November 3, 2011

Late last month, Abbott CEO Miles White led Abbott’s investor day with a focus on the company’s long- term strategy as it separates into two separate publicly traded companies: one in research-based pharmaceuticals and the other in diversified medical products. The rationale for the split is to offer shareholders distinct opportunities given the two companies’ unique business profiles and attributes. On the diabetes front, Abbott’s diabetes care division will be part of the diversified medical products company (retaining the “Abbott” name), while bardoxolone (phase 3 treatment for chronic kidney disease in development with Reata) and atrasentan (phase 2 treatment for chronic kidney disease) will fall under the umbrella of the research-based pharmaceuticals company. Management noted that the diversified medical products company will prioritize emerging markets and accelerating margins, while the research-based pharmaceuticals company will focus on the developed world and advancing its pharma pipeline. The big question, of course, is what does this decision mean for Abbott Diabetes Care? Since this division is still self-contained within the overarching medical products company, we don’t think the split will have a huge impact. However, Diabetes Care will now occupy a larger share of the overall company, meaning its performance and strategy are even that much more important to shareholders and management. We’ll be interested to see how this plays out as the companies complete the transition. Of course we will be hugely interested in continuing to follow the pharma side, with its potential disease-modifying compound, bardoxolone.

On that note, management highlighted Reata/Abbott’s baroxolone for chronic kidney disease (CKD), discussing for the first time publicly the possibility of US collaboration with Reata during Q&A (although rights to the US sound like they would be extremely hard to pry away from Reata). As a reminder, currently, Abbott holds rights in most international markets. CEO of the new pharmaceutical company Rick Gonzalez said that “nothing could be more perfect” than bardoxolone given its beneficial clinical profile in an area of unmet need and low cost of manufacturing (no specifics given on cost); management reiterated its forecast of over $1 billion in peak-year revenue – it’s early to say, but it well may be well over $1 billion. During Q&A, management explained that observed transient increases in ALT (alanine aminotransferase, a liver enzyme used as an indicator of toxicity) are an inherent and benign side effect of bardoxolone’s mechanism, not a byproduct of liver damage. Finally, management discussed Abbott’s in-house CKD treatment, atrasentan, as a therapy that could be complementary to bardoxolone and that has the potential to benefit patients earlier in the course of chronic kidney disease. Bardoxolone and atrasentan remain on track for potential commercialization as early as 2014 and 2015, respectively.

• Abbott’s split stems from “divergent business models with distinct investment identities.” The $40 billion company will split roughly evenly between diversified medical products and research-based pharmaceuticals. For context, medical devices represent 27% of Abbott’s overall sales, of which Diabetes Care accounts for 25% of sales.

*Emerging markets include all countries and regions excluding US, Canada, Western Europe, Japan, and Australia

• To promote near-term growth, Abbott’s Diabetes Care division will continue to prioritize a) insulin dependent patients; b) launching new products; and c) improving operating margins. Within the insulin-dependent patient segment, Abbott is the fastest growing US BGM player. Additionally, the company recently launched the Insulinx in the EU in May, which features a built-in bolus calculator. Management also highlighted that operating margin improvement will be driven by patient mix (which we presume means more insulin-using patients and fewer lower-frequency testers) and cost reductions.
• Management highlighted developing countries on the diagnostics side; this was interesting in terms of thinking about diabetes, as successes to date have been important on the international side, especially in emerging markets – although the US is where the bulk of the market is, as well as the highest margins.
• Management highlighted Reata/Abbott’s antioxidant inflammation modulator for chronic kidney disease (CKD), discussing the possibility of US collaboration with Reata during Q&A. As a reminder, the drug activates the Keap1-Nrf2 pathway, involved in maintaining kidney structure and function (among other functions throughout the body). As in previous calls, management described the once-daily oral drug’s disease-modifying potential to dramatically change the treatment landscape for CKD. Indeed, during Q&A, CEO of the new pharmaceutical company Rick Gonzalez said that “nothing could be more perfect” than bardoxolone given its beneficial clinical profile in an area of unmet need and low cost of manufacturing (no specifics given on cost). Management continues to anticipate commercial availability in 2014 or later, pending completion of bardoxolone’s outcomes-driven phase 3 study (BEACON) in 2013. (For additional details on bardoxolone’s phase 2 results and phase 3 design, see our coverage of Reata’s ADA corporate symposium in the CVD and Complications section of the full ADA report, July 15, 2011 at https://closeconcerns.box.net/files/0/f/97972638/1/f_822703840#/files/6/f/97972638/1/f_822703840). Management said that pending the meeting of various endpoints (we assume these are mostly clinical but may also involvemanufacturability), bardoxolone revenue could be “well over” $1 billion annually, a paraphrase of previous forecasts. We note that this projection includes only the territories where Abbott has rights to the drug (all international markets except for Japan, China, Korea, Taiwan, and Southeast Asian countries). During Q&A, CEO of the new pharmaceutical company Rick Gonzalez said that he would “love” to have US rights to bardoxolone but that Reata CEO Warren Huff intends to keep them. He suggested that Reata and the new pharmaceutical company could find opportunities to cooperate in the US, but he did not indicate that US rights per se were on the negotiation table. Regardless of how these US discussions turn out, the new pharmaceutical company will certainly stand to benefit greatly from bardoxolone; we continue to await phase 3 results with great interest.
• During Q&A, management explained that observed transient increases in ALT (alanine aminotransferase, a liver enzyme used as an indicator of toxicity) are an inherent and benign side effect of bardoxolone’s mechanism, not a byproduct of liver damage. In the New England Journal of Medicine’s July publication of yearlong phase 2 data, Pergola and colleagues explained that aminotransferase levels were asymptomatic and resolved without stopping bardoxolone. Liver biopsies were performed on two patients with high ALT levels who were deemed to have chronic disease unrelated to bardoxolone. In fact, preclinical studies suggest that Nrf2 activation actually inhibits acute inflammatory liver injury. On the call, the ALT increases were said to have gone back to normal in “all” or “almost all” cases (Dr. John Leonard, Abbott’s SVP, Pharmaceuticals, said both). Management did not specifically address a question about bilirubin levels (another indicator of liver function) in patients with the highest ALT increases, aside from the general statements that the ALT rises did not reflect hepatotoxicity. Still, as we were reminded during the FDA Advisory Committee meeting on BMS/AZ’s dapagliflozin, the agency takes liver safety signals quite seriously, so we would not be surprised to hear these concerns discussed (and hopefully, decisively put to rest) as bardoxolone comes up for regulatory review.
• Management discussed Abbott’s in-house CKD treatment, atrasentan, as a therapy that could be complementary to bardoxolone and that has potential to benefit patients earlier in the course of chronic kidney disease. As a reminder, atrasentan is an oral, once-daily compound that interferes with endothelin-I, a protein with vasoconstrictive and hypertensive effects. In a phase 2 dose-ranging study, atrasentan reduced albuminuria (protein content in the urine) – a symptom that can be used as a proxy for renal function – though its effects appear less dramatic than those of bardoxolone. Management said that phase 3 studies could start as early as next year, enabling commercial entry as early as 2015 (no change from previous forecasts).
  • As noted in our coverage of Abbott’s 3Q11 update, the company recently updated its phase 2 atrasentan program with two more postings on clinicaltrials.gov. One study will compare two doses of atrasentan to placebo in Japanese patients (n=54) with type 2 diabetes and nephropathy who are treated with the maximal dose of an angiotensin converting enzyme inhibitor (ACEi) or angiotensin II receptor blocker (ARB). The primary outcome of the study will be 12-week change in urine albumin-to-creatinine ratio; the study is expected to complete in August 2012 (clinicaltrials.gov identifier: NCT01424319). The other study is similar in design but smaller (n=45), shorter (eight weeks), and based in the US. Notably, it will include thoracic bioimpedance (a noninvasive measurement of various hemodynamic qualities like cardiac output) as a secondary safety endpoint. Completion is expected in July 2012 (clinicaltrials.gov identifier: NCT01399580). No notable changes have been announced to the design or to the August 2012 completion target of RADAR, which continues to enrolldiabetic nephropathy patients toward its goal of 150 (clinicaltrials.gov: NCT01356849). Similar to the more recently announced phase 2 trials, the primary outcome will be 12- week change in UACR.
• Although not related to Abbott’s diabetes products, management offered insight into the threat of biosimilars. The company does not seem worried – management believes the FDA is moving carefully to ensure safety and efficacy equivalent to the innovator. As a result, they believe the process will be far more extensive than small molecules, likely requiring animal and human clinical studies and significant investment in biologics infrastructure. Overall, Abbott forecasts that generic erosion for biologics will likely be much slower and more limited than small molecules. We believe this will depend to some degree on how biosimilars are priced – if market entrants can meaningfully undercut established players and establish a very high quality product, “slow and limited” might be a stretch. However, if the higher manufacturing costs and regulatory barriers are significant, Abbott may be on point with this analysis. Of course, everyone is eagerly awaiting FDA guidance on this matter before the end of the year. It is highly likely from our view that this guidance will be further delayed.

Questions and Answers

Q: Do you think that there’s an opportunity to expand margins in medical devices?

A: I think there’s opportunity to expand margins in all the businesses, but I think the biggest opportunity today is in Nutrition. We’ve seen great improvement in diagnostics, and it’s very steady. I think there’s substantial opportunity in the nutrition business, and we’re very focused on that. I think that’s probably the most visible margin improvement opportunity there is. But we’ve got a similar thing underway in our diabetes care business, and it shows.

Q: How do you see the standalone pharma company being valued?

A: Valuation of these companies is going to be up to investors […] We believe very strongly that Humira is sustainable at its current level of performance for a significant number of years. This underlying growth rate will be muted to some extent as the dyslipidemia franchise goes generic through 2013 and 2014, so you’ll automatically get lift in 2015 without the pipeline even coming into play. Then if you look at the pipeline – we have numerous assets in the pipeline but I’d point as an example to daclizumab, bardoxolone, HCV treatments, and the additional indications on Humira. These four opportunities could drive $4 billion worth of peak sales above and beyond the current performance that we see in the business.

Q: Could you comment on early bardoxolone safety data? I know in the New England Journal of Medicine article, some transient ALT elevations were seen. I don’t think the earlier, eight-week, phase 2 study has been published; could you comment on whether you saw those same ALT elevations? Were there any cases of elevated bilirubin that corresponded with those cases, particularly those that were three times the upper limit of normal?

A: Obviously we’re very excited about bardoxolone. As pointed out earlier, the data so far have been truly unprecedented. For the first time, we’re seeing renal disease actually go backwards. If you look at the overall safety profile, I’d say it’s actually pretty clean. There are so issues of tolerability, which included some GI issues, and cramping more than anything, which patients typically treat through and do very well with. The ALT increases that you referenced are in fact probably not hepatotoxicity itself, but a mechanism-of-action effect where you get some increased expression of those enzymes, along with a whole other set of genes that are turned on. In almost all cases, those LFT (liver function test) increases resolve and go back to baseline levels. What we’ve seen so far – and we’re now accumulating additional data with the rapidly enrolling phase 3 studies – is that it’s a very well-tolerated compound and we think – particularly in this patient population – very, very safe.

With regard to your question on the eight-week phase 2 study, LFT increases will be a function of just about anybody who takes the product, because it’s tied to the underlying mechanism. It’s not about hepatic injury; it’s about the genes that are affected by the Nrf2 activity itself. And again, in all of these cases, those increases – which are very, very modest – resolve.

Q: I agree bardoxolone could be a big opportunity, but right now you have the rights only outside the US. Given potential doubling if you get the US rights, could you talk about the desire to get the US rights and make this a big significant drug?

A: We’ve done a lot of work to understand the commercial opportunity for bardoxolone in the territories that we’re in. We obviously understand the US market very well because we’ve participated in it for quite some time with Zemplar [paricalcitol, used to treat a common comorbidity of chronic kidney disease called secondary hyperparathyroidism] and other assets that we have. Because of the cost of that particular therapy and what we think this particular drug could do, it fits ideally into the world where we’re operating now, in terms of health economics benefit with a product that has huge clinical benefit in an area of high unmet need. Nothing could be more perfect than this asset given what we believe it can do to treat patients better and the benefits that it will provide the healthcare system. In the territories that we’re in today, the modeling would suggest that based on the value it will return to the healthcare system in a reasonably short period of time, it will be well over a $1 billion asset, if it hits the endpoints that we are looking for.

Would I like to have the US rights? I would love to have the US rights. Warren Huff, who runs Reata, wants to keep the US rights. At the end of the day, I think there may be some additional opportunities to be able to work together in the US. We have been in discussions, and I think we will probably do some things in the US together. But I’m very excited about the opportunity that exists for bardoxolone in the markets that we’re operating in. I think if it hits the profile, you’ll be very pleased.

--by Adam Brown, Joseph Shivers, and Kelly Close