AbbVie Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited results. AbbVie completed its acquisition of Allergan on May 8, 2020; Allergan results are included only from that date.
Financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net revenue | $10.425B | $8.255B | $19.044B | $16.083B |
| Operating earnings | $752M | $3.400B | $4.355B | $6.410B |
| Net earnings attributable to AbbVie | $(738)M | $741M | $2.272B | $3.197B |
| Diluted EPS | $(0.46) | $0.49 | $1.43 | $2.14 |
| Operating cash flow | Not stated separately | Not stated separately | $6.904B | $5.494B |
Q2 revenue increased 26.3% reported (27.1% constant currency); first-half revenue rose 18.4% (19.1% constant currency). Allergan contributed $2.0B of revenue from closing through June 30. Q2 gross margin was 64%, versus 78% a year earlier; first-half gross margin was 70%, versus 78%. Q2 operating margin was approximately 7%, versus 41% in Q2 2019.
Reported earnings were weighed down by acquisition and integration costs, acquired intangible amortization, inventory fair-value step-up amortization, contingent consideration remeasurement and acquired R&D. First-half diluted EPS included after-tax costs of $1.9B related to the Allergan acquisition, $1.6B of intangible amortization, $881M from contingent consideration changes, $853M of acquired in-process R&D and $164M of milestone and other R&D costs.
Liquidity, debt and capital resources
- Cash and equivalents were $6.017B at June 30, 2020, down from $39.924B at year-end 2019, principally following the Allergan acquisition.
- Total current assets were $21.256B and current liabilities $24.646B. Short-term borrowings were $64M; current long-term debt and finance lease obligations were $5.307B; long-term debt and finance lease obligations were $82.061B.
- Operating cash flow was $6.904B. Investing cash outflow was $35.781B, including the acquisition; financing cash outflow was $4.992B. Dividends paid were $3.515B.
- AbbVie paid $39.675B cash consideration for Allergan and issued shares valued at $23.979B, for total consideration of $64.084B. It also borrowed $3.0B under term loans and issued $14.0B and €3.1B of notes in exchange for Allergan debt.
- The company had no commercial paper or revolving-credit-facility borrowings outstanding at quarter-end. Its $4.0B revolving facility matures in August 2024; AbbVie reported compliance with its covenants.
Material changes and business developments
- The Allergan acquisition substantially expanded the portfolio and balance sheet: goodwill rose to $42.669B and net intangible assets to $76.463B, from $15.604B and $18.649B, respectively, at year-end 2019. The purchase accounting valuations were preliminary.
- Revenue growth included strong performance from Skyrizi, Rinvoq, Imbruvica and Venclexta. Humira was broadly flat globally in Q2: U.S. growth was offset by international biosimilar competition. Mavyret sales fell 51% in Q2, primarily from competition and lower patient volumes.
- Allergan’s acquired products contributed revenue across aesthetics, neuroscience, eye care and women’s health, but only for the post-acquisition period.
- AbbVie entered a Genmab collaboration and recorded a $750M upfront payment as acquired in-process R&D; up to $3.2B of additional development, regulatory and commercial milestone payments may be due.
Outlook, risks and unusual items
- Management set an objective to achieve more than $2B of annual cost synergies over three years from Allergan integration, with approximately $2B of related charges expected through 2022. It also stated goals of growing the dividend, reducing incremental debt, expanding margins and advancing the pipeline. The filing provides no specific full-year earnings or revenue guidance.
- COVID-19 had not materially affected operations through the filing date, but could negatively affect results for the duration of the outbreak. AbbVie cited potential effects on demand, new patient starts, manufacturing, supply chains, sales and clinical trials. Lower new patient starts were already affecting some products.
- Humira represented approximately 50% of first-half 2020 revenue, down from 58% a year earlier. Three U.S. wholesalers represented 73% of accounts receivable at June 30, 2020.
- Significant legal exposures include antitrust, product-liability, opioid, patent and securities matters. Litigation accruals were approximately $330M; management said ultimate disposition was not expected to materially affect consolidated financial position, results or cash flows, while noting outcomes are uncertain. No liability was accrued for the appealed FTC AndroGel ruling.
- Following the acquisition, S&P lowered AbbVie’s issuer rating one notch to BBB+ and revised the outlook to stable. Moody’s maintained Baa2 with a stable outlook.
- Development risks include the FDA’s complete response letter for abicipar pegol, citing an unfavorable benefit-risk profile due to intraocular inflammation; AbbVie withdrew its EU application. The Phase 3 VIALE-C Venclexta trial in AML did not meet its primary endpoint, while VIALE-A met its primary endpoints.
Key facts for investors to verify
- How quickly Allergan integration delivers the stated synergies, and whether charges remain within the approximately $2B estimate.
- Debt reduction, interest expense and liquidity trends after the acquisition, including the maturity schedule and refinancing needs.
- Underlying performance excluding Allergan, purchase-accounting amortization, inventory step-up, acquisition costs and contingent consideration revaluations.
- Humira’s international erosion and the ability of Skyrizi, Rinvoq and other products to offset it; COVID-19 effects on patient starts and demand.
- Final Allergan purchase-price accounting, contingent consideration estimates, and developments in material litigation and regulatory programs.