AbbVie Inc. — Q1 2019 Form 10-Q
Business context and period. AbbVie is a global biopharmaceutical company reporting one pharmaceutical-products segment. This unaudited filing covers the three months ended March 31, 2019, compared with Q1 2018; balance-sheet figures are compared with December 31, 2018. Dollar amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net revenues | $7.828 billion | $7.934 billion | Down 1.3%; up 0.4% at constant currency |
| Gross margin | $6.134 billion; 78% of revenue | $6.007 billion; 76% | Margin improved 2 percentage points |
| Operating earnings | $3.010 billion | $2.903 billion | Up 3.7% |
| Net earnings | $2.456 billion | $2.783 billion | Down 11.8% |
| Diluted EPS | $1.65 | $1.74 | Down 5.2% |
| Operating cash flow | $3.017 billion | $2.645 billion | Up $372 million |
Interest expense, net was $325 million versus $251 million; other expense, net was $135 million versus $153 million of other income. The effective tax rate was 3% versus 1%. Management attributed the higher rate principally to prior-year tax timing benefits, partly offset in 2019 by favorable tax-position resolutions and other items.
At March 31, cash and equivalents were $4.897 billion, current assets $14.413 billion and current liabilities $13.904 billion. Short-term borrowings were $499 million; current and long-term debt and finance lease obligations were $1.579 billion and $35.066 billion, respectively. These reported components total approximately $37.1 billion. Stockholders’ equity was a deficit of $7.826 billion. Financing cash outflow was $5.383 billion, including repayment of a $3.0 billion term loan and $1.588 billion of dividends; cash declined $2.392 billion during the quarter.
Material changes and business drivers
- U.S. revenue rose 10.0%, while international revenue fell 18.6% at reported rates (14.2% at constant currency), leaving total revenue lower year over year.
- HUMIRA revenue was $4.446 billion, down 5.6% reported and 3.8% at constant currency. U.S. sales grew 7.1%; international sales fell 23.0% at constant currency, primarily from biosimilar competition. HUMIRA represented approximately 57% of total revenue, versus 59% a year earlier.
- IMBRUVICA revenue, including collaboration revenue, increased 34% to $1.022 billion; VENCLEXTA increased to $151 million from $59 million. Growth was offset in part by lower HUMIRA and hepatitis C product sales.
- Gross margin benefited primarily from the expiration of HUMIRA royalties. SG&A declined 6%, partly reflecting lower litigation reserve charges and administrative costs. R&D rose 4% to $1.289 billion, reflecting restructuring costs and pipeline investment.
- Net earnings and EPS declined despite higher operating earnings, with higher net interest expense and a $169 million charge from increased fair value of contingent consideration liabilities contributing to the comparison.
Outlook, commentary, risks and unusual items
- No quantified revenue or earnings guidance for the remainder of 2019 is provided in this filing. Management emphasized revenue diversification, pipeline development, operating-margin expansion and returning cash to shareholders. It expected multiple Phase 2 programs to enter Phase 3 and anticipated regulatory submissions and key trial readouts over the next 12 months.
- After quarter-end, the FDA and European Commission approved SKYRIZI for plaque psoriasis. AbbVie expected these approvals to increase the fair value of contingent consideration liabilities in Q2; the amount was still being evaluated.
- The FDA placed a partial clinical hold on VENCLEXTA trials for investigational multiple myeloma after a Phase 3 study showed a higher proportion of deaths in the treatment arm. The hold did not affect approved indications, including CLL and AML.
- AbbVie identified biosimilar competition and intellectual-property challenges as business risks. It reported new HUMIRA antitrust class actions and other litigation. Litigation accruals were approximately $345 million; a separate FTC AndroGel case had a $448 million disgorgement order under appeal, with no liability accrued based on management’s assessment.
- Approximately 63% of accounts receivable was due from three U.S. wholesalers. Management stated that it believed financial flexibility and access to capital were sufficient; no amounts were drawn on its $3.0 billion revolving credit facility, and the company was in compliance with its covenants.
- AbbVie adopted the new lease accounting standard in Q1, recognizing operating lease right-of-use assets and liabilities; adoption did not significantly affect earnings. Restructuring charges were $167 million, primarily severance-related. Q1 diluted EPS also included after-tax costs identified by management for amortization, contingent consideration, acquired IPR&D, restructuring and milestone payments, partly offset by a tax benefit.
Key facts for investors to verify
- Whether U.S. HUMIRA growth and newer-product gains can offset continuing international biosimilar erosion and the product concentration in HUMIRA.
- Pipeline and regulatory progress, particularly SKYRIZI’s commercial contribution and the VENCLEXTA multiple-myeloma clinical hold.
- Future contingent-consideration remeasurement, restructuring costs, litigation outcomes and their effects on earnings and cash flows.
- Debt levels, interest costs, liquidity and the sustainability of dividends and repurchases relative to operating cash generation.
- Revenue and earnings trends on both reported and constant-currency bases; interim results are not necessarily indicative of full-year results.