AbbVie Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; comparative periods ended September 30, 2016. Amounts are U.S. dollars unless noted.
Business context and results
AbbVie is a global biopharmaceutical company operating in one segment. HUMIRA remains its largest product, representing approximately 66% of nine-month 2017 net revenue. Management’s stated priorities include growing established and pipeline products, investing in R&D, expanding margins, and returning cash to shareholders.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenue | $6.995B | $6.432B | $20.477B | $18.842B |
| Operating earnings | $2.705B | $2.361B | $7.798B | $7.026B |
| Net earnings | $1.631B | $1.598B | $5.257B | $4.562B |
| Diluted EPS | $1.01 | $0.97 | $3.27 | $2.78 |
| Gross margin | 77% | 77% | 77% | 77% |
Revenue increased 8.8% in Q3 and 8.7% for the nine months at actual exchange rates; nine-month constant-currency growth was 8.8%. HUMIRA revenue rose 15% on a constant-currency basis for the nine months, and IMBRUVICA rose 41%. HCV revenue fell 37%, reflecting market contraction, lower share and price erosion. Q3 operating margin was approximately 38.7% versus 36.7%; net margin was approximately 23.3% versus 24.8%.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $7.376B, versus $5.500B in 2016. Investing cash outflow was $475M, versus $5.955B; financing cash outflow was $3.584B, versus $1.426B.
- Cash and equivalents were $8.446B at September 30, 2017, up from $5.100B at year-end 2016. Current assets were $18.930B and current liabilities $13.033B.
- Short- and long-term debt and lease obligations totaled approximately $34.8B at September 30, including $800M of commercial paper. The filing reports $33.974B long-term and $3.021B current debt and lease obligations, or $36.995B combined. The company had no drawings on its $3.0B revolving credit facility and said it was compliant with covenants.
- Cash uses included $3.077B of dividends, $500M of open-market share repurchases and $305M of contingent consideration payments. A quarterly dividend increase to $0.71 per share, from $0.64, was announced for the February 2018 payment.
Material changes, outlook and risks
- HUMIRA and IMBRUVICA were the principal growth drivers; HCV, AndroGel, Kaletra and “all other” products declined for the nine months. HUMIRA concentration and potential biosimilar competition are important exposure points.
- Other expense rose to $349M in Q3 and $484M for the nine months, primarily reflecting fair-value increases in contingent consideration liabilities. The nine-month increase was $547M, recognized in earnings; management attributed the 2017 remeasurement mainly to passage of time and higher probabilities of success.
- R&D spending increased 13% for the nine months to $3.580B. The company reported more than 60 clinical-development compounds or indications, over 30 in mid- or late-stage development, and anticipated several regulatory submissions and key trial readouts over the next 12 months. No quantified revenue or EPS guidance is provided in the supplied filing text.
- Pipeline developments included positive Phase 3 results for upadacitinib and venetoclax in specified studies; two Phase 3 veliparib studies failed primary endpoints. MAVYRET was approved in the U.S. in August 2017. These are clinical and regulatory developments, not assurances of commercial success.
- Litigation accruals were approximately $215M. Testosterone-replacement product cases include large consolidated claim counts and two 2017 jury awards of punitive damages ($150M and $140M); the company expected the awards to be challenged. Other disclosed matters include antitrust and patent disputes. Management stated ultimate disposition was not expected to materially adversely affect consolidated financial position, results or cash flows.
- Other risks include reliance on HUMIRA, drug development and regulatory uncertainty, intellectual-property challenges, competition, government reimbursement and collection risk. Three U.S. wholesalers accounted for 56% of net receivables. Government receivables in certain countries could face collection delays.
- Adoption of revenue-recognition guidance in 2018 was expected to cause an approximately $130M after-tax cumulative adjustment to retained earnings, primarily for deferred license revenue; the company did not expect significant changes to product-sales revenue recognition.
Most important facts for investors to verify
- Whether HUMIRA growth and market share can be sustained amid biosimilar entry and patent challenges, given its 66% share of nine-month revenue.
- Progress, safety, regulatory outcomes and commercial prospects for key pipeline programs, including upadacitinib, risankizumab, venetoclax and Rova-T.
- Future HCV revenue trends and the commercial contribution of MAVYRET/MAVIRET.
- Changes in contingent-consideration fair values and the assumptions behind the $4.455B liability, which uses significant unobservable inputs.
- Developments in testosterone litigation and other material legal or patent matters, and any resulting changes to reserves or cash requirements.
- Debt maturity and refinancing needs, cash availability, and the effect of repatriation taxes on foreign-held cash if funds are needed in the U.S.