AbbVie Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014. Unaudited results; comparisons are with the corresponding 2013 periods. AbbVie is a global biopharmaceutical company operating in one pharmaceutical-products segment.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $4.926 billion | $4.692 billion | $9.489 billion | $9.021 billion |
| Operating earnings | $1.515 billion | $1.453 billion | $2.866 billion | $2.758 billion |
| Net earnings | $1.098 billion | $1.068 billion | $2.078 billion | $2.036 billion |
| Diluted EPS | $0.68 | $0.66 | $1.29 | $1.27 |
| Gross margin | 77% | 78% | 77% | 76% |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $2.341 billion | $3.224 billion |
- Q2 sales rose 5% year over year; first-half sales rose 5% at actual exchange rates and 6% at constant currency. International sales increased 10% in Q2 and 8% in the first half.
- Q2 operating expenses included R&D of $834 million, up 18%, and SG&A of $1.448 billion, up 3%. First-half R&D increased 20% to $1.606 billion.
- At June 30, cash and equivalents were $9.086 billion and short-term investments were $1.160 billion. Total current assets were $17.794 billion against current liabilities of $6.317 billion.
- Debt and lease obligations included $14.470 billion long-term and $20 million current; short-term borrowings were $251 million. No borrowings were outstanding under the $2.0 billion revolving credit facility.
- First-half dividends paid were $1.314 billion. The board declared a $0.42-per-share quarterly dividend, payable August 15, 2014.
Changes and drivers versus prior year
- HUMIRA sales increased 26% in Q2 to $3.288 billion and 22% in the first half to $5.925 billion. HUMIRA represented approximately 62% of first-half sales, versus 54% a year earlier.
- Growth in HUMIRA, Synthroid, Creon and Duodopa offset continued generic erosion in the lipid franchise. First-half TriCor, TRILIPIX and Niaspan losses reduced revenue by $554 million year over year; combined dyslipidemia-product sales fell 77% in the first half.
- Q2 gross margin declined to 77% from 78%, reflecting lipid-product exclusivity losses and unfavorable foreign exchange, partly offset by product mix, efficiencies and lower amortization. First-half gross margin improved to 77% from 76%.
- First-half operating cash flow fell $883 million, primarily due to timing of U.S. wholesaler collections, a $370 million pension contribution versus $145 million in 2013, and inventory investment ahead of the planned HCV launch.
- Separation-related expenses were $110 million in Q2 and $190 million in the first half, versus $67 million and $100 million, respectively, in 2013.
Outlook, risks and unusual items
- Management expected a 2014 effective tax rate of approximately 22%, excluding discrete items. The reported first-half rate was 23.6%.
- AbbVie expected U.S. regulatory approval in 2014 for its interferon-free HCV combination and European approval in early 2015. Duodopa was under U.S. review, with a decision expected in early 2015. These are expectations, not guarantees.
- The pipeline included more than 20 compounds or indications in Phase II or III, with 12 in Phase III or registrational review. R&D spending increased to support mid- and late-stage programs and additional HUMIRA indications.
- On July 18, 2014, after quarter-end, AbbVie announced an agreed recommended combination with Shire. Shire shareholders were to receive £24.44 cash and 0.8960 shares of the new company per share; AbbVie shareholders were to receive one share of the combined company per AbbVie share. Completion remained subject to approvals and other conditions. AbbVie also arranged a £13.5 billion bridge facility. The filing warns the transaction could be delayed, fail, or not deliver expected benefits, and related expenses or termination fees could adversely affect results.
- Key business risks include dependence on HUMIRA, generic competition and product patent challenges, R&D and regulatory uncertainty, litigation, foreign exchange and interest-rate exposure, and customer concentration. Three U.S. wholesalers accounted for 41% of receivables; net government receivables in Greece, Portugal, Italy and Spain totaled $603 million.
- Legal matters include antitrust litigation concerning Niaspan and AndroGel, product patent disputes, and a Norvir-related matter remanded for a new trial. The litigation accrual was not significant; management did not expect the proceedings to materially adversely affect consolidated results, while noting outcomes are uncertain.
- Disclosure controls were assessed as effective. The company was continuing phased implementation of a stand-alone ERP and related infrastructure, expected to be completed in 2015.
Important facts for investors to verify
- HUMIRA’s sales concentration and durability of growth, including pricing, market share, and exposure to competition or patent challenges.
- The pace and financial impact of generic erosion in the lipid franchise and expected AndroGel generic competition in early 2015.
- HCV program regulatory decisions, launch readiness, and commercial performance; confirm whether expected approvals and pipeline milestones were achieved.
- Operating cash flow conversion, wholesaler collection timing, inventory levels, and the effect of pension contributions and dividends on liquidity.
- Shire transaction approvals, terms, financing, fees, credit-rating implications, and whether the projected benefits materialized.
- Developments in material litigation, Southern European government receivables, and other contingencies; the filing does not provide a clear estimate of potential losses for the described legal matters.