AbbVie Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. AbbVie became an independent, publicly traded pharmaceutical company on January 1, 2013. Prior-year results reflect the business as part of Abbott and include allocated corporate expenses, so comparisons may not fully represent stand-alone costs.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $4.692 billion | $4.493 billion | $9.021 billion | $8.666 billion |
| Operating earnings | $1.453 billion | $1.422 billion | $2.758 billion | $2.400 billion |
| Net earnings | $1.068 billion | $1.267 billion | $2.036 billion | $2.150 billion |
| Diluted EPS | $0.66 | $0.80 | $1.27 | $1.36 |
| Gross margin | 78% | 76% | 76% | 74% |
Sales rose 4% at reported currency and 5% at constant currency in both the quarter and first half. Operating earnings increased 2% in Q2 and 15% in the first half. Net earnings fell 16% and 5%, respectively, primarily reflecting higher income tax expense; the effective tax rate was 21.9% in 2013 versus 9.6% in Q2 2012 and 10.7% in first-half 2012. Q2 diluted EPS comparisons also reflect a larger weighted-average diluted share count in 2013.
HUMIRA was the principal growth driver: Q2 sales were $2.606 billion, up 12% reported and 13% constant currency; first-half sales were $4.850 billion, up 14% and 15%, respectively. TriCor/TRILIPIX sales fell 66% in Q2 and 58% in the first half. Company gross margin improved, mainly due to lower intangible amortization and product mix, partly offset by foreign exchange. SG&A increased 13% in Q2 and 6% in the first half, including growth-brand support and stand-alone company costs. R&D increased 10% and 5%, respectively.
Cash flow, liquidity and debt
First-half operating cash flow was $3.224 billion, compared with $3.155 billion. Investing activities provided $1.720 billion versus $406 million used in the prior-year period, notably including $2.075 billion of proceeds from investment security sales. Financing activities used $2.082 billion, including $1.274 billion of dividends paid. Cash and equivalents were $8.743 billion at June 30, up from $5.901 billion at year-end; cash plus short-term investments totaled $8.754 billion.
At June 30, short-term borrowings were $410 million, current maturities of long-term debt and lease obligations were $22 million, and long-term debt and lease obligations were $14.326 billion. The company had no borrowings under its $2.0 billion revolving credit facility and reported compliance with its covenants. It expected approximately $300 million of net interest expense for 2013.
Outlook, commentary and risks
- Management expected a 2013 effective tax rate of approximately 22%, excluding discrete items, and regular cash dividends at an annual rate of $1.60 per share. Dividend decisions remain subject to board discretion and other factors.
- AbbVie highlighted a pipeline of more than 20 compounds or indications in Phase II or Phase III. Development updates included progress on HUMIRA indications, an HCV Phase III program and a Phase III chronic kidney disease study. A $70 million Alvine collaboration payment was expensed as acquired in-process R&D; further payments of up to $275 million may be due on milestones.
- Product and exclusivity risks include generic TriCor competition, generic TRILIPIX competition beginning in July 2013, anticipated Niaspan generic competition in September 2013, and expected AndroGel 1% generic competition in 2015. Management expected generic TRILIPIX to weigh on sales, particularly in Q4 2013.
- Net government receivables in Greece, Portugal, Italy and Spain totaled $783 million, including $97 million more than one year past due. AbbVie warned that funding or reimbursement deterioration could impair collection. Three U.S. wholesalers represented 42% of net receivables.
- Separation-related expenses were $67 million in Q2 and $100 million in the first half. Transition services from Abbott may continue for up to 24 months, with a one-year extension option; further separation adjustments and stand-alone costs may occur.
- Other notable exposures include foreign-exchange and interest-rate sensitivity, ongoing AndroGel antitrust litigation following a Supreme Court remand of FTC claims, and patent litigation involving proposed generic Norvir products. Management said pending legal matters were not expected to have a material adverse effect, while noting outcomes are uncertain.
Most important facts to verify
- Whether HUMIRA growth can offset continued erosion in products facing generic competition.
- How stand-alone costs, separation adjustments and prior-year Abbott expense allocations affect comparability and future margins.
- Whether the higher 2013 tax rate and the approximately 22% full-year expectation are sustained.
- Collection progress on overdue Southern European government receivables and any resulting credit losses.
- Debt service, expected interest expense, planned dividends and the use of the $1.5 billion share repurchase authorization.
- Developments in AndroGel antitrust and Norvir patent proceedings, as well as pipeline trial and regulatory milestones.