AbbVie Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. AbbVie is a global biopharmaceutical company operating in one segment: pharmaceutical products.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net revenues | $6.452 billion | $5.475 billion | $12.410 billion | $10.515 billion |
| Operating earnings | $2.387 billion | $1.852 billion | $4.665 billion | $3.539 billion |
| Net earnings | $1.610 billion | $1.366 billion | $2.964 billion | $2.388 billion |
| Diluted EPS | $0.98 | $0.83 | $1.81 | $1.47 |
| Gross margin | 78% | 83% | 78% | 82% |
- Revenue increased 18% in both Q2 and the first half at actual currency rates; first-half growth was 20% at constant currency. Q2 net earnings rose about 18%; first-half net earnings rose about 24%.
- Management reported first-half operating margin of 38%, up from the prior year, reflecting lower SG&A and revenue growth. Gross margin declined, principally due to higher acquired-intangible amortization, foreign exchange, and Pharmacyclics-related costs.
- First-half SG&A was $2.821 billion, down 11%; R&D was $2.070 billion, up 16%. Net interest expense increased to $425 million from $290 million.
- Effective tax rate was 23% for the first half versus 22% in 2015; the increase reflected earnings mix and discrete items, including acquisitions and the nondeductible Venezuela currency charge.
Cash flow, liquidity and debt
- First-half operating cash flow was $4.046 billion, versus $3.417 billion. Investing cash outflow was $5.756 billion and financing cash outflow was $55 million. Cash and equivalents ended June at $6.327 billion, down from $8.399 billion at year-end 2015.
- Current assets were $16.791 billion and current liabilities $9.272 billion. Short-term investments were $1.675 billion.
- Long-term debt and lease obligations were $37.328 billion, with $494 million of short-term borrowings and $23 million of current debt and lease obligations. The company issued $7.8 billion of senior notes in May, used in part to repay a $2.0 billion term loan, fund Stemcentrx, and finance a share repurchase.
- AbbVie paid $1.851 billion in dividends and recorded $4.212 billion of treasury-stock purchases in the first half, including the $3.8 billion accelerated share repurchase (ASR). The ASR’s final settlement was expected before year-end 2016.
- The company reported no borrowings under its $3.0 billion revolving credit facility and compliance with its covenants. Credit ratings were reduced following the Stemcentrx announcement: S&P to A- (stable outlook) and Moody’s to Baa2.
Material changes and business developments
- HUMIRA revenue grew 17% in Q2 and 16% in the first half; it represented approximately 62% of first-half revenue. U.S. sales were strong, while international first-half sales were slightly lower at actual exchange rates.
- IMBRUVICA revenue reached $439 million in Q2 and $820 million in the first half, versus $107 million for the comparable 2015 periods; comparisons reflect the May 2015 Pharmacyclics acquisition. VIEKIRA first-half revenue rose 35%, though U.S. sales fell 42% amid lower market share and pricing pressure from a new entrant.
- AbbVie acquired Stemcentrx on June 1 for total consideration of approximately $6.2 billion, including $3.9 billion in AbbVie shares, $1.9 billion cash and $370 million fair value of contingent consideration. Potential additional milestone payments are up to $4.0 billion. The acquisition added Rova-T, in registrational trials for small cell lung cancer, and other oncology assets. Stemcentrx contributed an immaterial amount of revenue and a $90 million operating loss through quarter-end, including $65 million of accelerated-vesting compensation expense.
- In April, AbbVie acquired rights to risankizumab and BI 655064 from Boehringer Ingelheim. Total acquisition-date consideration was $4.375 billion, including $3.760 billion of contingent consideration.
Outlook, risks and unusual items
- The filing provides no specific numeric full-year revenue or earnings guidance. Management described priorities of growing existing and pipeline products, improving margins, investing in R&D and returning cash to shareholders; it expected multiple Phase 2 programs to advance to Phase 3 during 2016.
- First-half results included a $298 million Venezuela currency devaluation loss, a $39 million intangible-asset impairment, $80 million of acquired in-process R&D charges, and a $41 million increase in contingent consideration fair value. Acquired-intangible and inventory step-up costs also weighed on earnings.
- Risks include HUMIRA revenue concentration and competition, clinical and regulatory uncertainty, patent challenges, foreign exchange and interest-rate exposure, government-customer collection risk, and leverage following acquisitions. Net government receivables in Greece, Portugal, Italy and Spain were $488 million; receivables in Saudi Arabia and Russia were $135 million and $113 million, respectively.
- Litigation accruals were approximately $170 million. Matters include testosterone-replacement and Depakote product-liability claims, antitrust cases, and challenges to HUMIRA patents. Management stated that ultimate dispositions were not expected to materially adversely affect consolidated financial position, results or cash flows, while noting outcomes are uncertain.
- Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether HUMIRA growth and its large share of revenue remain sustainable amid competition and patent challenges.
- Rova-T and other acquired pipeline assets’ clinical, regulatory and commercial prospects, along with potential contingent acquisition payments.
- How acquisition-related debt, higher interest expense and credit-rating reductions affect liquidity and financial flexibility.
- Drivers of weaker gross margin and the expected burden of acquired-intangible amortization.
- Final settlement of the $3.8 billion ASR and any material developments in litigation, foreign-exchange exposure or government receivable collections.