AbbVie Inc. — Q3 2013 Form 10-Q Summary
Business context and reporting period
Reports the quarter and nine months ended September 30, 2013. AbbVie is a global research-based pharmaceutical company operating in one segment. It became an independent public company on January 1, 2013; 2012 comparative results are historical combined results from when the business was part of Abbott, so period-to-period comparisons may not reflect the costs of operating independently.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $4.658 billion | $4.508 billion | $13.679 billion | $13.174 billion |
| Operating earnings | $1.371 billion | $1.596 billion | $4.129 billion | $3.996 billion |
| Net earnings | $964 million | $1.585 billion | $3.000 billion | $3.735 billion |
| Diluted EPS | $0.60 | $1.01 | $1.86 | $2.37 |
| Gross margin | 77% | 78% | 76% | 75% |
Q3 sales rose 3% as reported (4% at constant currency); nine-month sales increased 4% (5% at constant currency). HUMIRA sales grew 19% in Q3 to $2.770 billion and 16% for the nine months to $7.620 billion. U.S. sales fell 2% in Q3, while international sales rose 11%.
Q3 operating earnings declined despite higher sales, reflecting higher SG&A and $220 million of acquired in-process R&D charges. Net earnings also reflected a higher effective tax rate: 25.0% in Q3 2013 versus 1.2% in Q3 2012, when a $190 million tax benefit was recognized. Nine-month effective tax rates were 22.9% and 7.0%, respectively.
Operating cash flow was $5.022 billion for the first nine months, versus $5.404 billion in 2012. Investing activities provided $756 million, compared with $2.212 billion used in 2012; financing activities used $2.695 billion, including $1.914 billion of dividends paid. Cash and equivalents were $8.975 billion at September 30; cash plus short-term investments totaled $9.596 billion.
At September 30, total reported borrowings and debt maturities were approximately $14.809 billion: $411 million of short-term borrowings, $23 million of current long-term debt and lease obligations, and $14.375 billion of long-term debt and lease obligations. The $2.0 billion revolving credit facility had no borrowings outstanding, and AbbVie reported compliance with its covenants. The company held $400 million of commercial paper outstanding.
Material changes versus the prior comparable period
- HUMIRA remained the principal growth driver. TriCor/TRILIPIX sales fell 88% in Q3 following generic competition; the lipid franchise, including Niaspan, declined 55% in Q3. Management expected generic impacts to be more pronounced in Q4 2013.
- SG&A increased 16% in Q3 and 9% year to date, driven by sales and marketing support for growth brands and costs of becoming a standalone company. AbbVie recorded $51 million of separation-related expenses in Q3 and $151 million year to date.
- Reported R&D expense declined 12% in Q3 and 2% year to date, partly because 2012 included a $150 million restructuring charge and a $50 million milestone payment. Excluding these items, management said R&D expense increased 8% in both periods.
- AbbVie recorded a $582 million reduction to equity and long-term deferred tax assets in Q3 to correct an error concerning deferred tax assets transferred in the pension-plan separation. The filing says this did not affect the 2012 Form 10-K or prior years.
Outlook, commentary, risks and unusual items
- Management expected 2013 effective income tax rate of approximately 22%, excluding discrete items, and approximately $300 million of net interest expense for 2013.
- AbbVie expected ongoing standalone-company costs and non-recurring costs and capital expenditures as it established independent corporate, IT and back-office functions. Transition services from Abbott could continue for up to 24 months, with an option for a one-year extension.
- Management highlighted a pipeline of more than 20 compounds or indications in Phase II or III. Developments included Phase III HCV enrollment completion, a Phase III kidney-disease study for atrasentan, and FDA approval of Creon 36,000. Pipeline success is uncertain and depends on clinical and regulatory outcomes.
- In September 2013, AbbVie recorded $175 million of acquired IPR&D for an Ablynx collaboration and $45 million for a Galapagos cystic-fibrosis collaboration. Potential additional milestone payments were up to $665 million and $360 million, respectively, plus royalties. A separate Alvine collaboration included a $70 million upfront payment and potential further payments up to $275 million.
- Net governmental receivables in Greece, Portugal, Italy and Spain totaled $804 million, including $142 million more than one year past due. The filing warns that fiscal or reimbursement changes could impair collections. Three U.S. wholesalers accounted for 39% of net receivables and substantially all U.S. sales.
- Health-care reform rebates, coverage-gap discounts and industry fees were expected to weigh on future gross margins. Other risks include generic competition, patent challenges, R&D uncertainty, foreign exchange and interest-rate exposure.
- Litigation accruals were not significant, and management did not expect the ultimate disposition of proceedings to materially affect consolidated results. New matters included Niaspan antitrust class actions and a Depakote-related RICO suit. AbbVie also disclosed Norvir patent litigation. The Depakote federal and most state claims had previously been settled; AbbVie paid approximately $1.6 billion in 2012.
- The board declared a quarterly dividend of $0.40 per share, and the company expected a 2013 annual dividend rate of $1.60 per share, subject to board discretion. A $1.5 billion repurchase authorization was in place; no purchases under the publicly announced plan were reported for the quarter.
Important facts for investors to verify
- HUMIRA growth, competitive durability and the status of its indications and intellectual-property protections.
- Timing and financial effects of generic erosion in TriCor, TRILIPIX, Niaspan and expected AndroGel competition.
- Standalone operating costs, separation adjustments and whether historical comparisons adequately represent future cost levels.
- Collection trends and credit exposure for Southern European government receivables, and dependence on three U.S. wholesalers.
- Debt servicing, interest-rate and foreign-exchange exposures, cash deployment, dividends and repurchases.
- Clinical, regulatory and milestone outcomes for pipeline programs and collaborations, as well as developments in disclosed litigation.