AbbVie Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2014; financial comparisons are to the three and nine months ended September 30, 2013 unless otherwise noted. Amounts are in U.S. dollars.
Business context and results
AbbVie is a global research-based pharmaceutical company operating in one segment. HUMIRA was its largest product, accounting for approximately 63% of sales in the first nine months of 2014. The company was continuing its transition to stand-alone operations following its 2013 separation from Abbott.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $5.019 billion | $4.658 billion | $14.508 billion | $13.679 billion |
| Gross margin | $3.925 billion; 78% | $3.566 billion; 77% | $11.201 billion; 77% | $10.380 billion; 76% |
| Operating earnings | $960 million | $1.371 billion | $3.826 billion | $4.129 billion |
| Net earnings | $506 million | $964 million | $2.584 billion | $3.000 billion |
| Diluted EPS | $0.31 | $0.60 | $1.60 | $1.86 |
| Operating cash flow | Not provided separately | Not provided separately | $4.127 billion | $5.022 billion |
Q3 sales rose 8% at reported and constant currency rates; nine-month sales increased 6% reported and 7% at constant currency. HUMIRA sales grew 18% in Q3 and 21% for the first nine months. Growth was partly offset by the lipid franchise’s 77% decline, as generic competition reduced nine-month revenue by $761 million versus the prior year. Q3 net earnings fell 47%, reflecting higher operating expenses, interest and foreign-exchange losses.
Q3 operating margin was approximately 19% of sales, compared with 29% a year earlier; nine-month operating margin was approximately 26%, versus 30%. Gross margin improved, aided by product mix, efficiencies and lower intangible amortization, partly offset by foreign exchange, a $37 million product-rights impairment and lipid-product exclusivity losses. SG&A rose 27% in Q3 and 12% for nine months; R&D rose 14% and 18%, respectively.
Cash, debt and liquidity
At September 30, 2014, cash and equivalents were $7.719 billion and restricted cash was $2.595 billion, primarily escrowed for the proposed Shire transaction. Including short-term investments, these balances totaled $10.323 billion. Current assets were $17.555 billion and current liabilities $6.635 billion. Long-term debt and lease obligations were $14.469 billion; short-term borrowings were $301 million. The company reported no borrowings under its revolving credit facility and was in compliance with its covenants.
Nine-month operating cash flow was $4.127 billion. Investing activities used $3.440 billion, including the $2.700 billion transfer to restricted cash, and financing activities used $2.411 billion. Cash dividends paid were $1.987 billion. Cash and equivalents declined from $9.595 billion at year-end 2013 to $7.719 billion. Management cited timing of U.S. wholesaler collections, higher pension contributions and inventory investment for the lower operating cash flow versus 2013.
Material developments, outlook and risks
- Shire transaction terminated: AbbVie and Shire mutually terminated the proposed combination on October 20, 2014, after AbbVie’s board withdrew its recommendation. AbbVie paid a $1.635 billion break fee in October; the fee is expected to be tax deductible and will be recorded as Q4 SG&A. AbbVie also expects to expense $70 million of capitalized financing costs in Q4. The escrowed cash was expected to be released in Q4. Shire-related forward contracts generated $165 million of Q3 foreign-exchange losses.
- Pipeline and collaborations: AbbVie reported more than 20 compounds or indications in Phase 2 or 3, with approximately 12 in Phase 3 or registrational review. The company expected U.S. approval of its interferon-free HCV combination in 2014 and European approval in early 2015. It paid $275 million for an Infinity collaboration on duvelisib and recorded a $250 million Calico collaboration charge. A further $500 million Calico contribution was expected in Q4, conditional on specified requirements.
- Product outlook: Management expected AndroGel 1% to face generic competition in early 2015. Duodopa’s U.S. regulatory decision was expected in early 2015. Management also noted continued U.S. testosterone-market weakness and ongoing lipid-franchise generic pressure. No quantified full-year earnings or revenue guidance is stated in the provided filing text.
- Capital returns: The board declared a quarterly dividend of $0.49 per share in October, about 17% above the prior $0.42 rate, and authorized a new $5 billion share repurchase program.
- Concentration and contingencies: Three U.S. wholesalers represented 42% of net receivables. Government receivables in Greece, Portugal, Italy and Spain totaled $541 million. HUMIRA sales concentration, generic competition, foreign exchange, R&D and regulatory outcomes, and legal matters are important risks. The filing describes antitrust and patent litigation; management said the recorded litigation accrual was not significant and did not expect the matters discussed to materially affect the company, while noting outcomes are uncertain.
Most important facts for investors to verify
- Q4 accounting and cash impact of the $1.635 billion Shire break fee, financing-cost write-off and release of restricted cash.
- Whether HUMIRA growth can offset continued lipid-franchise erosion and anticipated AndroGel generic competition.
- Progress, approvals and commercial prospects for the HCV combination and other late-stage pipeline programs.
- Cash generation and capital allocation capacity given debt, dividends, the new repurchase authorization and planned collaboration spending.
- Exposure to major wholesalers, Southern European government receivables, foreign exchange and pending litigation.