AbbVie Inc. 2013 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2013, AbbVie reported its first full year as an independent, publicly traded company after separating from Abbott Laboratories on January 1, 2013. AbbVie is a global biopharmaceutical company operating in one segment: pharmaceutical products. Its portfolio is led by HUMIRA, and it sells products in more than 170 countries. Prior-year results are combined historical results from Abbott and may not be directly comparable with AbbVie’s results as a standalone company.
Financial performance and position
| Metric | 2013 | 2012 | Change or context |
|---|---|---|---|
| Net sales | $18.790 billion | $18.380 billion | Up 2% reported; up 3% at constant currency |
| Operating earnings | $5.664 billion | $5.817 billion | Down 3%; operating margin about 30.1%, versus 31.6% |
| Net earnings | $4.128 billion | $5.275 billion | Down 22%; net margin about 22.0%, versus 28.7% |
| Diluted EPS | $2.56 | $3.35 | Down 24% |
| Gross margin | 76% | 75% | Improved on product mix and efficiencies |
| Operating cash flow | $6.267 billion | $6.345 billion | Down modestly |
| Cash and short-term investments | $9.895 billion | $7.976 billion | At year-end |
| Debt and borrowings | $14.723 billion | $15.672 billion | $14.310 billion long-term debt and $0.413 billion short-term borrowings |
R&D expense was $2.855 billion, or about 15% of sales; acquired in-process R&D expense was an additional $338 million. The effective tax rate was 22.6%, compared with 7.9% in 2012. Year-end current assets were $17.848 billion and current liabilities were $6.879 billion. Operating cash flow funded investment, dividends of $2.555 billion paid, and share repurchases of approximately $223 million. AbbVie had no balance outstanding on its $2.0 billion revolving credit facility and was in compliance with its covenants. Net debt, calculated as borrowings less cash and short-term investments, was approximately $4.8 billion.
Material changes versus the prior comparable period
- HUMIRA sales increased 15% to $10.659 billion, representing approximately 57% of total sales. Sales growth and other products offset erosion in the lipid franchise.
- Generic competition for TriCor, TRILIPIX and Niaspan contributed to a $1.1 billion year-over-year revenue loss; combined dyslipidemia product sales fell 50% to $1.076 billion.
- Reported U.S. sales declined 2%, while international sales grew 8%. Unfavorable foreign exchange affected reported growth.
- Net earnings fell despite higher sales and gross margin, reflecting a higher tax rate, increased interest expense and standalone-company costs. The 2013 tax rate also lacked the $195 million of favorable prior-year tax resolutions recognized in 2012.
- AbbVie’s first-year standalone results included incremental operating costs and a full year of interest expense on debt issued in November 2012. In 2012, historical results included Abbott corporate expense allocations, so comparisons have limitations.
- Fourth-quarter 2013 sales were $5.111 billion versus $5.206 billion in fourth-quarter 2012; net earnings were $1.128 billion versus $1.540 billion, and diluted EPS was $0.70 versus $0.98.
Outlook, commentary, risks and unusual items
Management emphasized HUMIRA growth, pipeline advancement, emerging-market expansion and portfolio management. It planned continued investment in key products and pipeline programs, and expected launches to support growth in 2015 and beyond. AbbVie targeted R&D spending of approximately 16% of net sales annually. No specific consolidated revenue or EPS guidance for 2014 is provided in the filing.
- Management expected U.S. and EU regulatory submissions for its genotype 1 hepatitis C program in the second quarter of 2014 and anticipated U.S. commercialization before year-end 2014. A U.S. regulatory decision on Duopa was expected before year-end 2014.
- Key risks include HUMIRA concentration and patent/biosimilar competition: U.S. composition-of-matter protection was expected to expire in December 2016 and the equivalent EU patent in most EU countries in April 2018. The sales impact of biosimilars was uncertain.
- Other risks include drug development and approval failures, safety concerns, pricing and reimbursement pressure, generic competition, reliance on third-party collaborators and suppliers, and foreign-exchange exposure.
- AbbVie was completing its transition from Abbott, including establishing independent systems and international back-office infrastructure. Transition-service arrangements, separation-related indemnities and other Abbott agreements could create costs or operational disruption.
- AbbVie remained subject to the Depakote-related probation and Corporate Integrity Agreement inherited from Abbott. Failure to comply could result in penalties or exclusion from federal health programs. The filing reported no significant litigation reserves at year-end; pending matters included Niaspan and AndroGel antitrust litigation and patent disputes.
- Unusual and notable items included $338 million of acquired in-process R&D charges related mainly to collaborations, $83 million of restructuring charges, and $254 million of separation-related expenses. AbbVie also made a $145 million pension contribution during 2013 and a further $370 million contribution after year-end.
Important facts for investors to verify
- HUMIRA sales concentration, remaining patent protection, ongoing indication expansions and the timing and commercial impact of biosimilar competition.
- Progress, regulatory outcomes and launch timing for the HCV program, Duopa and other late-stage pipeline programs.
- Whether sales growth can offset lipid-franchise erosion, pricing pressure and expected generic competition for AndroGel 1% in late 2014.
- Standalone operating costs, completion of Abbott systems and service transitions, and the comparability of future results with Abbott-era historical figures.
- Debt maturities, interest-rate exposure, pension funding needs, cash generation and the sustainability of dividends and repurchases.
- Developments in the Depakote compliance obligations and outstanding litigation. The filing reports unqualified audit opinions on the 2013 financial statements and internal control over financial reporting.