AbbVie Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results. AbbVie operates as one global business segment. Comparisons are materially affected by the May 8, 2020 acquisition of Allergan; Allergan’s results are included only from the acquisition date.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenues | $12.902bn | $8.479bn | $31.946bn | $24.562bn |
| Operating earnings | $3.255bn | $2.617bn | $7.610bn | $9.027bn |
| Operating margin | 25.2% | 30.9% | 23.8% | 36.7% |
| Net earnings attributable to AbbVie | $2.308bn | $1.884bn | $4.580bn | $5.081bn |
| Diluted EPS | $1.29 | $1.26 | $2.77 | $3.41 |
| Operating cash flow | Not provided separately | Not provided separately | $12.734bn | $10.049bn |
Q3 revenue rose 52.1% reported (52.4% constant currency); nine-month revenue rose 30.1% (30.7% constant currency). Q3 diluted EPS increased 2.4%, while nine-month diluted EPS fell 18.8%. Gross margin was 61% in Q3 and 66% for the nine-month period, versus 77% and 78%, respectively, in 2019.
Cash, debt and liquidity: Cash and equivalents were $7.890bn at September 30, down from $39.924bn at December 31, 2019. Current assets were $23.009bn and current liabilities $24.181bn. Current and long-term debt and finance lease obligations totaled $87.005bn, versus $66.728bn at year-end 2019. Nine-month investing cash outflow was $36.930bn, mainly reflecting the Allergan acquisition; financing cash outflow was $7.806bn. Capital expenditures were $519m, implying approximate nine-month operating cash flow less capital expenditures of $12.215bn.
Material changes and drivers
- AbbVie completed the $64.084bn Allergan acquisition, funded with $39.675bn cash consideration and $23.979bn of AbbVie shares. Allergan contributed $5.9bn of revenue from closing through September 30 and recorded a $1.5bn operating loss, including $2.6bn of intangible amortization and $964m of inventory fair-value step-up amortization.
- Acquisition-related amortization and inventory step-up costs reduced gross margin. SG&A rose 72% in Q3 and 62% for nine months, with Allergan expenses and transaction/integration costs contributing. Nine-month interest expense, net, increased to $1.662bn from $1.054bn, mainly due to acquisition-related debt.
- Core product trends were mixed. Q3 Humira revenue grew 4% globally, with U.S. growth offset in part by international biosimilar competition. Skyrizi and Rinvoq grew from recently launched products; Imbruvica and Venclexta rose 9% and 59%, respectively. Mavyret fell 41% and Lupron 42% in Q3.
- Revenue from Allergan products, including Botox, Juvederm, Vraylar and eye-care products, was included only from May 8; these products therefore lack comparable reported 2019 revenue in the product table.
- Nine-month other expense included a $1.078bn charge from changes in fair value of contingent consideration liabilities. Acquired IPR&D charges were $898m, including a $750m Genmab upfront payment.
Outlook, commentary and risks
- Management expects more than $2bn in annual cost synergies over three years from Allergan integration and approximately $2bn of related charges through 2022. It also intends to reduce incremental debt while investing in its pipeline and returning cash to shareholders.
- The board increased the quarterly dividend from $1.18 to $1.30 per share beginning with the February 2021 payment, an increase of approximately 10.2%. The filing gives no specific earnings or revenue forecast.
- COVID-19 had not materially affected operations to date, but AbbVie reported lower new-patient starts and said the pandemic could continue to affect results; the ultimate impact remained uncertain.
- Risks include Allergan integration and synergy execution, product and patent competition, clinical and regulatory outcomes, litigation, and pandemic-related disruption. Humira represented approximately 46% of nine-month revenue, down from 58% in 2019.
- Legal matters include opioid-related claims against Allergan, antitrust and product-liability litigation, and intellectual-property disputes. The recorded litigation accrual was approximately $70m at September 30; management said ultimate disposition was not expected to materially affect the company, while noting outcomes cannot be predicted with certainty.
- Allergan purchase-price valuations remained preliminary at quarter-end. The filing also notes that contingent consideration fair values depend on significant unobservable assumptions and may materially affect results.
Important facts for investors to verify
- How reported growth and margins develop once Allergan is included for comparable full periods, and how much acquisition-related amortization and integration expense remains.
- Debt repayment progress, cash generation, and capacity to fund dividends, integration costs and research commitments.
- Whether projected Allergan synergies are achieved and whether the preliminary purchase accounting changes materially.
- Performance of Humira amid international biosimilar competition, growth from newer medicines, and continuing COVID-19 effects on patient starts.
- Developments in significant litigation and the assumptions behind contingent consideration liabilities.