AbbVie Inc. — Q3 2018 Form 10-Q
Business context and reporting period
AbbVie is a global biopharmaceutical company operating in one segment: pharmaceutical products. This unaudited filing covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Unless noted, amounts are U.S. dollars.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenues | $8.236B | $6.995B | $24.448B | $20.477B |
| Operating earnings | $3.159B | $2.694B | $8.824B | $7.763B |
| Net earnings | $2.747B | $1.631B | $7.513B | $5.257B |
| Diluted EPS | $1.81 | $1.01 | $4.79 | $3.27 |
| Operating cash flow | Not separately stated | Not separately stated | $10.035B | $7.376B |
- Revenue grew 17.8% at actual exchange rates and 18.5% at constant currency in Q3; nine-month growth was 19.4% and 17.8%, respectively.
- Q3 gross margin was 78% of revenue versus 77% a year earlier; nine-month gross margin was 77% in both periods. SG&A was 23% of Q3 revenue versus 21%; R&D was 15% versus 18%.
- Nine-month investing cash outflow was $723M and financing cash outflow was $10.571B. Cash and equivalents were $8.015B at September 30, down from $9.303B at year-end 2017. Operating cash flow less capital expenditures was approximately $9.520B.
- Balance-sheet debt totaled approximately $40.5B, comprising short-term borrowings, current maturities and long-term debt and lease obligations. Cash plus short-term investments was $8.785B. Stockholders’ equity was a deficit of $2.921B, compared with positive equity of $5.097B at year-end.
Material changes versus the prior comparable period
- HUMIRA revenue increased 9% globally in Q3 at constant currency, while IMBRUVICA revenue increased 41%. MAVYRET drove HCV growth; VIEKIRA sales declined sharply.
- Nine-month HUMIRA sales were $15.018B, about 61% of company revenue, down from 66% in the prior-year period. HUMIRA remains a material product concentration.
- Q3 and nine-month net earnings benefited from a substantially lower effective tax rate: 1% in 2018 versus 22% and 20%, respectively, in 2017. Management attributed the change principally to U.S. tax reform and timing effects involving certain foreign subsidiaries.
- SG&A rose 32% in Q3 and 26% for nine months, reflecting higher litigation reserves, charitable contributions and product-launch spending. Nine-month operating cash flow increased 36% year over year.
Outlook, management commentary, risks and unusual items
- Management emphasized revenue diversification, pipeline investment, margin expansion and shareholder returns. AbbVie reported more than 60 compounds or indications in clinical development, with more than 30 in mid- or late-stage development, and anticipated regulatory submissions and clinical readouts over the next 12 months. The filing provides no specific numerical earnings or revenue guidance.
- In October 2018, HUMIRA’s EU composition-of-matter patent expired and biosimilars launched in Europe; management did not expect U.S. biosimilar competition until 2023. The filing describes strategies to differentiate HUMIRA, but its high revenue concentration remains a key exposure.
- Nine-month results included a $500M charge for extending the Calico collaboration, $432M of expense from fair-value changes in contingent consideration, $276M in litigation reserve charges, $182M in charitable contributions, $124M of acquired in-process R&D and $87M in milestone payments. The company also reported $801M of after-tax intangible amortization in its EPS discussion.
- AbbVie issued $6.0B of senior notes in September and had $3.0B outstanding under a 364-day term loan at quarter-end. It also repurchased $8.5B of shares under its new $10B authorization and paid $4.129B in dividends during the first nine months.
- Litigation accruals were approximately $770M, up from $445M at year-end. AbbVie was appealing a court ruling ordering $448M plus interest in disgorgement in an FTC AndroGel case and had accrued no liability for that matter. A confidential term sheet to settle existing testosterone-product claims remained subject to definitive documentation and contingencies.
- Other risks include patent challenges, product liability and other litigation, clinical and regulatory uncertainty, customer and government-payer credit risk, foreign-exchange exposure, and sensitivity in contingent-consideration valuations. Three U.S. wholesalers represented 61% of net receivables at quarter-end.
Most important facts for investors to verify
- HUMIRA’s revenue concentration and the commercial impact and pace of European biosimilar competition.
- Whether growth in IMBRUVICA, MAVYRET and newer pipeline products can offset pressure on established products.
- Cash generation, debt maturities and interest expense, alongside substantial dividends and share repurchases.
- Updates on the testosterone litigation settlement, the FTC AndroGel appeal, HUMIRA-related allegations and the $770M litigation accrual.
- The sustainability of the unusually low 2018 effective tax rate and any final adjustments to provisional tax-reform accounting.