Abbvie Inc. quarterly report, Q2 FY2018

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AbbVie Inc. — Q2 2018 Form 10-Q

Business context and period. AbbVie is a global biopharmaceutical company operating in one pharmaceutical-products segment. This unaudited report covers the quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. Amounts are in U.S. dollars unless noted.

Financial results and liquidity

  • Revenue: Q2 net revenue was $8.278 billion, up 19.2% reported and 17.4% at constant currency. First-half revenue was $16.212 billion, up 20.2% reported and 17.5% at constant currency. HUMIRA generated $9.894 billion in first-half revenue, approximately 61% of total, versus 66% a year earlier.
  • Profit and margins: Q2 operating earnings were $2.762 billion versus $2.662 billion; net earnings were $1.983 billion versus $1.915 billion; diluted EPS was $1.26 versus $1.19. First-half operating earnings were $5.665 billion versus $5.069 billion; net earnings were $4.766 billion versus $3.626 billion; diluted EPS was $2.99 versus $2.25. Reported gross margin declined to 77% from 78% in Q2 and to 76% from 77% for the first half. Higher amortization, foreign exchange and IMBRUVICA profit sharing weighed on gross margin.
  • Product performance: First-half HUMIRA revenue grew 12% reported (9.3% constant currency); IMBRUVICA revenue grew 36.9%; and HCV revenue rose to $1.892 billion from $488 million, largely reflecting the MAVYRET launch. AndroGel, Kaletra and “all other” revenue declined.
  • Cash flow: First-half operating cash flow was $5.511 billion, up from $4.105 billion. Investing activities provided $240 million versus using $366 million. Financing activities used $11.487 billion, primarily reflecting share repurchases, dividends and debt repayment. Cash and equivalents fell to $3.547 billion from $9.303 billion at year-end 2017.
  • Debt and liquidity: Short-term borrowings were $3.511 billion, current long-term debt and lease obligations $3.019 billion, and long-term debt and lease obligations $30.579 billion. Current assets of $13.845 billion were below current liabilities of $17.224 billion. AbbVie drew a $3.0 billion, 364-day term loan at one-month LIBOR plus a margin and repaid $3.0 billion of senior notes at maturity. It reported compliance with applicable credit-facility covenants and no change in credit ratings.
  • Capital returns: AbbVie paid $2.668 billion in dividends and repurchased 72.8 million shares for $7.5 billion in a Dutch auction tender, plus approximately 10.9 million shares for $1.3 billion in open-market purchases. The quarterly dividend declared was $0.96 per share.

Material changes and unusual items

  • The effective tax rate was 2% in Q2 and 1% for the first half, compared with 19% and 18% in 2017. The filing attributes the change principally to U.S. tax reform and timing effects involving certain foreign-subsidiary earnings. Prior-year tax-law transition and deferred-tax estimates remained provisional; no adjustment was made in the first half of 2018.
  • Q2 operating expenses included a $500 million charge for extending the Calico collaboration. AbbVie and Calico each committed an additional $500 million to the collaboration.
  • Other expense included a $485 million Q2 charge from fair-value changes in Boehringer Ingelheim and Stemcentrx contingent consideration liabilities; the first-half change was $337 million. The liabilities totaled $4.821 billion and are valued using significant unobservable assumptions.
  • Management cited first-half diluted EPS costs including $538 million after tax for intangible amortization, $500 million for the Calico extension, $337 million for contingent-consideration fair value changes, $100 million in litigation reserve charges, $93 million in charitable contributions, $87 million in milestone payments and $69 million in acquired in-process R&D.
  • AbbVie adopted the new revenue-recognition standard in 2018 using the modified retrospective method. Product-sales recognition was not significantly changed; the standard increased opening retained earnings by $124 million. First-half reported revenue was $30 million higher than it would have been without adoption, while Q2 revenue was $13 million lower.

Outlook, commentary and risks

  • Management’s stated priorities include diversifying revenue, advancing late-stage pipeline assets, expanding operating margins and returning cash to shareholders. It anticipated multiple Phase 2 programs moving to Phase 3 and regulatory submissions and clinical readouts over the next 12 months. The filing text does not provide a clear quantified earnings or revenue guidance figure.
  • Pipeline updates included positive Phase 3 results for upadacitinib in rheumatoid arthritis, regulatory submissions for risankizumab in psoriasis, FDA approval of VENCLEXTA plus Rituxan for certain CLL/SLL patients, and FDA approval of ORILISSA for endometriosis pain in July. AbbVie said it would not seek accelerated approval for Rova-T in third-line relapsed/refractory small-cell lung cancer after reviewing Phase 2 results; ongoing studies were to continue.
  • Material risks include reliance on HUMIRA, competition and intellectual-property challenges, clinical and regulatory uncertainty, litigation, foreign-exchange and interest-rate exposure, and collection risk from government customers. The filing notes that five PTO proceedings found certain HUMIRA-related patents invalid; AbbVie’s appeal was pending. Three U.S. wholesalers represented 59% of net receivables.
  • Legal matters include approximately $4.3 billion in consolidated testosterone-replacement product-liability claims (about 4,130 MDL claims and 200 state-court claims), as well as AndroGel and other antitrust, patent and securities matters. In June, a court ordered $448 million plus prejudgment interest in an FTC AndroGel matter; AbbVie planned to appeal and recorded no liability for that matter. Total litigation accruals were approximately $560 million at June 30.
  • AbbVie reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. As with all controls, management cautioned they provide reasonable, not absolute, assurance.

Important facts for investors to verify

  • Whether HUMIRA growth and its 61% share of first-half revenue remain sustainable amid biosimilar competition and patent challenges.
  • How the company’s unusually low 2018 effective tax rate evolves as tax-reform estimates and timing effects are finalized.
  • The assumptions behind the $4.821 billion contingent-consideration liability and potential sensitivity of its valuation.
  • The outcome and potential financial exposure of the FTC AndroGel order and other litigation, including testosterone-related claims.
  • How AbbVie will fund upcoming debt maturities, dividends, pipeline investment and remaining repurchase authorization while cash balances are lower and current liabilities exceed current assets.
  • Whether pipeline candidates advance successfully through clinical trials and regulatory review, including the programs identified as near-term milestones.