AbbVie Inc. — Q3 2016 Form 10-Q
Business context and reporting period. AbbVie is a global biopharmaceutical company operating in one segment. This unaudited filing covers the quarter and nine months ended September 30, 2016; comparisons are with the same 2015 periods unless noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Net revenue | $6.432 billion, up 8.2% reported (8.8% constant currency) | $18.842 billion, up 14.5% reported (16.1% constant currency) |
| Operating earnings | $2.361 billion, versus $1.885 billion | $7.026 billion, versus $5.424 billion |
| Net earnings | $1.598 billion, versus $1.239 billion | $4.562 billion, versus $3.627 billion |
| Diluted EPS | $0.97, versus $0.74 | $2.78, versus $2.21 |
| Gross margin | 77%, versus 80% | 77%, versus 82% |
| Operating margin | Approximately 37%, versus 32% | 37%, versus 33% |
For the nine months, reported diluted EPS included after-tax costs of $445 million for intangible amortization, $298 million for Venezuela devaluation, $229 million related to acquisitions, $160 million of acquired in-process R&D, $145 million from contingent-consideration changes and $70 million of milestone payments.
- Cash flow: Operating cash flow was $5.500 billion for the nine months, compared with $5.572 billion. Investing cash outflow was $5.955 billion; financing cash outflow was $1.426 billion. Cash and equivalents fell by $2.181 billion to $6.218 billion.
- Liquidity and debt: Cash, equivalents and short-term investments totaled $7.950 billion; current assets were $16.290 billion and current liabilities $9.103 billion. Long-term debt and lease obligations were $37.284 billion, with another $26 million current. No commercial paper or revolving-credit-facility borrowings were outstanding at quarter-end; $3.0 billion was available under the facility.
- Shareholder returns: Nine-month cash dividends were $2.784 billion. On October 28, 2016, AbbVie announced a quarterly dividend increase from $0.57 to $0.64 per share beginning with the February 2017 payment.
Material changes and drivers
- HUMIRA revenue rose 11.3% in Q3 and 14.5% for the nine months, and represented about 63% of nine-month revenue. IMBRUVICA revenue increased 64% in Q3; its nine-month comparison is affected by the May 2015 Pharmacyclics acquisition.
- VIEKIRA revenue declined 19.6% in Q3, mainly from lower U.S. market share, but rose 11.6% for the nine months on international growth and geographic expansion. Kaletra and several other established products declined.
- Operating earnings improved, supported by revenue growth and lower SG&A. SG&A declined 6% in Q3 and 10% for the nine months; prior-year costs included separation and Pharmacyclics acquisition expenses. Gross margin fell due to higher intangible amortization, foreign exchange and Pharmacyclics-related profit sharing and inventory step-up amortization.
- AbbVie acquired Stemcentrx in June for reported total consideration of $6.426 billion, including contingent consideration, adding Rova-T and other oncology assets. It acquired rights to risankizumab and BI 655064 from Boehringer Ingelheim in April; the recorded total consideration was $3.978 billion, including contingent payments. Valuations remain subject to measurement-period finalization.
- May debt issuance of $7.8 billion helped fund Stemcentrx, repay a $2.0 billion term loan and finance a $3.8 billion accelerated share repurchase. S&P lowered AbbVie’s ratings to A- and Moody’s lowered its senior unsecured rating to Baa2 in 2016.
Outlook, commentary and risks
- Management emphasized growth from HUMIRA, IMBRUVICA, VIEKIRA and pipeline products; margin expansion; continued R&D and business development; and dividends and repurchases. It anticipated multiple Phase 2 programs moving to Phase 3 and regulatory submissions and clinical readouts over the next 12 months. The filing provides no specific full-year revenue or EPS guidance.
- Pipeline and execution risks include clinical-trial outcomes, regulatory approvals, commercialization and competition. HUMIRA concentration and biosimilar competition are material considerations; the filing describes patent review proceedings and AbbVie’s patent-infringement suit concerning Amgen’s proposed adalimumab biosimilar.
- Other risks include intellectual-property and antitrust disputes, product-liability claims, foreign-exchange and interest-rate exposure, and collection delays from government customers. AbbVie recorded a $298 million Venezuela devaluation loss; Venezuelan net monetary assets were approximately $3 million at quarter-end.
- Litigation accruals were approximately $205 million, versus $170 million at year-end 2015. The company described several significant ongoing matters, including testosterone-therapy and Depakote product-liability cases and AndroGel and Niaspan antitrust litigation; management stated that ultimate disposition was not expected to materially adversely affect consolidated results, position or cash flows.
- Three U.S. wholesalers accounted for 47% of accounts receivable at quarter-end, and substantially all U.S. revenue was sold to those wholesalers. The filing also identifies governmental receivables in several European and oil-exporting countries as potential collection risks.
Most important facts for investors to verify
- Whether HUMIRA growth and revenue concentration can be sustained amid biosimilar, pricing and patent challenges.
- IMBRUVICA growth, collaboration economics and the effect of Pharmacyclics-related costs on margins and cash generation.
- Clinical, regulatory and commercial progress of Rova-T, risankizumab and other pipeline assets, and the assumptions underlying contingent consideration.
- Debt-service capacity, credit-rating developments and the impact of acquisition financing and shareholder returns on liquidity.
- Developments in major litigation, government receivable collections, and potential further foreign-exchange losses.