AbbVie Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. AbbVie is a global biopharmaceutical company operating in one segment. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Net revenues | $6.538B | $5.958B | Up 9.7% reported; 10.1% at constant currency |
| Operating earnings | $2.419B | $2.278B | Up 6.2% |
| Gross margin | $4.922B; 75% of revenue | $4.589B; 77% | Margin down 2 percentage points |
| Research and development | $1.135B | $946M | Up 20%; 17% of revenue versus 16% |
| Net earnings | $1.711B | $1.354B | Up 26.4% |
| Diluted EPS | $1.06 | $0.83 | Up 27.7% |
| Operating cash flow | $2.102B | $2.128B | Down $26M |
| Cash and equivalents | $4.740B | $5.100B at Dec. 31, 2016 | Quarter-end balance |
SG&A was $1.368B, or 21% of revenue, versus $1.355B, or 23%. Interest expense, net, rose to $247M from $200M, largely reflecting debt issued in May 2016 to help finance the Stemcentrx acquisition. The effective tax rate declined to 18% from 24%, reflecting earnings mix and other factors, including the prior-year Venezuela loss and adoption of stock-compensation accounting guidance.
At March 31, 2017, short-term borrowings were $400M, current long-term debt and lease obligations $25M, and long-term debt and lease obligations $36.526B. Current assets were $15.547B and current liabilities $8.844B. The company had a $3.0B revolving credit facility with no outstanding balance and reported compliance with its covenants.
Revenue trends and material changes
- HUMIRA revenue rose 15.1% to $4.118B and represented approximately 63% of total revenue, up from 60% a year earlier.
- IMBRUVICA revenue increased 44.7% to $551M, reflecting continued uptake, including as a first-line CLL treatment.
- VIEKIRA revenue fell 36.3% to $263M amid market contraction, lower market share and price erosion.
- Creon rose 22.8% to $185M; Duodopa rose 17.0% to $80M. Synagis declined 5.9% to $300M, partly reflecting lower volume.
- U.S. revenue grew 15.9%; international revenue grew 0.9% reported and 1.8% at constant currency.
Gross margin percentage fell mainly because of higher intangible amortization, IMBRUVICA profit sharing and unfavorable foreign exchange, partly offset by product mix. R&D increased to support mid- and late-stage programs and acquired pipeline assets. The 2016 comparison included a $298M Venezuela devaluation loss; Q1 2017 had no comparable charge. Q1 2017 also included an $85M increase in the fair value of contingent consideration liabilities, recorded in other expense.
Cash flow, capital allocation and outlook
Operating cash flow was $2.102B. Investing activities used $684M, including net purchases of investment securities; financing activities used $1.794B, including $1.027B of dividends paid and $895M of treasury-stock purchases. AbbVie repurchased about 7.8 million shares for $500M in the quarter and reported $4.5B remaining under its repurchase authorization after the board added $5.0B to the program. The quarterly dividend was raised to $0.64 per share from $0.57.
The filing provides no specific full-year financial guidance. Management cited expected regulatory submissions and clinical readouts over the next 12 months, and anticipated multiple Phase 2 programs could advance to Phase 3. The pipeline included more than 50 compounds or indications in clinical development, with more than 30 in mid- or late-stage development. In April 2017, the FDA accepted and granted priority review to the investigational glecaprevir/pibrentasvir HCV application; two Phase 3 veliparib studies announced in April did not meet their primary endpoints.
Risks, contingencies and unusual items
- Product concentration and competition: HUMIRA dependence is significant. AbbVie is litigating to enforce HUMIRA patents against Amgen’s proposed biosimilar and faces patent validity proceedings; outcomes could affect competition and revenue.
- Pipeline and acquisition exposure: Stemcentrx and Boehringer Ingelheim-related contingent consideration totaled $4.298B at fair value, measured using significant unobservable inputs. Management sensitivity estimates included approximately $180M impact from a 50-basis-point discount-rate change and $360M from a five-percentage-point change in assumed success probabilities.
- Legal matters: Accrued litigation liabilities were approximately $225M. The company described multiple antitrust, product-liability, intellectual-property and other matters, including approximately 4,150 consolidated testosterone-therapy claims and approximately 695 Depakote birth-defect claims. Management stated that ultimate disposition was not expected to materially adversely affect consolidated financial position, results or cash flows, while noting outcomes are uncertain.
- Credit and collection risk: Government receivables included $244M in Greece, Portugal, Italy and Spain; $125M in Saudi Arabia; and $110M in Russia. Three U.S. wholesalers accounted for 49% of net receivables. Delays or collection losses could arise from customer or government funding conditions.
- Other exposures: Foreign exchange, intellectual-property challenges, litigation or government action, R&D failure, and changes in laws and regulation are identified risks. The company reported no material change to critical accounting policies and effective disclosure controls.
Important facts for investors to verify
- Whether HUMIRA growth and patent protections can sustain results given its high share of revenue and biosimilar challenges.
- Commercial and clinical progress for IMBRUVICA, the HCV pipeline and other late-stage programs, including the impact of the veliparib trial failures.
- Debt servicing, cash generation and the pace of dividends and repurchases relative to investment needs and net debt.
- Changes in contingent-consideration valuations, acquisition-related charges and the assumptions underlying acquired pipeline assets.
- Developments in major litigation, government receivable collections and the $225M litigation accrual.