AbbVie Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2015; filed November 6, 2015. AbbVie is a global biopharmaceutical company operating in one pharmaceutical-products segment.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net revenues | $5.944 billion | $5.019 billion | $16.459 billion | $14.508 billion |
| Operating earnings | $1.885 billion | $960 million | $5.424 billion | $3.826 billion |
| Net earnings | $1.239 billion | $506 million | $3.627 billion | $2.584 billion |
| Diluted EPS | $0.74 | $0.31 | $2.21 | $1.60 |
| Gross margin as percentage of revenue | 80% | 78% | 82% | 77% |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $5.572 billion | $4.127 billion |
Revenue increased 18% in Q3 and 13% for the nine months at reported exchange rates; growth at constant currency was 26% and 21%, respectively. Nine-month gross margin improved on product mix, operating efficiencies, and foreign exchange. Nine-month net earnings included a lower effective tax rate: 23%, versus 24% in 2014. Q3 effective tax rate was 25%, versus 26%.
Business drivers and changes versus prior year
- HUMIRA revenue was $3.647 billion in Q3 and $10.295 billion for the nine months, up 20% at constant currency in both periods. It represented approximately 63% of nine-month company revenue.
- Newly acquired IMBRUVICA contributed $304 million in Q3 and $411 million since acquisition; VIEKIRA contributed $469 million in Q3 and $1.085 billion for the nine months.
- AndroGel revenue declined 24% in Q3 and 29% for the nine months, primarily from market contraction and generic competition. Kaletra and dyslipidemia products also declined.
- AbbVie completed its approximately $20.8 billion acquisition of Pharmacyclics on May 26, 2015. The acquired business contributed $431 million of revenue and an operating loss of $422 million through September 30; reported costs included acquisition-related compensation, inventory step-up and amortization, and transaction and integration expenses. The purchase-price allocation remained preliminary.
Cash, debt and capital allocation
- At September 30, cash and equivalents were $9.223 billion. Current assets were $17.912 billion and current liabilities $8.813 billion.
- Total reported short- and long-term borrowings and lease obligations were approximately $32.1 billion, compared with approximately $15.0 billion at December 31, 2014. The increase primarily reflects financing activity associated with Pharmacyclics and a $5 billion accelerated share repurchase (ASR).
- Nine-month investing cash outflow was $12.639 billion, including $11.488 billion for Pharmacyclics, net of cash acquired. Financing cash inflow was $8.183 billion, including $16.660 billion of long-term debt proceeds; dividends paid were $2.454 billion.
- The $5 billion ASR resulted in delivery of 73 million shares. AbbVie also repurchased approximately 21 million shares for $1.2 billion in the open market; $3.5 billion remained under the authorization at quarter-end.
- AbbVie stated that it drew on two term-loan facilities totaling $4 billion in November 2015 to refinance notes maturing in 2015. Those notes were classified as long-term debt at September 30. The company reported compliance with its debt covenants.
Outlook, commentary and risks
- Management expected 2015 revenue performance to be supported by HUMIRA, the HCV-treatment launch, and IMBRUVICA, with generic competition and declines in certain products as offsets. It expected operating-margin improvement and growth in operating cash flow, while continuing pipeline investment. No specific full-year revenue or EPS guidance is stated in the provided filing text.
- AbbVie expected Pharmacyclics to contribute to growth and to be earnings-accretive beginning in 2017. Management expected IMBRUVICA and its HCV regimen to contribute significantly to revenue growth in Q4 2015 and 2016.
- On October 30, 2015, the board announced an increase in the quarterly dividend from $0.51 to $0.57 per share beginning with the February 2016 payment.
- Key exposures include dependence on HUMIRA, generic and other product competition, clinical and regulatory uncertainty, intellectual-property challenges, foreign-exchange movements, and customer and government reimbursement risks. Three U.S. wholesalers accounted for 50% of net receivables. Government receivables in Greece, Portugal, Italy and Spain totaled $607 million.
- AbbVie used an official exchange rate of 6.3 bolivars per U.S. dollar for Venezuela. It disclosed that applying 13.5 would have produced a $163 million devaluation loss on its net monetary assets, and warned that a change in the applicable rate could significantly affect results.
- Litigation includes antitrust matters, testosterone-replacement-therapy product-liability cases (approximately 1,600 federal MDL cases and 70 state cases), and Depakote product-liability claims (approximately 700). The company said litigation accruals were not significant and believed the proceedings’ ultimate disposition would not materially affect its financial position, results or cash flows.
- Other notable expenses included $350 million for a priority review voucher, a $130 million Infinity collaboration milestone, $150 million of acquired IPR&D charges for the nine months, and $86 million of Pharmacyclics-related financing costs. Management reported effective disclosure controls; the ERP and related transition from Abbott services remained in progress.
Important facts for investors to verify
- HUMIRA’s revenue concentration, patent protection and durability of growth, alongside the impact of competition and product mix.
- IMBRUVICA and HCV launch performance, including collaboration economics, regulatory progress and the expected timing of Pharmacyclics accretion.
- Post-acquisition debt, interest expense, integration costs, and final Pharmacyclics asset and liability valuations.
- Whether operating cash flow can support dividends, investment and repurchases while maintaining liquidity and credit ratings.
- Potential financial effects of Venezuela exchange-rate changes, Southern European government receivables, and ongoing litigation.