AbbVie Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. AbbVie is a global biopharmaceutical company operating in one pharmaceutical-products segment. Financial amounts are in U.S. dollars; dollar figures below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change or context |
|---|---|---|---|
| Net sales | $5,040 | $4,563 | Up 10% at reported exchange rates; up 18% at constant currency |
| Gross profit / margin | $4,098 / 81% | $3,463 / 76% | Margin improved 5 percentage points |
| Operating earnings | $1,687 | $1,351 | Up 25% |
| Net earnings | $1,022 | $980 | Up 4% |
| Diluted EPS | $0.63 | $0.61 | Up 3% |
| Operating cash flow | $1,585 | $624 | Increase attributed primarily to stronger operating results and lower pension contributions |
| Cash and equivalents | $7,906 | $8,348 at Dec. 31, 2014 | Down $442 million during the quarter |
| Debt and lease obligations, including short-term borrowings | $15,273 | — | Includes $569 million of short-term borrowings; no borrowings under the $3.0 billion revolving facility |
| Current assets / current liabilities | $15,408 / $11,050 | $16,088 / $11,400 at Dec. 31, 2014 | Current ratio approximately 1.39 at quarter-end |
| Dividends declared per share | $0.51 | $0.42 | Quarterly rate increased; cash dividends paid were $786 million versus $641 million |
Gross-margin improvement reflected product mix, operational efficiencies, foreign-exchange effects, and lower intangible amortization. SG&A rose 10% to $1,473 million, while R&D rose 5% to $811 million. The effective tax rate increased to 27% from 24%.
Material changes and business drivers
- HUMIRA sales increased 18% reported and 26% at constant currency to $3,111 million, representing approximately 62% of total sales.
- VIEKIRA generated $231 million in sales following launches in the United States and Europe. Management expected the hepatitis C regimen to contribute significantly to 2015 sales growth.
- AndroGel sales fell 40% to $153 million, reflecting market weakness and generic competition for the 1% formulation. Dyslipidemia product sales fell 54% to $43 million.
- Other sales increases included Synthroid (+19%), Creon (+19%), and Duodopa (+19% at constant currency). International sales grew 2% reported but 17% at constant currency, with currency weakness materially affecting reported results.
- Q1 operating cash flow was substantially higher year over year, in part because voluntary contributions to the main domestic defined-benefit pension plan were $150 million versus $370 million in Q1 2014.
Outlook, transactions, risks, and unusual items
- Management expected 2015 sales growth from HUMIRA, the HCV launch, Creon, and Duodopa, partly offset by generic competition and declines in selected products. It also expected operating-margin improvement and operating-cash-flow growth while continuing pipeline investment. No full-year numerical guidance is provided in this filing text.
- AbbVie agreed to acquire Pharmacyclics for approximately $21 billion, with the transaction expected to close in Q2 2015 subject to tender and regulatory conditions. It arranged an undrawn $18 billion, 364-day bridge facility and intended to issue approximately $17 billion of senior notes. Acquisition-related financing costs of $59 million were expensed in Q1.
- The board expanded the share-repurchase authorization by $5 billion to support an accelerated repurchase intended to offset at least half of the equity issued for Pharmacyclics. Remaining authorization was approximately $9.4 billion at March 31.
- AbbVie recorded $127 million of acquired in-process R&D charges, including a $100 million upfront payment for an exclusive anti-tau antibody license from C2N; potential additional milestone payments were up to $685 million plus royalties. Cash outflows for acquisitions, collaborations, and other arrangements totaled $736 million, including a $500 million Calico payment.
- Net foreign-exchange loss was $164 million; management said it included $170 million of losses on liquidation of currency positions related to the terminated proposed Shire combination. The quarter also had a $549 million foreign-currency translation loss in other comprehensive income, principally associated with the weaker euro.
- Venezuela is a significant currency uncertainty: AbbVie used the official rate of 6.3 bolivars per U.S. dollar for $265 million of net monetary assets. Using a rate of 12 would have produced a $126 million devaluation loss, according to the filing.
- Pharmacyclics prompted negative outlook revisions from Moody’s and S&P, although their cited ratings were affirmed. AbbVie reported compliance with its revolving-credit covenants and said the facility had no amounts outstanding.
- Three U.S. wholesalers accounted for 48% of net receivables, and substantially all U.S. sales were to those wholesalers. Government receivables in Greece, Portugal, Italy, and Spain totaled $479 million; the company noted collection risk if funding or reimbursement conditions worsen.
- Legal matters include antitrust and product-related claims, securities litigation concerning the terminated Shire transaction, and other proceedings. Accrued litigation balances were not significant; management did not expect ultimate dispositions to materially adversely affect consolidated financial position, results, or cash flows, while acknowledging outcomes are uncertain.
- Disclosure controls were assessed as effective. A phased ERP and infrastructure implementation was expected to continue through 2015 and would involve changes to financial-reporting controls.
Key investor verification points
- Confirm Pharmacyclics closing, final consideration mix, funding terms, resulting leverage, and any further credit-rating changes.
- Track HUMIRA concentration and growth, VIEKIRA adoption, and generic or market-driven declines in AndroGel and the lipid franchise.
- Assess whether operating cash-flow growth persists after considering pension contributions, working-capital movements, and acquisition and collaboration spending.
- Monitor foreign-exchange exposure, especially the euro and Venezuela’s official exchange rate, and distinguish earnings effects from translation adjustments.
- Review collection trends for concentrated wholesaler and Southern European government receivables, as well as developments in material litigation and patent challenges.