AbbVie Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015; filed August 7, 2015. AbbVie is a global pharmaceutical company reporting one business segment. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net revenue | $5.475B | $4.926B | $10.515B | $9.489B |
| Operating earnings | $1.852B | $1.515B | $3.539B | $2.866B |
| Net earnings | $1.366B | $1.098B | $2.388B | $2.078B |
| Diluted EPS | $0.83 | $0.68 | $1.47 | $1.29 |
| Gross margin | 83% | 77% | 82% | 77% |
- Revenue rose 11% at reported exchange rates and 19% at constant currency for both Q2 and the first half. Q2 net earnings increased 24%; first-half net earnings increased 15%.
- First-half operating cash flow was $3.417B, versus $2.341B a year earlier. Investing cash outflow was $13.384B and financing cash inflow was $9.239B, largely reflecting the Pharmacyclics acquisition, debt issuance and share repurchase.
- At June 30, cash and equivalents were $7.4B and short-term investments were $879M. Current assets were $16.877B and current liabilities $11.258B.
- Debt and lease obligations totaled approximately $31.1B, including $4.0B current and $27.1B long-term, compared with approximately $14.6B at year-end 2014. No short-term borrowings were outstanding. The $3.0B revolving credit facility was undrawn, and the company reported compliance with its covenants.
- HUMIRA generated $6.648B in first-half revenue, approximately 63% of total revenue. Its worldwide revenue grew 21% at constant currency; U.S. revenue grew 33%.
Material changes and notable items
- AbbVie acquired Pharmacyclics on May 26 for approximately $20.8B, comprising $12.4B cash consideration and about $8.4B of AbbVie shares. The acquisition added IMBRUVICA, which contributed $107M of revenue after acquisition close. Acquisition accounting and acquired asset valuations remained preliminary.
- AbbVie issued $16.7B of senior notes in May, with maturities from 2018 to 2045. Proceeds funded the acquisition and a $5.0B accelerated share repurchase (ASR). About 68 million shares were initially delivered under the ASR; final settlement was expected before the end of Q4 2015.
- First-half revenue growth was supported by HUMIRA, the VIEKIRA hepatitis C launch, and growth in products including Synthroid, Creon and Duodopa. AndroGel revenue fell 32% for the half, primarily due to market contraction and generic competition; dyslipidemia product revenue declined 50%.
- Gross margin improvement reflected product mix, operating efficiencies and foreign exchange effects. SG&A and R&D expenses increased, including spending for launches and pipeline programs, separation costs, and Pharmacyclics-related costs.
- First-half net foreign exchange loss included $170M from liquidation of currency positions related to the terminated proposed Shire combination. Interest expense also rose, partly because of acquisition financing and $86M of bridge-loan-related costs for the half.
- AbbVie paid $1.604B in dividends in the first half; the board declared a quarterly dividend of $0.51 per share payable in August 2015. Open-market repurchases, excluding the ASR, were approximately $250M.
Outlook, risks and contingencies
- Management expected 2015 revenue growth from HUMIRA, the global HCV launch and IMBRUVICA, partly offset by generic competition and declines in certain established products. It also expected operating-margin improvement and growth in operating cash flow while continuing pipeline investment. The filing does not provide a clear numerical full-year revenue or EPS guidance figure.
- AbbVie expected the Pharmacyclics acquisition to be earnings-accretive beginning in 2017. Management cited opportunities to expand oncology, including IMBRUVICA, which had more than 60 trials underway, 13 in Phase 3.
- Key risks include successful and profitable commercialization and supply of IMBRUVICA; substantial new debt and potential credit-rating effects; dependence on HUMIRA; generic competition; R&D and regulatory uncertainty; foreign exchange exposure; and concentration of U.S. sales among three wholesalers.
- AbbVie used the official 6.3 VEF/USD rate for Venezuela. It reported $260M of net monetary assets there and estimated that conversion at 12.8 VEF/USD would imply a $132M devaluation loss. A change in the appropriate exchange rate could materially affect results.
- Net governmental receivables in Greece, Portugal, Italy and Spain totaled $514M. Management did not expect a material liquidity impact but noted that collection could be affected by reduced government funding or reimbursement changes.
- The filing describes multiple antitrust, product-liability, securities and other legal matters. Accrued litigation losses were not significant, and management did not expect the ultimate outcomes to materially adversely affect the company; outcomes remain uncertain.
- The effective tax rate was 19% for Q2 and 22% for the first half, down from 23% and 24%, respectively, in 2014. The decrease reflected earnings mix and discrete items, including a $103M reversal of state valuation allowances connected with Pharmacyclics.
Investor facts to verify
- Whether IMBRUVICA and VIEKIRA sustain expected commercial growth and deliver the projected acquisition benefits.
- Debt reduction, interest costs, credit-rating outlook and capacity to fund dividends, buybacks and R&D.
- HUMIRA’s continued growth and exposure to product concentration, competition and future patent challenges.
- Final Pharmacyclics purchase accounting, integration costs, synergies and ASR settlement.
- Foreign-exchange developments, particularly Venezuela and the euro, and collection trends for Southern European government receivables.
- Developments in material litigation, product-liability claims and pipeline regulatory decisions.