AbbVie Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless otherwise noted. AbbVie is a research-based pharmaceutical company operating as a standalone public company since January 2013.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $4.563 billion | $4.329 billion | +5% reported; +7% at constant currency |
| Gross margin | $3.463 billion; 76% of sales | $3.176 billion; 73% of sales | +9% |
| Operating earnings | $1.351 billion | $1.305 billion | +4% |
| Net earnings | $980 million | $968 million | +1% |
| Diluted EPS | $0.61 | $0.60 | Up $0.01 |
| Operating cash flow | $624 million | $1.187 billion | Down $563 million |
SG&A was $1.340 billion, or 29% of sales, up 8%. R&D was $772 million, or 17% of sales, up 22%, reflecting increased investment in pipeline programs and additional HUMIRA indications. The effective tax rate was 23.8%, versus 21.9%.
Revenue drivers and material changes
- HUMIRA sales rose 18% to $2.637 billion and represented approximately 58% of total sales, compared with 52% a year earlier. U.S. sales grew 25%; international sales grew 12% reported and 14% at constant currency.
- Sales of Synthroid, Creon and Duodopa also increased. The lipid franchise (TriCor, TRILIPIX and Niaspan) fell 72% to $96 million as generic competition continued; AbbVie cited a $248 million year-over-year revenue loss from this competition.
- Gross margin improved on product mix, operational efficiencies and lower intangible amortization, partly offset by foreign exchange and lipid-product exclusivity losses.
- Separation-related expenses were $80 million, versus $34 million in Q1 2013; $77 million and $29 million, respectively, were included in SG&A. SG&A growth also reflected increased selling and marketing support, including preparation for a potential HCV launch.
Liquidity, debt and capital allocation
At March 31, 2014, cash and equivalents were $8.140 billion and short-term investments were $960 million, totaling $9.100 billion, down from $9.895 billion at year-end. Total current assets were $17.329 billion and current liabilities $6.216 billion. Long-term debt and lease obligations were $14.386 billion; current debt and lease obligations were $18 million, with $2 million of short-term borrowings. No commercial paper was outstanding at quarter-end. The $2.0 billion revolving credit facility was undrawn, and AbbVie reported compliance with its covenants.
Operating cash flow decreased to $624 million and included a $370 million voluntary domestic pension contribution, compared with $145 million in Q1 2013. The decline also reflected changes in operating assets and liabilities, including a $612 million use of cash from accounts payable and other liabilities. Investing cash flow was a $797 million use, including $660 million of investment-security purchases; financing cash flow was a $1.277 billion use, including $641 million of dividends and $329 million of treasury-stock purchases.
The board declared a quarterly dividend of $0.42 per share, a 5% increase from $0.40. Q1 2014 dividends paid were $641 million. AbbVie repurchased approximately 5 million shares for $250 million and had about $1.0 billion remaining under its $1.5 billion authorization. The Q1 2013 declared-dividend figure of $0.80 per share includes a $0.40 dividend declared from pre-separation earnings; it is not directly comparable to the regular quarterly rate.
Outlook, management commentary and risks
- Management expected the 2014 effective tax rate to be approximately 22%, excluding discrete items. No full-year sales or EPS guidance is stated in this filing text.
- AbbVie expected U.S. commercialization of its interferon-free HCV combination in 2014 and planned an EU regulatory submission in early May 2014, with European approval expected in early 2015. Duodopa was under U.S. regulatory review, with a decision expected in 2014.
- The company reported more than 20 compounds or indications in Phase II or III development, about 12 in Phase III or registration; it expected several Phase II programs to advance to Phase III during 2014. A Phase IIb acute kidney injury study was discontinued. FDA issued a complete response letter for levodopa-carbidopa intestinal gel, principally concerning its delivery system, without identifying safety issues or requesting additional clinical trials.
- Key business risks include reliance on HUMIRA, generic competition and loss of exclusivity, R&D and regulatory uncertainty, foreign-exchange and interest-rate exposure, and customer/wholesaler concentration. Three U.S. wholesalers accounted for 34% of net accounts receivable. Government receivables in Greece, Portugal, Italy and Spain totaled $566 million, including $30 million more than one year past due; management did not expect Southern European conditions to materially affect liquidity or financial flexibility.
- Legal matters include antitrust litigation concerning Niaspan and AndroGel, Depakote-related claims, patent disputes involving AndroGel, Kaletra and Norvir, and a remanded Norvir antitrust matter. The litigation accrual was not significant; management believed the ultimate disposition of proceedings should not materially adversely affect consolidated financial position, cash flows or results, while noting outcomes are uncertain.
- AbbVie continued replacing Abbott-provided systems and services with standalone infrastructure; the phased ERP and related control implementation was expected to continue through 2015. Disclosure controls were assessed as effective at quarter-end.
Investor facts to verify
- HUMIRA’s growth, concentration of sales and receivables, and exposure to competition and future exclusivity changes.
- Whether HCV and Duodopa regulatory milestones and commercialization expectations were achieved, and how pipeline spending translates into approved products.
- Cash-flow sustainability after pension contributions, ongoing dividends and repurchases, and the company’s debt and refinancing needs.
- Developments in generic competition, material litigation and patent protection, and collection of overdue government receivables.
- Progress and costs of the transition to standalone operations, including the ERP implementation and remaining Abbott-related activities.