AbbVie Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. AbbVie became an independent, publicly traded company on January 1, 2013, following its separation from Abbott Laboratories. Prior-year results are historical combined results derived from Abbott’s records, including allocated corporate costs; they may not reflect AbbVie’s costs as a standalone company.
Financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $4.329 billion | $4.173 billion |
| Operating earnings | $1.305 billion | $978 million |
| Net earnings | $968 million | $883 million |
| Diluted EPS | $0.60 | $0.56 |
| Operating cash flow | $1.187 billion | $1.594 billion |
| Cash and equivalents | $6.979 billion | $5.901 billion at Dec. 31, 2012 |
| Short-term investments | $500 million | $2.075 billion at Dec. 31, 2012 |
| Long-term debt and lease obligations | $14.601 billion | $14.630 billion at Dec. 31, 2012 |
Sales increased 4% at actual exchange rates and 5% at constant currency. Gross margin was 73% of sales, compared with 72% a year earlier. SG&A was $1.237 billion (29% of sales), and R&D was $634 million (15% of sales). Net interest expense was $66 million; the effective tax rate rose to 21.9% from 12.2%. Cash and short-term investments together were $7.479 billion at quarter-end, down from $7.976 billion at year-end 2012. Current liabilities were $6.766 billion.
Material changes and drivers
- HUMIRA sales rose 16% at actual exchange rates and 17% at constant currency to $2.244 billion, driven by market growth, share gains, pricing in some markets and new indications.
- U.S. TriCor/TRILIPIX sales fell 50% amid generic competition; the broader lipid franchise, including Niaspan, declined 29% at constant currency. Other declines included Lupron, Sevoflurane and Zemplar.
- Operating earnings improved partly because Q1 2012 included $150 million of acquired in-process R&D expense and a $100 million Depakote-related charge in SG&A. Q1 2013 included $29 million of separation-related SG&A costs; the filing reports $34 million of total separation-related expenses.
- Operating cash flow fell year over year, despite higher net earnings, with changes in operating liabilities among the reported cash-flow movements. Investing cash flow was $1.487 billion, including $1.575 billion of investment-security sales; financing cash flow was negative $1.582 billion, including dividends and net short-term borrowing repayments.
Liquidity, capital and outlook
- Long-term debt and lease obligations totaled $14.623 billion including current maturities; the weighted-average effective rate was 2.37%. Commercial paper outstanding was $400 million at a weighted-average rate of 0.3%; no revolving-credit-facility borrowings were outstanding. AbbVie reported compliance with facility covenants.
- Management expected approximately $300 million of net interest expense for 2013 and an effective tax rate of approximately 22%, excluding discrete items. The filing provides no specific revenue or earnings guidance.
- The board declared a quarterly dividend of $0.40 per share and management expected regular dividends at an annual rate of $1.60 per share, subject to board discretion. A $1.5 billion repurchase authorization was announced; no shares were repurchased under the program during the quarter.
- AbbVie reported a pipeline of more than 20 compounds or indications in Phase II or III. It cited positive Phase IIb results for interferon-free HCV studies and ongoing Phase III development, and reported FDA approval of Creon 36,000 capsules.
Risks, contingencies and unusual items
- AbbVie reported $781 million in net government receivables from Greece, Portugal, Italy and Spain, including $113 million more than one year past due. Management warned that funding or reimbursement changes could impair collection.
- Three U.S. wholesalers accounted for 41% of net accounts receivable at quarter-end; substantially all U.S. sales were to those wholesalers.
- Product and patent risks include generic competition affecting the lipid franchise, potential generic entry for Niaspan from September 2013 and TRILIPIX as early as July 2013 under certain circumstances, and expected AndroGel 1% generic competition in 2015. AbbVie was pursuing patent litigation concerning proposed generic AndroGel 1.62%.
- AbbVie cited ongoing competition and healthcare regulation, including rebates and fees expected to pressure future gross margins. Foreign-exchange and interest-rate exposures are hedged in part; the filing also reports an $11 million loss from Venezuela’s February 2013 currency devaluation.
- Litigation accruals were not significant at March 31, 2013. Management said pending matters were not expected to materially affect financial position, cash flows or results, while noting outcomes cannot be predicted with certainty. The Depakote matter had been resolved in 2012, with approximately $1.6 billion paid that year.
- The separation transferred pension obligations to AbbVie, including reported net liabilities of $621 million for defined-benefit plans and $270 million for other post-employment plans; the company made a voluntary $145 million pension contribution in Q1.
Important facts for investors to verify
- Whether standalone operating costs and separation-related expenses develop as expected; Q1 2012 allocations from Abbott may limit comparability.
- HUMIRA growth and the timing and commercial impact of generic competition across the lipid portfolio and AndroGel.
- Collection trends, aging and potential credit losses for European government receivables, and exposure to major U.S. wholesalers.
- Debt-service capacity, planned dividends and repurchases, and the assumptions underlying management’s 2013 interest-expense and tax-rate expectations.
- Developments in patent, antitrust and other legal proceedings, and progress and regulatory outcomes for the clinical pipeline.