AbbVie Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. AbbVie is a global biopharmaceutical company operating in one segment, pharmaceutical products. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net revenues | $8,255 | $8,278 | $16,083 | $16,212 |
| Operating earnings | $3,400 | $2,762 | $6,410 | $5,665 |
| Net earnings | $741 | $1,983 | $3,197 | $4,766 |
| Diluted EPS | $0.49 | $1.26 | $2.14 | $2.99 |
| Operating cash flow | Not provided separately | Not provided separately | $5,494 | $5,511 |
- Q2 revenue fell 0.3% reported but rose 1.3% at constant currency. First-half revenue declined 0.8% reported and increased 0.9% at constant currency.
- Gross margin was 78% in Q2 and the first half, versus 77% and 76%, respectively, in the comparable 2018 periods. The filing attributes improvement principally to expiration of HUMIRA royalties, partly offset by higher intangible amortization and IMBRUVICA profit sharing.
- Net earnings were weighed down by other expense, net of $2.278 billion in Q2 and $2.413 billion in the first half, primarily reflecting fair-value increases in contingent consideration liabilities. These included a $2.3 billion Q2 increase in the SKYRIZI-related liability after regulatory approvals and improved commercial estimates. This is a significant unusual item in interpreting reported earnings.
- Interest expense, net was $309 million in Q2 and $634 million in the first half, higher year over year, principally due to higher rates and average debt balances. Effective tax rates were 8% for Q2 and 5% for the first half, compared with 2% and 1% in 2018.
Revenue drivers and changes
- HUMIRA remained the largest product, representing approximately 58% of first-half revenue, down from 61% a year earlier. U.S. HUMIRA revenue rose 7% in the first half, while international revenue fell 27% at constant currency, primarily due to biosimilar competition.
- IMBRUVICA revenue increased 32% in the first half at constant currency; VENCLEXTA revenue more than doubled. SKYRIZI launched following April approvals and generated $48 million in Q2.
- MAVYRET first-half revenue declined 10% at constant currency, and AndroGel revenue fell 63% reported. U.S. HUMIRA biosimilar competition was not expected before 2023, according to the filing.
- SG&A expense fell 6% in both the quarter and first half. Lower charitable contributions and international HUMIRA-related expenses helped; new product launch costs and $24 million of Allergan transaction costs partly offset the reduction. R&D spending was $2.580 billion for the first half, broadly level with 2018.
Cash flow, debt and liquidity
- First-half operating cash flow was $5.494 billion, essentially flat year over year. Investing cash flow was an outflow of $167 million and financing cash flow an outflow of $7.453 billion. Cash and equivalents declined to $5.172 billion from $7.289 billion at year-end 2018.
- At June 30, current assets were $15.100 billion and current liabilities $16.941 billion. The resulting working-capital deficit was approximately $1.841 billion. Short-term borrowings were $306 million; current and long-term debt and finance lease obligations were $5.335 billion and $31.619 billion, respectively.
- Cash dividends paid in the first half were $3.180 billion. The declared quarterly dividend was $1.07 per share. AbbVie repurchased 4 million shares for $300 million during the first half, versus 84 million shares for $8.8 billion in the prior-year period.
- The $3.0 billion revolving credit facility was undrawn, and AbbVie reported compliance with its covenants. The company stated it believed it had sufficient financial flexibility to meet obligations and support growth.
Outlook, transactions and risks
- No specific full-year financial guidance is stated in the supplied filing text. Management’s strategic priorities include diversifying revenue, advancing pipeline assets and launches, expanding margins, and returning cash to shareholders. The company expected multiple regulatory submissions and clinical readouts over the following 12 months.
- On June 25, AbbVie agreed to acquire Allergan in a cash-and-stock transaction with an approximate $63 billion equity value, subject to regulatory and Allergan shareholder approvals; closing was expected in early 2020. AbbVie entered a $38 billion 364-day bridge facility, later reduced to $32 billion after a $6 billion term-loan commitment. No amounts had been drawn. Moody’s affirmed its Baa2 rating with a stable outlook; S&P revised its outlook to negative and anticipated a one-notch downgrade upon closing.
- Key business risks include international HUMIRA biosimilar erosion, reliance on HUMIRA, product development and regulatory uncertainty, and legal and intellectual-property challenges. The filing also identifies risks that the Allergan transaction could be delayed, blocked, require divestitures or fail to deliver expected benefits, and that acquisition debt could adversely affect financial condition or results.
- VENCLEXTA multiple-myeloma trials remained subject to a partial FDA clinical hold after excess deaths in a Phase 3 study; the hold was lifted for the CANOVA trial subject to protocol changes, while other such trials remained on hold. The company also discontinued the Depatux-M Phase 3 program for lack of survival benefit.
- AbbVie reported approximately $330 million in accrued litigation reserves. It was appealing an FTC ruling ordering $448 million plus interest in an AndroGel matter and had accrued no liability for that matter. Other disclosed proceedings include HUMIRA-related antitrust and insurance-fraud allegations and product-liability claims.
Important facts for investors to verify
- How quickly international HUMIRA biosimilar pressure affects revenue and whether growth in IMBRUVICA, VENCLEXTA, SKYRIZI and other products offsets it.
- The assumptions behind the $2.473 billion first-half increase in contingent consideration liabilities, especially SKYRIZI milestone probabilities and sales estimates.
- Allergan approval and closing conditions, integration plans, actual borrowing needs, and the effect of added debt on credit ratings and cash available for dividends.
- Updates on VENCLEXTA multiple-myeloma trials, other pipeline results, and the material litigation matters described in the filing.
- Liquidity and debt maturities: current liabilities exceeded current assets at quarter-end, while cash declined by $2.117 billion during the first half.