AbbVie Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. AbbVie is a global biopharmaceutical company operating in one segment, pharmaceutical products. Comparisons below are with the corresponding 2016 periods unless noted. Dollar figures are in U.S. dollars.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net revenues | $6.944 billion | $6.452 billion | $13.482 billion | $12.410 billion |
| Operating earnings | $2.674 billion | $2.387 billion | $5.093 billion | $4.665 billion |
| Net earnings | $1.915 billion | $1.610 billion | $3.626 billion | $2.964 billion |
| Diluted EPS | $1.19 | $0.98 | $2.25 | $1.81 |
| Gross margin | 78% | 78% | 77% | 78% |
- Q2 revenue grew 7.6% at actual exchange rates and 8.5% at constant currency; six-month revenue rose 8.6% and 9.3%, respectively. Six-month operating earnings increased 9% and net earnings increased 22%.
- HUMIRA generated $8.834 billion in first-half sales, about 66% of total revenue, up 14% at actual rates. IMBRUVICA revenue rose 44% to $1.177 billion; VIEKIRA fell 41% to $488 million.
- Operating cash flow was $4.105 billion for the first half, versus $4.046 billion. Investing cash outflow was $366 million and financing cash outflow was $2.774 billion. Cash and equivalents ended June at $6.088 billion, up from $5.100 billion at year-end.
- At June 30, current assets were $16.962 billion and current liabilities $12.259 billion. Debt and lease obligations totaled approximately $37.2 billion, including $400 million of short-term borrowings. The $3.0 billion revolving credit facility had no borrowings outstanding; AbbVie reported compliance with its covenants.
- Cash dividends paid were $2.051 billion in the first half. The declared quarterly dividend was $0.64 per share. AbbVie repurchased about 7.8 million shares for $500 million and reported $4.5 billion remaining under its repurchase authorization.
Changes, drivers, and notable items
- Growth was led by HUMIRA and IMBRUVICA, with additional gains from products including Creon and Duodopa. VIEKIRA declined amid market contraction, lower share, and price erosion. U.S. revenue grew 12.8% in Q2, while international revenue was down 1.5% at actual rates but up 1.0% at constant currency.
- Gross margin percentage was flat in Q2 and down one percentage point for the first half. Higher intangible amortization and IMBRUVICA profit sharing weighed on margin, partly offset by product mix and operating efficiencies.
- First-half R&D expense rose 14% to $2.358 billion, reflecting investment in mid- and late-stage pipeline assets and acquired programs. The company reported more than 60 compounds or indications in clinical development, with more than 30 in mid- or late-stage development.
- Interest expense, net rose to $500 million for the first half from $425 million, primarily reflecting debt issued in 2016 to fund the Stemcentrx acquisition and repay a term loan. A $146 million first-half increase in contingent consideration fair value was recorded in other expense.
- The effective tax rate was 18% for the first half, versus 23% in 2016, reflecting jurisdictional earnings mix and discrete items, including stock-based compensation accounting changes. The prior-year first-half results included a $298 million Venezuela devaluation loss; no such loss was recorded in 2017.
- A $93 million litigation-reserve charge was recorded in Q2. The litigation accrual was approximately $310 million at June 30, compared with $225 million at year-end 2016.
Outlook, risks, and contingencies
- AbbVie provided no numerical revenue or earnings guidance in this filing. Management’s stated priorities include growing existing and pipeline products, expanding operating margins, investing in R&D and returning cash through dividends and repurchases. It anticipated regulatory submissions and key clinical readouts over the next 12 months.
- Pipeline developments included positive top-line Phase 3 results for upadacitinib in rheumatoid arthritis; initiation of further Phase 3 studies for upadacitinib, venetoclax, and Rova-T; and two Phase 3 veliparib studies that failed their primary endpoints. The filing also reported FDA and European approvals for IMBRUVICA and MAVYRET/MAVIRET after quarter-end.
- Material risks include competition and intellectual-property challenges, clinical and regulatory uncertainty, and product liability and antitrust litigation. Five U.S. patent review proceedings concerning HUMIRA treatment-method patents resulted in invalidity decisions in May–July 2017; AbbVie also described ongoing patent litigation involving Amgen’s proposed adalimumab biosimilar.
- The filing described thousands of pending testosterone-replacement-therapy product-liability claims and hundreds of Depakote birth-defect claims. In a July 2017 testosterone case, the jury awarded $150 million in punitive damages but no compensatory damages; AbbVie said it expected the punitive award not to stand. The GSK Norvir lawsuit settled in July 2017.
- HUMIRA dependence is significant, and U.S. sales are concentrated among three wholesalers, which represented 54% of net receivables at June 30. Receivables from certain foreign government health systems may face collection delays. Contingent consideration liabilities were $4.359 billion and depend on significant unobservable assumptions; management estimated a 50-basis-point discount-rate change could shift their value by about $160 million.
Important facts for investors to verify
- HUMIRA’s growth durability, revenue concentration, and the commercial and legal effects of competing biosimilars.
- Whether IMBRUVICA growth and pipeline programs can offset VIEKIRA’s decline and sustain portfolio growth.
- Debt maturities, interest costs, cash availability, and the ongoing capacity for dividends and share repurchases.
- Developments in the disclosed litigation, patent proceedings, and contingent consideration estimates.
- Timing and outcomes of the anticipated regulatory submissions and clinical readouts; the filing does not provide numerical full-year guidance.