Business context and reporting period
AbbVie Inc. is a research-based biopharmaceutical company operating in one pharmaceutical-products segment. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net revenues | $8.479 billion | $8.236 billion | $24.562 billion | $24.448 billion |
| Operating earnings | $2.617 billion | $3.159 billion | $9.027 billion | $8.824 billion |
| Net earnings | $1.884 billion | $2.747 billion | $5.081 billion | $7.513 billion |
| Diluted EPS | $1.26 | $1.81 | $3.41 | $4.79 |
| Gross margin | 77% | 78% | 78% | 77% |
- Q3 revenue rose 3.0% at actual exchange rates (3.5% constant currency); nine-month revenue rose 0.5% (1.8% constant currency). U.S. nine-month revenue increased 10.4%, while international revenue fell 17.7% at actual rates, chiefly reflecting international HUMIRA biosimilar competition.
- Q3 operating earnings declined about 17% and net earnings about 31% year over year. Nine-month net earnings fell despite slightly higher operating earnings, reflecting notably higher other expense, including the change in fair value of contingent consideration.
- Operating cash flow was $10.049 billion for nine months, nearly flat year over year. Investing activities provided $1.211 billion, including net sales and maturities of investment securities; financing used $7.894 billion. Cash and equivalents were $10.648 billion at September 30, up from $7.289 billion at year-end.
- Debt and finance lease obligations totaled approximately $38.4 billion at September 30, including $5.276 billion current and $33.126 billion long-term. There were no commercial paper borrowings outstanding. Current assets were $20.166 billion and current liabilities $17.493 billion; stockholders’ equity was a deficit of $8.226 billion.
Material changes and drivers
- HUMIRA global sales declined 3% in Q3 and 4% for nine months at constant currency. U.S. sales grew, but international sales dropped 32% and 29%, respectively. HUMIRA generated approximately 58% of nine-month company revenue; U.S. biosimilar competition was not expected before 2023.
- IMBRUVICA revenue grew 29% in Q3 and 31% for nine months; VENCLEXTA more than doubled in both periods. Newer launches contributed: SKYRIZI generated $139 million in nine-month revenue and RINVOQ $14 million. MAVYRET revenue declined 12% for nine months at constant currency.
- Q3 R&D expense rose 80% to $2.285 billion, including a $1.0 billion impairment after AbbVie terminated the Rova-T program. The nine-month fair-value charge for contingent consideration was $2.653 billion, largely reflecting increased expectations for SKYRIZI following approvals. These items materially affected reported earnings.
- SG&A declined 14% in Q3 and 9% for nine months, helped by lower litigation-reserve charges and other cost reductions. Net interest expense increased, partly due to $139 million of acquisition-related financing fees for the nine-month period.
Outlook, commentary and risks
- AbbVie said its priorities include diversifying revenue, advancing new medicines, expanding operating margins, and returning cash to shareholders. Management expected multiple Phase 2 programs to enter Phase 3 within 12 months and anticipated regulatory submissions and clinical readouts. The filing does not provide a clear numerical earnings or revenue forecast.
- The proposed Allergan acquisition, announced at approximately $63 billion equity value, was expected to close in early 2020, subject to regulatory and other conditions. Allergan shareholders approved it in October; the FTC issued a Second Request. AbbVie had arranged a $38 billion bridge facility and $6 billion of term loans, with no amounts drawn as of September 30. AbbVie warned of execution, approval, integration, increased-debt and potential tax risks.
- Management announced in November a quarterly dividend increase from $1.07 to $1.18 per share beginning with the February 2020 payment. Nine-month dividends paid were $4.771 billion.
- Material uncertainties include product and patent competition, clinical-development and regulatory outcomes, and ongoing litigation. Litigation accruals were approximately $325 million. The filing describes AndroGel antitrust matters, HUMIRA-related antitrust and insurance-fraud allegations, and other proceedings; the FTC’s $448 million AndroGel disgorgement order was under appeal and AbbVie had accrued no liability for that matter.
- Three U.S. wholesalers accounted for 68% of receivables at September 30. Contingent consideration is a Level 3 fair-value estimate sensitive to assumptions about milestones, sales, probabilities and discount rates.
Important facts for investors to verify
- Progress, regulatory conditions, financing and expected closing timing of the Allergan acquisition, including resulting leverage and credit-rating effects.
- U.S. HUMIRA performance and the pace of international biosimilar erosion, alongside growth and launch execution for SKYRIZI, RINVOQ, IMBRUVICA and VENCLEXTA.
- Whether contingent-consideration revaluations, R&D impairment charges and other unusual items continue to drive volatility in reported earnings.
- Cash generation, debt maturities, dividend commitments and the company’s ability to fund the acquisition while maintaining its capital-return plans.
- Developments in key litigation and clinical programs, including the safety-related VENCLEXTA multiple-myeloma trial hold history and terminated Rova-T program.