AbbVie Inc. — Q1 2016 Form 10-Q Summary
Reporting period: Three months ended March 31, 2016; filed May 6, 2016. AbbVie is a global biopharmaceutical company operating in one segment. Comparisons are with Q1 2015 unless noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net revenue | $5.958 billion | $5.040 billion | +18% reported; +22% constant currency |
| Operating earnings | $2.278 billion | $1.687 billion | +35% |
| Net earnings | $1.354 billion | $1.022 billion | +32% |
| Diluted EPS | $0.83 | $0.63 | Up $0.20 |
| Gross margin | 77% | 81% | Down 4 percentage points |
| Operating margin | 38% | Not stated in the filing text | Management cited improvement |
| Effective tax rate | 24% | 27% | Down 3 percentage points |
| Operating cash flow | $2.128 billion | $1.585 billion | Up $543 million |
Revenue growth was driven principally by HUMIRA, IMBRUVICA revenues following the Pharmacyclics acquisition, and VIEKIRA. U.S. revenue rose 32%; international revenue rose 3% reported and 12% at constant currency. HUMIRA generated $3.577 billion, about 60% of company revenue, versus 62% a year earlier. IMBRUVICA generated $381 million, compared with no reported revenue in Q1 2015.
Expenses included cost of products sold of $1.369 billion (up from $942 million), SG&A of $1.355 billion (down from $1.473 billion), R&D of $946 million (up from $811 million), and acquired IPR&D of $10 million (down from $127 million). Higher Pharmacyclics-related amortization and acquired-inventory step-up costs, plus a $39 million intangible impairment, weighed on gross margin. SG&A benefited from revenue leverage and the prior-year period’s $101 million of Abbott separation costs.
Liquidity, cash flow and debt
At March 31, 2016, cash and equivalents were $7.556 billion and short-term investments were $1.044 billion, compared with cash of $8.399 billion at year-end 2015. Current assets were $16.622 billion and current liabilities $10.662 billion. Total debt and lease obligations were approximately $31.9 billion, including $400 million of short-term borrowings. Operating cash flow was $2.128 billion; investing outflow was $1.458 billion, largely reflecting $1.3 billion of net purchases of investment securities; financing outflow was $1.219 billion.
Cash uses included $924 million of dividends and $409 million of treasury-stock purchases in the cash-flow statement; the filing says $300 million of the latter settled open-market repurchases made in Q4 2015. The quarterly dividend was $0.57 per share, up from $0.51 in Q1 2015. Remaining repurchase authorization was approximately $1.9 billion at quarter-end. AbbVie reported no borrowings under its $3.0 billion revolving credit facility and compliance with its covenants.
Material changes and unusual items
- A $298 million foreign-exchange loss reflected revaluation of Venezuelan bolivar-denominated net monetary assets using the DICOM rate. Those net monetary assets were below $10 million after revaluation. Management said further devaluation and continued use of that rate were uncertain.
- Q1 2016 diluted EPS included, after tax, $115 million of Pharmacyclics acquired-intangible amortization and inventory step-up costs and a $25 million intangible impairment charge, in addition to the Venezuela loss.
- Interest expense, net increased to $200 million from $126 million, mainly reflecting $16.7 billion of senior notes issued in May 2015 to help finance Pharmacyclics. The prior-year figure included $59 million of bridge-financing costs.
- Pharmacyclics purchase-price allocation remained preliminary at quarter-end. In March 2016, FDA approval of IMBRUVICA as first-line CLL treatment led to reclassification of $7.2 billion of indefinite-lived R&D assets to developed-product rights, which will be amortized.
Outlook, management commentary and risks
Management’s stated 2016 priorities were revenue growth from HUMIRA, IMBRUVICA, VIEKIRA and pipeline products; margin expansion; pipeline investment and business development; and shareholder returns. AbbVie expected IMBRUVICA to be a significant contributor to 2016 revenue growth and anticipated regulatory submissions and clinical readouts. The filing text does not provide a clear numerical full-year revenue or EPS guidance value.
After quarter-end, AbbVie paid Boehringer Ingelheim $595 million upfront for rights to risankizumab and an anti-CD40 antibody; potential additional milestone payments are up to $1.6 billion plus royalties. AbbVie also agreed to acquire Stemcentrx for approximately $5.8 billion upfront (62.5 million shares and about $2.0 billion cash), with up to $4.0 billion in potential milestone payments. The deal was expected to close in Q2 2016, subject to conditions. AbbVie authorized a further $4.0 billion of repurchases and intended to repurchase the newly issued shares following closing.
Following the Stemcentrx announcement, S&P lowered AbbVie’s corporate and senior unsecured ratings to A- from A, with a stable outlook; Moody’s placed its Baa1 senior unsecured rating under review for downgrade. Key exposures include HUMIRA’s revenue concentration, reliance on three U.S. wholesalers for substantially all U.S. revenue, foreign-exchange and interest-rate risk, potential collection delays from some foreign governments, competition, product liability and antitrust litigation, and drug-development and regulatory uncertainty. Litigation accruals were $166 million; management stated that ultimate outcomes were not expected to materially adversely affect consolidated results, while noting outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Whether HUMIRA growth and its high share of revenue can be sustained amid competition and evolving market conditions.
- IMBRUVICA’s commercial growth and the economics of its Janssen collaboration, including profit-sharing obligations.
- Whether gross-margin pressure from acquired-asset amortization and inventory step-up costs moderates as expected.
- The funding, closing, dilution, milestone exposure and repurchase implications of the Stemcentrx transaction, as well as the cost and development progress of the BI assets.
- Future Venezuelan currency treatment and collection trends in oil-exporting countries and European government receivables.
- Debt-rating developments, refinancing costs, and the outcome or potential financial effect of disclosed litigation and product-liability claims.