Business context and reporting period
AbbVie Inc. is a global biopharmaceutical company reporting one segment: pharmaceutical products. This Form 10-K covers the fiscal year ended December 31, 2018; it also presents unaudited quarterly results, including the fourth quarter. All dollar amounts below are U.S. dollars.
Financial results and position
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net revenues | $32.753 billion | $28.216 billion | +16.1% (+15.2% constant currency) |
| Operating earnings | $6.383 billion | $9.545 billion | -33.1% |
| Net earnings | $5.687 billion | $5.309 billion | +7.1% |
| Diluted EPS | $3.66 | $3.30 | +10.9% |
| Gross margin | 76% | 75% | +1 percentage point |
| Operating margin | 19.5% | 33.8% | -14.3 percentage points |
| Cash flow from operations | $13.427 billion | $9.960 billion | +34.8% |
Operating cash flow less capital expenditures of $638 million was approximately $12.789 billion. Cash and equivalents were $7.289 billion at year-end, down from $9.303 billion. Current assets were $16.945 billion and current liabilities $17.239 billion (current ratio approximately 0.98).
At December 31, 2018, short-term borrowings were $3.699 billion and long-term debt and lease obligations, including current maturities, totaled $36.611 billion—approximately $40.310 billion combined. The company also had a $3.0 billion undrawn revolving credit facility; it reported compliance with its debt covenants and no change in credit ratings during 2018.
HUMIRA generated $19.936 billion, about 61% of total revenue. Other major growth contributors included IMBRUVICA ($3.590 billion), MAVYRET ($3.438 billion) and VENCLEXTA ($344 million). International revenue was $11.229 billion, or about 34% of total.
Fourth-quarter revenue was $8.305 billion, versus $7.739 billion a year earlier. The quarter recorded a net loss of $1.826 billion, or $1.23 per diluted share, compared with net earnings of $52 million in fourth-quarter 2017.
Material changes versus the prior comparable period
- Revenue growth was led by MAVYRET, IMBRUVICA and VENCLEXTA, alongside continued HUMIRA growth. HUMIRA revenue rose 8.2% reported for the year; its international growth slowed as biosimilar competition began in Europe.
- Operating earnings fell despite revenue growth, primarily because R&D expense included a $5.070 billion pre-tax impairment of acquired Stemcentrx in-process R&D. The impairment followed the decision to stop enrollment in the Rova-T TAHOE trial; its after-tax impact was approximately $4.5 billion.
- Net earnings and EPS increased partly because the 2018 income tax benefit was $490 million, compared with tax expense of $2.418 billion in 2017. The 2017 tax result included the one-time U.S. tax-reform transition tax and deferred-tax remeasurement.
- Cash from operations rose to $13.427 billion. Financing cash outflow increased to $14.396 billion, reflecting, among other items, $5.580 billion of dividends and $12.014 billion of treasury-stock purchases, partly offset by debt issuance.
- Year-end stockholders’ equity was a deficit of $8.446 billion, compared with positive equity of $5.097 billion in 2017, with buybacks and dividends among the factors affecting equity.
Outlook, commentary, risks and unusual items
Management’s 2019 priorities include diversifying revenue, advancing late-stage pipeline programs, launching new products, expanding operating margins and returning cash through dividends and repurchases. It cited expected margin support from revenue growth, lower HUMIRA royalty expense and productivity initiatives. The filing does not provide a clear numerical full-year 2019 revenue or earnings guidance value.
Management expected international HUMIRA revenue to decline in 2019 as biosimilar competition expands; U.S. HUMIRA biosimilar competition was not expected until 2023. AndroGel revenue was also expected to continue declining following generic entry. AbbVie reported more than 60 compounds or indications in clinical development, including more than 30 in mid- or late-stage development; clinical outcomes and approvals remain uncertain.
- Concentration and competition: HUMIRA’s approximately 61% revenue share creates substantial product concentration risk. Patent challenges and biosimilar competition may pressure sales and pricing.
- Pipeline and impairment: Rova-T enrollment in the second-line TAHOE study was stopped after the monitoring committee observed shorter overall survival versus control. AbbVie discontinued Rova-T’s third-line accelerated-approval pursuit but continued its first-line study. Further Stemcentrx-related impairment remains possible.
- Pricing and regulation: Government and payer cost-containment, rebates, price controls, and healthcare regulation could reduce revenue or margins.
- Debt and capital allocation: Debt service, short-term borrowings and substantial dividends and buybacks use cash. The board authorized an additional $5 billion of repurchases in December 2018; $4.3 billion remained authorized at year-end. Future dividends and repurchases are discretionary.
- Legal contingencies: Litigation accruals were approximately $350 million at year-end. The FTC obtained a $448 million disgorgement ruling in an AndroGel antitrust case, which AbbVie appealed; AbbVie recorded no liability for that matter. Testosterone product-liability claims and other antitrust, patent and commercial proceedings remain relevant exposures.
- Tax and accounting: The 2018 effective tax rate was negative 9.4% and was affected by tax reform, foreign earnings and the Stemcentrx impairment; it may vary substantially. Adoption of a new intercompany-transfer tax standard reduced opening retained earnings by $1.9 billion, while other accounting-standard adoption adjustments also affected opening equity.
Important facts for investors to verify
- Track HUMIRA sales by geography, biosimilar uptake and the timing and commercial impact of U.S. competition.
- Assess whether growth in IMBRUVICA, VENCLEXTA, MAVYRET and future launches can offset HUMIRA erosion and declining legacy products.
- Review Rova-T and other Stemcentrx program updates, impairment assumptions and the remaining value of acquired pipeline assets.
- Reconcile reported earnings with the large impairment and other unusual charges; examine the sustainability of the tax benefit and cash flow.
- Monitor debt maturities, short-term borrowing repayment, interest costs, liquidity and the cash demands of dividends and share repurchases.
- Follow the FTC appeal, testosterone litigation and settlement developments, patent proceedings and the company’s litigation reserves.