AbbVie Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted. AbbVie is a global biopharmaceutical company operating in one segment: pharmaceutical products. Dollar amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Net revenues | $7.934 billion | $6.538 billion | +21.4% reported; +17.6% at constant currency |
| Gross margin | $6.007 billion; 76% | $4.922 billion; 75% | Margin improved, reflecting product mix and efficiencies, partly offset by amortization, FX and IMBRUVICA profit sharing |
| Operating earnings | $2.903 billion | $2.407 billion | +20.6% |
| Net earnings | $2.783 billion | $1.711 billion | +62.7%; includes a much lower effective tax rate and a contingent-consideration benefit |
| Diluted EPS | $1.74 | $1.06 | Compared with reported prior-year diluted EPS |
| Operating cash flow | $2.645 billion | $2.102 billion | Up $543 million |
| Cash and equivalents | $9.007 billion | $9.303 billion at Dec. 31, 2017 | Down $296 million during the quarter |
Q1 2018 operating margin was approximately 36.6%, versus 36.8% in Q1 2017. Net margin was approximately 35.1%, versus 26.2%; the comparison reflects, among other items, the 1% effective tax rate in 2018 versus 18% in 2017.
Revenue drivers and material changes
- HUMIRA: Revenue was $4.709 billion, up 14.4% reported and 10.7% at constant currency. It represented approximately 59% of total revenue, down from 63% a year earlier.
- IMBRUVICA: Revenue and collaboration revenue totaled $762 million, up 38.5%, driven by continued CLL adoption and favorable pricing.
- HCV products: Revenue rose to $919 million from $263 million, primarily with the MAVYRET launch; VIEKIRA’s decline partly offset growth.
- Other revenue declines included Kaletra (down 36.0% reported) and “all other” (down 32.3%). International revenue rose 26.4% reported, or 16.6% at constant currency.
- SG&A increased 30% to $1.791 billion, including new-product launch spending and $118 million of litigation reserve charges. R&D rose 9% to $1.244 billion to support mid- and late-stage pipeline programs. Acquired IPR&D expense was $69 million, versus none in Q1 2017.
Cash, debt and liquidity
- Operating, investing and financing cash flows were $2.645 billion, negative $447 million and negative $2.509 billion, respectively. Financing outflows included $1.137 billion in dividends and $1.431 billion in treasury-stock purchases.
- At March 31, cash and equivalents were $9.007 billion; short-term investments were $467 million. Current assets were $20.444 billion and current liabilities $17.058 billion, a current ratio of approximately 1.20.
- Short-term borrowings were $367 million; current and long-term debt and lease obligations were $6.014 billion and $30.906 billion. Including short-term borrowings, these reported balances total approximately $37.3 billion. The filing reports no outstanding borrowings under its $3.0 billion revolving credit facility; AbbVie was in compliance with its covenants.
- AbbVie said it expects to fund obligations through cash, operating cash flow or additional debt and believes it has sufficient financial flexibility. It planned a further $600 million of voluntary defined-benefit-plan contributions in 2018, after contributing $150 million in Q1.
Outlook, management commentary and key risks
- Management’s stated priorities include diversifying revenue, advancing pipeline products, expanding operating margins and returning cash to shareholders. The filing does not provide a clear numerical full-year revenue or earnings guidance figure.
- The company reported more than 60 compounds or indications in clinical development, including more than 30 in mid- or late-stage development, and anticipated multiple Phase 2 programs advancing to Phase 3 over the next 12 months. Updates included April 2018 submissions for risankizumab and IMBRUVICA; the FDA extended its review of elagolix for endometriosis-associated pain by three months. AbbVie said it would not seek accelerated approval for Rova-T in third-line relapsed/refractory SCLC, while Phase 3 studies continue.
- AbbVie and Biogen voluntarily withdrew ZINBRYTA marketing authorizations worldwide in March 2018.
- Tax effects were significant: the effective tax rate was 1%, with management citing foreign operations and timing of Tax Cuts and Jobs Act provisions. The company’s tax-reform accounting remained preliminary; Q1 included no adjustment to its provisional 2017 estimates of $4.5 billion transition-tax expense and $4.1 billion deferred-tax remeasurement benefit.
- Other (income) expense included a $148 million benefit from revaluing contingent consideration liabilities, versus an $85 million charge in Q1 2017. The liabilities were $4.386 billion at quarter-end and depend on significant unobservable assumptions.
- Legal proceedings include antitrust, product-liability and intellectual-property matters. Litigation accruals were approximately $560 million, up from $445 million at year-end. The filing describes thousands of testosterone-therapy claims and other proceedings; outcomes and potential additional losses are uncertain.
- Risk concentrations include HUMIRA’s large share of revenue and three U.S. wholesalers’ 52% share of net receivables. Government receivables in certain European countries totaled $320 million; Saudi Arabia and Russia receivables were $143 million and $106 million, respectively. Collection delays or losses are possible.
- Patent challenges, biosimilar and other competition, R&D execution, litigation, regulatory changes, foreign exchange and customer credit are identified risks. Management said the ultimate disposition of proceedings was not expected to materially adversely affect the company, but acknowledged uncertainty.
Other material items
- AbbVie adopted the new revenue-recognition standard using the modified retrospective method. Product-sale recognition was not significantly changed. Adoption increased Q1 revenue by $43 million and diluted EPS by $0.01; the standard increased opening retained earnings by $124 million.
- Adoption of the intercompany-transfer tax accounting standard reduced opening retained earnings by $1.9 billion. These accounting changes are relevant when comparing reported balance-sheet equity with prior periods.
- The board authorized a new $10.0 billion share-repurchase program; AbbVie repurchased approximately 10.9 million shares for $1.3 billion in Q1. The quarterly dividend was raised from $0.71 to $0.96 per share beginning with the May 2018 payment. A subsequent $7.5 billion Dutch-auction tender offer was announced May 1, 2018.
Important facts for investors to verify
- Whether HUMIRA growth and revenue diversification can offset its 59% revenue concentration and future competitive pressure.
- How much Q1 earnings growth is sustainable after separating operating performance from the unusually low tax rate and $148 million contingent-consideration benefit.
- Pipeline milestones, including the regulatory review of elagolix and progress of risankizumab, upadacitinib, IMBRUVICA and Rova-T programs.
- Potential cash and earnings effects of litigation, patent disputes, product-liability claims and the $560 million litigation accrual.
- Debt-service capacity and the pace of dividends and repurchases relative to cash generation, planned pension contributions and investment needs.
- Final tax-reform accounting, collection of government receivables, and changes in contingent-consideration valuation assumptions.