AbbVie Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also provides unaudited fourth-quarter results; this is an annual report, not a standalone quarterly filing. AbbVie is a research-based biopharmaceutical company operating in one segment: pharmaceutical products.
Financial performance and position
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net revenues | $25.638 billion | $22.859 billion |
| Operating earnings | $9.384 billion | $7.537 billion |
| Net earnings | $5.953 billion | $5.144 billion |
| Diluted EPS | $3.63 | $3.13 |
| Gross margin | 77% | 80% |
| Cash from operations | $7.041 billion | $7.535 billion |
- Revenue increased 12.2% at actual exchange rates (13.5% at constant currency). Operating earnings rose about 25%; net earnings rose about 16%.
- Fourth-quarter revenue was $6.796 billion versus $6.400 billion in Q4 2015; net earnings were $1.391 billion versus $1.517 billion, and diluted EPS was $0.85 versus $0.92.
- FY operating margin was approximately 36.6%, up from 33.0%; net margin was approximately 23.2%, up from 22.5%. Gross margin fell from 80% to 77%, reflecting foreign exchange, higher intangible amortization and Pharmacyclics-related costs, partly offset by mix and manufacturing efficiencies.
- Cash and equivalents were $5.100 billion, with $1.323 billion of short-term investments. Current assets were $16.187 billion and current liabilities $9.781 billion.
- Long-term debt and lease obligations were $36.465 billion, plus $377 million of short-term borrowings, compared with $31.265 billion and $406 million, respectively, in 2015. Interest expense, net, increased to $965 million from $686 million.
- Investing cash outflow was $6.074 billion and financing cash outflow was $3.928 billion. Capital expenditures were $479 million; operating cash flow less capital expenditures was approximately $6.562 billion.
- AbbVie paid $3.717 billion in dividends and repurchased shares, including accelerated repurchases, during 2016. The quarterly dividend was raised from $0.57 to $0.64 per share beginning in February 2017.
Business drivers and changes versus prior year
- HUMIRA revenue grew 14.7% to $16.078 billion and represented approximately 63% of total revenue. U.S. sales rose 24.1%; international sales grew 0.7% at actual exchange rates, or 4.3% at constant currency.
- IMBRUVICA revenue increased to $1.832 billion from $754 million, reflecting a full year of ownership and expanded use, including first-line CLL approvals.
- VIEKIRA revenue declined 7.1% to $1.522 billion, principally from U.S. market-share losses, market contraction and price erosion. Kaletra fell 21.5% to $549 million; management expected further decline in 2017.
- Creon rose 15.5% to $730 million, while Duodopa rose 26.9% to $293 million. The filing attributes overall growth primarily to HUMIRA, IMBRUVICA and selected other products.
- Research and development expense increased 2% to $4.366 billion, or 17% of revenue. SG&A declined 8% to $5.855 billion, partly reflecting lower acquisition, separation and litigation-related costs than in 2015.
Outlook, management commentary, risks and unusual items
- Management’s 2017 priorities were revenue growth from HUMIRA, IMBRUVICA and pipeline products; operating-margin expansion; continued pipeline investment; strategic licensing and acquisitions; and shareholder returns. The filing gives no specific numerical revenue or earnings guidance.
- The clinical pipeline included more than 50 programs, with more than 30 in mid- or late-stage development. The Stemcentrx acquisition added Rova-T and other oncology assets; AbbVie also acquired rights to risankizumab from Boehringer Ingelheim.
- HUMIRA concentration and patent exposure are central risks: its U.S. composition-of-matter patent expired in December 2016, although other U.S. patents were stated to expire no earlier than 2022. The filing reported U.S. FDA approval of a HUMIRA biosimilar and anticipated final EU approval; patent challenges and biosimilar competition could materially affect sales.
- Other principal risks include drug-development and regulatory failure, pricing and reimbursement pressure, product safety and liability, manufacturing or supplier disruptions, foreign-exchange exposure, and dependence on a small number of U.S. wholesalers.
- Debt ratings were lowered in 2016: S&P reduced the corporate and senior unsecured ratings to A-; Moody’s reduced the senior unsecured rating to Baa2. AbbVie reported compliance with debt covenants and no borrowings under its $3 billion revolving credit facility at year-end.
- Stemcentrx was acquired for total consideration of approximately $6.426 billion; Boehringer Ingelheim-related acquisition consideration was approximately $3.978 billion. Year-end contingent consideration liabilities were $4.213 billion, valued using significant unobservable assumptions and subject to remeasurement.
- Unusual FY 2016 items included a $298 million Venezuela currency devaluation loss, $228 million expense from changes in contingent consideration fair value, $200 million of acquired in-process R&D, and $187 million of tax expense from a tax-law change. The filing also reports $615 million after tax for intangible amortization among its listed FY costs.
- Litigation accruals were approximately $225 million at year-end. The filing describes antitrust, product-liability and other proceedings, including testosterone-therapy and Depakote claims; management stated that ultimate disposition was not expected to materially adversely affect consolidated results, but outcomes remain uncertain.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- HUMIRA’s sales trajectory, biosimilar launch timing and impact, and the status and enforceability of remaining adalimumab patents.
- Whether IMBRUVICA and newer pipeline products can offset HUMIRA exposure and declining VIEKIRA and Kaletra sales.
- Debt maturities, interest costs, credit ratings and the company’s capacity to sustain dividends and repurchases alongside acquisitions and R&D spending.
- Assumptions underlying the $4.213 billion contingent consideration valuation and the clinical, regulatory and commercial milestones that could change it.
- Developments in major litigation, government pricing and reimbursement policies, and rebate accruals, which totaled $10.8 billion in 2016.