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ABBV > SEC Filings for ABBV > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for ABBVIE INC.

Form 10-Q for ABBVIE INC.


12-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion and analysis of the financial condition of AbbVie Inc. (AbbVie or the company) and the results of operations as of and for the third quarter and first nine months ended September 30, 2013. This commentary should be read in conjunction with the condensed consolidated financial statements and accompanying notes appearing under "Item 1. Financial Statements and Supplementary Data."

EXECUTIVE OVERVIEW

AbbVie is a global, research-based biopharmaceutical company. AbbVie develops and markets advanced therapies that address some of the world's most complex and serious diseases. AbbVie products are used to treat rheumatoid arthritis, psoriasis, Crohn's disease, HIV, cystic fibrosis complications, low testosterone, thyroid disease, Parkinson's disease, ulcerative colitis, and complications associated with chronic kidney disease, among other indications. AbbVie also has a pipeline of promising new medicines, including more than 20 compounds or indications in Phase II or Phase III development across such important medical specialties as immunology, renal care, hepatitis C virus (HCV), women's health, oncology, and neuroscience, including multiple sclerosis and Alzheimer's disease. AbbVie has approximately 21,500 employees and its products are sold in over 170 countries. AbbVie operates in one business segment - pharmaceutical products.

AbbVie's products include a broad line of adult and pediatric pharmaceuticals manufactured, marketed, and sold worldwide and are generally sold directly to wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers from distribution centers and public warehouses. Outside the United States, sales are made either directly to customers or through distributors, depending on the market served. Certain products are co-marketed or co-promoted with other companies.

Research and Development

Research and development (R&D) innovation and scientific productivity continue to be key strategic priorities for AbbVie. AbbVie's long-term success depends to a great extent on its ability to continue to discover and develop innovative pharmaceutical products and acquire or collaborate on compounds currently in development at other biotechnology or pharmaceutical companies. R&D is focused on therapeutic areas that include virology, renal disease, neuroscience, oncology, immunology, and women's health, among others.

AbbVie continues to execute on its long-term strategy of advancing its new product pipeline and maximizing its existing portfolio through new indications and formulations. Significant developments in R&D during the first nine months of 2013 included the following:

AbbVie continues to dedicate R&D efforts to expanding indications for HUMIRA, including in the fields of rheumatology, ophthalmology and dermatology. Additionally, during the second quarter of 2013, the company secured approval for two new gastroenterology indications in Japan - intestinal Behcet's and ulcerative colitis. As of September 30, 2013, HUMIRA's list of uses totals ten indications in major geographies, including nine approved in Europe and seven in the United States.

The company released positive Phase IIb results from a study examining interferon-free therapies for the treatment of chronic HCV infection. The data showed patients achieved sustained virologic response rates regardless of baseline characteristics that have been associated with a lower response to interferon-based therapies. The company completed enrollment in a comprehensive Phase III program for genotype 1 HCV that involves combinations of ABT-450, a protease inhibitor for HCV infection; ABT-333, a polymerase inhibitor; and ABT-267, a NS5A inhibitor with and without ribavirin.

AbbVie initiated a Phase III study to assess the effects of the investigational compound atrasentan, when added to standard of care, on progression of kidney disease in patients with stage 2 to 4 chronic kidney disease and type 2 diabetes.

The company received U.S. Food and Drug Administration (FDA) approval for Creon 36,000 lipase-unit capsules for patients with exocrine pancreatic insufficiency. Creon 36,000 is the highest dose of pancreatic therapy currently available for patients.


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The company's registration submission for Duopa, our levodopa and carbidopa intestinal gel for the treatment of Parkinson's disease, was filed with the FDA.

The company recently started a second Phase III pivotal trial to evaluate elagolix, an oral gonadotropin-releasing hormone antagonist for the treatment of endometriosis-related pain.

For a more comprehensive discussion of AbbVie's products and pipeline, refer to the company's Annual Report on Form 10-K for the year ended December 31, 2012.

Separation from Abbott Laboratories

On January 1, 2013, AbbVie became an independent, publicly-traded company as a result of the distribution by Abbott Laboratories (Abbott) of 100 percent of the outstanding common stock of AbbVie to Abbott's shareholders (the separation). Each Abbott shareholder of record as of the close of business on December 12, 2012 received one share of AbbVie common stock for each Abbott common share held as of the record date. AbbVie was incorporated in Delaware on April 10, 2012 and is comprised of Abbott's former research-based proprietary pharmaceuticals business. AbbVie's registration statement on Form 10 was declared effective by the U.S. Securities and Exchange Commission on December 7, 2012. AbbVie's common stock began trading "regular-way" under the ticker symbol "ABBV" on the New York Stock Exchange on January 2, 2013. Refer to the "Basis of Presentation" below for further information.

Basis of Presentation

Prior to the separation, the historical financial statements were prepared on a stand-alone basis and were derived from Abbott's consolidated financial statements and accounting records as if the former research-based pharmaceutical business of Abbott had been part of AbbVie for all periods presented. Accordingly, AbbVie's financial statements for periods prior to January 1, 2013 are presented on a combined basis and reflect AbbVie's financial position, results of operations and cash flows as its business was operated as part of Abbott prior to the separation, in conformity with U.S. GAAP. The historical combined financial statements also reflect an allocation of expenses related to certain Abbott corporate functions, including senior management, legal, human resources, finance, information technology and quality assurance. These expenses were allocated to AbbVie based on direct usage or benefit where identifiable, with the remainder allocated on a pro rata basis of revenues, headcount, square footage, number of transactions or other measures. AbbVie considers the expense allocation methodology and results to be reasonable. However, the allocations may not be indicative of the actual expenses that would have been incurred had AbbVie operated as an independent, stand-alone, publicly-traded company for the periods presented.

The historical combined financial statements reflected the operating results and financial position of AbbVie as it was operated by Abbott, rather than as an independent company. AbbVie will incur additional ongoing operating expenses to operate as an independent company. These costs will include the cost of various corporate headquarters functions, incremental information technology-related costs, and incremental costs to operate a stand-alone back office infrastructure outside the United States. In order to establish these stand-alone functions, AbbVie will also incur non-recurring expenses and capital expenditures.

It is not practicable to estimate the costs that would have been incurred in each of the periods presented in the historical financial statements for the functions described above. Actual costs that would have been incurred if AbbVie operated as a stand-alone company during these periods would have depended on various factors, including organizational design, outsourcing and other strategic decisions related to corporate functions, information technology, and international back office infrastructure.


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RESULTS OF OPERATIONS



Net Sales



                                                 Percent change                                          Percent change
                  Three months ended       At actual       At constant      Nine months ended      At actual       At constant
                    September 30,        currency rates   currency rates      September 30,      currency rates   currency rates
(in millions)        2013         2012             2013             2013       2013       2012             2013             2013
United States      $2,616       $2,665             (2)%             (2)%     $7,363     $7,362               -%               -%
International       2,042        1,843              11%              12%      6,316      5,812               9%              10%
Net sales          $4,658       $4,508               3%               4%    $13,679    $13,174               4%               5%

Sales growth in the third quarter and first nine months of 2013 was driven by the continued strength of HUMIRA, both in the United States and internationally. Total company sales growth was also driven by sales of key products including Synthroid, Creon, Zemplar and Duodopa. Sales increased in the third quarter and first nine months of 2013 despite the loss of exclusivity for TriCor in November 2012, for TRILIPIX in July 2013, and Niaspan in mid-September 2013, as well as unfavorable foreign exchange rate fluctuations.

The following table details the sales of key products.

                                               Percent change                                  Percent change
                    Three months ended     At actual   At constant    Nine months ended    At actual   At constant
                      September 30,        currency     currency        September 30,      currency     currency
                                             rates        rates                              rates        rates
(in millions)          2013         2012        2013          2013       2013       2012        2013          2013
HUMIRA
United States        $1,389       $1,136         22%           22%     $3,569     $2,964         20%           20%
International         1,381        1,190         16%           16%      4,051      3,621         12%           13%
Total                $2,770       $2,326         19%           19%     $7,620     $6,585         16%           16%
AndroGel
United States          $248         $279       (11)%         (11)%       $746       $787        (5)%          (5)%
Kaletra
United States           $63          $71       (11)%         (11)%       $181       $196        (8)%          (8)%
International           174          196       (11)%         (11)%        553        567        (3)%          (1)%
Total                  $237         $267       (11)%         (11)%       $734       $763        (4)%          (3)%
Niaspan
United States          $201         $232       (13)%         (13)%       $619       $634        (2)%          (2)%
Lupron
United States          $141         $132          7%            7%       $410       $414        (1)%          (1)%
International            55           57        (4)%          (2)%        166        175        (5)%          (4)%
Total                  $196         $189          4%            4%       $576       $589        (2)%          (2)%
Synthroid
United States          $161         $131         23%           23%       $433       $383         13%           13%
Sevoflurane
United States           $19          $20        (5)%          (5)%        $54        $53          2%            2%
International           119          115          4%            6%        358        391        (8)%          (6)%
Total                  $138         $135          2%            4%       $412       $444        (7)%          (5)%
Creon
United States          $101          $92         10%           10%       $297       $248         20%           20%
Zemplar
United States           $57          $52         10%           10%       $161       $161          -%            -%
International            43           39         10%            8%        127        115         10%           10%
Total                  $100          $91         10%            9%       $288       $276          4%            4%
Synagis
International           $98          $96          2%           16%       $513       $506          1%           10%
Duodopa
International           $46          $37         24%           19%       $129       $108         19%           17%
TriCor/TRILIPIX
United States           $39         $332       (88)%         (88)%       $274       $897       (70)%         (70)%
Other                  $323         $301         10%           10%     $1,038       $954          3%            3%
Total                $4,658       $4,508          3%            4%    $13,679    $13,174          4%            5%


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The comparisons presented at constant currency rates reflect comparative local currency sales at the prior year's foreign exchange rates. This measure provides information on the change in net sales assuming that foreign currency exchange rates had not changed between the prior and the current period. AbbVie believes that the non-GAAP measure of change in net sales at constant currency rates, when used in conjunction with the GAAP measure of change in net sales at actual currency rates, may provide a more complete understanding of the company's operations and can facilitate analysis of the company's results of operations, particularly in evaluating performance from one period to another.

On a constant currency basis, global HUMIRA sales increased 19 percent and 16 percent during the third quarter and first nine months of 2013, respectively, as a result of continued market expansion and higher market share across various countries, higher pricing in certain geographies and the global launch of the ulcerative colitis indication in 2012. HUMIRA continues to have strong growth in the dermatology and gastroenterology categories. In 2012, HUMIRA received approvals from the European Commission for the treatment of moderately to severely active ulcerative colitis in adult patients who have had an inadequate response to conventional therapy, the treatment of severe axial spondyloarthritis in adult patients who have no X-ray evidence of structural damage, and the treatment of pediatric patients aged 6 to 17 years with severe active Crohn's disease who failed, are intolerant to, or have contraindications to conventional therapy. During the third quarter of 2013, the company made a registration submission in the U.S. for pediatric Crohn's disease. In 2013, the company received approval for two new gastroenterology indications in Japan - intestinal Behcet's and ulcerative colitis. AbbVie is pursuing several new indications to help further differentiate from competitive products and add to the sustainability and future growth of HUMIRA.

AndroGel sales for the third quarter and first nine months of 2013 were impacted by rebates implemented during the second half of 2012 and certain account losses in early 2013. AndroGel continues to hold the number one market share position in the U.S. testosterone replacement market, with approximately 60 percent of the market share. AndroGel 1% sales are expected to be impacted by generic competition in 2015.

Sales for AbbVie's consolidated lipid franchise, which includes TriCor, TRILIPIX and Niaspan, declined 55 percent and 40 percent for the third quarter and first nine months of 2013, respectively. The decline in TriCor, TRILIPIX and Niaspan sales for the third quarter and first nine months of 2013 reflects the introduction of generic versions in the U.S. market for TriCor in November 2012, for TRILIPIX in July 2013, and Niaspan in mid-September 2013. The impact of generic competition in the U.S. market on sales is expected to be the more pronounced in the fourth quarter of 2013.

U.S. sales of Kaletra declined in the third quarter and first nine months of 2013 primarily due to lower market share resulting from the impact of competition. On a constant currency basis, Sevoflurane sales increased 4 percent for the third quarter of 2013 due to a partial recovery in international demand. For the first nine months ended September 30, 2013, Sevoflurane sales declined 5 percent due to decreased international demand.

Synthroid sales increased 23 percent and 13 percent in the third quarter and first nine months of 2013, respectively. Synthroid maintains strong brand loyalty and market leadership.

Sales of Creon continued to grow during the third quarter and first nine months of 2013. Creon maintains market leadership in the pancreatic enzyme market and continues to capture the vast majority of new prescription starts. In the first quarter of 2013, the FDA approved a new dosage strength of Creon 36,000 lipase-unit capsules for patients with exocrine pancreatic insufficiency. Creon 36,000 is the highest dose of pancreatic therapy currently available, which may help to reduce pill burden for some patients. With this approval, Creon is able to offer patients the broadest range of dosage strengths.

Gross Margin



                        Three months ended     Percent    Nine months ended    Percent
                          September 30,        change       September 30,      change
(in millions)              2013         2012      2013        2013      2012      2013
Gross margin             $3,566       $3,494        2%     $10,380    $9,931        5%
as a % of net sales         77%          78%                   76%       75%

Gross profit margin in the third quarter and first nine months of 2013 reflects lower amortization expense for intangible assets and the favorable impact of product mix and operational efficiencies. The favorable impact of these items was more than offset and partially offset by the effect of unfavorable foreign exchange rates in the third quarter and the first nine months of 2013, respectively.


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Selling, General and Administrative



                                        Three months ended     Percent    Nine months ended     Percent
                                          September 30,        change       September 30,       change
(in millions)                              2013         2012      2013       2013        2012      2013
Selling, general and administrative      $1,261       $1,085       16%     $3,904      $3,578        9%
as a % of net sales                         27%          24%                  29%         27%

Selling, general and administrative (SG&A) expenses for the third quarter and first nine months ended September 30, 2013 increased due primarily to increased selling and marketing support for AbbVie's growth brands, including HUMIRA, and the incremental costs of becoming an independent company.

Research and Development and Acquired In-Process Research and Development



                                  Three months ended    Percent    Nine months ended     Percent
                                    September 30,       change       September 30,       change
(in millions)                        2013        2012      2013       2013        2012      2013
Research and development             $714        $813     (12)%     $2,057      $2,097      (2)%
as a % of net sales                   15%         18%                  15%         16%

Acquired in-process research
and development                      $220          $-      100%       $290        $260       12%

R&D expense declined in both the third quarter and first nine months of 2013 as a result of a restructuring charge of approximately $150 million recorded in the third quarter of 2012 and a $50 million R&D milestone payment recorded in the first quarter of 2012 related to a product in development for the treatment of chronic kidney disease. Excluding these items, R&D expense increased 8 percent in both the third quarter and first nine months of 2013 due to added funding to support the company's emerging mid- and late-stage pipeline assets and the continued pursuit of additional HUMIRA indications.

Acquired in-process research and development (IPR&D) expense for the three months ended September 30, 2013 included a charge of $45 million as a result of entering into a global collaboration with Galapagos NV for cystic fibrosis therapies and a charge of $175 million as a result of entering into a global license agreement with Ablynx NV to develop and commercialize ALX-0061. IPR&D expense for the nine months ended September 30, 2013 also included the second quarter charge of $70 million as a result of entering into a global collaboration with Alvine Pharmaceuticals.

IPR&D expense for the nine months ended September 30, 2012 included a charge of $110 million as a result of the acquisition of ABT-719 and a charge of $150 million as a result of entering into a global collaboration to develop and commercialize an oral, next-generation JAK1 inhibitor.

Interest Expense (Income), Net

Interest expense (income), net was $69 million and $210 million for the third quarter and first nine months ended September 30, 2013, respectively, and was comprised primarily of interest expense on outstanding debt, partially offset by interest income. In November 2012, AbbVie issued $14.7 billion of long-term debt and entered into interest rate swaps with various financial institutions, which converted $8.0 billion of its fixed rate interest rate debt to floating interest rate debt. The balance of commercial paper outstanding at September 30, 2013 was $400 million. AbbVie expects to incur approximately $300 million of net interest expense in 2013.

Income Tax Expense

The effective income tax rate was 25.0 percent and 22.9 percent for the three months and nine months ended September 30, 2013 and 1.2 percent and 7.0 percent for the third quarter and nine months ended September 30, 2012, respectively. The effective tax rates in each period were less than the statutory federal income tax rate of 35 percent principally due to the benefit of lower statutory tax rates and tax exemptions in certain foreign jurisdictions. In the third quarter of 2012, taxes on earnings reflected the recognition of $190 million of tax benefits as a result of the favorable resolution of various tax positions pertaining to a prior year. The increase in the effective tax rate in 2013 over the prior year is principally due to income tax expense relating to certain 2013 earnings outside the United States that are not deemed indefinitely reinvested and the absence of the $190 million of tax benefits recorded in the third quarter of 2012 as a result of the favorable resolution of various tax positions pertaining to a


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prior year. AbbVie will continue to evaluate whether to indefinitely reinvest certain future earnings in foreign jurisdictions as it analyzes its future global liquidity and financial structure.

AbbVie expects that its effective income tax rate in 2013 will be approximately 22 percent, excluding any discrete items.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES



                                     Nine months ended
                                       September 30,
(in millions)                           2013       2012
Cash flows provided by/(used in):
Operating activities                  $5,022     $5,404
Investing activities                     756    (2,212)
Financing activities                 (2,695)      (458)

Strong cash flows from operating activities were driven by net earnings and focused working capital management. The company made a voluntary contribution to its main domestic defined benefit pension plan of $145 million in the first nine months of 2013.

During the nine months ended September 30, 2013, AbbVie paid $70 million to Alvine related to a global collaboration to develop ALV003, $45 million to Galapagos NV related to a global collaboration to discover, develop and commercialize cystic fibrosis therapies, and $175 million to Ablynx NV related to a global license agreement to treat inflammatory diseases.

During the nine months ended September 30, 2012, AbbVie paid $110 million to Action Pharma A/S for the acquisition of ABT-719, $150 million to Galapagos NV as a result of entering into a global collaboration to develop and commercialize an oral, next-generation JAK1 inhibitor, and $400 million to Reata Pharmaceuticals related to a collaboration agreement for the joint development and commercialization of second-generation oral antioxidant inflammation modulators.

The company's cash and equivalents and short-term investments increased from $7.98 billion at December 31, 2012 to $9.60 billion at September 30, 2013. AbbVie did not report cash and equivalents or short-term investments on its condensed consolidated balance sheet at September 30, 2012 except for cash and equivalents and short-term investments that were held by entities that transferred to AbbVie. The company's cash and equivalents and short-term investments at December 31, 2012 consisted of contributions from Abbott and the proceeds from the issuance of debt. Refer to the company's Annual Report on Form 10-K for the year ended December 31, 2012 for further discussion of the issuance of debt by AbbVie in November 2012.

During the nine months ended September 30, 2013, the company issued and redeemed commercial paper, of which $400 million was outstanding as of September 30, 2013. The balance of commercial paper outstanding as of December 31, 2012 was $1.0 billion. Historically, cash flows from financing activities represented cash transactions with Abbott.

Dividend payments totaled $1.91 billion for the nine months ended September 30, 2013. On September 19, 2013, the board of directors declared a quarterly cash dividend of $0.40 per share for stockholders of record on October 15, 2013, payable on November 15, 2013. In 2013, AbbVie expects to pay regular cash dividends at an annual rate of $1.60 per share; however, the timing, declaration, amount and payment of any dividends is within the discretion of its board of directors and will depend upon many factors, including AbbVie's financial condition, earnings, capital requirements of its operating subsidiaries, covenants associated with certain of AbbVie's debt service obligations, legal requirements, regulatory constraints, industry practice, ability to access capital markets, and other factors deemed relevant by its board of directors.

On February 15, 2013, the company announced a $1.5 billion common stock repurchase program, which was effective immediately. Purchases of AbbVie shares may be made from time to time at management's discretion. The plan has no time limit and can be discontinued at any time.

Substantially all of AbbVie's trade receivables in Greece, Portugal, Italy and Spain are with governmental health systems. Global economic conditions and . . .

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