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ABBV > SEC Filings for ABBV > Form 10-K on 21-Feb-2014All Recent SEC Filings

Show all filings for ABBVIE INC.

Form 10-K for ABBVIE INC.


21-Feb-2014

Annual Report


ITEM 7. 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 results of operations as of and for each of the three years in the period ended December 31, 2013. This commentary should be read in conjunction with the consolidated financial statements and accompanying notes appearing in Item 8, "Financial Statements and Supplementary Data."

EXECUTIVE OVERVIEW

Company 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 chronic autoimmune diseases, including rheumatoid arthritis, psoriasis, and Crohn's disease; low testosterone; HIV; endometriosis; thyroid disease; Parkinson's disease; and complications associated with chronic kidney disease (CKD) and cystic fibrosis, among other health conditions. 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, virology, oncology, renal disease, neurological diseases and women's health.

In the United States, AbbVie's products 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. AbbVie has approximately 25,000 employees and its products are sold in over 170 countries. AbbVie operates in one business segment-pharmaceutical products.

Financial Results

In its first full year as an independent company, AbbVie achieved its key objectives, including strong sales growth of HUMIRA and other key products, operational efficiencies and progress in advancing its pipeline, particularly with its late-stage hepatitis C virus (HCV) program. Worldwide net sales in 2013 totaled $18.8 billion, an increase of 2 percent, despite the loss of exclusivity in the company's lipid franchise during the year. Generic competition began in November 2012 for TriCor, July 2013 for TRILIPIX and September 2013 for Niaspan, resulting in the loss of $1.1 billion of revenue in 2013 over the prior year. The company's financial performance also included delivering fully diluted earnings per share of $2.56, while accelerating its investment in research and development and increasing sales and marketing support for new and existing products. In 2013, the company generated cash flows from operations of $6.3 billion. These strong cash flows enabled the company to enhance its pipeline through licensing and collaboration activities and to pay cash dividends to shareholders of $2.6 billion in 2013. In 2014, AbbVie plans to continue to invest in key products, advance its pipeline and prepare for anticipated product launches that are expected to drive growth in 2015 and beyond.

Strategic Objectives

AbbVie's long-term strategy is to maximize its existing portfolio of products through new indications, share gains, increased geographic expansion in underserved markets while also advancing its new product pipeline to meet unmet medical needs. To successfully execute its long-term strategy, AbbVie will focus on expanding HUMIRA sales, advancing the pipeline, expanding its presence in emerging markets and managing its product portfolio to maximize value.


AbbVie expects to continue to drive strong HUMIRA sales growth in several ways. AbbVie seeks to expand the HUMIRA patient base by applying for regulatory approval of new indications for HUMIRA, treating conditions such as uveitis, hidradenitis suppurativa and pediatric Crohn's disease. AbbVie will also seek to drive HUMIRA sales growth by expanding its market share and its presence in underserved markets.

Research and development (R&D) efforts will continue to focus a significant portion of expenditures on compounds for immunology, virology, oncology, renal disease, neurological diseases and women's health. AbbVie's scientists work to advance a pipeline of specialty molecules that demonstrate strong clinical performance for patients and economic value for patients and their healthcare systems. Current R&D projects are described in the "Research and Development" section below.

AbbVie plans to continue making investments in key emerging markets, including Brazil, China, Mexico and Russia. Continued penetration of HUMIRA and other leading products is expected to help drive growth in these markets.

AbbVie will continue its investment in products with durable sales, while making adjustments as necessary to increase the value of its product portfolio. AbbVie plans to achieve this objective in a variety of ways depending on product and circumstances by, for example, identifying supply chain efficiencies, pursuing additional indications, and optimizing residual value as products reach the end of exclusivity. AbbVie believes that its approach will allow the company to maintain a strong operating margin.

Research and Development

Research and innovation continues to be a key strategic priority 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.

AbbVie's pipeline includes more than 20 compounds or indications in Phase II or III development individually or under collaboration or license agreements. Of these programs, approximately 10 are in Phase III development or in registration. AbbVie expects several Phase II programs to transition into Phase III programs during 2014. R&D is focused on therapeutic areas that include immunology, virology, oncology, renal disease, neurological diseases, and women's health, among others.

Immunology

HUMIRA is currently approved for ten indications in major geographies, including nine indications in Europe and seven in the United States. AbbVie continues to dedicate R&D efforts to expanding indications for HUMIRA, including in the fields of gastroenterology, dermatology and ophthalmology. Registration submissions and regulatory approvals for HUMIRA in 2013 included approval for two new gastroenterology indications in Japan-intestinal Behcet's and ulcerative colitis.

Phase III trials are ongoing in preparation for regulatory applications of HUMIRA for uveitis and hidradenitis suppurativa in the United States and the European Union. The results of AbbVie's two fully-enrolled Phase III clinical trials to evaluate the safety and efficacy of HUMIRA for patients with moderate to severe hidradenitis suppurativa in the United States are expected in 2014. The FDA issued a Complete Response Letter to the company's registration submission for axial spondyloarthritis, which is currently under evaluation by the company.


AbbVie also has a number of next-generation programs underway to address immune-mediated conditions, including the following.


AbbVie's studies of dual variable domain immunoglobulin (DVD-Ig) technology, which represents an approach that can target multiple disease-causing antigens with a single biologic agent, continue to progress. This proprietary technology could lead to next-generation biologic treatments for complex conditions such as cancer or rheumatoid arthritis, where multiple pathways are involved in the disease.


AbbVie is collaborating with Biotest AG on an anti-CD4 biologic known as tregalizumab. The compound is currently in Phase IIb clinical trials for rheumatoid arthritis and psoriasis.


GLPG0634, a next-generation, oral Janus Kinase 1 (JAK1) inhibitor, is being developed with Galapagos NV (Galapagos) in a collaboration entered into during the first quarter of 2012. GLPG0634 is currently in Phase IIb development to treat rheumatoid arthritis and may be able to address other autoimmune diseases. In January 2014, a Phase II study to evaluate GLPG0634 to treat Crohn's disease was initiated.


In September 2013, AbbVie entered into a global collaboration with Ablynx NV (Ablynx) to develop and commercialize the anti-IL-6R Nanobody, ALX-0061, to treat inflammatory diseases including rheumatoid arthritis and systemic lupus erythematosus. ALX-0061 is currently in Phase II development for rheumatoid arthritis.


In May 2013, AbbVie entered into a global collaboration with Alvine Pharmaceuticals, Inc. to develop ALV003, a novel oral treatment for patients with celiac disease. ALV003 is currently in Phase IIb development.

Virology

In October 2012, AbbVie initiated 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. In December 2013 and January 2014, AbbVie disclosed top-line results from all six of these registrational studies. AbbVie expects to complete regulatory submissions in the United States and the European Union in the second quarter of 2014 and anticipates commercialization in the United States before the end of 2014. AbbVie also initiated Phase III development in Japan for HCV infection and expects to submit a regulatory application in Japan in 2015.

AbbVie also recently initiated Phase II studies of its next-generation HCV program which includes ABT-493, a potent protease inhibitor, and ABT-530, AbbVie's new NS5A inhibitor.

Oncology

AbbVie is focused on the development of targeted treatments that inhibit tumor growth and improve response to common cancer therapies. AbbVie's later-stage oncology pipeline includes the following.


Elotuzumab, an anti-CD37 antibody for the treatment of multiple myeloma under a collaboration with Bristol-Myers Squibb. Phase III development began in June 2011 for multiple myeloma. Two Phase III studies are ongoing with results expected in early 2015.


Veliparib (ABT-888), a PARP-inhibitor. A Phase IIb study in BRCA-mutated breast cancer being treated with chemotherapy was initiated in 2011. Veliparib is also in Phase II evaluation for the treatment of a variety of other solid tumors, including brain metastases from non-small-cell lung cancer being treated with radiation therapy and non-small-cell lung cancer in combination with chemotherapy. In January 2014, a Phase III clinical trial was initiated to evaluate the safety and


efficacy of Veliparib when added to carboplatin, a chemotherapy, in women with early-stage, triple-negative breast cancer.


ABT-199, a next-generation Bcl-2 inhibitor in development for chronic lymphocytic leukemia. In January 2014, a Phase III evaluation was initiated in collaboration with AbbVie's development partner, Roche Holding AG. AbbVie anticipates results from this trial in early 2015. ABT-199 is also being explored for use across a number of different hematologic cancers including non-Hodgkin lymphoma, diffuse large b-cell lymphoma and acute myeloid leukemia.


Other molecular targets are being explored with Antibody-Drug Conjugate approaches linking anti-target antibodies with potent cytotoxic agents.

Renal Disease

AbbVie's renal care pipeline includes atrasentan, for the treatment of diabetic CKD. In 2013, a Phase III study was initiated to assess atrasentan, when added to standard of care, on progression of kidney disease in patients with stage 2 to 4 CKD and type 2 diabetes. This global registrational study is expected to be completed in 2017. Atrasentan will potentially be the first compound launched to treat diabetic nephropathy by specifically targeting albuminuria and slowing the progression of CKD. AbbVie is also investigating ABT-719, in Phase IIb development, for the treatment of acute kidney injury associated with major cardiac surgeries.

Neurological Diseases

AbbVie has clinical studies underway on multiple compounds that target receptors in the brain that help regulate mood, memory, and other neurological functions and conditions, including the following.


AbbVie is collaborating with Biogen Idec to develop daclizumab for the treatment of the relapsing remitting form of multiple sclerosis (MS), which is the most common form, and affects nearly 85 percent of newly diagnosed MS patients. Daclizumab, an anti-CD25 monoclonal antibody, is currently in Phase III development.


AbbVie recently completed two Phase IIb studies of ABT-126, an 7-NNR modulator, in both Alzheimer's disease and cognitive deficits of schizophrenia. Based on the results of these studies, AbbVie plans to focus its efforts on the schizophrenia indication.


A levodopa-carbidopa intestinal gel for the treatment of Parkinson's disease is under regulatory review in the United States and a decision is expected before the end of 2014. This product is sold under the name Duodopa outside the United States.

Women's Health

AbbVie is developing a novel oral gonadotropin-releasing hormone (GnRH) antagonist, elagolix, under a collaboration with Neurocrine Biosciences for the treatment of endometriosis-related pain and uterine fibroids. A Phase III study in endometriosis began in mid-2012 and a Phase IIa study for uterine fibroids was initiated in November 2011. In 2013, AbbVie initiated a second Phase III trial for endometriosis and the study for uterine fibroids transitioned to Phase IIb.

Other

Given the numerous sources for potential future growth, no individual project is expected to be material to cash flows or results of operations over the next five years. Factors considered included R&D expenses projected to be incurred for the project over the next year relative to AbbVie's total R&D expenses as well as qualitative factors, such as marketplace perceptions and impact of a new


product on AbbVie's overall market position. There were no delays in AbbVie's 2013 R&D activities that are expected to have a material impact on operations.

While the aggregate cost to complete the numerous pharmaceutical projects currently in development is expected to be material, the total cost to complete will depend upon AbbVie's ability to successfully complete each project, the rate at which each project advances, the nature and extent of cost-sharing arrangements, and the ultimate timing for completion. Given the potential for significant delays and the high rate of failure inherent in the research and development of new pharmaceutical products, it is not possible to accurately estimate the total cost to complete all projects currently in development. However, AbbVie plans to continue to manage its portfolio of projects to achieve R&D spend equal to approximately 16 percent of net sales each year. AbbVie does not regularly accumulate or make management decisions based on the total expenses incurred for a particular development phase in a given period.

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 pharmaceuticals business. 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 Historical Presentation" section below for further information.

Basis of Historical 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 GAAP in the United States. The combined financial statements principally represent the historical results of operations and assets and liabilities of Abbott's Proprietary Pharmaceutical Products segment.

The historical combined financial statements included the allocation of certain assets and liabilities that were historically held at the Abbott corporate level but were specifically identifiable or allocable to AbbVie. Prior to 2012, cash and equivalents, short-term investments and restricted funds held by Abbott were not allocated to AbbVie unless those assets were held by an entity that was transferred to AbbVie. As of December 31, 2012, AbbVie's combined balance sheet reflected the direct holdings of AbbVie legal entities. Prior to 2012, long-term debt and short-term borrowings were not allocated to AbbVie as none of the debt recorded by Abbott was directly attributable to or guaranteed by AbbVie. In 2012, AbbVie issued $14.7 billion of long-term debt with maturities ranging from three to 30 years and $1.0 billion of commercial paper, which was reflected on AbbVie's combined balance sheet as of December 31, 2012.

Prior to 2012, all intercompany transactions between AbbVie and Abbott were considered to be effectively settled in the historical combined financial statements at the time the transactions were recorded. As a result, the total net effect of the settlement of these intercompany transactions was reflected in the combined statements of cash flows for the years ended December 31, 2012 and 2011 as a financing activity and in the combined balance sheet at December 31, 2012 as net parent company investment in AbbVie. As of December 31, 2012, outstanding transactions between AbbVie and Abbott


were reflected in the combined balance sheet outside of net parent company investment in AbbVie Inc. As of December 31, 2013 and 2012, the aggregate amount due from Abbott totaled $738 million and $696 million, respectively, and was classified in accounts and other receivables, net. The aggregate amount due to Abbott totaled $876 million and $923 million as of December 31, 2013 and 2012, respectively, and was classified in accounts payable and accrued liabilities.

The historical combined financial statements also reflected 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.

RESULTS OF OPERATIONS

Net Sales

                                                                          Percent change
                                                                  At actual         At constant
                                                                  currency            currency
                                                                    rates              rates
for the years ended (in
millions)                       2013       2012       2011      2013     2012     2013        2012

United States                 $ 10,181   $ 10,435   $  9,712       (2 )%     8 %      (2 )%       8 %
International                    8,609      7,945      7,732        8 %      3 %      10 %        8 %

Net sales                     $ 18,790   $ 18,380   $ 17,444        2 %      5 %       3 %        8 %

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.

Sales growth in 2013 was driven by the continued strength of HUMIRA, both in the United States and internationally as well as sales of key products including Synthroid, Creon and Duodopa. Sales increased in 2013 despite unfavorable foreign exchange rate fluctuations and the loss of exclusivity for AbbVie's consolidated lipid franchise. Generic competition began in November 2012 for TriCor, in July 2013 for TRILIPIX and in September of 2013 for Niaspan. The increase in sales in 2012 was primarily due to higher HUMIRA sales, partially offset by the impact of unfavorable foreign currency and the entry of generic competition for TriCor in November 2012.


The following table details the sales of key products.

                                                                          Percent change
                                                                   At actual         At constant
                                                                    currency          currency
                                                                     rates              rates
years ended December 31 (in
millions)                         2013       2012       2011     2013     2012      2013     2012

HUMIRA
United States                   $  5,236   $  4,377   $  3,427      20 %     28 %      20 %     28 %
International                      5,423      4,888      4,505      11 %      8 %      12 %     15 %

Total                           $ 10,659   $  9,265   $  7,932      15 %     17 %      15 %     21 %

AndroGel
United States                   $  1,035   $  1,152   $    874     (10 )%    32 %     (10 )%    32 %

Kaletra
United States                   $    244   $    279   $    326     (13 )%   (14 )%    (13 )%   (14 )%
International                        718        734        844      (2 )%   (13 )%     (1 )%    (7 )%

Total                           $    962   $  1,013   $  1,170      (5 )%   (13 )%     (4 )%    (9 )%

Synagis
International                   $    827   $    825   $    775       -        6 %       9 %      9 %

Lupron
United States                   $    566   $    569   $    540      (1 )%     5 %      (1 )%     5 %
International                        219        231        270      (5 )%   (14 )%     (3 )%   (11 )%

Total                           $    785   $    800   $    810      (2 )%    (1 )%     (1 )%     -

Synthroid
United States                   $    622   $    551   $    522      13 %      6 %      13 %      6 %

Sevoflurane
United States                   $     77   $     82   $     88      (5 )%    (7 )%     (5 )%    (7 )%
International                        491        520        577      (6 )%   (10 )%     (4 )%    (5 )%

Total                           $    568   $    602   $    665      (6 )%   (10 )%     (4 )%    (5 )%

Creon
United States                   $    412   $    353   $    332      17 %      6 %      17 %      6 %

Duodopa
International                   $    178   $    149   $    125      20 %     19 %      16 %     29 %

Dyslipidemia products
United States                   $  1,076   $  2,145   $  2,504     (50 )%   (14 )%    (50 )%   (14 )%

Other                           $  1,666   $  1,525   $  1,735       9 %    (12 )%     10 %    (11 )%

Total                           $ 18,790   $ 18,380   $ 17,444       2 %      5 %       3 %      8 %

On a constant currency basis, global HUMIRA sales increased 15 percent in 2013 and 21 percent in 2012 as a result of 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 sales continued to expand in the rheumatology, dermatology and gastroenterology categories. HUMIRA received approvals from the European Commission for the treatment of moderately to severely active ulcerative colitis in April 2012, the treatment of severe axial spondyloarthritis in July 2012, and the treatment of pediatric patients with severe active Crohn's disease in November 2012. 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 2013 were impacted by rebates implemented during the second half of 2012, certain account losses in early 2013 and continued moderation of market growth. The increase in AndroGel


sales in 2012 reflected higher prices, market share gains, the launch of AndroGel 1.62% in the second quarter of 2011, and volume growth in the U.S. testosterone replacement market. 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 late 2014.

Global sales of Kaletra declined in 2013 and 2012 primarily due to lower market share resulting from the impact of competition.

Synthroid sales increased 13 percent and 6 percent in 2013 and 2012, respectively, due to strong brand loyalty and market leadership, and price.

Sales of Sevoflurane were impacted in both years by generic competition.

Sales of Creon in 2013 and 2012 grew by 17 percent and 6 percent, respectively. Creon maintains market leadership in the pancreatic enzyme market and continued to capture the vast majority of new prescription starts in 2013. In the first quarter of 2013, the FDA approved Creon in a 36,000 lipase-unit dose for patients with exocrine pancreatic insufficiency. Creon 36,000 is the highest dose of pancreatic therapy currently available.

Sales of Duodopa, AbbVie's therapy for advanced Parkinson's disease currently approved in Europe and other international markets, increased 16 percent on a constant currency basis. Duodopa is currently under regulatory review in the United States and a regulatory decision is expected in 2014.

Sales for AbbVie's consolidated lipid franchise, which includes TriCor, TRILIPIX and Niaspan, declined 50 percent in 2013 and 14 percent in 2012 due to the introduction of generic versions of these products in the U.S. market and, in 2012, softness in the overall branded cholesterol market. Generic competition began in November 2012 for TriCor, in July 2013 for TRILIPIX, and in September 2013 for Niaspan. AbbVie expects the negative impact of generic competition on sales to continue in 2014.

Gross Margin
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