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ABBV > SEC Filings for ABBV > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for ABBVIE INC.

Form 10-Q for ABBVIE INC.


9-May-2014

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) as of March 31, 2014 and December 31, 2013 and the results of operations for the three months ended March 31, 2014 and 2013. This commentary should be read in conjunction with the condensed consolidated financial statements and accompanying notes appearing in "Item 1. 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; HIV; endometriosis; thyroid disease; Parkinson's disease; and complications associated with chronic kidney disease and cystic fibrosis, among other health conditions such as low testosterone. 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.

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.

Financial Results

Worldwide net sales for the three months ended March 31, 2014 totaled $4.563 billion, an increase of 5 percent, driven primarily by the continued strength of HUMIRA and double-digit sales growth from key products including Synthroid, Creon and Duodopa. Growth in these key products was partially offset by the continuing impact of the loss of exclusivity in the company's lipid franchise in 2013. Generic competition began in November 2012 for TriCor, July 2013 for TRILIPIX and September 2013 for Niaspan, resulting in the loss of $248 million of revenue in the three months ended March 31, 2014 over the prior year. The company's financial performance also included delivering fully diluted earnings per share of $0.61, while increasing funding in support of AbbVie's emerging mid-and late-stage pipeline assets and the continued support of additional HUMIRA indications. In the three months ended March 31, 2014, the company generated cash flows from operations of $624 million.

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 by 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 12 are in Phase III development or in registration. AbbVie expects several Phase II programs to transition into Phase III programs during 2014. Research and development (R&D) is focused on therapeutic areas that include immunology, virology, oncology, renal disease, neurological diseases, and women's health, among others.


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During the first quarter of 2014, AbbVie continued to execute on its long-term strategy of advancing its new product pipeline and maximizing its existing portfolio through new indications and formulations. Significant recent developments in R&D included the following:

AbbVie recently submitted its U.S. regulatory application for its interferon-free combination for patients with genotype 1 hepatitis C virus (HCV). AbbVie plans to submit applications for regulatory approval of its regimen in the European Union in early May 2014. The company expects U.S. commercialization in 2014 and European approval in early 2015.

AbbVie announced the initiation of a global Phase III clinical trial evaluating the safety and efficacy of its investigational compound, veliparib (ABT-888), in patients with previously untreated locally advanced or metastatic squamous non-small cell lung cancer (NSCLC). In addition, AbbVie initiated a Phase III clinical trial to evaluate the safety and efficacy of veliparib when added to carboplatin, a chemotherapy, in women with early-stage, triple negative breast cancer.

AbbVie initiated a Phase III evaluation for its next generation Bcl-2 inhibitor, ABT-199, for chronic lymphocytic leukemia in collaboration with AbbVie's development partner, Roche Holding AG.

AbbVie announced the initiation of a Phase III clinical trial that will evaluate the use of HUMIRA as a treatment for fingernail psoriasis in patients with moderate to severe chronic plaque psoriasis.

AbbVie discontinued its Phase IIb study for the use of ABT-719 for the treatment of acute kidney injury associated with major cardiac and vascular surgeries.

The company received a complete response letter from the U.S. Food and Drug Administration (FDA) with respect to the company's levodopa-carbidopa intestinal gel for the treatment of Parkinson's disease. The letter principally related to the use of the delivery system, and did not identify safety issues or request additional clinical trials. This product is sold under the name Duodopa outside the United States.

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, 2013.

RESULTS OF OPERATIONS



Net Sales



                                                 Percent change
                  Three months ended       At actual       At constant
                      March 31,          currency rates   currency rates
(in millions)        2014         2013             2014             2014
United States      $2,226       $2,122               5%               5%
International       2,337        2,207               6%               9%
Net sales          $4,563       $4,329               5%               7%

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 the three months ended March 31, 2014 was driven by the continued strength of HUMIRA, both in the United States and internationally as well as sales growth in key products including Synthroid, Creon and Duodopa. Sales increased in the quarter despite the continued decline in AbbVie's lipid franchise due to the loss of exclusivity and unfavorable foreign exchange rate fluctuations.


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The following table details the sales of key products.

                                                           Percent change
                            Three months ended      At actual        At constant
                                March 31,         currency rates    currency rates
(in millions)                     2014     2013             2014              2014
HUMIRA
United States                   $1,192     $956               25%              25%
International                    1,445    1,288               12%              14%
Total                           $2,637   $2,244               18%              18%
Synagis
International                     $354     $345                3%               9%
AndroGel
United States                     $254     $240                6%               6%
Kaletra
United States                      $54      $52                2%               2%
International                      141      167              -16%             -13%
Total                             $195     $219              -11%              -9%
Lupron
United States                     $140     $125               12%              12%
International                       49       56              -14%              -8%
Total                             $189     $181                4%               6%
Synthroid
United States                     $157     $119               32%              32%
Sevoflurane
United States                      $19      $16               16%              16%
International                      123      121                2%               5%
Total                             $142     $137                3%               6%
Creon
United States                     $107      $90               18%              18%
Duodopa
International                      $52      $39               32%              29%
 Dyslipidemia products
United States                      $96     $344              -72%             -72%
Other                             $380     $371                3%               4%
Total                           $4,563   $4,329                5%               7%

On a constant currency basis, global HUMIRA sales increased 18 percent primarily as a result of continued market growth across therapeutic categories and geographies, higher market share and higher pricing in certain geographies. In the United States, HUMIRA sales continued to expand across therapeutic categories. Internationally, growth is driven by the continued uptake of new indications, increased market share and market growth in most key countries. AbbVie is pursuing several new indications to help further differentiate from competitive products and add to the sustainability and future growth of HUMIRA.

Sales for Synagis increased 9 percent in the first quarter of 2014 reflecting seasonal demand. Synagis is a seasonal product with the majority of sales occuring in the first and fourth quarters.

AndroGel sales in the first quarter of 2014 increased 6 percent, benefitting from a favorable comparison versus 2013. While AndroGel continues to gain market share, the overall U.S. testosterone replacement market is experiencing a decline. AndroGel 1% sales are expected to be impacted by generic competition in early 2015.

Global sales of Kaletra declined in the first quarter of 2014 primarily due to lower market share resulting from the impact of competition.


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Sales of Creon continued to grow in the first quarter of 2014. 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 U.S. FDA approved a new dosage strength of Creon 36,000 lipase-unit capsules for patients with exocrine pancreatic insufficiency.

Sales of Duodopa, AbbVie's therapy for advanced Parkinson's disease currently approved in Europe and other international markets, increased 29 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 72 percent in the first quarter of 2014 due to the introduction of generic versions of these products in the U.S. market. Generic competition began in November 2012 for TriCor, in July 2013 for TRILIPIX, and in September 2013 for Niaspan.

Gross Margin



                        Three months ended     Percent
                            March 31,          change
(in millions)              2014         2013      2014
Gross margin             $3,463       $3,176        9%
as a % of net sales         76%          73%

The gross profit margin in the first quarter of 2014 reflected the favorable impact of product mix across the product portfolio, including HUMIRA, operational efficiencies and lower amortization expense for intangible assets, partially offset by the effect of unfavorable foreign exchange rates and loss of exclusivity for the lipid franchise.

Selling, General and Administrative



                                        Three months ended     Percent
                                            March 31,          change
(in millions)                              2014         2013      2014
Selling, general and administrative      $1,340       $1,237        8%
as a % of net sales                         29%          29%

Selling, general and administrative (SG&A) expenses in the first quarter of 2014 and 2013 included $77 million and $29 million, respectively, of costs associated with the separation of AbbVie from Abbott Laboratories (Abbott). The increases in SG&A expenses in the first quarter of 2014 were due primarily to increased selling and marketing support for new, including preparations for the expected launch of AbbVie's interferon-free HCV combination, and existing products, including continued spending for HUMIRA.

Research and Development and Acquired In-Process Research and Development



                            Three months ended    Percent
                                March 31,         change
(in millions)                  2014        2013      2014
Research and development       $772        $634       22%
as a % of net sales             17%         15%

R&D expense in the first quarter of 2014 reflects added funding to support the company's emerging mid- and late-stage pipeline assets and the continued pursuit of additional HUMIRA indications.


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Interest Expense, Net

Interest expense, net, which was comprised primarily of interest expense on outstanding debt, partially offset by interest income, was $65 million and $66 million for the three months ended March 31, 2014 and 2013, respectively.

Income Tax Expense

The effective income tax rates were 23.8 percent and 21.9 percent in the first quarters of 2014 and 2013, respectively. The effective tax rates in both periods 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. The increase in the effective tax rate in the first quarter of 2014 over the prior year was primarily due to changes in the jurisdictional mix of earnings.

AbbVie expects that its effective income tax rate in 2014 will be approximately 22 percent, excluding any discrete items.

Transition from Abbott and Cost to Operate as an Independent Company

On January 1, 2013, AbbVie became an independent, publicly-traded company as a result of the distribution by Abbott of 100 percent of the outstanding common stock of AbbVie to Abbott's shareholders (the separation). Prior to the separation, Abbott provided AbbVie certain services, which included administration of treasury, payroll, employee compensation and benefits, travel and meeting services, public and investor relations, real estate services, internal audit, telecommunications, information technology, corporate income tax and selected legal services. Some of these services continue to be provided to AbbVie on a temporary basis after the separation pursuant to certain transition services agreements with Abbott. As a result, AbbVie has and will continue to incur additional ongoing operating expenses to operate as an independent company, including 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.

AbbVie's transition services agreements with Abbott in the United States cover certain corporate support services that AbbVie has historically received from Abbott. Such services include information technology, accounts payable, payroll, and other financial functions, as well as engineering support for various facilities, quality assurance support, and other administrative services. The terms of the services under the agreements vary by activity. These agreements facilitate the separation by allowing AbbVie to operate independently prior to establishing stand-alone back office functions across its organization.

As of the date of the separation, AbbVie did not have sufficient back office infrastructure to operate in markets outside the United States. As a result, AbbVie entered into transition services agreements with Abbott to provide services outside the United States, including back office services in certain countries, for up to two years after separation. The back office services provided include information technology, accounts payable, payroll, receivables collection, treasury and other financial functions, as well as order entry, warehousing, and other administrative services. These transition services agreements have allowed AbbVie to operate its international pharmaceuticals business independently prior to establishing a stand-alone back office infrastructure for all countries. During the transition from Abbott, AbbVie has and will continue to incur non-recurring expenses to expand its international infrastructure. In addition, in certain international markets as of the date of the separation and as of March 31, 2014, certain marketing authorizations to sell AbbVie's products continued to be held by Abbott until such authorizations could be transferred through the applicable regulatory channels.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES



                                      Three months ended
                                          March 31,

(in millions)                               2014     2013
Cash flows provided by/(used in):
Operating activities                      $  624   $1,187
Investing activities                        (797 )  1,487
Financing activities                      (1,277 ) (1,582 )


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Cash flows provided by operations for the first three months of 2014 was $624 million compared to $1,187 million for the first three months of 2013. Cash provided by operating activities in the first three months of 2014 and 2013 includes voluntary contributions to the company's main domestic defined benefit plan of $370 million and $145 million, respectively.

Cash flows from investing activities for the three months ended 2014 and 2013 reflected capital expenditures and net sales (purchases) of short-term investments.

During the three months ended March 31, 2014 and 2013, the company issued and redeemed commercial paper. The balance of commercial paper outstanding at December 31, 2013 was $400 million. No commercial paper borrowings were outstanding at March 31, 2014. The weighted-average interest rates for the three months ended March 31, 2014 and 2013 were 0.2% and 0.3%, respectively. AbbVie may issue additional commercial paper or retire commercial paper to meet liquidity requirements as needed.

The company's cash and equivalents and short-term investments decreased from $9,895 million at December 31, 2013 to $9,100 million at March 31, 2014. While a significant portion of cash and equivalents at March 31, 2014 are considered reinvested indefinitely in foreign subsidiaries, AbbVie does not expect such reinvestment to affect its liquidity and capital resources. If these funds were needed for operations in the United States, AbbVie would be required to accrue and pay U.S. income taxes to repatriate these funds. AbbVie believes that it has sufficient sources of liquidity to support its assumption that the disclosed amount of undistributed earnings at March 31, 2014 has been reinvested indefinitely.

Dividends of $641 million were paid on February 14, 2014 to stockholders of record on January 15, 2014 at $0.40 per share. On February 20, 2014, the board of directors declared a quarterly cash dividend of $0.42 per share for stockholders of record on April 15, 2014, payable on May 15, 2014. The timing, declaration, amount of, 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. Cash dividends paid in the first quarter of 2013 were $636 million.

In February 2013, AbbVie's board of directors authorized 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. During the three months ended March 31, 2014, the company repurchased approximately 5 million shares for $250 million in the open market. As of March 31, 2014, approximately $1 billion remained available under the February 2013 authorization. There were no share repurchases in the first quarter of 2013.

Substantially all of AbbVie's trade receivables in Greece, Portugal, Italy and Spain are with governmental health systems. AbbVie continues to monitor the economic health of the economy in Southern Europe, as heightened economic concerns still exist. Outstanding net governmental receivables in these countries at March 31, 2014 and December 31, 2013 were as follows.

                                              Net receivables over
                    Net receivables            one year past due
                March 31,   December 31,   March 31,   December 31,
(in millions)        2014           2013        2014           2013
Greece                $49            $37          $-             $-
Portugal               61             59           7              3
Italy                 264            245          23             22
Spain                 192            440           -            135
Total                $566           $781         $30           $160


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AbbVie monitors economic conditions, the creditworthiness of customers, and government regulations and funding, both domestically and abroad. AbbVie regularly communicates with its customers regarding the status of receivable balances, including their payment plans and obtains positive confirmation of the validity of the receivables. AbbVie establishes an allowance against accounts receivable when it is probable they will not be collected. AbbVie also monitors the potential for and periodically has utilized factoring arrangements to mitigate credit risk although the receivables included in such arrangements have historically not been a material amount of total outstanding receivables. Currently, AbbVie does not believe the economic conditions in Southern Europe will have a material impact on the company's liquidity, cash flow or financial flexibility.

Credit Facility, Access to Capital and Credit Ratings

Credit Facility

AbbVie currently has a $2.0 billion unsecured five-year revolving credit facility from a syndicate of lenders, which also supports commercial paper borrowings. The credit facility enables the company to borrow funds at floating interest rates. At March 31, 2014, the company was in compliance with all its credit facility covenants. Commitment fees under the credit facility are not material. There were no amounts outstanding on the credit facility as of March 31, 2014 and December 31, 2013.

Access to Capital

The company intends to fund short-term and long-term financial obligations as they mature through cash on hand, future cash flows from operations or by issuing additional debt. The company's ability to generate cash flows from operations, issue debt or enter into financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for the company's products or in the solvency of its customers or suppliers, deterioration in the company's key financial ratios or credit ratings or other material unfavorable changes in business conditions. At the current time, the company believes it has sufficient financial flexibility to issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms to support the company's growth objectives.

Credit Ratings

On March 4, 2014, Moody's affirmed its rating of Baa1 and revised its ratings outlook to "positive" from "stable". There were no other changes in the company's credit ratings in the first three months of 2014. Refer to the 2013 Annual Report for further discussion of the company's credit ratings.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses. Certain of these policies are considered critical as these most significantly impact the company's financial condition and results of operations and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Actual results may vary from these estimates. A summary of the company's significant accounting policies is included in Note 2 to the company's Annual Report on Form 10-K for the year ended December 31, 2013. There have been no significant changes in the company's application of its critical accounting polices during the first three months of 2014.


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Forward-Looking Statements

Some statements in this quarterly report on Form 10-Q may be forward-looking statements for purposes of the Private Securities Litigation Reform Act of . . .

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