Introduction:
AbbVie Inc (ABBV) is a biopharmaceutical company engaged in research, development and marketing of biotech drugs. In this article, we analyze its business mix, growth and income prospects, balance sheet, risks and finally conclude with our opinion on whether the company’s stock offers an attractive balance between risks and rewards.
Overview: AbbVie (ABBV), Yield: 5.8%
AbbVie Inc produces and markets drugs in several specialty therapeutic areas such as rheumatology, gastroenterology, immunology, dermatology, oncology, virology and neurological disorders. It started operating as an independent company in 2013 after a spin off from Abbott Laboratories.
While the company’s product portfolio includes a broad line of therapies to address a number of complex diseases, it derives a major portion of its revenue from Humira therapy which contributes around 61% to the total revenue followed Imbruvica, an oncology therapy contributing around 11% to overall revenues.
AbbVie distributes its products through a variety of channels both in domestic as well as international markets. In the US, distribution is done primarily through wholesale distributors with some sales directly to pharmacies and patients. In international markets however a number of agencies are used for distribution such as wholesalers, government agencies, health care facilities, pharmacies, retailers depending on the market being served.
AbbVie’s stock has tested investor patience over the last 12-15 months
AbbVie’s stock has been under pressure as a result of the lack of visibility into long term earnings as the company’s blockbuster drug Humira which accounts for 61% of sales goes ex patent in 2023 in the US, the largest market for the drug. Post 2023, the drug will face competition from cheaper biosimilars which should naturally impact pricing and market share of Humira. Please note that Humira has already gone ex-patent in Europe which has had some impact on revenue growth in the recent quarter. Humira’s international sales were down 31% in the latest quarter which partially offset 7.5% growth in the US Humira business, translating into an overall company growth of 1.5% on a constant currency basis. The company struck a deal with Amgen and Samsung Bioepis whereby the two companies will gain access to AbbVie’s intellectual property from 2023, produce biosimilars and share a percentage of revenue as royalty with AbbVie. Despite these deals, revenue from Humira will decline post 2023 and the real question is by how much? Not surprisingly, investors have been slow to embrace the stock given the wall of worry around Humira.
Additionally, the company’s announced mega merger with Allergan has led to anxiety among investors as the company takes on debt to fund the deal as well as risks to synergies and execution as is often the case with large M&A transactions.
Allergan acquisition, a game changer
The merger will lead to Humira generating 40% of the combined company sales as compared to 61% of AbbVie’s sales currently. Reduced dependence on a drug that will go off-patent is a major de-risking factor. Additionally, Allergan will help diversify the therapeutic focus from Immunology and Oncology to add Medical Aesthetics and Neuroscience.
Additionally, the non-Humira part of the company with around $29 billion in sales will be positioned for a 7-9% revenue growth over the medium term as well as enhance funding of R&D activities and additional pipeline expansion. The company has forecasted immediate financial benefits with EPS accretion of 10% in the first full year of the combination, increasing to above 20% at peak with significant additional earnings in the period following the loss of HUMIRA exclusivity.
AbbVie’s own drug pipeline is not worth ignoring
The company has received approval for two next generation products this year that could replace a significant portion of the potential loss of Humira revenue post 2023. Skyrizi, an investigational interleukin inhibitor for the treatment of moderate to severe plaque psoriasis in adults, has been approved by FDA and granted marketing access by European Commission in 2019. Additionally, Upadacitinib, an investigational oral selective inhibitor for the treatment of adult patients with moderate to severe rheumatoid arthritis, received approval in August 2019.
Together, the two drugs could do over $1 billion in sales in 2020 as per management guidance. Additionally, the company’s risk-adjusted revenue forecast by 2025 for the two drugs is over $10 billion. Finally, Imbruvica, in combination with Venclexta for adult patients with previously untreated chronic lymphocytic leukemia (CLL) are together a $4 billion market growing at over 40%.
Finally, Allergan is a mid-single digit grower in revenue over the medium to long term driven by mid to high single digit growth in the Botox franchise, 10-20% growth in international business as well as new product launches. Allergan’s pipeline contains several promising products in the Neuroscience area as they are developing new drugs to treat and prevent migraines as well as expanding their depression treatment Vraylar to other indications. In the Gastrointestinal area, they are developing drugs for NASH and gastroparesis. The positives are offset by some business going off-patent.
Strong Cash Flow Generation & Income Profile
Allergan recently released its merger prospectus providing investors 5-year forward forecasts for the combined company. The combined company can continue to increase its dividend alongside repayment of $15 to $18 billion of debt by 2021 as it promised at the time of merger announcement. Additionally, from 2022, it should generate excess cash to facilitate buy back of shares as well.
Source: Allergan Merger Prospectus, Seeking Alpha
Valuation Appealing
AbbVie’s stock is trading at attractive valuation relative to its cash flow profile as evidenced by the record current dividend yield in the chart below. Additionally, it is important to note that the company has a highly consistent history of growing its dividend and in fact, the combined company is targeting a 3% annual increase in dividend per share as per recently filed merger prospectus. Therefore, the current high dividend yield provides an opportunity to lock in a sustainable cash flow stream over the foreseeable future.
Source: Blue Harbinger Research, Seeking Alpha
Risks
Regulatory environment increasingly hostile
Pharmaceutical and biotech industry has attracted immense amount of focus from politicians and regulators for the negative reasons. The industry has come under pressure for pricing strategies especially on drugs protected by patents. There is almost a bipartisan support for the need to control pricing of essential drugs and manage the cost of the healthcare system. Given the upcoming election cycle in the country, there could be an extended overhang on the sector caused by negative headlines.
M&A execution risks
Large M&A transactions bring increasing level of complexity and execution risk. The company has guided to 10% EPS accretion in the first year post acquisition as well as over $2 billion in synergies and cost savings in year 3. The stock could come under pressure if the company cuts its guidance on any of key numbers associated with the transaction.
Conclusion
The current valuation of Abbvie discounts the majority of the post 2023 loss of revenue from Humira going off-patent in the US, however ignores the company’s own drug pipeline, more diversified growth and cash flow profile post Allergan, as well as a consistent history of dividends. We believe the current negative sentiment in the stock provides investors an opportunity to gain exposure to a quality biopharmaceutical company at an attractive risk reward. This one is absolutely worth considering for a spot in your long-term, prudently-diversified, income-focused investment portfolio.