AbbVie (ABBV, Financial) is a major drug manufacturer with a $107 billion market cap. The company manufactures and markets Humira, Creon, and other pharmaceutical treatments in the U.S. AbbVie was spun-off from Abbott Laboratories (ABT, Financial) in January 2013. The company is a Dividend Aristocrat because it shares Abbott Laboratories’ long dividend history and has paid increasing dividends since the spin-off. AbbVie is the subject of part 45 of the Dividend Aristocrats In Focus series. The company’s business is analyzed below to give a clearer picture of AbbVie’s operations.
Business Overview
Unlike other businesses I have analyzed, AbbVie operates in just one segment: pharmaceutical products. The company knows exactly what it does and focuses specifically on pharmaceuticals. AbbVie is best analyzed on a product-by-product basis. The company generates all its revenue from just 10 pharmaceutical products. The name and percent of total company revenue generated of each of AbbVie’s 10 products is shown below:
- Humira: 70% of total revenue
- Kaletra : 5% of total revenue
- AndroGel: 5% of total revenue
- Synthroid: 4% of total revenue
- Lupron: 4% of total revenue
- Creon: 3% of total revenue
- Sevoflurane: 3% of total revenue
- Synagis: 2% of total revenue
- Dyslipidemia: 1% of total revenue
- Duodopa: 1% of total revenue
AbbVie is dependent upon Humira for 70% of its revenue. The company’s lack of diversification puts even ‘focused value’ investors who employ concentrated portfolios like Seth Klarman (Trades, Portfolio), Monish Pabrai, and Warren Buffett to shame. When one invests in AbbVie, they are betting big on Humira; at least at the moment. AbbVie is more than just Humira. The company has a strong research and development division which is actively building the company’s product pipeline.
Competitive Advantage
AbbVie’s competitive advantage comes from its strong research and development division which creates new products and intellectual property for the company. AbbVie spent $2.9 billion on research and development for its full fiscal 2013. This comes to 15.4% of total revenue.
As a result of strong research and development spending, AbbVie currently has 40 active clinical development programs underway. This includes 12 programs in stage 3 development or under regulatory review. AbbVie’s competitive advantage comes from its ability to continually develop new drugs and protect them for years through various patents.
Growth Prospects
AbbVie is experiencing strong growth on strength from Humira. Humira constant-currency sales increased 17.8% for AbbVie’s most recent quarter versus the same quarter a year ago. The company saw total sales increase 8.3% on a constant currency basis in the quarter. AbbVie’s non-Humira revenue declined 14% over the same time period. Much of the decline was driven by the loss of exclusivity (patent expiration) on the company’s dyslipidemia products. These produces saw revenue decline 76.9% versus the same quarter a year ago.
AbbVie will lose exclusivity on Humira at the end of 2016. Humira is a biological compound and will be significantly more difficult to produce generically than AbbVie’s dyslipidemia products. With that said, the pharmaceutical market is highly competitive with large players including Sandoz and Amgen (AMGN, Financial). Amgen’s biosimilar treatment outperformed Humira in clinical trials on October 8. AbbVie will see declines in Humira revenue in 2017 and beyond as biosimilar products erode both margin and market share for AbbVie.
The company has until the end of 2017 to significantly grow its product portfolio and diversify its revenue base away from Humira. It is difficult to tell at this point how successful AbbVie will be in replacing its revenue from Humira. The company carries significantly more growth risks than most Dividend Aristocrats due to its reliance on Humira.
Dividend Analysis
AbbVie has a solid dividend yield of nearly 3%. The company has a payout ratio of about 60% of expected full 2014 EPS. AbbVie had planned to fuel growth and realize substantial tax savings by acquiring Irish biopharmaceutical company Shire (SHPG). The deal fell through because the IRS made tax inversions substantially more difficult. Upon the announcement of the deal falling through, AbbVie announced a dividend hike of nearly 17% and a $5 billion share repurchase plan.
The company’s willingness to use its strong cash flows from Humira to reward shareholders in the aftermath of the failed Shire acquisition is a welcome change for management. Before the announcement, AbbVie had been a net share issuer. Increasing share counts slowly reduce shareholder value by reducing the percentage of the company each share controls.
Valuation
AbbVie currently trades at a P/E ratio of about 14.5 times expected fiscal 2014 earnings. The company appears cheap at the moment compared to the S&P 500’s P/E ratio of about 20. AbbVie is likely cheap due to the pending drop in sales from Humira coupled with uncertainty about the company’s ability to replace lost Humira revenue with new products.
Final Thoughts
AbbVie does not offer the same level of certainty and stability that the majority of Dividend Aristocrats offer. The company’s future growth is in question and it faces significant product obsolescence hurdles. AbbVie gets an average score using the 8 Rules of Dividend Investing. The company has a solid dividend yield coupled with a reasonably low stock price volatility of 25%. Additionally, the company appears cheap at current prices (not factoring in growth risk). What holds AbbVie back from ranking higher is its uncertain growth prospects. AbbVie is not a good match for investors seeking stability and relative certainty. As a result, it likely does not appeal to investors interested in other Dividend Aristocrats.
