AbbVie - An Investor Trifecta
A Pharmaceutical Giant In Transition
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Disclaimer: This post is intended for informational purposes only. The information is not intended to facilitate an investment decision. Do ensure you understand that each investment involves a level of risk, so please ensure you perform your own due diligence prior to making any investment. Past performance is not guarantee future profits.
AbbVie Inc. (ABBV)
AbbVie has long been a popular stock for not only high-yield investors, but also dividend growth investors as well over the years. Over the past year, shares of ABBV have increased 30% over the past year and nearly 60% since the March 2020 lows.
✏️ The History of AbbVie ✏️
AbbVie was a spin-off in 2013 from Abbott Laboratories (ABT). The company made the decision to spin-off their pharmaceutical arm in order to focus more on their medical products and devices business.
January 3, 2013 was the company’s first day of trading on the NYSE as a separate public company, opening for $34 per share.
Shortly after becoming its own public company, AbbVie introduced Humira, which would go on to be the #1 selling drug for a number of years.
I will get into Humira a little more down below. In order for the company to continue growing and diversifying their portfolio, AbbVie has made numerous acquisitions over the years, which can be a boost, but also a drag on a company.
In 2016, AbbVie announced they would acquire a company called Stemcentrx for $5.8 Billion. The strategy behind the acquisition was to gain access to their late stage small-cell lung cancer drug Rova-T. The drug was going through clinical trials so there were no guarantees it would make it to market, but management felt good about the progress it had made and the opportunity to cash in.
Well, things did not go according to plan and by 2018 AbbVie found themselves with a failed product and were forced to write-off the investment.
Just this past year, the company made a HUGE acquisition when they acquired the owner of Botox, Allergan in a deal for $63 Billion. The Company closed in Q2 2020, so we are still in the early innings of this acquisition, but Allergan has many more products to offer in addition to a strong pipeline.
💉 The Reliance On Humira 💉
As I mentioned above, Humira has been the #1 selling drug in the world for some time now, but that parade is slowly coming to an end. Humira has already lost patent protection overseas, which has put a dent in International Sales and the drug is expected to lose patent protection in the US in 2023.
This has worried investors for awhile, and rightfully so, as Humira accounted for 70% of total company sales. As of the last twelve months, Humira sales account for roughly 46% of total company sales. This is largely due to the decline internationally, but also due to the rise from a few of the company’s up and coming drugs. The approach by committee is the focus of management going forward, which tends to be more well-rounded than focusing on one product, except for when that one product is Humira.
📰 Reviewing Recent Earnings 📰
During the company’s most recent quarter, AbbVie saw company revenues increase 52% and operating income increase 24%. I wish those were actual organic increases, but again, Allergan was not around in 2019, hence the big bump. The adjusted revenue, adjusting for organic results, revenue increased 4%, which was a combination of 6% growth in the US and a 2% dip in international sales.
Humira sales overall climbed 4% from prior year with Imbruvica, the company’s second largest drug by sales, increasing nearly 10% on the quarter.
As I mentioned above, the company is seeing other products begin to carry some of the weight that has been left by Humira’s patent loss overseas. Imbruvica, co-produced with Johnson & Johnson (JNJ), has been a major success as has Skyrizi and Rinvoq as well. Skyrizi and Rinvoq have now just completed a full year of sales and Skyrizi, which was released first, has already amassed more than $1 billion in total sales.
Management believes that Rinvoq has the opportunity to be a blockbuster drug in itself, albeit not at the level of Humira, but a multi-billion dollar drug. Rinvoq caters to patients with theumatoid arthritis, or RA, which is an autoimmune and inflammatory disease. Rinvoq continues to gain further patents due to its ability to address varies different diseases, which further enhances the drug’s potential.
Skyrizi had $91 million in sales in Q3 2019, which has now increased to $435 million in Q3 2020, its largest quarter yet. Rinvoq went from $14 million in sales a year ago to $215 million this most recent quarter. I fully expect these two drugs to keep climbing and contributing for the company. In fact, CEO Richard Gonzalez believes these two drugs could reach combined sales of $20 billion, which would offset Humira’s best annual sales mark.
Overall, the company has big plans for these drugs not named Humira, and the pipeline is stocked with many others just like it that will be more than ready to take the baton once Humira patents expire in a few years.
If the ABBV pipeline and new product offerings alone are not compelling enough, now we can add in the addition of Allergan’s attractive portfolio and product offerings that will further move the needle forward.
The next earnings statement is expected in early February.
💵 A Look At Key Metrics 💵
Due to the nature of the business, pharmaceutical companies will have a lot of non-recurring transactions in any given quarter, thus, reviewing the company’s non-GAAP disclosures, such as Adjusted EPS is important due to the fact this is the company’s attempt at showing normalized earnings.
Here is a look at the company’s adjusted EPS growth by year since 2015:
2015: $4.29/+29% YOY Growth
2016: $4.82/+12% YOY Growth
2017: $5.60/+16% YOY Growth
2018: $7.91/+41% YOY Growth
2019: $8.94/+13% YOY Growth
2020: estimated $10.48/+17% YOY Growth
If the company keeps on track and hits projections, we will see yet another double digit growth year for the company.
CEO Richard Gonzalez presented recently at the JP Morgan Healthcare Conference, where he updated investors and analysts on expectations for the company in the coming years. He mentioned that he fully expects company growth to continue until 2023, when Humira loses its US patent protection. He expects “modest growth” in 2024 and a return to “rapid growth” in 2025 through the remainder of the decade.
Being that we discussed EPS, we must touch on Price-to-Earnings. Due to 30% rise in ABBV shares over the past three months, the P/E ratio has rightfully increased as well. For a while, shares were trading at an embarrassingly low P/E around 7x. As of today, shares are trading at a P/E of 11.3.
Looking at forward estimates, analysts expect 2021 earnings to be around $12.15, which would equate to a Forward P/E of 9.1x, which is still extremely cheap for a company packed with this much growth potential. You are receiving double digit earnings growth each and every year and only paying 9x forward earnings. In terms of where the company has traded in terms of historic valuation, ABBV has traded at an average P/E of 13.2x.
Another metric we could look at today is Price-to-Sales, of which, ABBV trades at a P/S of 4.8x. The 5yr P/S average for ABBV is 4.5x, suggesting the stock is trading at fair value in terms of sales. Looking ahead, analysts are expecting 2021 revenues of $54 billion, which would equate to a Forward P/S of 3.6x.
🏇 The Investor Trifecta 🏇
One of the great things about being an ABBV shareholder is the fact you have the ability for what I like to call the Investor Trifecta. This is where a particular stock has the ability to provide reasonable growth, while also providing high-yield dividends, and strong dividend growth. That is exactly the potential of ABBV.
Over the course of the past five years, ABBV shares have climbed nearly 90%. During that same time span, the company has increased their dividend an average of 21% per year. That is incredible dividend growth considering the stock has been yielding at or above 5% for a number of years.
In terms of dividend safety, AbbVie has maintained a payout ratio below 50%, indicating plenty of room for growth to continue as long as the cash flows remain stable. As of the trailing twelve months, the company has a payout ratio of 53%, but this can largely be related to the COVID-19 pandemic in which the company saw a sizable impact in Q1 and Q2 of this year.
Earnings growth is obviously key in the company being able to increase the dividend going forward, but more importantly is operating cash flows. These are where the dividends are actually paid from. Through the first nine-months of 2020, the company has generated $12.7 billion in operating cash flows and $12.2 billion in Free Cash Flow. Both of these figures are increases of 26.7% and 26.4%, respectively.
AbbVie has been a cash cow for years and I expect that to continue. As Allergan continues to integrate, I fully expect this cash flow growth to continue fueling the growing dividend.
⚡️ Risks To Investors ⚡️
When it comes to investing, you always want to look at both sides. What makes this a great investment and what could derail this investment? Every company has risks, some are obvious, others not so much. Here are a few that relate to AbbVie.
Additional high-priced acquisitions that fail. Investors were dragged through the mud with the Rova-T debacle and do not want to go through that again. Allergan is still transitioning over, so we will have to wait to see what the true synergies come out to be over the years.
Drug failures. As we approach 2023, management is under more and more pressure to deliver on their strong pipeline.
Recent acquisitions have led to a sizable debt pile, which will need to be addressed with cash flows, thus the company cannot have any hiccups when it comes to performance these next few years.
A lot is riding on new drugs Skyrizi and Rinvoq, as management expects sales to reach a combined total of $20 billion
There is no denying that the next two years a huge for this company. The clock is ticking. I know it, you know it, and management certainly knows it. Q4 earnings will be interesting to see the latest progress the company has made.
✅ Investor Takeaway ✅
AbbVie is a stock that can check a lot of different boxes for an investor. The company can attract the high-yield investor with their sub 5% dividend yield; they could attract the dividend growth investor as well with the strong annual dividend growth the company has provided since becoming its own company. We discussed in detail the impact Humira has had on paving the road for AbbVie during their short history, but the days of Humira pulling all the weight are practically over. The drug is still a huge contributor, but not for much longer.
Humira will lose their patent protection in 2023, but I believe management is setting itself up for success. Gone are the days of relying on one product, and in are the days where we build a portfolio of contributors. Imbruvica, Skyrizi, and Rinvoq are all making great progress.
The addition of Allergan was both positive and necessary, as it allowed the company to diversify their portfolio in a much quicker fashion. Otherwise, though the company has a strong pipeline of drugs coming, the risk of those drugs not working out within the next 24 months was too much, thus Allergan provides its leading Botox segment and an array of fast growing products combined with a strong pipeline itself.
In terms of valuation, the company has seen a nice run of late, but for long-term minded investor, I believe ABBV has a lot left in the tank. You may experience some volatility as 2023 nears, but overall, this company has tons of ammunition, strong cash flows, and a more than capable management team to see this process through. Trading at 11x earnings, you are still getting a fairly attractive price for this high-yield pharma stock.
📌 My Position 📌
I have a position in ABBV that I started a few years back. The stock has made a nice run the past three-months or so, but as a long-term investor, I believe it is still an appealing entry point.
I will be looking forward to their Q4 earnings report, as I am interested in seeing the growth of the other drugs mentioned, see how Allergan is performing, and also how international sales for Humira have done.
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Have a wonderful day!
Mark Roussin, CPA
Roussin Financial
Disclosures
I do have a position in AbbVie Inc. However, I do not have any connection or relationship with with any company mentioned in this article and I am not receiving any form of compensation for this article.