AbbVie Inc.(Ticker symbol — ABBV) discovers, develops, manufactures, and sells pharmaceuticals internationally. AbbVie has a presence in the rheumatoid arthritis, cancer, psoriasis, Crohn’s disease, HIV, hepatitis C virus (HCV), thyroid disease, Parkinson’s disease, ulcerative colitis, endometriosis and cystic fibrosis markets.
It’s Key drugs include:
- Humira — 56.6% of total revenues at $4.7 Billion(10-Q 2020)
- Imbruvica — 14.8% of total revenues at $1.2 Billion(10-Q 2020)
Other drugs include Mavyret (HCV), Venclexta (oncology), AndroGel (low testosterone), Kaletra (HIV), Synthroid (hormone therapy for thyroid disease), Creon (pancreatic enzyme replacement therapy for conditions associated with cystic fibrosis and chronic pancreatitis), Duodopa (advanced Parkinson’s disease), Orilissa (endometriosis pain), Skyrizi (plaque psoriasis) and Rinvoq (RA). The company also has partnerships with companies like Roche and J&J.
My Investment Thesis
Key Performance Indicators:
- Cash Flow Growth — DCF method
- Consistent Dividend Growth
- Growing market Share — Revenues Growth
- EPS Growth
- Low Debt to Equity Ratio — Respective of the industry
- ROE, ROA, ROIC growth
- Owner’s Earnings Growth
- Humira U.S. Sales Going Strong: AbbVie’s flagship product, Humira, continues to drive revenues. Humira, an anti-inflammatory product, is the anti-tumor necrosis factor (TNF) drug of choice. Currently approved for 12 indications, Humira sales have increased consistently backed by robust demand trends. The product continues to see strong growth in the dermatology and gastroenterology markets in the United States despite new mechanisms of action and competition from indirect biosimilars. Though biosimilar versions of Humira are already approved by the FDA, per settlements with several companies, biosimilar entry into the United States is scheduled for 2023, thus delaying direct biosimilar competition in the country.
- Acquired Botox maker Allergan: AbbVie’s rationale behind the Allergan deal was to add a new blockbuster product to its portfolio, Allergan’s Botox, ahead of generic competition for Humira. Approved for therapeutic and aesthetic use, Botox is a key top-line driver for Allergan and looks fit to be the next revenue driver for AbbVie after Humira loses exclusivity. Overall, the Allergan acquisition should diversify AbbVie’s revenue base to markets/categories outside AbbVie’s present drug portfolio and accelerate its non-Humira business.
- Collaborations and Agreements to Strengthen Pipeline: I am positive on AbbVie’s efforts to strengthen its pipeline. The company has been actively pursuing partnership deals and collaborations for candidates across several therapeutic areas including oncology, immunology, neuroscience, cystic fibrosis and women’s health. Some partners include Roche (Venclexta — oncology), J&J (Imbruvica — cancer) and Boehringer Ingelheim (Skyrizi– psoriasis) among others. I believe the company will continue pursuing such deals to grow its pipeline.
- Growing Oncology Portfolio: AbbVie believes that oncology will be its major growth driver over the next 10 years. The acquisition of Pharmacyclics in May 2015 added Imbruvica to AbbVie’s portfolio and diversified the company’s revenue base. AbbVie has built a substantial oncology franchise with Imbruvica and Venclexta, which generated combined revenues of nearly $5.5 billion in 2019. Strong double-digit growth is expected in 2020.
- Favorable Debt Profile: As of Mar 31, 2020, AbbVie had $63.28 billion in long-term debt (plus finance lease obligations) and short-term debt/obligations of $3.76 billion on its balance sheet. Cash and cash equivalents totaled approximately $41.14 billion. Though the company is highly leveraged, its cash position is sufficient to pay its short- term debt in case of insolvency. Also, though AbbVie’s debt level has increased significantly with the Allergan buyout, AbbVie is expected to reduce debt within a couple of years of closing. Meanwhile, Fitch has assigned BBB credit rating to AbbVie which indicates that the expectations of default risk are currently low.
- Humira Biosimilars Can Erode Sales: Several companies have made biosimilar versions of Humira. With Humira accounting for around 55% of AbbVie’s sales, the entry of biosimilars would have a huge impact on the company’s financials. Per settlements with nine manufacturers, Humira biosimilars are expected to be launched in the United States in 2023. In the international markets, AbbVie is facing direct biosimilar competition in Europe and other countries. Humira international sales declined by 15% in 2020 due to generic competition.
- Declining HCV Sales: Sales of AbbVie’s relatively newer HCV medicine, Mavyret declined in 2018 and 2019 primarily driven by lower patient volumes in certain international markets and competitive dynamics in the United States. The declining trend continues in 2020.
- Pipeline and Regulatory Setbacks: While I believe that AbbVie has an impressive pipeline, I note that clinical development involves a high degree of risk. Gaining approval for pipeline candidates has become more difficult given the tough regulatory environment. Development and regulatory setbacks for late-stage pipeline candidates would be a major disappointment for the company.
Intrinsic Value Assessment
To determine the Intrinsic Value of AbbVie I used the Discounted Cash Flow (DCF) method. DCF uses AbbVie’s Free cash flows, which represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets and estimates the value of the investment to project it’s future cash flows and justifies the price I pay now for this expected return.
AbbVie’s average Free Cash Flow(FCF) over the past ten years is $7370. I conservatively expect AbbVie to grow their FCF at a rate of 7.31% and grow at a rate of 1.34% into perpetuity.
With these estimates in mind, AbbVie’s intrinsic value per share is $87.71 at a 10% annual discount rate. Based on the cash flows I have forecasted and a market price of $98.88, AbbVie may yield 9.14% annual return — Not taking dividends into account.
This is important as it shows discipline within management and compensates the stockholder for trusting the company with their money. An excessive offload of profits to investors via dividends can signal a loss of vision within management and their inability to seek growth. No dividends can also be destructive as holding onto profits might lead to excessive executive compensation, sloppy management, and unproductive use of assets. For the average investor, the money they have in the stock can be seen as more trustworthy when it makes its way into the shareholders pocket.
If payout ratio is close to or higher than 100%, dividends might not be sustainable.
This is the historical trailing annual dividend yield of AbbVie Inc. Buying stocks at higher yield relative its historical values is usually more profitable.
Revenues of $8.62 billion and sales rose by 10.1% on a reported basis. Excluding currency headwinds of 0.6%, operational revenues increased 10.7%, driven by continued strong performance of AbbVie’s immunology and hematology/oncology drugs despite the impact of international biosimilar competition for Humira. Operational revenue growth was much higher than the guidance of approximately 7%.
As a result of reduced physician and patient contacts due to COVID-19 related lockdowns, patients and pharmacies stocked up AbbVie’s medicines, which benefited sales. First-quarter operational sales growth included 240-basis point stocking benefit related to the COVID-19 pandemic.
However, mainly from late March and April, AbbVie saw a negative impact on the number of new patient starts for drugs like Humira and Skyrizi as fewer patients visited doctors. Meanwhile, the company also saw lower new patient utilization of hospital-based treatments like Venclexta.
First-quarter net revenues from Imbruvica were $1.23 billion, up 20.6% year over year operationally driven by continued penetration for patients with CLL as well as COVID-19 related stocking benefit. U.S. sales of Imbruvica grossed $966 million, up 16.6% from the year-ago figure, driven by strong share in all lines of therapy in CLL. AbbVie logged $266 million of international profit sharing with J&J, up 37.9% year over year.
Venclexta brought in revenues of $317 million, up more than 100% year over year driven by continued share gains across all approved indications.
HCV products, including Viekira and Mavyret, recorded sales of $564 million, down 30.8% year over year. Mavyret sales totaled $559 million in the quarter, down 29.2% year over year due to a decline in the United States as well as international markets. International sales of Mavyret declined 14.7% in the quarter on an operational basis due to lower treated patient volumes in some markets. U.S sales were down 42% year over year due to increased competition in management Medicaid segment.
Other products that delivered an encouraging performance include Duodopa, Lupron and Kaletra, which recorded revenue growth of 14%, 2.1% and 11.4% respectively.
Adjusted gross margin declined 70 bps to 82.7% in the quarter due to collaboration profit sharing arrangements for Imbruvica and Venclexta. Adjusted SG&A expenses increased 2.3% to $1.6 billion. R&D expenses were $1.2 billion in the first quarter, rising 2.9% year over year due to greater investments in the pipeline. Adjusted operating margin represented 49.8% of sales, up 170 bps year over year.
Low Debt to Equity Ratio — Respective of the industry
AbbVie’s Short-Term Debt & Capital Lease Obligation for the quarter that ended in Mar. 2020 was $3,762 Mil. AbbVie’s Long-Term Debt & Capital Lease Obligation for the quarter that ended in Mar. 2020 was $63,284 Mil. AbbVie’s Total Stockholders Equity for the quarter that ended in Mar. 2020 was $-7,415 Mil. AbbVie’s debt to equity for the quarter that ended in Mar. 2020 was -9.04.
A high debt to equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.
AbbVie has a negative debt-to-equity ratio as the company has negative equity, which means their liabilities exceed their assets. This increase in liabilities is due to the Allergan buyout.
AbbVie has negative equity.
ROA % is calculated as Net Income divided by its average Total Assets over a certain period of time. AbbVie’s annualized Net Income for the quarter that ended in Mar. 2020 was $12,040 Mil. AbbVie’s average Total Assets over the quarter that ended in Mar. 2020 was $90,157 Mil. Therefore, AbbVie’s annualized ROA % for the quarter that ended in Mar. 2020 was 13.35%.
ROIC % measures how well a company generates cash flow relative to the capital it has invested in its business. It is also called ROC %. AbbVie’s annualized return on invested capital (ROIC %) for the quarter that ended in Mar. 2020 was 32.36%.
As of today (2020–07–04), AbbVie’s WACC % is 4.39%. AbbVie’s ROIC % is 29.05%. AbbVie generates higher returns on investment than it costs the company to raise the capital needed for that investment. It is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases.
AbbVie’s Owner Earnings per Share (TTM) ended in Mar. 2020 was $6.14. It’s Price-to-Owner-Earnings ratio for today is 16.1.
AbbVie’s Price-to-Owner-Earnings is ranked higher than 72% of the 421 Companies in the Drug Manufacturers industry.
AbbVie’s key drug, Humira continues to see strong demand trends in the United States. AbbVie has been successful in expanding labels of its cancer drugs, Imbruvica and Venclexta. Moreover, it has an impressive late-stage pipeline. It gained approvals for two new drugs with significant potential, Skyrizi (risankizumab) and Rinvoq in 2019. Both are off to a strong start. Allergan’s acquisition should diversify AbbVie’s revenue base and accelerate its non-Humira business. AbbVie’s shares have outperformed the industry in the past year. However, sales erosion due to direct biosimilar competition to Humira in international markets is a big headwind. The decline in HCV drug Mavyret’s sales is a concern. Meanwhile, AbbVie expects slower new patient starts of physician-administered drugs and the first-quarter benefits of inventory stocking to reverse and hurt sales in the second quarter.