Oh, the world of spinouts!
Abbott spins off AbbVie in late 2012, and again the spinout does wonderfully, and the old rump is well, a rump.
Key Stats for AbbVie Inc
| Ticker | ABBV |
|---|---|
| Sector | Specialty & Advanced Pharmaceuticals |
| Latest price | $68.75 |
| Value | $109,418M |
| Daily vol | $358M |
| Date | 08 June 2017 |
| Links | Yahoo Finance, SEC Edgar, abbvie.com |
1. What does AbbVie do?
It's big pharma! And the old Abbott is the devices and diagnostics business.
It's products are focused on treating conditions, such as chronic autoimmune diseases in rheumatology, gastroenterology and dermatology; oncology, including blood cancers; virology, including hepatitis C virus (HCV) and human immunodeficiency virus (HIV); neurological disorders, such as Parkinson's disease and multiple sclerosis; metabolic diseases, including thyroid disease and complications associated with cystic fibrosis, and other serious health conditions.
At the time of the spin-out there was concern that over 50% of sales was concentrated in it's Humira drug, an arthritis drug.
| Metric | 2016A | 2015A | 2014A | 2013A | 2012A |
|---|---|---|---|---|---|
| Revenue | $25.6bn | $22.9bn | $20.0bn | $18.8bn | $18.4bn |
| EPS | $3.63 | $3.13 | $1.10 | $2.56 | $3.35 |
| DPS | $2.35 | $2.10 | $1.75 | $2.00 | n/a |
But those concerns ain't hurt the stock price. And AbbVie has been wheeling and dealing on partnerships and acquisitions. So... the future looks bright!
| Metric | 2016A | 2017E | 2018E |
|---|---|---|---|
| Revenue | $25.6bn | $27.8bn | $30.3bn |
| EPS | $3.63 | $5.52 | $6.48 |
Now, this has come at a cost. And today it's net debt is now 2.8x its latest operating profit. That's not a troublesome level, I think, but it is hard to see any new big deals in the near future.
| Metric | 2016A | 2015A | 2014A | 2013A | 2012A |
|---|---|---|---|---|---|
| Long-term debt | $36.5bn | $31.3bn | $14.6bn | $14.4bn | $14.7bn |
But the increase in debt doesn't look like it will hurt dividends, which are expected to continue to grow! And they have continued to do buybacks.
2. How does it compare?
A comparison with Abbott isn't fair, but it's nice to see that ABBV is the high margin, high returns part of the Abbott split!
If we look at margins relative to other big pharma players both margins and returns are top of class.
| Companies | Latest Sales | Operating Profit | Return on Equity |
|---|---|---|---|
| AbbVie Inc | $26,218M | 42% | 131% |
| Abbott Laboratories | $22,303M | 20% | 5% |
| Gilead Sciences, Inc. | $29,101M | 62% | 75% |
| GlaxoSmithKline plc (ADR) | $37,638M | 33% | 29% |
| Merck & Co., Inc. | $39,929M | 31% | 10% |
| Bristol-Myers Squibb Co | $19,965M | 31% | 34% |
| Pfizer Inc. | $52,599M | 39% | 12% |
| Novartis AG (ADR) | $49,411M | 28% | 9% |
But that nice margin and returns, and the expectation of double-digit growth hasn't translated into a higher valuation.
In fact, only Gilead, who's a higher margin has a lower valuation. What's the beef? Well, GILD's facing a patent cliff.
| Peers | Valuation | Forecast PE | Long-term Growth | Dividend Yield | FCF Yield |
|---|---|---|---|---|---|
| ABBV.K | $109,418M | 12x | 14% | 4% | 10% |
| ABT | $80,794M | 19x | 11% | 2% | 7% |
| GILD.O | $84,049M | 8x | -6% | 3% | 19% |
| GSK | $107,178M | 15x | 7% | 5% | 8% |
| MRK | $175,215M | 17x | 6% | 3% | 8% |
| BMY | $86,606M | 18x | 9% | 3% | 9% |
| PFE | $190,564M | 13x | 6% | 4% | 11% |
| NVS | $213,695M | 17x | 5% | 3% | 9% |
Perhaps the issue comes back to the concentration of sales in Humira! But would that be justified? On the latest call with analysts the CEO said:
We've built a compelling de-risked pipeline, which continues to progress well and is poised to fuel growth over the long term, and we're off to an exceptional start this year and are well-positioned to continue to deliver top-tier financial performance in 2017 and well beyond.
i.e. we are gonna grow!
3. Wall Street thinks?
The stock's traded from 10x to 17x forecast earnings in the last 2 years. i.e. the current level isn't excessive. And there is no surprise that the brokers on Wall Street are saying Buy. Though with a $72.28 target price, it's only 5% above the current level.
4. H-abbv-y?
Maybe.
The Gilead nightmare is in the back of my mind. Two blockbusters ramping a stock and then one going over the cliff, has shown that we investors sometimes are too busy extrapolating the past.
I've often wondered if a pharma stock should just be valued on 1 times the remaining years before a patent cliff! Or at least not much more. Any valuation above that relates to pipeline, of course.
At 12x forecast earnings, when well diversified mega caps like Pfizer, Merck and Novartis are pricier, I've some comfort that I'm being compensated for the risk.
To me, it boils down to the pipeline, when will I know if they've got another blockbuster! I know nothing about the pharma business, so ABBV would be speculative for me. But as a punt goes, it's tempting.
Question...
If you own it, or work in pharma, can you give us insight into the pipeline? As that's the key for me :)
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Disclosure:
I have no position in any of the stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.
Author notes: u/shane_stockflare is a Chartered Financial Analyst.
Submitted June 08, 2017 at 11:45AM by shane_stockflare http://ift.tt/2sY8OJA
