How Safe Is Abbvie's Dividend?

| About: AbbVie Inc. (ABBV)


On Jan. 4, 2013, the board of directors of AbbVie (NYSE:ABBV) declared the company's first quarterly dividend of $0.40 per share. AbbVie's dividend is payable on Feb. 15, 2013, to shareholders of record at the close of business on Jan. 15, 2013.

AbbVie's annualized cash dividend is $1.60 per share, which combined with Abbott's annualized cash dividend of $0.56 per share, equals a total annualized cash dividend of $2.16 per share, compared to the annualized cash dividend of Abbott Labs, prior to separation, of $2.04 per share.

Future dividends are subject to approval by each company's board of directors.

AbbVie's dividend is proportionally higher as a percentage of earnings per share than the new Abbott Labs, which is proportionally lower. But both managements promise a steady dividend growth for the future.

William J. Chase, Abbvie's Executive Vice President and CFO said during a recent earnings conference:

"If you look at our guidance range, our payout ratio depending on which end of the range you are at. It's somewhere between 51% to 53%. We think that's a pretty competitive payout range and certainly as we look to grow that over the next couple years despite a flattish topline you'd expect to see that payout ratio creep up. Then when the pipeline kicks in, we would expect to see accelerated growth in the dividend. When you start getting out into the timeframe of post 2017, 2018, it's a little difficult to predict a specific dividend payout ratio. But what I can tell you is, growing this dividend is very, very important to this company and we think we've got the cash flow potential and the growth potential to deliver that for many, many years."


Humira added more than $1 billion in sales growth in 2012.

In the split-up Abbvie inherited Abbott's proprietary pharmaceutical business, the most important drug in which is anti-TNF inhibitor Humira.

Humira's annual sales for 2012 stood at $9.3 billion, cementing the Humira's status as one of the biggest selling products ever, right behind Pfizer's (NYSE:PFE) Lipitor and Sanofi/ Bristol-Myers Squibb's (NYSE:BMY) Plavix.

In 2012 Humira received FDA approval for treatment of ulcerative colitis when certain other medicines have not worked sufficiently. Before that it was approved in Europe for Crohn's disease for adults patients who have not responded to conventional therapy.

Humira currently holds nine approved indications in Europe and seven approved indications in the U.S., including rheumatoid arthritis, psoriatic arthritis, ankylosing spondylitis, psoriasis, juvenile idiopathic arthritis, and Crohn's disease.

A number of factors should drive continued growth, including the addition of new indications, increasing penetration, geographic expansion, and market share gains.

Abbvie expects low-double-digit growth in 2013 and confident that Humira will continue to generate cash flow for many years to come.

Abbvie shall continue Humira's development with a number of new indications currently in late-stage trials. The new indications, including those approved in 2012 are estimated to add roughly $1.5 billion in global peak sales. In particular, there is room for further penetration in the dermatology category, where penetration rates are still in the mid single digits worldwide.

Negative aspect: Abbvie is too reliant on a product which faces the specter of losing patent protection starting in 2017. This one drug accounted for 51% for the company's 2012 sales.

It is such a massive drug that investors had all but forgotten about the rest of Abbott's business, and it was part of the rationale for splitting the company.


AbbVie in the past year suffered from generic competition for its cholesterol drugs, a class called fenofibrates: TriCor and Trilipix. New generics entered the market in November 2012 and as a result TriCor sales were down roughly 50%.

The company warned that 2013 and 2014 will be a time of transition for AbbVie as the lipid franchise will have to face generic competition.

Negative implication: Abbvie is forecasting a decline of roughly $1.2 billion to less than $1 billion in its lipid franchise sales for 2013.


Generic competition is a way of life in the pharma business, and only one way to compensate for those losses is continuous successful innovation.

Abbvie's late-stage pipeline includes 11 compounds or indications in Phase 3 development, focused on therapeutic areas including hepatitis C, immunology, multiple sclerosis, endometriosis and Parkinson's disease.

The flagship of the pipeline is the interferon-free hepatitis C combination.

The hep C Phase 3 program is well underway and enrolling rapidly, with results appearing in 2013 the application submitted in mid-2014.

The company's goal is to be first on the market with its interferon-free treatment for hep C genotype 1 patients. Today the cure rate of hep C patients remain unacceptably low.

The hep C all-oral field is highly competitive, with Gilead Sciences (NASDAQ:GILD) , Bristol-Myers Squibb and others are leading the charge. Due to the promising new drugs in sight, the current standard, Incivek from Vertex' (NASDAQ:VRTX) suffers in sales. Sales of Incivek fell 51% to $222.8 million in the fourth quarter of 2012 as hep C patients prefer to wait for the newer pills.

Abbvie management estimates that the company is about a year behind Bristol's estimated filing date, but Abbvie's treatment has some advantages. Bristol's treatment is a 24-week regimen while Abbvie's treatment is a 12-week, two pills a day regimen with somewhat superior safety and efficacy profile.

Atrasentan, a drug developed for diabetic kidney disease, is moving into Phase 3, following a successful completion of a Phase 2b program. Phase 2 data have demonstrated efficacy in reducing protein in the urine, a symptom that is often predictive of renal function.

Daclizumab, a next generation biologic, developed with Biogen for multiple sclerosis. Results from the first of two pivotal trials demonstrated strong efficacy in reducing relapse rates and disability performance. The second pivotal trial is fully enrolled and results are expected in 2014.

Elagolix is a compound Phase 3 development for endometriosis, a condition with few treatment options. Endometriosis is a female health disorder that occurs when cells from the lining of the uterus grow in other areas of the body. Elagolix is also tested for uterine fibroids.

Elotuzumab, developed in partnersip with Bristol Myers Squibb, is a treatment for multiple myeloma, the second most common blood cancer.

Duopa is a therapy for advanced Parkinson's disease. Phase 3 data show a decrease in periods of poor mobility, slowness and stiffness. Duopa is approved in Europe and being reviewed in the U.S.

The pipeline has the potential to generate an estimated $4 billion and $6 billion worth of sales over the course of 2015 through about 2017.

Negative implication: none of the new drugs expected to generate sales before 2015, if at all.

Investor's summary

Abbvie is a new company. For baseline the sales figure generated by proprietary drugs for Abbott Laboratories in 2012 can be used.

On that basis Abbvie has generated roughly $6 billion in annual operating cash flow and has cash on hand over $7 billion. The company obviously has sufficient resources to fund its extensive pipeline and pay good dividends.

AbbVie's sales should remain above $18 billion in 2013 despite the generic events playing out in the lipid franchise, according to management.

The guidance for 2013 projects earnings per share $3.03 to $3.13. This guidance contemplates sales somewhat above $18 billion with growth from key brands offsetting the expected decline in lipids.

So, to answer the question: 'How safe is Abbvie's dividend' can be answered this way:

It is safe for now, the company has plenty of cash and the management's declared intentions for the future can be taken at face value. However no new drugs from the pipeline are expected in the market for two years and two years is an eternity in the pharmaceutical business.

Anything can happen and investors are well advised to keep a close eye on developments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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