AbbVie Inc. (NYSE:ABBV) is a research based pharmaceutical organization that markets products to more than 170 countries with 57% of the top line attributable to the US alone. The company operates in a single business segment, the pharmaceutical products, with a number of medicines targeted at the world's most crucial diseases: rheumatoid arthritis, HIV, and Hepatitis C to name a few.
The following article highlights the current and expected future performance of the company in relation to better investor returns, strong financials, and an upbeat product pipeline.
Distributing the company's revenues based on products it is apparent that Humira is a major contributor to the top line of the company generating about 60% of the total net revenues. Over the past four years Humira's sales have risen at a CAGR of approximately 18% but the growth is following a decelerating trend. Moreover, it is important to point out here that the drug's patent is expiring in 2016 in the US and in 2017 in Europe. Considering that Humira is a major contributor to the top line of the company the already decelerating top line might receive an enormous blow when the patent expires if the company fails to introduce new products to make up for the loss of Humira.
Overall, the top line of the company grew by 2.2% compared to the sales generated last year. However, the sales are expected to gain momentum as the company grows its operations geographically and as new drugs receive FDA approval over the next couple of years.
Looking at the financials the most disturbing feature is the excessive debt on the company's balance sheet. However, AbbVie does maintain better liquidity and profitability positions compared to its rivals.
Presently, AbbVie's debt to equity ratio stands at 327.76 compared to the industry average of 9.78 as determined by Reuters. The excessively high debt to equity ratio has led to an artificially inflated ROE figure as well with AbbVie's ROE measured at 105.11 compared to the industry average of 20.13. However, if you look at the other ratios and metrics some of these concerns associated with high debt figure are alleviated. AbbVie maintains strong cash and CFO positions that enable the company to pay off its debt from internal finances without facing a tough cash position even as it pays out dividends to its investors.
Lastly, AbbVie maintains much stronger profit margins compared to its peers. The company's net profit margin is 22 where the norm is about 7%. These margins are further expected to grow as thanks to the new drugs in the company's pipeline that are highly likely to receive FDA approval.
AbbVie can be considered a dividend growth stock with its dividend yield meeting Merck & Co. Inc. (NYSE:MRK) and exceeding Bristol Myers Squibb Co. (NYSE:BMY). Considering the fact that the company started just last year, its dividend yield is quite impressive. Where Merck's yield is showing a declining trend, AbbVie's shows a rising trend and is expected to continue to rise in the foreseeable future. Take a look at the following chart to see AbbVie's dividend yield in comparison with its competitors.
The company maintains a high payout ratio of more than 60% while the industry average is around 20%. This means that investors can expect significant growth in its dividends. If the top line and margins of the company improve, which is highly likely, so will the dividends paid.
The company is on course to diversifying its operations by establishing worldwide facilities. The company is now expanding operations to Asia, establishing its first manufacturing facility in Singapore with an investment figure of $320 million. The facility is expected to improve the company's drug supply and provide treatment for un-catered medical problems in the region. The new Singapore facility is expected to become operational by 2019and will target its production of drugs related to cancer and immunology to serve global markets.
In addition to that, AbbVie is investing heavily in the research of Hepatitis C, breast cancer, rheumatoid arthritis, and multiple myeloma among other diseases. Humira is already the company's top selling drug and is the world's leading oral medication in treating the targeted disease. The strong pipeline of the company is expected to boost its future top and bottom lines. The company projects the net revenue base of the company will increase by approximately 1.12% to $19 billion minus potential revenue generation from the experimental hepatitis C drug, the HCV therapy. The drug is under FDA consideration as of now with a decent probability of receiving approval.
The company has made significant progress in finding a cure for Hepatitis C known to be a fatal disease that afflicts around 150 million people around the globe. Researchers estimated that the market for new Hepatitis C drugs is somewhere around $20 billion. Evidently, AbbVie's unnamed drug cured 99% of the afflicted patients in a late stage study. The study produced encouraging results regardless of the use of ribavirin that is responsible for producing flu like symptoms. This new pill will put the company in direct competition with Gilead Sciences Inc. (NASDAQ:GILD) and Bristol-Myers. AbbVie is expected to file for FDA approval by the end of June 2014. I believe that this drug has a high probability to earn a blockbuster status in the market.
Furthermore, with Humira's patent set to expire in 2016 in the US and 2017 in Europe the company is doing extensive research to increase the number of treatments done with the drug. Humira is presently targeted to treat a number of diseases including rheumatoid arthritis and Crohn's disease. In its phase III trial the drug is also tested for fingernail psoriasis patients. Note that Celgene Corp. (NASDAQ:CELG)'s Otezla has already won US approval in this regard and is expecting FDA approval by the end of September. The market is not free of competition and AbbVie will have to fight first mover advantage enjoyed by Celgene as well.
The company's AIDS drug, Kaletra, has also received positive news from a study based in Kenya where the drug showed extraordinary results proving to be the world's first non-surgical treatment for the disease. The experimental testing was conducted among 40 women and 90% of them reported encouraging results, clearing pre-cancerous cervical lesions. The drug testing is now being planned for a larger sample to confirm the results.
With its pipeline coupled and strong balance sheet I have no doubt that AbbVie will indeed grow in the foreseeable future. AbbVie's pipeline is gaining strength day by day and although patent expiries are approaching in 2016/17 it must be pointed out here that research and development process is an arduous task and generic drugs will face trouble receiving approval. The company ended the year on a strong note striking off much of the criticism it was facing earlier with regards to its separation from Abbot Labs and the company still rewards its investors in a generous fashion.
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.