AbbVie: Growth Story Or Patent Expiration Nightmare?

| About: AbbVie Inc. (ABBV)


AbbVie's Humira treatment is growing rapidly worldwide, propelling the company's revenue.

The company has a strong dividend yield of 3%.

AbbVie faces serious questions from patent expirations after 2016.

AbbVie (NYSE:ABBV) is a global biopharmaceutical company, with over 25,000 employees and products sold in over 170 countries. AbbVie split off from parent company Abbott Laboratories (NYSE:ABT) in January of 2013. The company currently has a dividend yield of 3%, and is the 8th largest publicly traded drug manufacturer in the world, behind giants such as AstraZeneca (NYSE:AZN), GlaxoSmithKline (NYSE:GSK), and Pfizer (NYSE:PFE).

Humira Is AbbVie's Biggest Winner

AbbVie generated 67% of its 2nd-quarter sales from its highly successful Humira (adalimumab) treatment. Humira treats Rheumatoid Arthritis, Plaque Psoriasis, Chrohn's Disease, Ulcerative Colitis, and Psoriatic Arthritis, among others. It is common to see the bulk of a small cap company's revenue come from one product, but not that of a corporation the size of AbbVie. AbbVie has a market cap of $89 billion; it is anything but a small cap.

Humira sales increased 26.2% in the company's most recent quarter versus the year-ago period. Overall, total sales for the company were up 5%. Not only is Humira the company's largest treatment by far, it is also its second-fastest growing. Only the company's Duodopa treatment grew faster, up 29.3% versus the same quarter a year ago. Duodopa makes up just 1% of the company's total sales.

The issue AbbVie has with Humira is its longevity. The company will lose patent protection and exclusivity of the product by the end of 2016. Generic competitors who can significantly undercut AbbVie's Humira prices will likely enter the market in 2017, causing Humira sales to plummet. In a well-diversified pharmaceutical portfolio, this would not be a catastrophic occurrence. AbbVie does not have a well-diversified portfolio. The company needs to replace about 67% of its revenue in the next 2 to 3 years to prevent a significant reduction in sales and earnings. This is not the first time AbbVie (and its parent company, Abbott Laboratories) have faced significant revenue loss from expiring patent protection.

Source: AbbVie Second-Quarter Earnings Announcement

Lipid Franchise Is On Life Support

AbbVie lost exclusive manufacturing rights on its popular lipid line in 2012. Since then, sales of Niaspan and Tricor/Triliplex are down more than 90%. All in all, the company has lost over $1.1 billion in revenue from these products in its fiscal 2013. AbbVie's lipid drugs together accounted for less than 1% of sales for its most recent quarter. The company's lipid line has gone from being an important revenue driver to little more than a footnote to the company. It is likely that AbbVie will see similar declines when Humira loses patent protection at the end of 2016.

Source: AbbVie 2013 Annual Report

Growth Potential: AbbVie's New Hepatitis C Treatment

Shareholders of AbbVie stand to gain from the company's new hepatitis C treatment. The as-yet-unnamed treatment will be the first interferon-free hepatitis C treatment. The drug's efficacy has been stunning. AbbVie CEO Ricky Gonzalez said the following during the company's annual meeting about the company's hepatitis C treatment:

In our clinical trials, we're seeing the majority of patients - even up to 100 percent of patients - experiencing a cure. And patients are able to tolerate the therapy very well, with fewer than 2.3 percent having to discontinue treatment due to adverse events.

The drug has the potential to benefit a great deal of people. There are an estimated 130 million to 150 million people globally suffering from hepatitis C. The market size and potential revenue for the new treatment are enormous. Shareholders will not have to wait long to see gains from this new treatment. AbbVie expects commercialization in late 2014 in the US, and early 2015 in the European Union. The company has plans to increase its size, scope, and net profit margins through a recently announced merger.

Proposed Tax-Saving Merger with Shire

AbbVie has proposed to merge with Ireland-based pharmaceutical company, Shire. The deal would be accretive to shareholders by reducing the company's tax rate from about 22% to 13%, an immediate boost of 9% to the bottom line. Additionally, the proposed merger would better align the company internationally.

Source: AbbVie Investor Relations

Shire generated $1.47 billion in sales in its most recent quarter, compared to $4.92 billion for AbbVie. Shire holds several strong performing pharmaceutical products, including the ADD and ADHD medicine Vyvanse, which is the company's best-seller. Vyvanse accounted for about 25% of the company's revenue in its most recent quarter. Other strong selling pharmaceutical products for the company include:

  • Elaprase, which treats Hunter's Syndrome
  • Lialda/Mezavant which treats Ulcerative Colitis
  • Replagal which treats Fabry Disease
  • Cinryze which treats Heredity Angioedema
  • Intuniv which treats high blood pressure and ADHD

Source: Shire Investor Relations

The proposed deal will create a new business in which current shareholders of AbbVie would have about a 75% stake, and current shareholders of Shire would have about a 25% stake. The new company would be publicly traded in the US. The benefits for AbbVie shareholders are a better-diversified pharmaceutical portfolio, synergies derived from greater company scale, and significant tax savings.

Comparison to Other Dividend Growth Stocks

AbbVie has a long history of dividend payments when you consider its history with its parent company, Abbott Laboratories. AbbVie has increased its dividend for 42 consecutive years, including its history with Abbott Laboratories. The company's management has said it is committed to continued dividend increases in a similar fashion as it has done historically. AbbVie will be compared to other businesses with a long history of dividend increases using the 5 Buy Rules from the 8 Rules of Dividend Investing below. Each rule includes evidence as to why it is relevant for investors seeking dividend income and growth.

Consecutive Years of Dividend Increases

AbbVie has increased its dividend for 42 consecutive years, including the history of its parent company, Abbott Laboratories. The company has a long history of dividend increases, and its management has stated that it plans to continue the dividend policy of its parent company.

Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Source: S&P 500 Dividend Aristocrats Factsheet

Dividend Yield

AbbVie has a current dividend yield of about 3%. The company has the 39th-highest dividend yield out of 132 businesses with 25+ years of dividend payments without a reduction. The company's high yield should appeal to investors seeking current income.

Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns

Payout Ratio

AbbVie has a fairly high payout ratio of 62%. The company has the 87th-lowest payout ratio out of 132 businesses with 25+ years of dividend payments without a reduction. AbbVie does not have significant room to increase its dividend payments faster than overall company growth.

Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Long-Term Growth Rate

AbbVie has a very short history. Its long-term historical growth rate is difficult to pin down, and the company's long-term future growth will come from as yet undeveloped treatments. The company is well-managed, and has increased its dividend payments by about 5% per year since its spin-off. A long-term growth rate of about 5% ranks the company as the 64th-fastest growing out of 132 businesses with 25+ years of dividend payments without a reduction.

Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4

Long-Term Volatility

AbbVie has a standard deviation of about 25% since spinning off from Abbott Laboratories. The company has the 47th-lowest standard deviation out of 132 businesses with 25+ years of dividend payments without a reduction.

Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race

Ending Thoughts

AbbVie will likely experience strong growth from Humira until the end of 2016, when the company's patent protection expires. In the meantime, the company's management is actively bolstering the company's product pipeline. The company's new hepatitis C treatment looks especially promising. Overall, Abbvie's long-term future is less certain than many of the other businesses with a long history of dividend increases I've analyzed, due to its undiversified pharmaceutical portfolio. The company ranks at 42 out of 132 overall using the 8 Rules of Dividend Investing. The company is not a sell, but there are better investment opportunities available at this time.

Disclosure: The author is long ABT.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.