AbbVie: A Long-Term Hold

| About: AbbVie Inc. (ABBV)

Summary

AbbVie is considered a risk due to Humira going off-patent.

Humira makes up a huge chunk of AbbVie's sales, but is not all that it has to offer.

In the long-run, AbbVie should serve shareholders well.

AbbVie (NYSE:ABBV) has been deemed a risky proposition by many investors for one key reason - 60% of its revenue is dependent upon one product: Humira. And in December 2016, Humira's US patent will expire, while its European patent will expire in April 2018. The impact that this will have on AbbVie's future earnings has made many investors bearish on AbbVie. But is such bearishness warranted?

Overview

AbbVie Inc. is a research-based pharmaceutical firm which engages in the research, development, manufacture and sale of various pharmaceutical products. Its focus is primarily on treatments for chronic autoimmune diseases, neurological disorders and virology.

It was founded in 2013 after it spun off from Abbott Laboratories (NYSE:ABT), and has been placed on the S&P 500 Dividend Aristocrats index due to its lineage from Abbott Labs, despite the fact that to qualify as an index member a company has to have paid consecutively rising dividends for 25 years, a qualification that AbbVie does not actually meet as a three-year old firm.

AbbVie is headquartered in Lake Bluff, North Chicago, Illinois, has a market capitalization of $103.20 billion, a workforce of 28,000 employees, and serves over 170 countries around the world. It also has seven R&D and manufacturing centers worldwide.

Competitive Advantage

AbbVie sells branded pharmaceuticals, a sector with high entry barriers and therefore high profit margins. Indeed, AbbVie had a 33% profit margin last year. Companies of AbbVie's size and profitability can invest a lot in R&D and in brand promotion of their products.

AbbVie's chief weakness is the current concentration of its product portfolio. As noted, Humira, a drug for arthritis treatment, accounts for nearly 60% of its overall revenue, and the patent for Humira will soon expire. However, to their credit, AbbVie are working ruthlessly to diversify its range of offerings. To quote the company directly:

Our expertise in both small molecules and biologics allow us to find and pursue the best solution for a given disease.

AbbVie's pipeline shows promise in this direction: by 2020 they anticipate that their Humira-related offerings will account for $18 billion in sales, while their de-risked late stage assets (Elagolix, Imbruvica, Rova-T, Venclexta, Zinbryta etc.) will account for $25-30 billion.

AbbVie plan to concentrate their R&D in three key areas: Immunology, Neuroscience and Oncology. They have already established a strong financial commitment to R&D - between 2013-2015, AbbVie invested between $2.5 billion and over $3.5 billion in R&D, which accounts for approximately 15% of sales in each of the years concerned.

Acquisitions are another area that AbbVie are exploiting to diversify their offerings, most notably in March 2015 when they bought Pharmacyclics Inc for $21 billion. Here, they can be criticized for overpaying - AbbVie paid $261.25 per share in cash and stock, at a 13% premium to Pharmacyclics trading price at that time. However, this acquisition did provide access to the blood cancer treatment Imbruvica, which is expected to be one of AbbVie's strongest performers going forward.

Valuation

Currently, AbbVie trades in the low-to-mid $60 range with a price-to-earnings ratio of 19.12, and a forward price-to-earnings ratio of 11.37. It offers a dividend yield of 3.57% with a tolerable payout ratio of 64.30%.

Though AbbVie is only a Dividend Aristocrat on a technicality (i.e. they spun off from a Dividend Aristocrat - Abbott Labs), their net income history since spinning off suggests that they will be able to continue supporting their dividends. Net income in 2014 was $1.77 billion, and in 2015 it was $5.12 billion.

Earnings per share over the past twelve months was $3.34, and the EPS growth rate for the next five years is projected to be 16.34%. Using a discount rate of 21.17% - the required rate of return on AbbVie common stock - I see fair value for AbbVie at $124.06. The stock is currently undervalued by 49% at this time.

Final Thoughts

Short-term, AbbVie will have a few bumps when Humira comes off-patent, but in the long-run its pipeline of products and acquisitions to diversify its operations and offerings will provide its shareholders with value for money.

Presently, AbbVie is trading at a considerable discount relative to its intrinsic value, offers a 3.57% dividend yield, and has a fair payout ratio and good net income to ensure that the dividend can both continue to be paid and potentially be increased going forward.

DISCLAIMER: I am not a financial professional and accept no responsibility for any investment decisions a reader makes. This article is presented for information purposes only. Furthermore, the figures cited are the product of the author's own research and may differ from those of other analysts. Always do your own due diligence when researching potential investments.

Disclosure: I/we 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.