- Growth and diversity in pipeline look to be reflective on share price in 2018.
- New Capital Return Program expected to aid in a dividend hike in coming quarters.
- Humira will continue to lead the immunology drug market in 2018.
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AbbVie (NYSE:ABBV) is a pharmaceutical company that discovers, develops and markets both biopharmaceuticals and small molecule drugs. It originated in 2013 as a spin-off of Abbott Laboratories. They produce pharmaceutical drugs for specialty therapeutic areas such as immunology, chronic kidney disease, hepatitis C, women's health, oncology, and neuroscience. They also offer treatments for diseases such as multiple sclerosis, Parkinson and Alzheimer's.
Humira Patent Dispute
AbbVie recently won a patent infringement case involving top selling drug Humira (60% of revenue). The case occurred last August when AbbVie filed a complaint against Amgen (AMGN) in response to a 351K biologics license application filed by Amgen with the FDA seeking approval to market a drug that is biosimilar to Humira. AbbVie now has protection over their most profitable product for the next 5 years as sales are expected to increase for the drug.
New Capital Return Program
Since their origination as a spin-off of Abbott Laboratories (ABT), AbbVie has been seen as top prospect for dividend growth investors. Recently, they are one of the best companies from a dividend perspective, seeing a 140% increase in dividend payment since it went public. On February 15th, AbbVie announced their capital return program that encompasses two parts: an increase in their quarterly dividends from $0.71 to $0.96 and a new $10 billion share repurchasing authorization. Management mentioned that their repurchasing program surpasses any existing repurchasing authorizations. Although there is no concrete information as to how quickly this program will be completed, AbbVie is one of the best companies for shareholders and expectations are around 2 years for this to be completed.
Corporate Strategy: Growth
Management's strategy plans on expanding their market share in all segments of their business. Their goal is to be an innovated-driven, patient-focused specialty biopharmaceutical company that is able to achieve top-tier financial performance. They have continued to advance this mission by growing revenues by diversifying their revenue streams, announcing top line results from drugs such as Upadacitinib, Imbruvica, and Risankizumba, aiding the highly successful blockbuster in Humira. Imbruvica specifically has seen substantial revenue growth driven by increasing market share with its eight currently approved indications in six different disease areas. With multiple drugs in their pipeline making their way through each phase, they are also able to protect themselves from patent-cliffs in the future. AbbVie plans to keep innovation as a top priority in 2018, with goals of developing consistent streams of new medicine, maximizing benefits for their customers.
Through its ever-growing pipeline and recent share buy-back program, AbbVie looks to be the best growth story in large pharma in 2018. The recent change in the tax law structure has provided some clarity that had been lacking regarding policy impacts on major investments. This may have prevented more aggressive M&A activity among powerhouses like Pfizer or J&J, with a quieter 2017 then previous. 2018 however is poised to see steady growth for large pharma as acquisitions as well as pipeline growth are expected to increase.
There is no question that AbbVie led pharmaceuticals in growth in 2017, and there is nothing stopping it from doing it again in 2018. Sales and EPS growth will be significantly higher than its competitors. Even with growth, valuation is at around a 5% discount, based on 2018 P/E. EPS growth from competitors such as Bristol-Myers and Merck are at risk, with both Opdivo (BMY) and Keytruda (MRK) having exposure to potential success from Roche with their abundance of Phase III trials that are being reported in the near future.
With an unusual year of clinical data in immune-oncology, 2018 sees Roche's Tecentriq in the spotlight with Phase III readouts due in the first six months. Data from other competitors such as AstraZeneca and Merck are expected to help narrow down which combination of compounds work best for patients. With increases in R&D across the industry, Immuno-oncology should see substantial growth and competition among the peers.
The drug-pricing issue went dormant during Obamacare, but is expecting be a strong topic in politics with the 2018 midterm elections taking place in November, as Democrats hope to regain control of congress. The Affordable Care Act's tax on brand drugs will subside post-2018, while the tax reform could revive the theme of M&A in pharmaceuticals, which was at a low point in 2017. The influx of money they have in foreign territories, especially within the pharmaceutical sector, will undoubtedly spur industry consolidation, similar to what happened after the 2004 Bush repatriation.
-Pipeline includes an impressive 95 clinical programs.
-Higher dividend yield.
Merck & Co. Inc.
-One of the most promising drugs on the market in Keytruda's, which treats melanoma.
-Deal with Biogen that will make them AbbVie's biggest competitor in the Alzheimer's market.
Johnson and Johnson (JNJ)
-Co-market fast growing cancer drug Imbruvica with AbbVie.
-Largest healthcare company in the world.
-Strong sales growth from drugs, especially Humira.
-$10 billion buy back
-High dividend yield of 3.23%
-Strong free cash flow
-Exposure to Humira biosimilars in Europe.
-Unfavorable foreign exchange
-Gaining market share in the relatively untapped Alzheimer's market
-Low inflation rate, bringing more stability in the market.
-New products in pipeline
-Rising costs of raw materials
-Patent expirations or loss of patent protection and licenses
Development of New Treatments for Alzheimer's
Recently, AbbVie announced that they are collaborating with clinical-stage gene therapy company Voyager to develop potential new treatments for Alzheimer's disease and other Tau-related neurodegenerative diseases. This partnership combines AbbVie's monoclonal antibody expertise, size and resources with Voyagers gene therapy platform that allows generating adeno-associated viral vectors for the treatment of neurodegenerative diseases, with a strong focus on the Alzheimer disease. Under the terms of their agreement, Voyager will receive upfront cash payment of $69 million with the potential of receiving more in preclinical and Phase 1 option payments. Voyager is responsible for most aspects in Phase I, while AbbVie has the option to license the vectorized tau antibody program and lead further clinical development and commercialization around the world. Entering this market will not be an easy feat, but the large amount of resources AbbVie has paired with a smaller yet more specialized therapy company in therapeutic will allow them to have success in this untapped market.
U.S. Tax-Reform Benefits
With the U.S. shifting to a territorial tax system, AbbVie is able to reduce their overall tax rate. The new tax setup allows foreign income from the company to not be taxed in the U.S. This tax reform enables more efficient access to their foreign cash and the ability to deploy it in the United States. Another catalyst for their reduction in effective U.S. tax rate is their use of capital expensing. They plan to invest $2.5 billion in itself over the next 5 or so years, which is attributed to the increase in its post-tax cash.
Strength in Pipeline
Although they rely on Humira as a huge source of their yearly revenue, AbbVie stands at the forefront of the pharmaceutical industry with their ever growing and successful pipeline. Drugs like Imbruvica and Mavyret are ones that both financial and pharmaceutical experts should be excited about, as they have seen substantial growth in sales of the past year. In 2017, Imbruvica saw strong momentum and growth, with sales approaching $2.6 billion, a 41% increase over the prior year. Mavyret ended the year with a market share of 32%, proving to be a highly-competitively positioned product with the HCV market. AbbVie also has began registrational trials for several pipeline assets including Phase III studies in Crohn's disease for both upadacitinib and risankizumab. These are expected to be huge successes in the future.
AbbVie is considered the best dividend company in healthcare over the past few years, and that reputation is only going to continue. On February 15th, they announced a 35% increase in their quarterly dividend and their dividend yield currently stands at 3.24%. This was the company's fifth consecutive year to hike their dividends, since their beginning. They currently only use 60% of earning to fund the dividend program, which suggests that investors can expect more hikes to come in the near future. AbbVie grew adjusted earnings 16.2% to $5.20 last year and expects its bottom line to grow another 32% in 2018. The company currently pays out 79.45% of its earning as dividends, according to its twelve-month data. This outstanding performance drove the board to authorize a new $10 billion stock repurchase program. There is no indication that suggests a slow down in dividend increases in future quarters, which bodes well for investors.
Revenue: AbbVie experienced another year of financial success, seeing their net revenues at $28.2 billion, up around 10.1%, not including their favorable impacted from foreign exchange. This is heavily attributed to 2017 global Humira sales, which were $18.4 billion, reflecting operational growth of 14.4%. This drug remains the market leader across the large range of therapeutic indications, reflecting its strong position with physicians and strong commercial execution. It is expected to see steady gains up until 2023, which is when its patent expires. Global Imbruvica revenues were also up to $708 million in the most recent quarter, seeing a 39% growth compared with the same period a year ago. Its 2017 sales were $2.6 billion, which was driven by continued uptake in the CLL market. With new drugs entering their pipeline every year, there is no indication that this growth in global sales will taper any time within the next few years.
Research & Development: R&D expenses in 2017 increased from the prior year, primarily due to increased funding to support the company's emerging mid- and late-stage pipeline assets as well as an increase in development milestones of $63 million. These were partially offset by a decrease in acquisition costs of $135 million. As AbbVie increases their partnership with other companies to develop more advanced drugs in their pipeline, they look to increase their R&D to provide more advanced work while their partner, such as the recent collaboration with Voyager Therapeutics, will handle the development of the potential drugs through proof-of-concept. Their pipeline currently includes more than 60 compounds or indications in clinical development, and 30 of them are in mid-and late-stage development.
Operating Margins: One of the main goals of the organization is to drive continued expansion of operating margins and expects to achieve this through continued leverage from revenue growth, the reduction of Humira royalty expenses, productivity initiatives in their supply chain, and continued efficiency programs to optimize manufacturing and general corporate expenses. Management is forecasting an operating margin of approximately 44% for 2018, roughly 150 basis points higher than 2017, inclusive of the incremental investments for AbbVie's upcoming product launches.
SG&A: Management expects SG&A to be just over 20% of sales. In 2018, they will be investing in order to maximize their sales potential of products launching in the next two years. This includes incremental spending related to the launch of elagolix and endometriosis. They are also going to be investing in immunology and oncology and hope to see launches in 2019. Although they have all these investments, we anticipate SG&A to decline as a percentage of sales due to their rapidly growing topline.
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