Just a few weeks ago, I looked at the prospects for AbbVie (NYSE:ABBV) after it took a massive write-down on its Stemcentrx acquisition, as I wondered if it was a worrying sign.
In that article, I noted that huge cash flows and rapid growth of non-Humira sales look encouraging, yet I would be happy to see reduced concentration on Humira. Shares looked cheap, as the combination of elevated shareholder payouts and reliance on Humira still made me a bit cautious, given the big dividends as well, as I noted that cheap optics did not necessarily translate into a cheap valuation.
With the company having reported arguably soft fourth quarter results, accompanied by a non-inspiring outlook for 2019, let's re-evaluate the cautious thesis with shares now down to $80.
About Those Q4 Results
AbbVie ended 2018 on a soft note with revenues up 7.3% to $8.30 billion as currencies shaved off one percent from reported sales growth. This marks quite a deceleration from the reported sales growth of 16% for all of 2018.
The shortfall is the direct result of real softness at Humira with revenues up 0.5% on a reported basis, or 1.4% on adjusted basis, as fully year adjusted revenues still grew by 7.4%. US growth was solid at 9%, yet bio-similar competition in some international markets made that international sales were down 15%.
The good news is that the reliance on Humira has now fallen to 59.2% based on the Q4 results, down from 60.9% for the entire year. The hematologic oncology business grew sales by 50.2% to $1.13 billion, marking acceleration from the annual growth rates. Sales of Imbruvica rose 42% and just broke the quarterly billion number for the quarter, with fourth quarter revenues of Venclexta growing rapidly to $124 million.
HCV sales rose by 69.3% to $862 million but have lost some momentum, as is the case of many of the company's competitors, as the patient population is declining (for a good reason, of course, that is patients being cured). Sales of Viekira collapsed and no longer generated any revenues in the US, with Mavyret still showing very decent growth. The 8 drugs which collectively are labelled "other key products" saw revenues down 4.9% to $1.33 billion, while they were still up 0.1% for the year, really driven by weakness across the board.
For the year, the company earned $7.91 per share (on an adjusted basis of course). GAAP earnings only totaled $3.66 per share as roughly three quarters of the difference between both earnings metrics stem from the big impairment charge on Stemcentrx. Other charges mostly relate to "regular" amortization charges, smaller charges on research program, collaborations, litigation and charitable contribution, as some of these really involve cash outflows and are structural in nature.
Outlook And Financial State
During the fourth quarter, the company did indeed recognise a massive impairment charge on Stemcentrx. That impairment charge is $4.6 billion on a pre-tax basis, having a $2.75 per share impact on the bottom line (GAAP results). This came after it became apparent that experimental lung cancer drug Rova-T would not become a success as the decision is a clear admittance that this deal has been a failure.
For the current year, the company sees adjusted earnings at $8.70 per share, plus or minus five cents. GAAP earnings are seen at $7.44 per share, plus or minus five cents. The identified gap between both earnings metrics stems from intangible asset amortisation expenses, non-cash charges on acquisition charges, among others. While growth in expected earnings is comforting, total revenues are seen up just a percent this year.
Humira sales are seen up 7% in the US, with international sales down 30%. That suggests total Humira sales across the globe will be down nearly a billion. With overall revenue growth of 1% that suggests a roughly $300 million increase in total revenues, which implies that non-Humira sales are up $1.3 billion on an annual basis. This is equivalent to roughly 10% based on the current run rate, marking quite a slowdown from growth rates reported at the moment.
As no balance sheet has been released yet, we have to rely on the third quarter results which revealed cash holdings of $10.3 billion with debt standing at $40.5 billion, for quite large net debt load of $30 billion. Having reported adjusted operating earnings of $13.5 billion in 2018, that is after excluding amortisation charges, of course, I peg EBITDA at roughly $14 billion, given that depreciation charges run at half a billion. This makes for a 2.1 times leverage ratio.
Trading at $80 per share, multiples have fallen to 9 times based on the midpoint of the adjusted earnings number provided for 2019, or 11 times based on GAAP accounting. Nonetheless, I would not rule out more charges to hurt GAAP earnings during the remainder of the year.
The Road Map
AbbVie has rapidly grown to become a $33 billion business, driven by the $20 billion contribution of Humira, although non-Humira sales growth is pretty encouraging, being a $13.5 billion business based on the Q4 results.
For 2025, the company has laid down a road map in which it sees sales of $47 billion, including a $12 billion contribution from Humira. Based on the Q4 results and the outlook, it seems evident that sales of Humira have peaked, despite a previous outlook calling for Humira sales of $21 billion in 2021.
Furthermore, the company has a real task at hand to grow non-Humira sales from $13.5 billion to $35 billion in the coming six years. That is a formidable task at hand, requiring $22 billion in sales growth in the five/six years to come.
Valuation Talks
The combination of shares down another 10% to $80 at the moment of writing and further earnings growth foreseen in 2019 means that appeal is improving rapidly. Furthermore, leverage ratios are improving, although I would like to see reductions in absolute debt levels as well, given that Humira sales might have peaked.
Leverage reduction is important as non-Humira sales rose by 35% in Q3, yet this growth rate slowed down to 23% in Q4, due to lower sales at other drugs and HCV sales growth slowing down a bit. That is worrisome, given the recent prominent pipeline failure, as continued sales growth is very much needed, certainly as Humira sales are starting to fall. With sales in international markets down 15% in the fourth quarter, and seen down 30% for the entire year, the outlook is bleak although real competition in the crucial US market is not seen before 2023.
The key question is if 2025 targets can be achieved. In that case, Humira sales are seen at $12 billion, which, with a modest revenue multiple, suggests a $20-30 billion valuation, based on a rough estimate of 30% operating margins and declining sales patterns. $35 billion in "promised" non-Humira sales might be valued at 5 times, or $175 billion, for a combined value of $200 billion. This valuation, minus $30 billion in net debt, results in a $170 billion equity valuation. Assuming a reasonable 3% reduction in the annual share count per annum through 2025 marks a share count of 1.25 billion shares at the time. Including retained earnings, that might work down to roughly $150 per share.
Trading at $89 per share in early January, with 6 years to achieve the ambitions, that works out to 9% potential compounded growth rate, which is not too much, given the elevated risks in the pipeline and the task at hand. At $80, this potential growth rate now comes in at 11% but is driven by heightened execution risks in this development path, with non-Humira sales growth slowing down, as Humira has already peaked.
Cautiously Optimistic
Since the start of the year, AbbVie has seen continued pressure on the stock price, and while growth is slowing down, 2019 should be another solid cash flow-generating year. One concern of mine in January was the high payout ratio, as these "committed" dividend streams can be devastating if earnings turn south and leverage ratios go up.
Working with a more modest 15% increase in non-Humira sales through 2025, I see sales at $30 billion in 2025 and perhaps a $150 billion valuation for that business. With the value of Humira at the time offsetting the current net debt load, I come up with a valuation of just $120 per share. Requiring a modest 8% discount, given the lower expectations (and thus lower execution risks), I am cautiously constructive on AbbVie, looking to start small at $75 per share.
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