AbbVie Is Much More Than Humira

Summary

• AbbVie's success story is going on as the company delivered another strikingly strong set of quarterly results and managed to deliver another record year.
• Not only can investors expect another strong year from the pharmaceutical giant but instead prepare themselves for a very strong long-term growth path where AbbVie will continue to shine bright.
• AbbVie is offering a unique combination for long-term dividend investors of high yield (>4.5%), strong dividend growth (around 10% annually) and a shockingly undervalued stock.
• Investors do not need to look for super highly-valued growth stocks when seeking capital appreciation.
• AbbVie looks primed to deliver a very strong decade which could please growth and income investors alike.

AbbVie's (NYSE:ABBV) success story is going on as the company delivered another strikingly strong set of quarterly results and managed to deliver another record year in terms of sales for 2020.

AbbVie has shown its strong resilience amid the pandemic and as the giant Allergan acquisition is being digested with synergies realized and the portfolio becoming further diversified the market has become interested in AbbVie again.

Not only can investors expect another strong year from the pharmaceutical giant but instead prepare themselves for a very strong long-term growth path where AbbVie will continue to shine bright.

AbbVie is offering a unique combination for long-term dividend investors of high yield (>4.5%), strong dividend growth (around 10% annually) and a shockingly undervalued stock which only trades at 10 times forward earnings. Investors do not need to look for super highly-valued growth stocks when seeking capital appreciation. AbbVie looks primed to deliver a very strong decade which could please growth and income investors alike.

What is going on at AbbVie?

As we have become used to with AbbVie, the company produced another easy double beat for its Q4/2020 results. Revenue climbed to $13.86B (up 59.2% Y/Y) and EPS reached $2.92 which represents a sequential improvement of $0.09. Excluding the impact of the Allergan acquisition, adjusted net revenues increased 6.8% Y/Y as a slight decline internationally (-1.2%) was offset several magnitudes by an extremely strong U.S. performance with sales jumping 9.4% Y/Y.

AbbVie's Q4 sales also represent a sharp sequential improvement. Adjusted net revenues were up almost $700M with U.S. growth accelerating from 6% to 9.4% while at the same time declines in international sales slightly moderated from (1.6)% to (1.2)%.

So far these strong top-down results (they are even more impressive once we have dialed into some of the details) combined with upbeat guidance have not positively affected the stock price. The stock is still hovering in the $105 to $110 area. Purely based on fundamentals the stock is massively undervalued and should trade more in the area of $150+. Even with a $40 or 36% upside the stock would still only trade at 12 times forward earnings which is far below Johnson & Johnson's (JNJ) P/E ratio of 17.

Now that the Allergan business has been integrated into AbbVie's business AbbVie's product portfolio is more diversified than ever before. Next to immunology AbbVie has strong presences in growth markets like hematologic oncology, neuroscience and aesthetics. Today though AbbVie's main business remains immunology with the segment contributing 43% in sales for Q4 and 48% for FY2020. For the total year 2020 sales increased 13.2%.

AbbVie's immunology segment is spearheaded by blockbuster drug HUMIRA. Lifetime revenues from HUMIRA have eclipsed the $100B milestone already years ago and have continued to climb ever since.

In Q4 Humira sales rose 4.4% Y/Y as double digit losses in international sales (-11.4%) were easily offset by the bigger U.S. business which grew 8.2% over that same period. That has been the story for each quarter in 2020 with HUMIRA sales growing by 3.7% for FY2020 to $19.8B. So after a small hiccup in HUMIRA sales in 2019 ($19.2B) as international HUMIRA sales dropped 31%, sales have stabilized and started to grow again by almost reaching the $19.9B sales record set in 2018.

Source: axios.com

HUMIRA is AbbVie's main cash cow and also the main reason that the stock is so cheap. HUMIRA will lose US patent protection relatively soon in 2023 and for a very long time markets have been discounting the stock on that uncertainty as to how AbbVie is planning to offset this expected and sharp loss in sales. AbbVie has a multi-faceted plan to do just this and one major part of that strategy is to quickly ramp up sales in HUMIRA's improved successors . SKYRIZY and RINVOQ.

These drugs have been launched at different points of time in 2019 and sales have shattered expectations each and every quarter ever since. Ramping up happened at break-neck pack. SKYRIZI has already turned into a billion dollar drug ($1.59B sales in 2020) and RINVOQ which was launched a few months later hit $731M in total sales. Momentum is extremely strong and thus a simple and equal extrapolation of sales in the most recent quarter would already return annual sales projections of $2.1B for SKYRIZI and $1B for RINVOQ.

In reality sales will be much stronger given that both drugs are still growing at strong double-digit pace, present tremendous long-term value and continue to defy management's expectations in the short-term.

For instance, in AbbVie's Q3 earnings call management stated that it would expect both drugs to generate $2.2B in sales for the year. Now that Q4 is in the bag total sales reached $2.3B and already eclipsed expectations by 4.5%.

Source: JPMorgan Healthcare Conference

Long-term the importance and potential of these two drugs for AbbVie as an investment case cannot be stressed enough. AbbVie is projecting 2025 risk-adjusted sales to reach more than $15B which would represent an increase of around 550% over the next 5 years.

In order for that to materialize it is crucial that both SKYRIZI and RINVOQ receive unrestricted approvals for multiple other indications that go far beyond HUMIRA's current treatment abilities in areas like psoriatic arthritis, atopic dermatitis and ankylosing spondylitis.

In fact, this enormous sales potential in immunology combined with robust growth in hematologic oncology, neuroscience and aesthetics should give investors a lot of confidence. Management is very confident and bullish and I couldn't agree more:

we will be able to successfully absorb the Humira LOE impact in 2023, support an immediate return to total sales growth in 2024 and produce compelling high single-digit compounded annual total sales growth in 2025 through the remainder of the decade with the diversified portfolio and pipeline that we have today.

Source: AbbVie Q4/2020 Earnings Call

While 2025 is still some time away there are also lots of sales catalysts in the near term. For 2021 management expects sales from RINVOQ and SKYRIZI to double and reach around $4.6B combined. The newly combined neuroscience segments is projected to grow double digits in 2021 and reach at least $5.5B in sales.

AbbVie's second largest segment, hematologic oncology, with top sellers IMBRUVICA ($5.3B sales in 2020) and rapidly growing VENCLEXTA ($1.3B sales in 2020), are expected to keep their strong momentum by growing double digits again in 2021.

Source: AbbVie Pipeline Update

That is already impressive but pales in comparison to AbbVie's pipeline which was recently expanded by two promising oncology antibody candidates designed to treat B-cell malignancies as well as multiple forms of cancers currently being studied.

The pipeline also includes several new indications for RINVOQ and SKYRIZI which are expected to launch to market within the next two years and be sufficient to cover all of HUMIRA's current major indications in addition to several new disease areas.

While there are no guarantees when it comes to R&D and drugs, AbbVie boasts a strong R&D track record and has significantly increased its R&D investments over time. R&D expenses jumped from $2.8B in 2013 to almost $6.2B in 2020 and thereby more than doubled. There have been 14 major approvals since 2013 which generated a combined $9B in sales in 2019 and more than $10B in 2020.

Source: AbbVie R&D Deep Dive

AbbVie has built a healthy and productive pipeline. Given their strong track record in the past with bringing candidate drugs from initial discovery through various study phases into market, the company will continue to do the same this decade with several key pipeline events expected in 2021.

Dividends on the rise

AbbVie has posted very healthy growth figures over the last couple of years and its dividend has followed suit. The five-year dividend growth rate stands at a whopping 20% thanks to two separate monstrous dividend hikes in October 2017 (+10.9%) and February 2018 (+35.2%). The more normalized dividend growth rate is still around 10% with the latest hike coming in at 10.2% in November 2020:

AbbVie's current dividend yield still stands at a juicy 4.9%, and its dividend growth has been in the double digits for years. The last dividend raise announced in November 2020 came in at a strong 10.2%. Back then the forward yield stood at a whopping 6.45%, but even today's less than 5% dividend yield makes it an attractive dividend growth stock.

And still, despite such stellar dividend growth amid revenue headwinds, the company's cash dividend payout ratio still remains around 50% and thus leaves room for future growth, although that is expected to temporarily decouple itself from AbbVie's earnings growth as the HUMIRA LOE event is looming on the horizon and edging closer.

(Source: Seeking Alpha - AbbVie Dividend Scorecard)

One thing is for sure and that is that management is highly committed to support a robust and growing dividend.

Finally, AbbVie's strong business performance and outlook continues to support our capital allocation priorities. Our cash balance at the end of December was $8.4 billion and we expect to generate free cash flow of approximately $21 billion in 2021. This fully supports a strong and growing dividend, which we have more than tripled since inception, as well as rapid debt repayment where we expect to pay down $17 billion of combined company debt by the end of 2021, including the $8.6 billion that was repaid in 2020

Source: AbbVie Q4/2020 Earnings Call

AbbVie's dividend is highly secure and its vast cash reserves and enormous free cash flow generation will fuel further dividend growth down the road.

The company's next dividend has already been declared and the stock goes ex-dividend on April 14, 2021 with payment scheduled on May 14, 2021.

To keep track of dividend payment and ex-dividend dates, I use the newly released Dividend Calendar & Dashboard Tool (make sure to follow instructions), which shows my expected dividend payments, in this case for May 2021. Here we can see that I am expecting a sizable payment on May 14 from AbbVie.

Source: My Dividend Calendar

Investor Takeaway

Despite all the hype surrounding hot growth stocks in cool sectors like EVs, hydrogen and cloud services, I am more focused on investing in companies with business models that have been proven over years and decades.

Naturally, this also means that these businesses are growing and will continue to grow but in a healthy and sustainable way without seeing their shares getting hyped. For a long-term investor like myself AbbVie offers the perfect combination of a depressed stock price, high dividend yield and more than solid dividend growth.

Now that AbbVie has fully incorporated Allergan into its organization this new AbbVie is more resilient and diversified than ever before. AbbVie is much more than HUMIRA. With strong leadership positions in four key growth markets, i.e. immunology, hematologic oncology, neuroscience and aesthetic, a healthy pipeline, experienced leadership and a strong balance sheet, AbbVie remains one of the very few bargains in this market.

In the latest call AbbVie's CEO Richard Gonzales stated:

I would say the business is firing on all cylinders

Source: AbbVie Q4/2020 Earnings Call

I couldn't agree more!

Given my limited cash position I am only buying AbbVie via monthly savings plans automatically executed on three different occasions during the month and I am very bullish on the stock.

Analyst’s Disclosure: I am/we are long ABBV, JNJ. 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.

I am not offering financial advice but only my personal opinion. Investors may take further aspects and their own due diligence into consideration before making a decision.