AbbVie recently released its third quarter results. The mixed bag was met with a fall of around 5% on its stock price, from a close of $153.54 on 10/27/22 to an open of $145.71 on 10/28/22. However, the company announced a raise of 5% in its quarterly cash dividend.
What shareholders need to ask is this: is the fall in stock price justified, and is the dividend safe?
Business Overview
Incorporated in 2012, AbbVie is a developer, manufacturer, and seller of pharmaceuticals worldwide. Its number one drug (the biggest seller in the world), Humira, is a therapy administered for autoimmune and intestinal diseases. While this drug has been the driver of revenues and profits, AbbVie has developed several other drugs and treatments including, Skyrizi (a treatment for psoriasis), Rinvoq (to treat active rheumatoid arthritis), Imbruvica (for the treatment of lymphocytic leukemia), and Venclexta (to aid in the treatment of CLL or SLL).
AbbVie has also stepped into the world of aesthetics, offering several treatments in its aesthetics portfolio, including Botox Cosmetic and Botox Therapeutic.
Business Performance
AbbVie’s earnings have been driven by its star product, Humira. This $20 billion-a-year revenue producer has been the force behind its ability to grow its portfolio. However, while Humira has been crucial to its financial success, it would be wrong to think that it is a one-drug company. It has developed a highly diversified portfolio of revenue streams, which include neuroscience, aesthetics, hematologic oncology, and eye care, as well as immunology.
As its portfolio of pharmaceuticals grew, so does its revenues – from around $18.4 billion in 2012 to $56.2 billion in 2021. Its trailing 12-month (TTM) revenues have stepped up impressively, too, with barely a dip in its history.
In AbbVie’s third quarter release, Chairman and CEO Rick Gonzalez said, “We remain confident in the outlook of our business and are reaffirming the midpoint of our full-year 2022 EPS guidance at $13.86, which represents strong double-digit growth.”
Growth Prospects
While there are some risks to the business (which we’ll cover below), the prospects for growth looks promising. The company believes that the aesthetics business will deliver $9 billion in sales per year by 2029. It also believes that it will enable at least 80% of covered lives to be served by formulary access to Humira, allowing it to compete well against biosimilars when the patent expires in 2023.
AbbVie’s management does expect some erosion of revenues as Humira’s patent expire next year, but expects the outcome to be at the lower end of the current range for EPS. However, Gonzales says, “While it’s possible 2023 could outperform our guidance regardless of the shape of the erosion curve, we don’t anticipate 2024 earnings will be lower than the initial 2023 EPS guidance given the momentum and growth from another year of our ex-Humira portfolio, which is expected to more than offset any incremental Humira erosion in 2024.”
The company is excited by the long-term potential for many of its pharmaceuticals and expects these to have a significant impact on AbbVie’s long-term performance and growth.
In other words, even if earnings dip in 2023, they should reengage with a growth path in 2024. As CEO Gonzales sums up:
“The guidance range will provide and give investors additional clarity regarding our expectations for the company’s core EPS. In summary, we continue to deliver strong results and see numerous opportunities for our diverse portfolio to drive long-term growth.”
Dividend Profile
AbbVie’s record of returning cash to shareholders via dividend payments is impressive. After it was spun off from fellow pharmaceutical Dividend King, Abbott Laboratories in 2013, its dividends has grown at a CAGR of 18.8% for the past nine years.
AbbVie’s ability to pay strong dividends is underpinned by some impressive numbers:
- Operating cashflow has increased from $13.4 billion in 2018 to $22.9 billion in the latest TTM
- It currently holds around $8.6 billion in cash
- Its forward dividend is covered 1.2x by earnings
Business Risks
There are several risk factors for investors to consider when investing in Abbvie today.
The obvious one is the expiry of the Humira patent, which may impact AbbVie’s revenues. The expiry of the patent allows new competition to get into the market. However, while some investors are forecasting a cliff-edge catastrophe, AbbVie’s management has already strategically positioned the company to handle the patent expiry.
“With regards to the status of contracting for Humira, our intent has always been to maintain broad formulary access so that we can compete effectively with forthcoming biosimilars,” says Gonzales. “We are making very good progress consistent with this objective, and are currently projecting formulary access for at least 80% of all U.S. covered lives. We expect this percentage to increase further as we conclude additional contract discussions between now and the end of the year. As a result, we anticipate strong access for U.S. Humira throughout 2023, and project biosimilars will share access as they become available.”
Another area of risk is the global economy, and if it should go into meltdown. The company is already seeing some pressure on the consumer, and this appears to correlate with the slowdown in spending on aesthetic treatments the company has experienced. However, when the economy recovers its poise, we should also witness a growth in discretionary spending – so the slowdown the company is experiencing at present should prove transitory.
As always with such companies, forward sales and income streams rely on continuing to develop a steady flow of new products. Therefore, we should maintain a wary eye on the development of AbbVie’s portfolio, as we should also keep a watchful eye on regulations and litigation.
Finally, AbbVie’s total debt, at $76.7 billion, is a concern. However, much of this is due to acquisitions in recent years, specifically its purchase of Allergan in 2019/20 for $63 billion. At present, AbbVie’s revenues, cash flow, and earnings are sufficient to support this debt, paying down around $10 billion of its debt in the last 12 months.
Final Thoughts
Third-quarter sales may have missed market expectations, but they did increase – albeit by only 3%. However, earnings surged upward, rising more than 29%.
AbbVie’s management appears to have the potential Humira cliff-edge under control by investing heavily in new products, as well as acquisitions to boost its growth.
All in all, a solid dividend play in the pharmaceutical arena in your own diversified investment portfolio