This is probably the most impressive company I have assessed to date. They have just acquired another business (Allergan), and they have a very impressive R&D pipeline as well as a profitable inventory of in use medications and drugs.
While I don’t normally look at Pharmaceutical companies, I am eager to tell you a bit more about AbbVie and why they should be on your radar.
What Does AbbVie Do?
They are a biopharmaceutical company focused on creating, testing, and selling new medicines. If like me you are an outsider to medical trials and process, know that testing a new drug takes an extremely long time, and there is a lot of room for failure.
First, you must go through extensive laboratory research which can involve years of experiments in animals and human cells. If the initial laboratory research is successful, the new drug is submitted to the Food and Drug Administration (FDA) for approval to continue research and testing in humans. Once approved, human testing of experimental drugs can begin and is typically conducted in four phases. Each phase is considered a separate trial and, after completion of a phase, you are required to submit data for approval from the FDA before continuing to the next phase.
Source: CB Insights on Trials
Phase 1 studies assess the safety of a drug. This can take several months to complete, and about 70% of drugs pass this phase. Phase 2 studies test the efficacy of a drug This second phase of testing can last from several months to two years, and roughly 1/3 of drugs pass this phase. Phase 3 studies involve randomized and blind testing in several hundred to several thousand patients. This large-scale testing, which can last several years has an 80% pass rate for drugs. Phase 4 studies, often called Post Marketing Surveillance Trials, are conducted after a drug has been approved for consumer sale. This is making sure new data doesn’t come to light and can result in the removal of the drug after it was originally approved.
The point being, after years of lab work, clinical human trials which can take three or more years and which have a 1.5 out of 10 pass rate, will be then approved for sale in the US. Meanwhile, approval for other nations is handled separately. Some countries faster than others, but with AbbVie they primarily sell and make their revenue in the US.
AbbVie is in an expensive and risky business, but if you get it right, you have the exclusive rights to your drug and depending on what you are treating could sell for thousands of pounds peruse.
Let’s breakdown the key focus areas.
Source: AbbVie Corporate Presentation
The immunology focus is all about, biologics and small molecules in rheumatology (skeleton and joints), dermatology (skin, hair, and membranes) and gastroenterology (digestive system.) AbbVie medicines in immunology currently treat +1million patients in 15 indications worldwide.
Oncology is related to treatments for two types of leukaemia (cancer), host disease (you get a transplant or craft and your body attacks it), two types of lymphoma (cancer) and macroglobulinemia (cancer.)
Neuroscience is all about your brain. Alzheimer’s, to Parkinson’s, to schizophrenia. It’s a complex area with a very broad scope of diseases they treat and develop for.
Eye Care is the one I haven’t had to do as much Googling about. Glaucoma, retina-related diseases, and even just age-related degeneration.
Virology is the study of viruses. Currently, they are working towards eliminating hepatitis C, with AbbVie’s drug being the main treatment.
They have three smaller areas which are cardiology (heart diseases), general medicines (e.g. making over the counter or medicines which aren’t locked behind IP), and women’s health (specialist medicines.)
Slightly outside of these is the final focus and comes with the business they recently purchased. Aesthetics is all about cosmetic surgery and alterations. Body contouring, facial injectables, plastics, regenerative medicine, and skincare. This is a natural extension of their skillsets and business but less wholesome than the others if you wanted to fund the cure for all cancers.
Source: AbbVie Merger Information
What About The Fundamentals?
In a sector with a high failure rate, expensive research costs, and a highly competitive industry, I was expecting a debt-heavy risky R&D burning investment.
Source: Genuine Impact
Rather it’s a defensible, high earning, large, dividend-paying, high performer. Colour me impressed. Let’s dive into some of the real details behind the relative assessment.
Starting with the quality, how well run is this company and do they look after their shareholders? Looking at the revenue AbbVie brought in $34bn last year, with a gross margin of 77.6%. In terms of rolling out the drugs they have approved they have an efficient process and the cost of revenue is under control. My biggest fear is the R&D expenses to keep discovering new drugs eating away at the gross margin. The profit margin, however, is an extremely impressive 23.69%.
To give you a flavour of the break down here is the latest quarterly report.
Source: AbbVie Q1 2020 Report
In terms of putting their money to work, they currently have an ROIC (return on invested capital, a.k.a how they use their own money) of 13.38%, meaning for every $100 they put into the company they make back $113~.
I also mentioned a dividend. In terms of looking after their shareholders, they have a 5.67x EPS and a quarterly dividend which yields 5%. This dividend has been growing for the last six years and has increased by 19% since last year. They are currently paying out 79.37% of their earnings back to shareholders. Their gains and successful trials will be fed directly back to investors.
Testing new drugs is expensive and capital intensive.
Source: AbbVie Latest Debt Update
However, they have some sizable long term debt, and they currently sit in too much debt to assets (109%.) This situation wasn’t helped by taking out a large chunk of additional financing to buy the other firm this year. Currently, this debt sits at $98bn, almost three times AbbVie’s annual revenue. Short term this is $3bn this year, with the rest far in the future. However, one slip up or major drug being pulled could switch AbbVie into a debt spiral.
The risk is 50% of their drug revenue (which is the main source currently) is coming from HUMIRA, a drug which reduces pain and inflammation in people who suffer from a range of autoimmune diseases. This is a reoccurring purchase for patients as it is not a cure, only relief. However, this means any advancements in a cure, better or safer alternatives, or a change in FDA ruling, 50% of their revenue would be at risk of vanishing overnight.
Source: Google Finance
In terms of the current share price, they have seen a COVID-19 related dip and quickly recovered. I was taken back when I saw the value ratios.
Given the high profitability, I shouldn’t be too surprised but it was interesting to see a PE ratio of 15.88x. After looking at the debt and revenue breakdown I can see a decent amount of market risk here, and it would make sense for the market to slightly lower their expectations.
I would take the value rankings with a pinch of salt in this case. The quick recovery while still being at a discount makes it seem like the market has a cap on what they expect regardless of the companies earnings. This reflects the fragile nature of the pharma business.
Latestly I wanted to check out the target price and analyst ratings for AbbVie.
Source: Genuine Impact
The analysts are not only in favour of AbbVie some from the Hold camp have moved over as well. Even with the market risks and market slowdown, AbbVie has the balance sheet to keep moving forward and keep caring for its shareholders.
However, a buy rating doesn’t mean the share price is going to be moving around any time soon.
Source: Genuine Impact
In this case, we have a smaller share price increase compared to the rest of the market, but high revenue and EPS targets which are likely to be hit. However, hitting these targets doesn’t mean the share price will shoot up, in this case, the targets are very high, you can see relative to the rest of the market the percentage year on year increase is aggressive. The lower share price growth might indicate less confidence in hitting these targets or a market that expects this level of growth based on new drugs currently in trial.
To turn this into actional numbers we are currently sitting around $90.50 a share and the average target price is $97 a share. For a year increase, there are more aggressive investments out there, but few will increase by this much and still pay an increasing quarterly dividend.
Why A Buy?
In terms of risks we have a concentration of revenue, we have an expensive R&D program, an industry of M&A which requires financing, and some looming debt which only increases.
When you look at a drug company there are two things to keep in mind. If they are profitable they have a market lead, somewhere. Price movement is driven less by earnings and spend, and more by successful trials.
Looking at the fundamentals tells us the company can keep going and has a steady stream of income, the price comes from the potential. By being a market leader and having a profit-generating drug already in use, they can build on this and expand the range of solutions offered.
We can also see through acquisitions they are looking to expand and branch out into complementary areas and help even out their revenue concentration.
While there is a higher degree of risk with any drug manufacturer (and lots of legal battles) this one has a route to success to build upon, and that sets it apart from some of their competition.
Let me know what you think, this one has a bit more of a qualitative feel to it due to the nature of the industry. Where is AbbVie on your wish lists, something you hold already, or a sector you don’t get involved in?
Thanks for reading!