(Published by Nicholas McCullum on April 27)
AbbVie (ABBV, Financial) was spun off from Abbott Laboratories (ABT, Financial) in 2013. Like many spinoffs, AbbVie has outperformed the overall stock market since inception.
Despite AbbVie’s short history as a publicly traded security, it has operated for many years as a subsidiary of Abbott Laboratories.
In fact, if the company’s history under Abbott is accounted for, AbbVie is a member of the Dividend Aristocrats – a group of elite, shareholder-friendly stocks with 25-plus years of consecutive dividend increases.
You can see the list of all 51 Dividend Aristocrats here.
AbbVie recently reported earnings for the first quarter of fiscal 2017.
In this earnings report, there was one notable number with regard to sales of the company’s flagship drug that was much better than anticipated.
Current events
On April 27, AbbVie reported earnings for the first quarter ending March 31.
Investors should be pleased with one number in particular from this press release.
Sales of the company’s flagship drug Humira increased by an eye-popping 15.1% on a reported basis. On a constant-currency basis, results were even better – sales of Humira increased 15.8% ex-currency.
Why is this important?
Humira is the highest-grossing drug in the world.
It is also very important to AbbVie’s overall business. Humira‘s 2016 sales of $16.1 billion contributed 63% to AbbVie’s 2016 revenues.
Humira‘s impressive revenue growth is also in direct contradiction to what the markets expected. Like most pharmaceutical companies, AbbVie protects its drugs with a complex portfolio of intellectual property contracts and patents.
These patents began expiring at the end of 2016. Investors were worried that increased competition resulting from a lack of patent protection would reduce Humira sales and negatively affect AbbVie.
Clearly, this has not been the case so far in 2017.
Outside of Humira, the rest of AbbVie’s business performed well in the first quarter.
Some of the company’s other metrics are outlined below.
- Companywide net revenues were $6.5 billion in the first quarter, increasing 10.1% on a constant-currency basis.
- Imbruvica net revenues were $551 million, showing growth of 44.7%.
- Research and development expense was 17.4% of net revenues.
- Adjusted diluted EPS was $1.28, an increase of 11.3% from the year-ago period.
From the metrics above, two things impress me the most.
The first is adjusted diluted earnings-per-share growth of 11.3% for the quarter. Investor total returns come from valuation changes, earnings-per-share growth and dividend yield. If AbbVie can keep up 10% to 12% earnings-per-share growth over the long run, investors should realize 14% to 16% total returns with the stock’s 4% dividend yield.
Second, I was impressed with Imbruvica’s net revenues increasing by ~45%.
Imbruvica is seen as a key growth catalyst for AbbVie so such rapid growth in this drug should be appreciated by investors.
Here’s what AbbVie’s CEO had to say about the company’s impressive performance:
“AbbVie delivered strong first quarter results with double-digit EPS and operational revenue growth, exceeding our guidance for the quarter,” said Richard A. Gonzalez, AbbVie chairman and CEO. “As we look ahead to the remainder of the year we expect continued strong commercial execution and significant pipeline progress. This includes a dozen pivotal trial readouts and several regulatory submissions and approvals, further supporting our ability to drive top-tier performance over the long term. 2017 is an important year for AbbVie, and we are off to an excellent start.”
It appears that AbbVie’s growth runway remains strong. The rest of this article will outline the various factors that will impact AbbVie’s growth over the coming years.
Growth prospects
As a pharmaceutical company, AbbVie earmarks a huge portion of its revenues for research and development.
AbbVie’s spending on this front has been fruitful. The company is building a leadership position in neuroscience, virology and "focused investments" – which includes areas where there is an identified unmet need.
Source: AbbVie Presentation at the JPMorgan Healthcare Conference, slide 7
AbbVie is also building market leadership in the hematologic malignancies market.
This market is growing rapidly, from ~$29 billion in 2015 to $50 billion in 2020. This means that AbbVie’s treatments for hematologic malignancies should continue to see rapid growth even if their market share remains constant.
Further, AbbVie’s portfolio of drugs that are in either Phase 2 or Phase 3 has the potential to address 65% of this large market.
Source: AbbVie Presentation at the JPMorgan Healthcare Conference, slide 9
Zooming in, AbbVie has identified assets that are likely to drive near-term sales growth and has called them "near-term growth assets."
These assets are significantly de-risked, which means that the company believes there is a minimal probability that the products are not brought to market (due to lack of regulatory approval or otherwise).
Source: AbbVie Presentation at the JPMorgan Healthcare Conference, slide 12
In particular, AbbVie has identified eight near-term growth assets:
- Imbruvica (which saw sales grow ~45% in the recently announced quarter).
- Venclexta.
- Zinbryta.
- Next-Gen HCV.
- Rova-T.
- Elagolix.
- ABT-494.
- Risankizumab.
Three of these products have already been brought to market, while the company’s Next-Gen HCV drug is expected to be launched in 2017.
Altogether, these eight assets are expected to generate $25 billion to $30 billion of sales by 2020.
Even better, Humira sales are expected to increase during that time to $18 billion (from $16.1 billion in 2016).
Source: AbbVie Presentation at the JPMorgan Healthcare Conference, slide 13
Investors can estimate the feasibility of these goals by considering AbbVie’s Humira sales during the most recent quarter.
AbbVie sold $4.118 billion of Humira during the first quarter. If we multiply this by four to get an approximate annual figure, we note that Humira is on pace to reach Humira sales of $16.5 billion for fiscal 2017.
Sales of $18 billion by 2020 would only require annual sales growth of ~3%. Even with the expiration of Humira’s patents, it is highly likely that AbbVie reaches its guidance of $18 billion by 2020.
Altogether, AbbVie’s growth prospects are very strong.
Final thoughts
Ever since AbbVie was spun off from Abbott Laboratories, the company has been viewed as one of the riskier Dividend Aristocrats.
As time passes, the uncertainty surrounding a patentless Humira will diminish, and the markets will reward AbbVie with a higher valuation.
For investors looking to purchase AbbVie now, there’s a lot to like. The company is trading at just 12.1x 2017’s expected earnings per share.
AbbVie is also remarkably shareholder-friendly. Aside from regular dividend increases, the company recently announced a $5 billion addition to its existing share repurchase program – which amounts to ~5% of the company’s current market capitalization.
Thanks to its low price-earnings (P/E) ratio, strong earnings growth and high dividend yield, AbbVie ranked as a top 10 stock according to The 8 Rules of Dividend Investing in the April edition of the Sure Dividend Newsletter.
This makes AbbVie a buy for investors who are willing to closely monitor the evolution of Humira sales post-patent expiration.
Disclosure: I am long AbbVie and Abbott.
Start a free seven-day trial of Premium Membership to GuruFocus.
