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AbbVie beats and student
Major biotech company AbbVie (ABBV) reported a record pre-market performance in the third quarter on Friday. These are the main points of his press release:
- Reports diluted third quarter EPS of $ 1.81 on a GAAP basis; Adjusted diluted EPS of 2.14 USD reflects growth of 51.8%
- Achieves a net sales figure of $ 8.236 billion in the third quarter under Generally Accepted Accounting Principles (GAAP); Adjusted net revenues of $ 8.236 billion up 18.5% on an operating basis
- US $ 5.134 billion increase in HUMIRA's global business in the third quarter, up 9.0% on a reported basis, or 9.8% on an operational basis
- World net revenues for the hematology oncology portfolio were $ 1.068 billion in the third quarter, an increase of 48.1%.
All the numbers were strong; revenues were a slight surprise up.
Diluted EPS is expected to yield approximately $ 6.45 for this year; Unadjusted diluted EPS under GAAP is expected to be approximately $ 7.92.
In addition, ABBV experienced a difficult period and forecasted double-digit earnings growth in 2019. It was a bit surprising given the following problems:
- the advent of biosimilar competition with Humira in the EU last month
- cost pressures in the United States
- ongoing launches of Venclexta and Orilissa and planned launch of "risa" for refractory psoriasis during the first half of the year.
Adjusted figures differ primarily from GAAP figures due to the adjustment to exclude the depreciation of assets acquired but wasting, such as the limited assets in (wasteful) time of the year. ; Imbruvica. Clearly, Imbruvica cost about $ 21 billion and, since this cost was reasonably cost-free during the asset acquisition period (2015), the depreciable cost must be spread over the expected useful life of the drug. So I'm thinking only of ABBV and all the pharmaceutical and biotech companies that use GAAP, which remains the best tool available to not only measure cash flow (or free cash flow), but the profitability of a company's activities.
In the absence of any major new transactions, I expect the ratio of GAAP / non-GAAP EPS to remain unchanged next year, perhaps improving slightly, and therefore will accept a double-digit 2018 forecast of $ 6.45 increasing from 70% cents to $ 7.15.
At the time I write these lines, ABBV averaging $ 80, the stock trades a little above the projected EPS under GAAP 2019 of 11X.
Is it attractive?
The street has aggressively reduced this stock lately, but I'm fighting it for the following reasons.
Upcoming dividend, producing a rare return for a strong company above 5%
ABBV has announced that the starting dividend for next year will be 1.07 USD per share, against 0.96 USD currently. That's $ 4.28 a year. With ABBV at $ 80, the yield is correct of 5.35%. Note that ABBV organized an auction in the Netherlands this year, but gives priority to dividends rather than redemptions.
It's not just in my retirement that I prefer buy-back dividends for most businesses, as qualified divisions are generally treated on a par with capital gains under US tax law. in force. The fact is that a dividend from a big, strong company like ABBV is more like an obligation, a promise, than a buyout, which by nature is or can be treated as opportunistic.
Is the dividend sustainable and can it be increased in the foreseeable future after its rapid rise in recent years?
I think so, for the following reasons.
The new product flow is robust and builds on the company's strengths: Part 1 – Humira franchise
Let's start with Humira. The share of EU international sales is starting to erode. A very small part of this erosion comes from fees paid to ABBV by biosimilar manufacturers for access to ABBV's patents. Other international sales, such as those from Japan, are unaffected by biosim launches in the EU.
For example, Humira's global sales could remain stable, as growth in the United States and other parts of the world offsets the continued decline in sales in the EU. The entire analytical community will know the details of this situation before yours, but that's the way I think for the moment. In other words, I model ABBV with a current value of about $ 20 billion of Humira's gross revenue until January 2023, then an unknown speed decline. The Humira royalty disappearing at some point next year, I think of Humira as if it were the only asset of an autonomous Newco. In this context, I give it a value in which $ 100 billion of future revenue from Humira, including US revenues after biosimes, will come in 2023, which is $ 60 billion of after-tax income.
So, I appreciate the Humira franchise of about $ 60 billion, a figure that I will naturally adjust downward or upward as the actual numbers come up.
But the value of the Humira franchise is well above the actual benefits specific to Humira. This value lies in the expected launch of "risa" for the first half of 2019, an antibody to the study for several major autoimmune diseases, the main indication being psoriasis. It is then in the launch scheduled for the end of 2019 the "upa", an oral drug whose main indication the PR. Risa and Upa have several other ongoing Phase 3 and Phase 2 studies. Boehringer Ingelheim has granted a license to ABBV and will share the increase.
These are the gigantic knowledge of ABBV about diseases treated by Humira, the prescription habits of many doctors around the world who prescribe it, the regulatory considerations, the lows and downs of insurance coverage, etc. ., which constitute a first and great intangible advantage to choose to go with these two molecules as next-generation products to follow Humira, then develop them and market them optimally.
Also, in the United States and internationally, it's very helpful to be able to tell doctors that you can use Humira first or second line, and then first or second line, you can use a different ABBV product. risa or upa (as far as labeling allows). This is a rare benefit because the market leader covers many indications and then the new generation products are all detailed by the same representative of the drug and related to the same marketing strategy.
It is too early to talk about numbers, but knowing that neither risa nor upa have been approved for marketing, I attribute them together as having a very significant present value.
Then there is oncology.
The Imbruvica Agreement: Building an Oncology Franchise (Part 2)
I was wondering why ABBV would spend about 21 billion USD to buy Pharmacyclics in order to access Imbruvica at the height of the biotech market in 2015. But one of the two oncology assets of ABBV in the development phase Advanced, Venetoclax – now Venclexta in the United States – seems to come to fruition. Venclexta could be part of new methods, alongside treatment paradigms based on Imbruvica, to treat hematological malignancies. See the transcript of the teleconference and recent ABBV press releases for more details.
At the last Roche teleconference (OTCQX: RHHBY), the CFO clarified the financial agreement between ABBV and RHHBY on Venclexta:
I had talked about the agreement we have with AbbVie on Venclexta and what is leaked is somehow half and half probably split in the United States. Outside of the United States, we are receiving royalties and I would say that it's a solid two-digit number has given you, but we have not yet revealed the details.
It seems that Venclexta could have a profit sharing of 65-35 or 60-40, with ABBV getting the lion's share of the profits. Venclexta is protected by a US patent in the FDA's Orange Book until 2031. Imbruvica seems to have this protection until 2033. So even though J & J (JNJ) is in line with about half Imbruvica benefits and that RHHBY gets a good share of the benefits of Venclexta, I see these drugs, which treat similar or identical diseases with revolutionary mechanisms orally, not chemo, as having very high current values.
In addition, having this type of scientific and marketing expertise confers significant franchise value, as previously reported for Humira and its next-generation drugs.
Do not forget Orilissa (Part 3)
In making its agreement with Neurocrine (NBIX) to authorize and develop what is now marketed for the treatment of endometriosis, Orilissa, ABBV has relied on its knowledge of the pharmacology of reproductive hormones, confirmed by Lupron, which was approved in 1995 and which achieves an annual business turnover of about $ 850 MM.
I expect that Orilissa, first for endometriosis then for uterine fibroids, will be a potent product with significant benefits large enough to move the needle, even in view of the large market capitalization of ABBV. ABBV has indicated its intention to find ways to limit the bone loss it causes, which has resulted in a limitation in the time of use in the initial label. No guarantee, but I am optimistic about the success of Orilissa.
Orilissa represents a third way in which ABBV extends its knowledge of a domain to generate new opportunities.
Provisional summary
All I have just said is that ABBV has done, and I believe is doing, a top-notch job in developing, maintaining and building different franchises. This is not easy to do, but the evidence is before us.
This is the kind of company I am comfortable with owning without much worry about the news of the day.
To move on …
ABBV has other concentrated forces
ABBV, a pioneer of HIV antivirals, has been successful in the treatment of HCV, with Mavyret / Maviret as the main drug. It shares about 50% of the global market with Gilead (GILD).
ABBV also has franchises in pancreatic insufficiency with Creon, intravenous Parkinson's drug administration with Duopa / Duodopa and a seemingly immortal franchise with Synthroid; and others.
Risks
I think everyone is now focusing on many risks in the biotech / pharma sector. There is also the risk that the dividend may not be secure. Please refer to the regulatory documents filed by ABBV for a detailed description of the many reasons why you may lose money by holding ABBV shares.
While ABBV dropped during the teleconference when the CEO acknowledged a stronger price pressure of biosim in the EU than he thought, and it's about 39, a permanent risk, I think this largely contributed to the fall of the title, which went from 100 USD to 80 USD. -ish already. Nevertheless, no one knows how all this will unfold.
Conclusions – fighting the street by overweighting ABBV
The title of this article, the 1968 Rolling Stones song, referred to street riots in France that rocked the de Gaulle government. On the other hand, in the field of investments, a peaceful way to fight is to buy when the street is dumping on a stock. Strangely, ABBV traded around $ 82 and then fell below the $ 80 mark at a time when CEO Rick Gonzalez said ABBV was of the opinion that transaction prices were generally too high. he felt that ABBV had a solid pipeline. As they say on Wall Street, greed is good. But in DoctoRx-land, a single Stemcentrx chord suffices.
With the latest announcement of a dividend increase in 2019, ABBV seems to me to be a unique title. It's a very profitable company that does not play the game of rewarding shareholders by concentrating most of its capital return program on redemptions. Given that, in my opinion, shares are not expensive in an absolute sense, I like the idea of sharing wealth in near real time at par with all other shareholders, rather than dreaming about the future. 39, greater wealth per share later through redemptions. It is clear that biosim competition in the EU today and in 2023 in the United States carries many risks, as well as the many ongoing and planned drug launches. As usual, equities are risky assets regardless of their dividend yields. Nevertheless, I liked ABBV at $ 90 and improved it to about $ 80, so I deployed cash to increase my holdings after the earnings release. The purchase of ABBV at 61 USD early 2017 for a dividend yield of 4.2% has been running smoothly so far, and I hope that the. buying a higher dividend yield in a higher rate scenario will evolve the same way.
Thank you for reading and sharing the ideas you want to bring.
Disclosure: I am / we have long been ABBV, RHHBY, GILD.
I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose actions are mentioned in this article.
Additional disclosure: No investment advice. I am not an investment advisor.
Editor's Note: This article deals with one or more securities that are not traded in a major US market. Please be aware of the risks associated with these stocks.
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