AbbVie’s Key Risks
We prefer to invest in pharmaceuticals that have diversified streams of income from their drugs. It’s very hard for a complete outsider to forecast the timing and profitability of a company’s drug pipeline, so finding businesses with enough diversification helps reduce this risk.
Johnson & Johnson is a great example. While pharmaceuticals drive over half of the company’s profits, it is well diversified by drug and gets reliable cash flows from its consumer products and medical devices segments. The flop of any one drug will not endanger the business. You can read our analysis of Johnson & Johnson by clicking here.
On the other hand, AbbVie is much more concentrated. Sales of Humira accounted for over 60% of sales last year and are expected to represent nearly 50% of revenue by 2020 as well. AbbVie’s composition of matter patents for Humira expire in the U.S. and Europe in December 2016 and October 2018, respectively.
However, the company hopes that it can litigate against biosimilar manufacturers of Humira for at least four or five years based on industry norms and its non-composition of matter patents. These patents covers area such as manufacturing and formulation and do not begin to expire until 2022.
The company obviously hopes to use these patents to litigate against new biosimilar competition for Humira, and it was successful earlier this year in defending against a patent review case filed by Amgen last year. If successful, AbbVie believes it can maintain strong profitability in the U.S. through 2022, but there is plenty of skepticism surrounding the matter.
Regardless of the ultimate timing, branded drugs cannot maintain their high profit margins forever. As patents expire, lower-cost competition emerges with knock-offs that quickly erode sales and margins. If new drugs have not been successful in the pipeline, earnings can erode very quickly.
This is a key point of controversy surrounding the stock. While management believes Humira sales can exceed $18 billion in 2020, some analysts see Humira revenue coming up at least 30% short of management’s ambitions. AbbVie’s forecast assumes that biosimilar versions of Humira will stay out of the U.S. until 2022, whereas some analysts see competition emerging in 2019.
In addition to the risk posed by Humira’s large contribution to company profits, the Food and Drug Administration (FDA) can also pose unexpected challenges. For example, during one week in October 2015, AbbVie’s stock fell by more than 10% after the FDA warned that AbbVie’s Viekira treatment caused liver injury to a small number of patients.
You just never know what might crop up any given week as it relates to new competition, unexpected developments in the drug pipeline, litigation, or other issues with existing treatments. For these reasons, we generally prefer to invest elsewhere in the market.
Dividend Analysis: AbbVie
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. ABBV’s long-term dividend and fundamental data charts can all be seen by clicking here.
Dividend Safety Score
Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
For the time being, AbbVie’s dividend payment is extremely safe. The company received a Dividend Safety Score of 78, which is excellent and places it in the top quartile of dividend-paying stocks.
AbbVie’s free cash flow payout ratio over the last 12 months is a healthy 49%, which is roughly in line with the company’s payout ratios realized since it was spun off in 2013. Given AbbVie’s strong outlook over the next few years for continued growth, we think its payout ratio is very healthy for the time being.
Source: Simply Safe Dividends
