AbbVie, Inc.
Chris Glotzbach, Tom Van Spankeren and
Jeffrey Li
October 23, 2014
Agenda
1.
2.
3.
4.
5.
6.
7.
8.
Introduction
Macroeconomic Review
Relevant Stock Market Prospects
Company Review
Financial Analysis
Financial Projection
Application of Valuation Methodologies
Recommendation
Introduction
- Spin-off of Abbott Laboratories (2013)
- Research based pharmaceutical
company
- 8th largest publicly traded
pharmeceutical
- Employs 25,000 worldwide
- Drugs are sold in over 170 Countries
Source: AbbVie, Inc. 10-K (Fiscal 2013) page 5, 10 16,
Position
- Listed on NYSE - ABBV - 400 shares
- 200 shares @ $27.08
- 100 shares @ $27.53
- 100 shares @ $34.22
- Cost Basis = $28.98 ($11,592)
- Current Price = $56.90 ($22,760)
Industry Trends
- Worldwide total prescription drug sales projected
at 5.1% CAGR until 2020
- $749 Billion  $1.05 trillion by 2020
- Biologicals are increasing! From 22% to almost
30% of total pharmaceuticals by 2020
- AbbVie has 7% market share of biologicals
- Less patent approvals by F.D.A.
- Intellectual Property Rights
- 2.3% market share of total prescriptions
- Substantial M+A activity
- Example: Valeant wants to buy Allergan
(Botox)
Source: EvaluatePharma Outlook to 2020, Page 3 & 7
Target Market and
Demographics
- Overall trend in
demographics favorable
for AbbVie
- Emerging markets in focus
- Increase emphasis on
disease prevention
Source: Age invaders, The Economist April 26 2014
Government Regulation
- Biologics Price Competition and Innovation Act
signed by President Obama in 2009 and vastly
amended with the Affordable Care Act
- Makes “biosimilars” very difficult to duplicate
- They need to be “safe secure and potent”
- However uncertainty exists with this legislation
- AbbVie petitioned F.D.A. not to approve biosimilars
for Humira
Source: AbbVie, Inc. 10-K (Fiscal 2013) Page 9
Porter’s Five Forces
-
Threat of Substitutes: Moderate  Generics
Threat of New Entrants: Low  High R&D barrier
Bargaining Power of Suppliers: Low  But…
Bargaining Power of Buyers: Low  Dependent
Rivalry: High  Attractive market
S.W.O.T. Analysis
- Strengths: Pipeline
- Weaknesses: Fragile Drug
Patent
- Opportunities: Hep C, Breast
Cancer, MS
- Threats: Competition
Source: Biopharmaceuticals in Perspective Page 52
Where in the Growth Cycle?
Growth Phase
Source: Graph Template from QuickMBA
Guidance and Mgt
“Last month, we raised our 2014 earnings-pershare guidance, reflecting strong underlying
business performance. We continue to
expect positive trends for the second half of
the year, as well as additional progress from
our pipeline, including the expected U.S.
approval of our interferon-free HCV
combination.“-CEO Richard Gonzalez
7/25/2014
“I wanted to send a note saying that I’m more
energized than ever about our two companies
coming together”-CEO Richard Gonzalez
9/29/2014
Source: AbbVie, Inc. FINANCIAL RELEASE 2014 Q2,
AbbVie Tells Shire Employees: The Merger Will Go On ,
WSJ Sept 29,2014
Products
-
Total Revenue For Fiscal 2013 (in Millions) Total = 18,790
Humira 56.73%
USA
International
Androgel 5.51%
Kaletra 5.12%
46%
54%
Lupron 4.4%
Synthroid 3.31%
Sevoflurance 3.02%
Other 17.73%
Source: AbbVie, Inc. 10-K (Fiscal 2013) Page 45
Humira
- Uses: Rheumatoid arthritis, Chrohn’s
disease and various other
ailments/diseases
- 26.2% year over year sales growth
- Costs approximately $2,246 a month
- 3rd largest sales in US
- AbbVie must diversify away from
Humira
Source: AbbVie, Inc. 10-K (Fiscal 2013) Page 6-15
Patents?
- Loses US Humira patent in December 2016 and
European patent in April 2018
- Concerned considering it is blockbuster drug
- Lack of clarity regarding biosimilar patents
- Will it be similar to Niaspan and Tricor/Triliplex where
sales declined 90%?
Source: AbbVie, Inc. 10-K (Fiscal 2013) Page 6-15
Research & Development
- 2013: Just < $3 Billion or 15% of Sales
Source: AbbVie, Inc. 10-K (Fiscal 2013) Page 57, AbbVie R&D Page
AbbVie’s Pipeline
-
Hepatitis C – Phase III. Accepted by FDA - Priority Review. Europe Accelerated Review
Breast Cancer - Phase III - Clinical Trial
Multiple Sclerosis – Daclizumab – Biogenic - Phase III DECIDE Trial
Source: AbbVie, Inc. 10-K (Fiscal 2013) Pages 41,41,47
Global Data, AbbVie Financial Analysis
Hepatitis C
- “In our clinical trials, we're seeing the majority of
patients - even up to 100 percent of patients experiencing a cure. And patients are able to
tolerate the therapy very well, with fewer than 2.3
percent having to discontinue treatment due to
adverse events.” – CEO Richard Gonzalez
- 130-150 million worldwide with Hepatitis C
- 3.2 million Americans and 17.5 million Europeans
- Competition from Gilead’s Sovaldi (already in
market) and Merck  15%-20% Discount
Source: AbbVie Annual Stockholder Meeting May 9, 2014, World Health Organization;
Hepatitis C Fact Sheet , Viral Hepatitis Action Coalition
Risks for AbbVie
-
Creation of biosimilars
Humira patent loss
Inability to gain market share – Hepatitis C
Research and Development efforts are not
sufficient
- Loss of shareholder trust with management
Source: AbbVie, Inc. 10-K (Fiscal 2013) Page 16 -26
Shire Deal? - $55 Billion
Pros:
- “Would diversify itself
internationally”
- ADD and ADHD drug
totaling 25% of
revenues, rare diseases
drugs
- Tax rate falls to 13%
from 22%  $8 billion
savings in 15 years
Cons:
- New inversion laws
- Huge premium being
paid
- Shire stock tumbled
30% at deal fallout
- $1.64 billion breakup
fee – tax deductible
Source: AbbVie to Buy Shire for $54 Billion WSJ July 18 2014
Collapse of AbbVie-Shire Deal Leaves Scars WSJ, oct 16 2014
Technical Analysis
Source: Fidelity Investments
Ratio Analysis
DuPont Analysis
1.20
9.00
8.00
1.00
Greenblatt
2011A
7.00
0.80
2012A 2013A
0.56
0.82
0.89
0.40
EBIT/EV
NA
9.2%
6%
0.20
0.00
2010
2013A
Debt/Assets
NA
0.54
0.49
InterestCoverage
-181.00
69.25
20.37
Tax Burden
Interest Burden
5.00
0.60
EBIT/Tangible
Assets
Leverage Ratios
2011A 2012A
6.00
4.00
3.00
2.00
1.00
2011
2012
Operating
Profit Margin
Asset Turnover
Leverage TA/
TE
0.00
2013
DuPont Analysis
2010A 2011A 2012A 2013A
Tax Burden
0.86
0.94
0.92
0.77
Interest Burden
1.03
1.01
0.98
0.94
Operating Margin
30%
21%
32%
30%
Asset Turnover
0.74
0.89
0.68
0.64
Leverage
1.35
1.64
8.03
6.50
ROE
27%
29%
157%
92%
Cost of Capital
Beta
Beta from Yahoo
1 Year
Half Year (Annualized)
ABT Beta
Adj Beta
Return to Owner
1.93
1.43
1.38
0.86
1.41
CAPM
Risk Free Rate
Market Premium
CAPM
1 Year
20%
Half Year (Annualized)
11%
Adj ABBV Return to Owner
14%
Graham Growth Rate
2.40%
6%
10%
Cost of Equity
ABBV Return to Owner
Graham Implied g%
CAPM
Cost of Equity
Trailing P/E
22.05
Graham Implied g%
6.78%
% Allocate
14%
33%
6.78%
33%
10%
33%
10.3%
100%
Cost of Capital
Debt
Equity
Total Financing
Capital Structure
$14,292.00
87493.12
$101,785.12
Discount Rate
14.0%
86.0%
100%
Cost of Equity
% Allocate
10.3%
100%
Pre Tax - Cost of Debt
Tax Rate
After Tax - Cost of Debt
2.49%
22%
2%
Cost of Equity
After Tax - Cost of Debt
WACC
Risk Premium
Discount Rate
10.3%
2%
9.1%
1.0%
10.1%
86.0%
14.0%
Revenue Projection
- Revenue projection: Major Product Revenue
Estimation
- Gross Profit Margin: 78%
- SG&A: 28.46%
- Research and development : 15%
- Tax Rate: 22%
Revenue Projection
Growth rate
HUMIRA US
HUMIRA Inter
HUMIRA Total
AndroGel US
Kaletra Total
Synagis Total
Lupron Total
Synthroid Total
Sevoflurane Total
Creon Total
Duodopa Total
Dyslipidemia Total
Other
HCV Drug
Total
2012A
2013A
2014E
2015E
2016E
2017E
2018E
27.7%
19.6%
25.0%
25.0%
22.0%
-15.0%
-5.0%
8.5%
10.9%
15.0%
15.0%
13.0%
10.0%
5.0%
16.8%
15.0%
19.9%
20.1%
17.8%
-3.8%
0.1%
31.8%
-10.2%
-15.0%
-15.0%
-13.0%
-10.0%
-8.0%
-13.4%
-5.0%
-5.0%
-5.0%
-5.0%
-5.0%
-5.0%
6.5%
0.2%
2.0%
2.0%
2.0%
2.0%
2.0%
-1.2%
-1.9%
-2.0%
-2.0%
-2.0%
-2.0%
-2.0%
5.6%
12.9%
12.0%
12.0%
12.0%
12.0%
12.0%
-9.5%
-5.6%
-5.0%
-5.0%
-5.0%
-5.0%
-5.0%
6.3%
16.7%
12.0%
12.0%
12.0%
12.0%
12.0%
19.2%
19.5%
19.5%
15.0%
10.0%
5.0%
5.0%
-14.3%
-49.8%
-5.0%
-5.0%
-5.0%
-5.0%
-5.0%
-12.1%
9.2%
7.0%
10.0%
5.0%
8.0%
10.0%
20.0%
20.0%
20.0%
20.0%
5.4%
2.2%
11.2%
16.6%
12.1%
-1.2%
2.0%
Forecasted Figures
in millions
Net sales
% growth
Cost of products sold
% of Sales
Gross Profit
% margin
2014E
2015E
2016E
2017E
2018E
$20,903.08 $24,369.67 $27,327.36 $27,011.10
$27,545.22
11%
17%
12%
-1%
2%
$4,598.68
$5,361.33
$6,012.02
$5,942.44
$6,059.95
22.00%
22.00%
22.00%
22.00%
22.00%
$16,304.41 $19,008.34 $21,315.34 $21,068.66
$21,485.27
78.00%
78.00%
78.00%
78.00%
78.00%
Selling, general and administrative
% of Sales
Research and development
% of Sales
Acquired in-process research and development
% of Sales
EBIT
% Margin
$7,589.16
28.46%
$3,167.71
15.15%
$397.20
1.90%
$5,150.35
24.64%
$6,935.77
28.46%
$3,693.04
15.15%
$463.07
1.90%
$7,916.46
32.48%
$7,777.55
28.46%
$4,141.26
15.15%
$519.27
1.90%
$8,877.26
32.48%
$7,687.54
28.46%
$4,093.33
15.15%
$513.26
1.90%
$8,774.53
32.48%
$7,839.55
28.46%
$4,174.27
15.15%
$523.41
1.90%
$8,948.04
32.48%
Interest expense, net
% of Sales
Net foreign exchange (gain) loss
% of Sales
Other (income) expense, net
% of Sales
EBT
% Margin
Income tax expense
% Tax Rate
$282.11
1.48%
$39.72
0.19%
($22.62)
-0.11%
$4,851.14
23.21%
$417.25
22%
$286.43
1.53%
$46.30
0.19%
($26.37)
-0.11%
$7,610.10
31.23%
$1,674.22
22%
$290.96
1.58%
$51.92
0.19%
($29.57)
-0.11%
$8,563.96
31.34%
$1,884.07
22%
$295.70
1.63%
$51.32
0.19%
($29.23)
-0.11%
$8,456.74
31.31%
$1,860.48
22%
$300.67
1.68%
$52.34
0.19%
($29.81)
-0.11%
$8,624.84
31.31%
$1,897.47
22%
Net earnings
% Margin
$4,433.89
21.21%
$5,935.88
24.36%
$6,679.89
24.44%
$6,596.26
24.42%
$6,727.38
24.42%
Discounted Cash Flow
Analysis
Discounted Cash Flow Analysis
2014
2015
2016
2017
Net Income
$4,434
$5,936
$6,680
$6,596
$6,727
Depreciation & Amortization
$1,353
$1,578
$1,769
$1,749
$1,783
CapEx
($418)
($487)
($547)
($540)
($551)
$837
$887
$758
$32
$130
FCF
$4,532
$6,139
$7,144
$7,772
$7,829 $113,115
PV FCF
$4,115
$5,062
$5,349
$5,284
$4,833
Change NWC
Implied Equity Value
$94,467
Discount rate
Less Debt
$14,292
Terminal Value Growth Rate
Implied Market Cap
$80,175
Current Share Outstanding
1,593.50
Estimated Share Buy Back
40
Estimated Share Outstanding
1,553.5
Implied share price
$51.61
2018 Terminal
$69,825
10.13%
3.00%
Scenario Analysis
Sensitivity Analysis
Discount rate
lost on Humira sales on 2016
####
9.17%
9.67%
10.17%
10.67%
11.17%
11.67%
-5%
$63.50
$57.87
$53.04
$48.84
$45.15
$41.89
-10%
$62.40
$56.88
$52.13
$48.00
$44.38
$41.18
-15%
$61.31
$55.89
$51.22
$47.17
$43.61
$40.46
-20%
$60.22
$54.90
$50.32
$46.33
$42.84
$39.75
-25%
$59.13
$53.90
$49.41
$45.50
$42.07
$39.04
-30%
$58.04
$52.91
$48.50
$44.66
$41.30
$38.32
-35%
$56.94
$51.92
$47.59
$43.83
$40.53
$37.61
-40%
$55.85
$50.92
$46.68
$43.00
$39.76
$36.90
Comparable Companies
Analysis
Target Company
AbbVie Inc.
Last
Close
Dividend Price/ Price/
Market Cap Yields
Sales Book P/E
Forward
P/E
TEV/
EBIT
EBIT/EV
$56.90
90,670
3.1%
4.83 17.17 22.05
14.66
14.8
6.6%
Comparable Companies
Bristol-Myers Squibb Company $51.84
85,946
2.8%
5.25 5.62
32.2
29.29
24.7
3.4%
Eli Lilly and Company
$64.68
69,001
3.1%
2.99 3.85 20.54
20.66
16.1
8.0%
Merck & Co. Inc.
$55.51
160,124
3.3%
3.64 3.31 29.25
15.55
16.8
5.4%
Pfizer Inc.
$28.30
179,447
3.7%
3.48 2.34 17.78
12.69
11.3
9.3%
AstraZeneca PLC
$69.36
87,588
2.6%
3.41 3.96 42.91
16.73
15.4
7.4%
$101.22
285,471
2.8%
4.00 3.63 16.76
16.33
12.7
7.0%
Johnson & Johnson
Multiple
Weight
Price/ Sales
Forward P/E
TEV/EBIT
Graham Ratio
ABBV Implied Stock Price
Implied ABBV Stock Price
25%
25%
25%
25%
$41.95
$64.16
$51.58
$57.12
$53.70
Decision?
HOLD
Valuation Summary
Weight
Price
DCF
50%
$
51.61
Comparable
50%
$
53.70
$
52.65
Main Reasoning?
- Strong growth prospects with Hepatitis C drug
- Uncertainty involved with Humira patent expiration
- Pipeline in general is strong
- Intrinsic value is less than market price
- Poor management
Questions?