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AbbVie, Inc.Date: 12 November 2013
Jing ChenHisham Haider Dewan
Harout Sahakian
Jing ChenHisham Haider Dewan
Harout Sahakian
Agenda
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• Introduction• Holding information• Macro-economic overview• Industry analysis• Company overview• Financial analysis and projections• Valuation• Recommendation
Introduction to AbbVie, Inc.
3Source: AbbVie Inc. 10K Filing 2012, Page 1, 6, 13
Business Segments
•Metabolics/Hormones• Virology• Endocrinology• Dyslipidemia• Other
4Source: AbbVie Inc. 10K Filing 2012, Page 1-3
Products and Revenue in Q1-Q3 FY 2013
• HUMIRA: $7,620 mil. • Metabolics/Hormones products: Synthroid, AndroGel, Creon $1,476m• Virology products: Kaletra, Norvir, $816m• Endocrinology products: Lupron, $576m• Dyslipidemia products: TriCor and TRILIPIX, Niaspan, $893m• Other products: Synagis, Anesthesia product Sevoflurane, Duodopa
and Duopa, Zemplar, $1,259m• 20 products in pipeline
5Source: Bloomberg Terminal, Revenue by product
Revenue Breakdown by Major Drugs
6Source: AbbVie, Inc. 2012 10K filing page 45
Where Does AbbVie Sell?
7Source: AbbVie, Inc. 2012 10K filing page 45
Revenue by Product
8Source: AbbVie, Inc. 2012 10K filing page 45
Patent of HUMIRA
• HUMIRA entitled to 12 years exclusivity under the Biologics Price Competition and Innovation Act
• EU has created a pathway for approval of biosimilars• In the US patent for Humira is expected to expire in December
2016, and the EU patent is expected to expire in the majority of EU countries in April 2018
9Source: AbbVie, Inc. 10K 2012 page 5
R&D Process and Patents
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AbbVie R&D Expense $2.8B in FY2012
Source: AbbVie, Inc. 10K 2012 page 3 and 4
Distribution and MarketingDistributors•McKesson – 38%•Cardinal Health – 27%•AmerisourceBergen – 26%Three largest distribute 91%
Distributors•McKesson – 38%•Cardinal Health – 27%•AmerisourceBergen – 26%Three largest distribute 91%
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Target market•Physicians•Health Care Providers•Hospitals•Government Agencies
Target market•Physicians•Health Care Providers•Hospitals•Government Agencies
Source: AbbVie, Inc. 10K 2012 page 6
Current Holdings
400 shares•200 shares @ $27.08•100 shares @ 27.53•100 shares @ 34.22
Total Purchase Price (adjusted for split) = $11,591Current Market Value = $19,428Holding period return (from Jan 02, 2013 to Nov 11, 2013) = 67.61%
12Source: Yahoo Finance
Macro-economic Overview
• Slowing growth in BRICS countries• Increasing number of physician visits1
• Adults aged 65 and over 13.7% of US population & rising• High birth rates in emerging markets• Increasing socio-economic status in emerging markets• Increasing emphasis on disease prevention• Changing regulatory environment
13Source: 1. IBISWorld Industry Report 33451b Medical Device Manufacturing in the US October 2013, page 42. US Census Bureau http://quickfacts.census.gov/qfd/states/00000.html
Brand Name Pharma. Industry in U.S.
14Source: http://clients1.ibisworld.com/reports/us/industry/ataglance.aspx?entid=487 Brand Name Pharmaceutical Manufacturing in the US industry report Page 4
Pharma. Industry In The U.S.
• U.S. spending on prescription medicine down 1% in 2012 – first decline since 1957
• Spending on name brand drugs in the U.S. declined 4.7% in 2012
• Market share of generic drugs accounted for 84% of dispensed prescriptions – 5 years ago the share was only 69%
• Reasons for decline include lower volume growth, loss of patent protection on major drugs, and less spending on new drugs
15Source: Mergent. North America Pharmaceuticals Sector. July 2013. Pg 9.
Where’s the Growth Opportunity?
• Emerging Markets - By 2018, global drug makers expect emerging markets to account
for more than 33% of company sales• FDA Approvals - In 2012, the FDA approved 39 new medicines – the highest in 15
years• Hepatitis C- Affects 150 million people worldwide- 10 drugs in development for treating disease
16Source: Mergent. North America Pharmaceuticals Sector. July 2013. Pg 15-16.
Patient Protection & Affordable Care Act: Impact on ABBV
• Healthcare coverage available to all Americans
• An attempt to keep costs lows• Changes how care is paid for• Annual Fee on branded
prescription pharmaceutical manufacturers and importers
17Source: IRS website http://www.irs.gov/uac/Affordable-Care-Act-Tax-Provisions
Risks to AbbVie
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Porter's Five Forces Analysis for ABBV
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SWOT Analysis for AbbVie
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AbbVie Life Cycle
21Source: http://marygardiner.wordpress.com/2013/05/28/product-cycles/
Recent Financial Performance• Humira sales grew 22.3% in U.S. Q3 FY2013• TriCor/Trilipix sales decline due to the loss of exclusivity• R&D was 15.2% of sales in 3Q, reflecting growing need to fund mid
and late-stage pipeline asset• Expects to commercialize HCV by 2015
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Source: ABBV 8K filed on 2013-10-25, ABBV CFO presentation in JP Morgan Healthcare Conference http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTY2OTgyfENoaWxkSUQ9LTF8VHlwZT0z&t=1
Equity Performance
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Source: Google Finance Jan 2, 2013 to Nov 11, 2013
Technical Analysis
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Source: Google Finance Feb 5, 2013 to Nov 11, 2013
Quarterly Ratio Analysis
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Profitability Q1 FY 2013 Q2 FY 2013 Q3 FY 2013 Return on Assets % 12.1% 13.8% 13.82%#
LiquidityQ1 FY 2013 Q2 FY 2013 Q3 FY 2013
Current Ratio 2.2x 2.3x NA Quick Ratio 1.7x 1.8x NA
Source: Capital IQ Ratios based on quarterly data; #based on end of Q2 FY 2013 Total Assets; *Assumes book value of debt and equity
Solvency Q1 FY 2013 Q2 FY 2013 Q3 FY 2013 Total Debt/Equity* 512.6% 425.9% LT Debt/Equity* 497.9% 413.8% Total Liabilities/Total Assets* 89.1% 87.3% EBIT / Interest Exp. 18.3x 19.3x 24.0x
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Valuation Valuation
Cost of Capital
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Cost of equity using CAPM 9.74%
Weighted average cost of debt 2.40%
Cost of equity using goal post method (CAPM Re + 1.85% ) 11.59%
Market value of debt $Mil. * 14,758
Market value of equity $Mil. * 76,148.1
Weight of debt* 16.23%
Weight of equity* 83.77%
Tax rate 22.00%
Number of shares outstanding 1,577
WACC 10.01%
Cost of equity using CAPM
Beta 1.18Market risk premium (Rm-Rf) 6.00%
10 year treasury yeild 2.66%Cost of equity using CAPM 9.74%
* Assumes market value of debt & equity instead of book value on the balance sheet
Free Cash Flow to Firm 2013 2014 2015 2016 2017 2018EBIT $6,217.04 $6,465.72 $6,724.35 $6,993.32 $7,273.05 $7,563.97 Taxes $1,295.99 $1,361.94 $1,422.31 $1,485.10 $1,550.33 $1,588.57 Plus: Depreciation & Amortization $1,190.11 $1,152.98 $1,101.13 $1,043.29 $1,043.29 $1,043.29 Less: Capital Expenditures + Acquisitions ($1,083.27) ($1,126.60) ($1,171.67) ($1,218.53) ($1,267.27) ($1,317.97)Less: Change in Net Working Capital ($7.00) $358.70 ($200.83) ($187.29) ($194.78) ($202.57)Free Cash Flow to Firm $5,034.88 $4,771.45 $5,432.33 $5,520.26 $5,693.51 $5,903.30
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Discounted Cash Flow
WACC 10.0118%% Growth Rate 4.00%Implied Enterprise Value $88,933.79 Less: Debt $14,758.00 Value of equity $74,175.79 Shares Outstanding 1,577.00 Estimated price per share $47.04
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DCF – Sensitivity to WACC and G
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Growth rate
Scenario Analysis (based on revenue)Best case 2013 2014 2015 2016 2017 2018Hepatitis C Virus Franchise 0 0 800 1,200 1,700 2000Daclizumab (Multiple Sclerosi) 0 0 0 100 175 200Revenue boost from pipeline 0 0 800 1,300 1,875 2,200
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Base case 2013 2014 2015 2016 2017 2018Hepatitis C Virus Franchise 0 0 0 800 1,200 1700Daclizumab (Multiple Sclerosi) 0 0 0 0 100 175Revenue boost from pipeline 0 0 0 800 1,300 1,875
Estimated share price (Best case) $51.77
Estimated share price (Base case) $51.21
Estimated share price (Worst case) $47.04
Comparable Companies to AbbVieCompany Name Market
Capitalization ($Mil) Total Revenue ($Mil)
Actavis plc (NYSE:ACT) 27,278.5 7,648.5 Amgen Inc. (NasdaqGS:AMGN) 85,374.6 18,086.0 AstraZeneca PLC (LSE:AZN) 65,698.2 26,149.0 Bristol-Myers Squibb Company (NYSE:BMY) 86,196.5 16,135.0 Eli Lilly and Company (NYSE:LLY) 55,371.1 23,261.7 Johnson & Johnson (NYSE:JNJ) 265,356.3 70,515.0 Merck & Co. Inc. (NYSE:MRK) 136,746.3 44,450.0 Mylan, Inc. (NasdaqGS:MYL) 15,471.3 6,823.5 Pfizer Inc. (NYSE:PFE) 207,347.8 56,246.0 Teva Pharmaceutical Industries Limited (NYSE:TEVA) 31,493.2 20,133.0 AbbVie Inc. (NYSE:ABBV) 76,148.1 18,885.0
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Comparable analysis
Comparable ratio Multiple WeightImplied price
per shareTEV/Total Revenues 3.6x 5.0% $36.71 TEV/EBITDA 11.5x 10.0% $47.84 TEV/EBIT 16.6x 15.0% $59.15 TEV/Forward Total Revenue (Capital IQ) 3.4x 5.0% $36.49 TEV/Forward EBITDA (Capital IQ) 10.1x 10.0% $42.72 Market Cap/Total Revenues 3.3x 10.0% $39.42 P/Diluted EPS Before Extra 22.4x 15.0% $65.30 Market Cap / Forward Total Revenues (Capital IQ) 3.2x 5.0% $39.38 Forward P/E (Capital IQ) 14.6x 25.0% $44.77 P/BV 3.7x 0.0% $8.35 Implied price using comparable company data 100% $48.49
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Valuation using Benjamin Graham's formula
Earnings from 2013 $4,594.87
Expected Annual growth rate G 4.00
Value of equity (E*8.5+2*G) 75815.39
Implied price per share $48.08
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Key decision driverUpside•Strong presence and growth of Humira•Potential breakthrough in hepatitis C therapy and 20 products in pipeline•Skilled management capable of delivering groundbreaking therapyDownside•Failure to deliver new products or getting regulatory approval•Sales dependent heavily on Humira & limited diversity of products•Product recalls, litigation, high tax burden•Changing regulatory requirements 35
Recommendation
Current price/share: $48.57 (Nov 11, 2013)DCF $47.04 DCF Scenario: Best case $51.77, Base case $51.21Comparable $48.49Ben Graham $48.08
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HOLDHOLD
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