For the month of September, I went after a deep discount but took on some risk. I purchased 16 shares of Abbvie (ABBV) at a price of around $65/share. Abbvie is a global researcher, manufacturer, and marketer of pharmaceuticals. Products developed treat conditions related to autoimmune disorders, gastroenterology, neurology, oncology, dermatology, and more. And while the company has a diverse pipeline, 60%+ of the company’s sales come from blockbuster drug, Humira. Patent protection in the U.S. is set to expire in 2023, allowing competitors to flood the market with generics. After the patent expired in Europe sales began to fall rapidly. Over the past year, Abbvie lost roughly half its value and now trades at a P/E of 8.
To combat these sales declines and diversify away from Humira, Abbvie announced a deal to acquire Allergan. Perhaps the most known drug behind Allergan is Botox. Overall, this deal would reduce Abbvie’s reliance on Humira. After the acquisition, Humira sales would only account for 40% of the company’s top line. Furthermore, this acquisition would add a vast pipeline of drugs to the company’s lineup. However, Abbvie’s stock fell 15% on the news as the acquisition will be financed with billions in new debt. Under the deal, Allergan shareholders will receive 0.866 shares of ABBV and $120.30 in cash for each Allergan share held. The deal is expected to cost $63 billion.
So, we have a tremendous amount of new debt on the horizon and falling Humira sales. These factors caused the stock to fall from $123 all the way down to $64. The risk here is the Allergan acquisition doesn’t work and that the debt becomes unmanageable. There’s legal risk associated with the new drug pipeline as well as political risk. Politicians on both sides believe drug prices are too high and could put forth a bipartisan bill to hamstring the pharma industry. In contrast, Abbvie’s blood cancer drugs Imbruvica and Venclexta are delivering impressive sales growth. The company also won FDA approvals for Skyrizi in treating psoriasis and Rinvoq for treating rheumatoid arthritis.
Abbvie does carry significant risk with its falling Humira sales and the high debt associated with its latest acquisition. The company also faces rising legal and political risk. However, this appears to be priced in with a P/E of 8 and a generous dividend of 6.07%. ABBV is a dividend growth powerhouse, delivering a 16.9% average dividend growth over the past 5 years. Even better, the payout ratio is below 50%, leaving room for further increases. For the month of September, I did a split buy and purchased two different stocks. This left ABBV as one of my smallest positions. Therefore, even if I lose my entire investment, ABBV only accounts for 0.7% of my portfolio. However, I believe ABBV was unfairly punished and that the company has a bright future.
DISCLAIMER: I am long on ABBV. I am not a licensed investment adviser or tax professional. I am not liable for any losses incurred by any parties. This blog should be viewed for entertainment and/or educational purposes only. Any transactions published are not recommendations to buy or sell any securities. Please consult with an investment professional before making investment decisions.