AbbVie, Inc. (NYSE: ABBV)
Analysts: Tianyu (Jack) Shen, Zijun (Moby) Xu
Presented April 26, 2016
Position: We own 100 shares at $27.08 cost basis, via spinoff of Abbott Labs, having sold our other 300 shares previously
RECOMMENDATION: Hold current position of 100 shares
Company Overview:
AbbVieis aglobal, research-based biopharmaceutical companythat discovers, develops, and marketsbothbiopharmaceuticalsandsmall moleculedrugs. It originated in 2013 asaspin-offofAbbott Laboratories.On March 4, 2015 AbbVie announced its agreement to acquireoncologyfirmPharmacyclicsand its treatment for blood cancers,ibrutinib. The acquisition valued at approximately $21 billion was completed on May 26, 2015.In April 2016, AbbVie revealed positive data on HCV therapy and leukemia treatment, and announced to acquire a biotech start-up Stemcentrx. AbbVie estimates global sales of the drug at $1 billion in 2016 and $5 billion in 2020. The product HUMIRA contributes 60% of AbbVie’s total revenue.
Industry Overview:
AbbVie is a major player in the research-based pharmaceutical industry. It’s a mature industry with strict regulations, complicated product development process, and intense capital investment. The industry has a rather high barrier of entry and the competition is intense. The consumers (patients) don’t have much bargaining power because there isn’t many options on the market. Although the product is patent-protected, unexpected R&D breakthrough of competitors could cripple a company’s ability to generate revenue. The R&D process is highly risky and capital intense.
Financial Analysis, Projection and Valuation:
Based on guidelines and data given in the 10-K and reasonable assumptions, we arrived at a discounted cash flow estimation of $43.31 a share. Based on the multiples of comparable companies, we arrived at a comparable estimation of $70-$80 a share. The table below contains the results of our calculation.
DCF estimation / Comparable estimation$43.31 / $70-$80
Risks:
Internal risk: The main risk that AbbVie faces is the risk of losing patent protection on key products like HUMIRA, the patent of which would expire in December 2016. The expiration of patent would severely damage the company’s profitability. The failure in R&D would negatively affect the company’s future profitability and even threaten the company’s survival.
External risk: The change in regulations would affect the company’s ongoing R&D; the advancement made by competitors will threaten the company’s position in the market.
Recommendation:
Given the huge differences among the results of the two methods and the market expectation, and the fact that the company is a “new company” that doesn’t have a very long history, we think we need more information and a better understanding of the pharmaceutical business before making a “well-informed” decision. Our recommendation is to hold our current position and keep close attention to the company’s movements on the coming months.