Transcript Text

Jing Chen
Hisham Haider Dewan
Harout Sahakian
AbbVie, Inc.
Date: 12 November 2013
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Agenda
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Introduction
Holding information
Macro-economic overview
Industry analysis
Company overview
Financial analysis and projections
Valuation
Recommendation
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Introduction to AbbVie, Inc.
On January 1, 2013 AbbVie was spun off from Abbott Lab.
Incorporated in Delaware on April 10, 2012 and is comprised of Abbott's former
research-based pharmaceuticals business
AbbVie develops and markets advanced therapies
21,500 employees
Innovation-driven biopharmaceutical company focused on delivering breakthrough
products
Products sold in over 170 countries
Source: AbbVie Inc. 10K Filing 2012, Page 1, 6, 13
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Business Segments
Pharmaceuticals
• Metabolics/Hormones
• Virology
• Endocrinology
• Dyslipidemia
• Other
Source: AbbVie Inc. 10K Filing 2012, Page 1-3
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Products and Revenue in Q1-Q3 FY 2013
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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
Source: Bloomberg Terminal, Revenue by product
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Revenue Breakdown by Major Drugs
HUMIRA
• 50.40% of FY2012 sales
AndroGel
• 6.26% of FY2012 sales
TriCor/TRILIPIX • 5.97% of FY2012 sales
Kalerta
• 5.51% of FY2012 sales
Niaspan
• 4.95% of FY2012 sales
Source: AbbVie, Inc. 2012 10K filing page 45
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Where Does AbbVie Sell?
FQ2 2013
FQ1 2013
44%
49%
51%
56%
International
Source: AbbVie, Inc. 2012 10K filing page 45
United States
International
United States
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Revenue by Product
Quaterly Revenue from all products
other than Humira
Humira Quarterly Revenue
3000
2770
600
2606
2500
2244
Metabolics,
510
500
2000
1500
Humira
1000
SALES $MIL
SALES $MIL
400
Other, 382
300
Dyslipidemia,
240
Virology, 237
200
Endocrino, 196
500
100
0
0
FQ1 2013
FQ2 2013
Source: AbbVie, Inc. 2012 10K filing page 45
FQ3 2013
FQ1 2013
FQ2 2013
FQ3 2013
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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
Source: AbbVie, Inc. 10K 2012 page 5
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R&D Process and Patents
Idea to Product
Phase: I, II, III
AbbVie R&D Expense $2.8B in
FY2012
Discovery to Launch
8 – 12 years
U.S Patent Protection
20 years from the day filed
Source: AbbVie, Inc. 10K 2012 page 3 and 4
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Distribution and Marketing
Distributors
• McKesson – 38%
• Cardinal Health – 27%
• AmerisourceBergen – 26%
Three largest distribute 91%
Target market
• Physicians
• Health Care Providers
• Hospitals
• Government Agencies
Source: AbbVie, Inc. 10K 2012 page 6
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Current Holdings
400 shares
• 200 shares @ $27.08
• 100 shares @ 27.53
• 100 shares @ 34.22
Total Purchase Price (adjusted for split) = $11,591
Current Market Value = $19,428
Holding period return (from Jan 02, 2013 to Nov 11, 2013) = 67.61%
Source: Yahoo Finance
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Macro-economic Overview
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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
Source: 1. IBISWorld Industry Report 33451b Medical Device Manufacturing in the US October 2013, page 4
2. US Census Bureau http://quickfacts.census.gov/qfd/states/00000.html
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Brand Name Pharma. Industry in U.S.
Source: http://clients1.ibisworld.com/reports/us/industry/ataglance.aspx?entid=487 Brand Name Pharmaceutical Manufacturing in the US industry report Page 4 14
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
Source: Mergent. North America Pharmaceuticals Sector. July 2013. Pg 9.
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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
Source: Mergent. North America Pharmaceuticals Sector. July 2013. Pg 15-16.
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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
Source: IRS website http://www.irs.gov/uac/Affordable-Care-Act-Tax-Provisions
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Risks to AbbVie
Increased
regulation
Loss of patents,
trademarks, or
intellectual
property
Delays in
regulatory
approval of
new products
Increased delay Product liability
in receipt of
claims
payments from
government
entities
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Porter's Five Forces Analysis for ABBV
Threat of New Entrant (Low)
Supplier bargaining power (Medium)
• High barriers to entry
• Challenging to find "blockbuster drugs"
• Challenging regulatory conditions
• Suppliers generally have little room for negotiation
Rivalry among existing
firms (High)
Buyer bargaining power (High)
Threat of substitute products ( Medium)
• Only have three distributors in U.S., high dependency on
distributors
• Pricing pressure from government
• Consolidation of managed care providers
• Threat from generic competition and biosimilars
• Generic companies are increasing focused on establishing
global operations
• Humira expires on Dec 2016 in U.S.
• Approval of follow–on biosimilars
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SWOT Analysis for AbbVie
Strengths
Weaknesses
• Patent protection
• Brand recognition
• International distribution channel
• Humira extremely popular
• R&D cost and lengthy investment timeframe
• Humira's patent expires in Dec 2016 in U.S.
Opportunities
Threats
• New ground breaking drug for HCV
• Rising healthcare needs in the international arena
• Collaborate with third party to develop near-term
pharmaceutical pipeline
• Barriers to entry are decreasing as the tax incentives
program targeting small pharmas
• Challenging regulatory conditions
• Increased tax burden
• Generic pharmaceutical manufacturers
• Biosimilars
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AbbVie Life Cycle
Source: http://marygardiner.wordpress.com/2013/05/28/product-cycles/
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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
Source: ABBV 8K filed on 2013-10-25, ABBV CFO presentation in JP Morgan Healthcare Conference http://phx.corporateir.net/External.File?item=UGFyZW50SUQ9MTY2OTgyfENoaWxkSUQ9LTF8VHlwZT0z&t=1
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Equity Performance
Source: Google Finance Jan 2, 2013 to Nov 11, 2013
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Technical Analysis
Source: Google Finance Feb 5, 2013 to Nov 11, 2013
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Quarterly Ratio Analysis
Profitability
Return on Assets %
Liquidity
Current Ratio
Quick Ratio
Solvency
Total Debt/Equity*
LT Debt/Equity*
Total Liabilities/Total Assets*
EBIT / Interest Exp.
Q1 FY 2013
12.1%
Q2 FY 2013
13.8%
Q3 FY 2013
13.82%#
Q1 FY 2013
2.2x
1.7x
Q2 FY 2013
2.3x
1.8x
Q3 FY 2013
NA
NA
Q2 FY 2013
425.9%
413.8%
87.3%
19.3x
Q3 FY 2013
Q1 FY 2013
512.6%
497.9%
89.1%
18.3x
Source: Capital IQ Ratios based on quarterly data; #based on end of Q2 FY 2013 Total Assets;
*Assumes book value of debt and equity
24.0x
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Valuation
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Cost of Capital
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
WACC
1,577
10.01%
Cost of equity using CAPM
Beta
Market risk premium
(Rm-Rf)
10 year treasury yeild
Cost of equity using
CAPM
1.18
6.00%
2.66%
9.74%
* Assumes market value of debt & equity
instead of book value on the balance sheet
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Free Cash Flow to Firm
EBIT
Taxes
Plus: Depreciation &
Amortization
Less: Capital
Expenditures +
Acquisitions
Less: Change in Net
Working Capital
Free Cash Flow to Firm
2013
2014
2015
2016
2017
2018
$6,217.04 $6,465.72 $6,724.35 $6,993.32 $7,273.05 $7,563.97
$1,295.99 $1,361.94 $1,422.31 $1,485.10 $1,550.33 $1,588.57
$1,190.11 $1,152.98 $1,101.13 $1,043.29 $1,043.29 $1,043.29
($1,083.27) ($1,126.60) ($1,171.67) ($1,218.53) ($1,267.27) ($1,317.97)
($7.00) $358.70 ($200.83) ($187.29) ($194.78) ($202.57)
$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
% Growth Rate
Implied Enterprise Value
Less: Debt
Value of equity
Shares Outstanding
Estimated price per share
10.0118%
4.00%
$88,933.79
$14,758.00
$74,175.79
1,577.00
$47.04
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DCF – Sensitivity to WACC and G
Growth rate
3.50% 4.00%
4.50%
5.00%
9.5118% $44.61
$47.94
$51.87
$56.58
$62.33
10.0118% $40.97
$43.77
$47.04
$50.89
$55.52
10.5118% $37.82
$40.20
$42.95
$46.15
$49.94
Discount rate
$47.04
3.00%
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Scenario Analysis (based on revenue)
Best case
Hepatitis C Virus Franchise
Daclizumab (Multiple Sclerosi)
Revenue boost from pipeline
2013
0
0
0
Base case
Hepatitis C Virus Franchise
Daclizumab (Multiple Sclerosi)
Revenue boost from pipeline
2013
0
0
0
2014
0
0
0
2015
800
0
800
2014
0
0
0
2015
0
0
0
Estimated share price (Best case)
$51.77
Estimated share price (Base case)
$51.21
Estimated share price (Worst case)
$47.04
2016
1,200
100
1,300
2016
800
0
800
2017
1,700
175
1,875
2018
2000
200
2,200
2017 2018
1,200 1700
100
175
1,300 1,875
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Comparable Companies to AbbVie
Company Name
Actavis plc (NYSE:ACT)
Amgen Inc. (NasdaqGS:AMGN)
AstraZeneca PLC (LSE:AZN)
Market
Total Revenue ($Mil)
Capitalization ($Mil)
27,278.5
7,648.5
85,374.6
18,086.0
65,698.2
26,149.0
Bristol-Myers Squibb Company (NYSE:BMY)
86,196.5
16,135.0
Eli Lilly and Company (NYSE:LLY)
Johnson & Johnson (NYSE:JNJ)
Merck & Co. Inc. (NYSE:MRK)
Mylan, Inc. (NasdaqGS:MYL)
Pfizer Inc. (NYSE:PFE)
Teva Pharmaceutical Industries Limited (NYSE:TEVA)
AbbVie Inc. (NYSE:ABBV)
55,371.1
265,356.3
136,746.3
15,471.3
207,347.8
31,493.2
76,148.1
23,261.7
70,515.0
44,450.0
6,823.5
56,246.0
20,133.0
18,885.0
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Comparable analysis
Comparable ratio
TEV/Total Revenues
TEV/EBITDA
TEV/EBIT
TEV/Forward Total Revenue (Capital IQ)
TEV/Forward EBITDA (Capital IQ)
Market Cap/Total Revenues
P/Diluted EPS Before Extra
Market Cap / Forward Total Revenues (Capital IQ)
Forward P/E (Capital IQ)
P/BV
Implied price using comparable company data
Multiple
3.6x
11.5x
16.6x
3.4x
10.1x
3.3x
22.4x
3.2x
14.6x
3.7x
Weight
5.0%
10.0%
15.0%
5.0%
10.0%
10.0%
15.0%
5.0%
25.0%
0.0%
100%
Implied price
per share
$36.71
$47.84
$59.15
$36.49
$42.72
$39.42
$65.30
$39.38
$44.77
$8.35
$48.49
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Valuation using Benjamin Graham's formula
Earnings from 2013
Expected Annual growth rate G
Value of equity (E*8.5+2*G)
Implied price per share
$4,594.87
4.00
75815.39
$48.08
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Key decision driver
Upside
• Strong presence and growth of Humira
• Potential breakthrough in hepatitis C therapy and 20 products in
pipeline
• Skilled management capable of delivering groundbreaking therapy
Downside
• 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
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Recommendation
HOLD
Current price/share: $48.57 (Nov 11, 2013)
DCF $47.04
DCF Scenario: Best case $51.77, Base case $51.21
Comparable $48.49
Ben Graham $48.08
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