Abbott was one of the largest pharmaceutical companies in the world prior to its split in December 2012. The company spun off its proprietary pharmaceutical business (classic business of developing drugs for FDA approval and then sale on patent) from the rest of the company, creating Abbvie.
What was left in Abbott was everything else, namely the following divisions:
- Established Pharmaceutical Products (Generics) – $3.7 bln in sales in first 9 months of 2013 ($3.8 in 2012)
- Nutritional Products – $5.0 bln in sales in first 9 months of 2013 ($4.7 in 2012)
- Diagnostic Products – $3.3 bln in sales in first 9 months of 2013 ($3.2 in 2012)
- Vascular Products – $2.2 bln in sales in first 9 months of 2013 ($2.3 in 2012)
Net sales at the new Abbott have been relatively stagnant in 2013, up only 2% so far in 2013 (-1% in the U.S., +3% in International). Management has been pulling on the cost lever to increase earnings as a result. Its restructuring plan initiated in 2012 has borne fruit, with gross margins going from around 49% to 51% in the past year as SG&A expenses have been reduced.
At the end of the day, Abbott is a more stable business without the ups and downs of developing proprietary drugs. The stock is allocated a higher multiple that ABBV as a result. However, ABT’s earnings growth is only expected to be 5% over the next couple years, so the stock’s 21x P/E multiple is not exactly a bargain.
On the other hand, the new company, ABBV, looks quite intriguing. First off, ABBV is actually the bigger company, at a $77 billion market cap vs. a $58 billion market cap for ABT. Yet, it’s the lesser-followed company, likely due to its more limited history, with only 16 analysts covering the stock vs. 27 analysts for ABT. In short, ABBV, for such a large company, has flown under the radar.
ABBV’s portfolio of drugs is as follows (from its 10-Q):
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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| (in millions) |
2013 |
2012 |
2013 |
2012 |
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| HUMIRA |
$2,606 |
$2,325 |
$4,850 |
$4,259 |
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| Kaletra |
278 |
275 |
497 |
496 |
||||
| AndroGel |
258 |
276 |
498 |
508 |
||||
| Niaspan |
232 |
211 |
418 |
402 |
||||
| Lupron |
199 |
201 |
380 |
400 |
||||
| Synthroid |
153 |
123 |
272 |
252 |
||||
| Sevoflurane |
137 |
153 |
274 |
309 |
||||
| TriCor/TRILIPIX |
107 |
311 |
235 |
565 |
||||
| Zemplar |
107 |
95 |
188 |
185 |
||||
| Creon |
106 |
88 |
196 |
156 |
||||
| Synagis |
70 |
64 |
415 |
410 |
||||
| Duodopa |
44 |
35 |
83 |
71 |
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| All other |
395 |
336 |
715 |
653 |
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| Net sales |
$4,692 |
$4,493 |
$9,021 |
$8,666 |
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HUMIRA is the more than half of sales, with the rest of the portfolio quite evenly distributed. HUMIRA is primarily used for ulcerative colitis and Crohn’s disease, but has other uses as well. As the company states:
AbbVie continues to dedicate R&D efforts to expanding indications for HUMIRA, including in the fields of rheumatology, ophthalmology and dermatology. Additionally, the company recently secured approval for two new gastroenterology indications in Japan – intestinal Bechet’s and ulcerative colitis. HUMIRA’s list of uses includes nine approved indications in Europe and seven in the United States.
In addition to the existing stable of drugs, the company has more than 20 compounds in Phase II or Phase III development. This is a well diversified pharmaceutical company at an interesting valuation.
The stock is actually up 42% in 2013, a stellar performance for a large cap pharma name (only BMY has done better). Interestingly, even after such a strong run, the stock looks relatively cheap compared to both its sector peers and the overall market.
- ABBV – 16x trailing P/E, 8% expected earnings growth over next 2 years
- PFE – 14.5x trailing P/E, 5% expected earnings growth
- MRK – 13.5x trailing P/E, 4% expected earnings growth
- GSK LN – 14x trailing P/E, 8.5% expected earnings growth
ABBV is better than almost all its U.S. peers on simple valuation vs. growth comparisons, and slightly expensive to its European peers (as are most U.S. stocks).
Finally, the technical history for ABBV is limited to the past year, but the stock has made consistently higher highs and higher lows:
[caption id="attachment_32639" align="alignnone" width="600"]
ABBV daily, Courtesy of Bloomberg[/caption]
The ideal entry would be on a move back to near $45. We might not get it, though. Here is a structure that we are putting on for a bullish bet over the next 6 months:
Note: Since this is a longer-term trade, I might actually add more to the trade on a move down to the $45 area, in contrast to most shorter-term positions.
TRADE: ABBV ($48.25) Buy the May14 50/55 Call Spread for 1.35
-Buy 1 May14 50 Call for 2.16
-Sell 1 May14 55 Call at 0.81
Break-Even:
Profits: Up to 3.65 between 51.35 and 55, with max profit of 3.65 at 55 or above
Losses: Up to 1.35 between 50 and 51.35, with max loss of 1.35 at 50 or below
Trade Rationale: This structure targets a breakout to a new all-time high above $50, but goes all the way out to May expiry, which is plenty of time for the stock to move without the structure decaying much over the next several months.