Splitting AbbVie to Unlock Value

AbbVie (ABBV) is a rare stock.

AbbVie’s yields almost 4%. Its current dividend yield is 3.87%. And unlike the other 4% yielders, it is not a slow growing utility, telecom, or cyclical car manufacturing business.

High dividend yield

Chart from Goldman Sachs. Click image to enlarge.

AbbVie is a growing biotech company with a promising drug pipeline with even more potential growth.

Why is a growth company trading with the yield of a utility company?

Because of Humira.

Humira starts losing patent exclusivity in a couple years.

Biologic vs Small Molecule Losing Its Patent

We’ve argued before that the loss of the Humira and other large biologics will be different than a small molecule drug losing its patent.

With a small molecule drug, like Claritin or Viagra, a generic version only has to prove that it is the same chemical formula and structure as the name brand drug. The generic drug does not have to undergo efficacy and safety tests. The name brand drug already underwent these trials and the two drugs are exactly the same.

Biologics are different.The entire process to produce the biologic is the drug. Small changes in the process can have large effects on the outcome. It is because of this that a generic biologic, a biosimilar, has to undergo efficacy and safety tests. This drives the cost of the biosimilar up. The cost savings of switching from a name brand biologic to a biosimilar is much less.

The entire process to produce the biologic is the drug. Small changes in the process can have large effects on the outcome. It is because of this that a generic biologic, a biosimilar, has to undergo efficacy and safety tests. This drives the cost of the biosimilar up. The cost savings of switching from a name brand biologic to a biosimilar are much less.

The real issue is potential Humira users using a biosimilar to start their treatment and finding it works. The likelihood of these patients switching to the higher costing Humira when their lower cost biosimilar works are minuscule.

Growth will slow but Humira will remain a cash cow from AbbVie.

And yet AbbVie is trading as if Humira will follow the same pattern as a small molecule going off patent and very little value is being given to AbbVie’s pipeline.

Goldman Sachs has a potential solution.

Splitting AbbVie into Two

Splitting the company into two. A Humira company and a pipeline company.

While investors wait for Growth-co to mature, we believe the company could unlock trapped value by separating business segments for reporting purposes (“Humira-co” and “Growth-Co”) and returning cash to shareholders. While Humira-co is a cash cow that is funding the pipeline, we believe its value (i.e., sustainable cash flows) is underappreciated, with heightened fear of Humira’s inevitable decline, the rate and magnitude of which are unclear. ABBV could unlock value by monetizing the asset and reward shareholders for owning the shares in the face of this uncertainty. We believe ABBV could return cash to shareholders through either a perpetual Humira dividend or share buyback, although we believe the former would be more attractive. We expect ABBV to have a strong balance sheet generating ~$60bn in cumulative cash flow (64% of current market cap) over the next 5 years that can more than support an additional dividend payout. With most of its cash overseas, tax repatriation makes this scenario even more possible. We think fears around Humira have overshadowed the new product story. For this reason, we think separating Growth co. for reporting purposes would reveal the segment’s potential for biotech top-line growth and margins. Driven by oncology, immunology, women’s health and other, Growth-co should see top line growth of 16% over the next 5 years from $9.8 bn (including legacy) to $20.5 bn.

AbbVie would remain whole. The company would create two new reporting structures.

I like the idea of a special dividend.

AbbVie

Chart courtesy of Goldman Sachs. Click image to enlarge.

The goal of the split is to act as aa catalyst to unlock and/or reveal AbbVie’s true worth. I’m all for that but when I’m ready to sell. I like AbbVie’s current low prices. I get to buy more at a cheap price.