Is AbbVie’s Dividend Safe?

Is AbbVie’s dividend safe?

1. Patent expiration– Humira, a treatment for autoimmune disease like rheumatoid arthritis, is AbbVie’s best

selling drug.• Humira accounts for 57% of AbbVie’s annual revenue.• Humira sales totaled $10.6 billion in 2013.• Humira’s U.S. patent expires in December 2016 and its European patent expires in

2018.

2. Shrinking margin– Operating margin has fallen from 33% to 30% in the past year.

2 big and important question marks hang over AbbVie’s dividend.

Patent expirationFirst, let’s consider AbbVie’s patent calendar. Expiring patents on TriCor, Trilipix, and Niaspan shaved $1.1 billion in sales off AbbVie’s top-line in 2013, but Humira’s 2016 patent risk is most significant given that Humira’s U.S. sales totaled $5.2 billion last year. To offset that risk, AbbVie will need wins from its R&D program, but it may also benefit from the fact that Humira is a biologic and the pathway to approval for biosimilars remains unclear. Biosimilars also tend to carry higher prices than traditional generics and so far biosimilars that have won approval have captured less market share than small molecule counterparts. That suggests AbbVie’s sales risk may not be as big as some fear.

Shrinking marginThe race to replace potential lost sales when Humira loses patent protection is increasing AbbVie’s spending on R&D and weighing on its operating margin, which peaked north of 33% last year. R&D spending is likely to remain a headwind as AbbVie advances pipeline candidates through pricey late stage trials, so investors will need to keep a close eye on margin to see if net income drops.

Reasons for dividend optimism

1. A maturing pipeline of new products– 20 compounds or indications in phase 2 or phase 3 trials.

• A doubling of compounds in its pipeline over the past 5 years.– Humira successors.

• Tregalizumab in phase 2b for rheumatoid arthritis & psoriasis.• GLPG0634 in phase 2b for rheumatoid arthritis.• ALX-0061 in phase 2 for rheumatoid arthritis.

– Hepatitis C potential.• FDA & EU decisions pending on 3 drug hepatitis C cocktail.

– Oncology potential.• Elotuzumab is in phase 3 for multiple myeloma.• Veliparib is in phase 2b for BRCA mutated breast cancer.• ABT-199 is in phase 3 for chronic lymphocytic leukemia.

AbbVie is developing new products that could offset Humira’s patent risk.

Cash dividend payoutAbbVie’s cash dividend payout ratio, which measures how much of a company’s operating cash minus capital expenses and preferred dividends is being spent to pay common dividends, is nearly 50%. That’s significantly higher than Amgen and roughly in line with Johnson & Johnson. Given AbbVie’s R&D expenses and its future risk to Humira revenue, the company has less room to boost its current dividend. That said, AbbVie had $9.5 billion in cash exiting 2013, up from $5.9 billion exiting 2012, suggesting it has room to maintain its dividend.

Current yieldAbbVie’s current dividend yield is 3.18%, higher than both Johnson & Johnson and Amgen. However, question marks remain suggesting investors may want to wait for the company’s pipeline to mature and for more insight into the biosimilars threat to become available before buying.

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