If AbbVie Buys Shire, Dividend Investors Will Cheer


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AbbVie (ABBV) has made another offer to acquire Shire (SHPG) in a bid to offset looming patent risk and lower its tax rate. Since Shire is generating a significant amount of free cash and currently doesn't pay much in the way of a dividend, acquiring the company should give AbbVie financial flexibility that will allow it to reward shareholders.

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If AbbVie Buys Shire, Dividend Investors Will Cheer

  1. 1. If AbbVie Buys Shire, Dividend Investors Will Cheer
  2. 2. AbbVie faces challenges 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. AbbVie is one of the largest global drug manufacturers, but dividend investors are right to be nervous.
  3. 3. Shire is growing and cash rich • ~$5 billion in annual sales. – Up 9% year-over-year in 2013. – Products sold in 50 countries. – Market leadership in ADHD. • Adderal XR. • Intuniv. • Vyvanse. – Growing rare disease product line. • Acquiring Shire would improve AbbVie’s ability to increase its dividend. – Significant free cash flow. – Lower tax rate. – Significantly lower cash dividend payout ratio. Shire is a growing, global drug manufacturer.
  4. 4. Shire is growing and cash rich Shire won’t escape the patent cliff, but it’s in better shape than AbbVie. Shire’s ADHD products generated $1.9 billion in sales last year, including $375 million from Adderall XR , which currently faces generic competition, and $335 million for Intuniv, which goes off-patent in December. •Aggressive pricing is helping stabilize the rate of decline for Adderall XR sales. •Sales of Vyvanse are offsetting risk to Adderall. While Adderal and Intuniv sales are at risk, Vyvanse is more important to Shire (and AbbVie) given that its market share totaled 17% exiting 2013. Shire’s revenue has climbed despite patent expiration.
  5. 5. Shire is growing and cash rich Shires’ fast growing therapies : – Vyvanse (ADHD): Sales grew 18% YoY to $351 million in Q1. – Firazyr (hereditary angioedema): Sales up 80% to $75 million in Q1. – Lialda (ulcerative colitis): Sales up 28% to $129 million. – Elaprase (Hunter syndrome): Sales up 13% to $129 million in Q1. – Cinryze (Hereditary Angioedema): Generated $86 million from Jan. 24th to Mar. 31st. • Acquired in buyout of ViroPharma. A strong platform of products and a solid pipeline of potential new therapies. Shire’s pipeline opportunity: Goal to double neuroscience sales by 2010. •Opportunity to grow market share in adult market. •Adderall IR and XR account for 58% market share of adults. •Vyvanse market share is 15%. •SHP465: long-lasting adult ADHD drug. •Potential launch in early 2015. •Vyvanse label expansion to include binge-eating. •Filing pending.
  6. 6. Shire is growing and cash rich Sales and earnings growth opportunity: •Shire expects its product sales will grow mid to high teens percentages this year. •EPS is forecast growing in the mid to high twenty percent range. •Revenue and EPS analyst estimates reflect future growth opportunity. •Shire projects sales could double to $10 billion by 2020.
  7. 7. Shire is growing and cash rich Sales and earnings are fueling dividend friendly cash generation •Free cash flow over the trailing 12 month period has been steadily climbing since 2010. •Future cash flow should remain strong given that operating margin is the highest in five years.
  8. 8. Cash dividend payout ratio AbbVie’s paying a much larger percentage of its free cash on its dividends than Shire. AbbVie’s cash dividend payout ratio, which measures the amount of free cash after capital expenses and preferred dividends used to pay common dividends, is nearly 50%. That high ratio and future patent risk poses risk to AbbVie’s future dividend increases. However, given that Shire’s payout ratio is just 6%, acquiring Shire should significantly improve AbbVie’s financial flexibility; making it far more dividend friendly.
  9. 9. Effective tax rates In addition to getting a solid stable of approved drugs and significant cash flow, the ability to invert should provide a significant bump up to net income. • AbbVie’s net income over the past 12 months was more than $4 billion. •Shire’s net income over the same period was more than $800 million. •AbbVie’s effective tax rate is over 23%. •Shire’s effective tax rate is roughly 15%.
  10. 10. Current yield Shire’s dividend yield is anemic at just 0.26%, but its free cash flow grew from $113 million last year to $231 million this year, suggesting that if AbbVie were to acquire the company there would be plenty of dividend flexibility for increases, especially when AbbVie lowers its tax rate on its own sales. Given that backdrop, if AbbVie succeeds in acquiring Shire, dividend investors may find AbbVie increasingly attractive.
  11. 11. . The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.