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Malcolm Berko: Is a takeover in AbbVie’s future?

Updated: March 27, 2013 6:17AM



Dear Mr. Berko: Shortly after my divorce my lawyer told me to use some of my settlement to buy 200 shares of Campbell Soup Co. at $54, which I did in 1998. It hasn’t gone back to my buying price since. I have a $3,500 loss, even though the company’s sales, profits and dividend have pretty good growth. I don’t understand. So I’m finally considering the sale of Campbell and using the money to buy 200 shares of AbbVie Inc. because over the past 10 years, I’ve spent more money on its Humira medication than I have making my mortgage payments. Is this a good exchange?

— J.S., Cleveland

Dear JS: Campbell Soup Co. (CPB-$40) has performed badly because its sales, profits and dividend growth haven’t been “good”; they’ve been stinky, really stinky. Campbell is also Prego, V8, Pepperidge Farm, Erasco and Pace, though these products are not sufficient enough to provide CPB with the get-up-and-grow it needs to improve its stock price.

CPB has a bottom-heavy management team, with light heads on top. They are good guys, but they can’t handle the continuing pricing pressures from private label offerings, are stymied by the constantly growing distribution and packaging costs, lack the necessary marketing moxie and promotional smarts, can’t capitalize on their foreign operations, which are 31 percent of revenues, and can’t figure out how to mend the continuing weakness in their company’s soup sales. And what a shame, because CPB has such an expealidocious product. I doubt CPB will be north of $54 in your lifetime, unless Warren Buffett and his friends decide to merge it with Heinz.

North Chicago-based AbbVie Inc. (ABBV-$37) sells high-margin pharmaceuticals and biologics, including primary and specialty care drugs that treat autoimmune, kidney and thyroid diseases. But its monster moneymaker is Humira, which treats rheumatoid arthritis and generates 50 percent of ABBV’s $18 billion in revenues and 70 percent of its profits. And that’s worrisome because Humira loses its patent protection by June 2017, and those revenues will crash.

ABBV markets several other drugs that are losing patent protection soon and will lose more than $1 billion of revenues this year from expiring cholesterol patents. ABBV depends on its pipeline, which is much smaller than its rivals’ pipelines, so any late-stage candidate failures can be extremely costly.

Meanwhile, Pfizer’s JAK inhibitor for RA shows impressive efficacy in stage 3 trials, and its oral dosing (Humira is injectable) also will take market share from ABBV. And Roche’s RA drug, Actemra, is gaining momentum and may also put a crimp in Humira’s $9 billion revenues.

This is an industry that thrives on blockbuster drugs, so ABBV has to climb out of Humira’s shadow. ABBV must convince investors that its research and development department has the ability to produce blockbuster drugs, and then it must convince investors it has the skills to market its new product.

Revenues this year are expected to come in at $18.3 billion, up less than 1 percent from 2012. Earnings are expected at $3, or 12 times earnings, and the expected $1.60 dividend yields 4.25 percent. ABBV’s $16 billion of debt and stand-alone R & D may limit the board’s ability to generate revenue and earnings growth.

So with the debt hanging like a boulder on ABBV’s balance sheet, some believe that a larger competitor will attempt a takeover. ABBV’s revenues, earnings and dividend look good today, but they’ll not improve much in 2014 or 2015. The $1.60 dividend appears safe, but I doubt ABBV shares will appreciate much. It may be a good short-term investment, but only if an acquirer emerges.

Address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or e-mail him at mjberko@yahoo.com.



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