AbbVie Buys a New Basket

AbbVie (ABBV), maker of Humira, a rheumatoid-arthritis drug, announced it is buying Allergan (AGN), maker of Botox. For AbbVie, the reason is to diversify its product portfolio and thereby its cash flow. Humira accounted for over 50% of AbbVie’s 2018 sales, and Humira is coming off patent in the US in 2023, which could severely cut its AbbVie’s sales of that product. With its acquisition of Allergan, AbbVie is attempting to position itself for future revenue diversity, as well as potential growth. With Humira coming off patent, AbbVie had to do something like this.

Mature Product

AbbVie is an example that a company needs to continue to grow in order to survive. Just like oil and gas wells get depleted and less productive over time, so to do drugs like Humira, in large part because the exclusivity goes away when the patent expires. With little in its drug development pipeline relative to the huge size of Humira, AbbVie has continued to hike its dividend. At ABBV’s current price of about $69/share, its dividend yield is about 6.3%. Compare this with 10-Year US Treasuries, which currently yield 2.0%. Companies can either invest their cash flow back into their business in the form of R&D or other internal expenses, or they can pay their cash flow out to their investors in the form of dividends. Companies such as ABBV that pay high dividends typically have not been able to find new products or new businesses in which to invest in an accretive way, and so they have instead paid out more of their cash flow to their investors.

IMO

AbbVie no longer wants to have all its eggs in the Humira basket, and so it is buying a new basket of products in the form of Allergan. Time will tell if the management team will be successful in integrating the new products and people that produce and market those products into a conglomeration that is not as dependent on a major cash cow product that is about to go off patent. As an investor, if you are looking at stock opportunities and see a company that pays a 6.3% dividend, make sure you dig into its story to determine why that company’s dividend is as high as it is. Perhaps you have a situation like AbbVie, where the dividend is high now but where there is a significant risk that the dividend might be much smaller in the not to distant future. Dividends are nice, but just know what you are getting yourself into.

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