The Business Of
Healthcare | AbbVie | What Do They Do With Their Profits?
Morning All!
Yesterday we put together AbbVie’s costs with their revenues. And we’ve covered a fair amount this week. So, let’s have a quick recap…
The GOAT of Drugs - AbbVie own the highest selling drug of all time. Humira made $21bn in revenues in 2022. And has made ~$200bn over its lifetime!
Tough Odds - roughly only 1 in 10,000 drugs that are discovered end up being approved by the regulator. Making R&D incredibly tiresome and expensive!
Pricing Power = Margin Power - AbbVie’s patent protection on Humira has meant strong pricing power. Which has led to a super high EBIT margin of 31%.
And speaking of margin. It is a Thursday morning. Which means it’s time to take a look at our famous TBO EBIT Margin ranking! Below, we can see our ranking updated to include AbbVie. And we can see that the drug giant has pretty exceptional margins!
However, we did see yesterday that AbbVie’s margin hasn’t been the most stable over the years! But for now, let’s crack on. Because, with ~$58bn in revenues. And a 31% EBIT margin. It means AbbVie made a solid ~$18bn EBIT in 2022. And the question we’ll be answering today is - what does AbbVie do with all that profit/cash?!
Buy Companies, Not Buybacks!
So, let’s as always take a look at the waterfall chart below. Which shows us how AbbVie have spent their cash from operations (CFO) since 2010. And we see something quite unusual.
Because, usually we see companies spending most of their cash on capex, or dividends or share buybacks. But today’s the first time on TBO that we’ve seen a company use their cash so heavily for acquisitions. AbbVie have made $144bn in CFO since 2010. And they’ve spent a huge $64bn of that on acquisitions!
But first, before we look at what acquisitions the company’s made. Let’s quickly chat about why acquisitions are so important for drug manufacturers. And why it’s such a valuable way for AbbVie to reinvest into their business.
Why Develop When You Can Buy?
Okay, so let’s rewind a second. Why do companies reinvest into their business again? Well, it’s to increase future profits. Which can happen by (i) increasing future revenues and/or (ii) decreasing future costs. We saw Tesco use a lot of their cash to build huge, automated warehouses. So they can employ less people in the future, reducing costs.
We saw Man United use the majority of their cash to purchase expensive players. So they can finish higher in the Premier League and generate more broadcasting revenue…
But back to AbbVie. We know they make revenue by selling drugs. And how can they generate more revenue in future? Well, by selling even more drugs! And yesterday, we saw the main way AbbVie does this is by investing in R&D. To discover new molecules and develop new drugs.
But there is another way! And that way avoids spending loads of money on R&D. What if AbbVie could just buy drugs from other drug manufacturers? That have ALREADY been approved. And just sell them! Well, as we’ll see now, that’s exactly what they do!
Wrinkle-Free, Risk-Free?
In 2015, AbbVie purchased the US biotech company, Pharmacyclics, for $21 billion. Pharmacyclics was focused on creating drugs to treat cancer. And one particular drug the company had developed was Imbruvica. Obviously, when AbbVie acquired Pharmacyclics, they bought Imbruvica too. Now, that $21bn might sound like a lot of money. And it is! But the deal starts to make sense when you realise that Imbruvica is now AbbVie’s 3rd biggest drug in terms of revenues. And since 2015, Imbruvica has made AbbVie nearly $30bn in revenue! So it seems like that was $21bn well spent!
And then in 2019, AbbVie went even bigger. And spent a whopping $63bn on acquiring Allergan - the company behind Botox! It’s early days for this acquisition but AbbVie had already recovered 25-30% of that initial $63bn cost through their acquired drugs’ revenues!
So, hopefully we can now see the value of acquisitions. AbbVie didn’t have to do any R&D for Imbruvica or Botox. They were buying drugs that were already approved by regulators and making revenue. And AbbVie simply added them to their own portfolio of drugs! The risk is a lot less than having to start developing drugs from scratch!
However, companies don’t always buy drugs that are making revenue. And this is a lot riskier! In 2016, AbbVie bought Stemcentrx - a company looking to treat tumours. But unlike Imbruvica/Botox - Stemcentrx’s main drug wasn’t yet approved by regulators! It was a much riskier deal for AbbVie. And the risk didn’t pay off - the drug failed to pass clinical testing in 2019! And as we saw yesterday, AbbVie had to take a $5bn loss due to the acquisition. I guess you can’t win them all!
29th Jun 2023
And that’s a wrap! Tomorrow, we have our very special newsletter on patent protections. On Tuesday, I kind of left everyone hanging about the importance of patents in this industry. But all will be revealed tomorrow!
Have a fabulous day!
The Business Of Team