by 
Pill sorting machines at an AbbVie manufacturing facility.
Courtesy of AbbVie
Text size
Sometimes, a single worry becomes so big that it overshadows all the good things happening at once. This is the case with the shares of the pharmaceutical giant
AbbVie
,
whose blockbuster drug Humira faces patent expiration.
Humira is an immunosuppressant that has amassed nearly $200 billion in sales since its approval in 2002. AbbVie (ticker: ABBV) has fought fiercely to extend its exclusivity of Humira, which treats conditions from rheumatoid arthritis to Crohn’s disease, but it has already lost patent protection in Europe and faces increasing competition from biosimilars in the US, starting next year.
But there is much more to AbbVie than Humira. The company has profitable products that have begun to fill the void left by Humira’s decline. Investors who preferred to wait for the transition from Humira may have made a mistake: AbbVie shares are up more than 19%, to a recent $162, so far in 2022. Also, the shares look cheap and have a good yield from dividends. It’s worth owning now.
“There are a lot of market participants who are myopically focused” on Humira’s selling slump and don’t want to own it before then, says Marshall Gordon, senior research analyst for health care at ClearBridge Investments. “It really doesn’t matter.”
That might sound like a bold statement. Humira is expected to account for $21.2 billion, or 36% of AbbVie’s sales in 2022, and is one of the company’s most profitable drugs. But AbbVie is developing its hematological oncology, or blood cancer, franchise, which is expected to reach $7.6 billion in sales by 2025, up from $6.8 billion expected this year. The company is also seeing increased sales of two new drugs, Skyrizi and Rinvoq, which treat psoriasis and arthritis, respectively, and are expected to account for $7.7 billion in revenue in 2022, 13% of the total. of the drug manufacturer.
These products should be around for a while: AbbVie won’t face another loss of exclusivity on a key pharmaceutical product until 2029. Management believes its two new big stars combined can make up for Humira’s lost sales, particularly if they get approval against other conditions. On Nov. 23, the European Union gave Skyrizi the green light to treat Crohn’s disease.
“You don’t need to believe in the pipeline, even though AbbVie appears to have a good one, because Skyrizi and Rinvoq are already out there delivering,” says Richard Sherry, portfolio manager at Kayne Anderson Rudnick, which owns shares in two income-focused funds.
That means AbbVie’s earnings should hold up better than expected. Wall Street estimates expect 2023 sales of $54.32 billion, down 7%, year over year, as Humira’s revenue shrinks from a forecasted $21.2 billion in 2022 to less than $13 billion l ‘next year. This should be the minimum for overall sales, even if Humira’s contribution continues to erode. At that point, Skyrizi and Rinvoq will ramp up, driving higher year-over-year growth of about 4.7% in 2025. And the revenue trough could even be pushed to 2024 if AbbVie manages to get more profit than expected from Humira. US sales next year, through factors such as favorable contracts or biosimilars supply issues.
Investors on the sidelines would then miss out on a period of stronger-than-expected results, which could boost the stock further. “If, for some reason, AbbVie ends up with a higher cash flow in 2023 and 2024 is the lowest…that makes the company more valuable, not less,” ClearBridge’s Gordon says.
Kayne Anderson’s Sherry Rudnick also notes that with free cash flow of $22 billion over the past year, Abbvie’s dividend – it currently yields 3.7% – is unassailable and the company still has the wherewithal to make acquisitions like the 2020 purchase of Allergan, which helped reduce AbbVie’s reliance on Humira and exceeded expectations. The beauty business, which includes Botox, Juvederm and fantasy sculptures, now accounts for nearly 10% of AbbVie’s sales.
Despite the big run in 2022, AbbVie has what appears to be an undemanding multiple. The stock is trading for 13.8 times 2023 earnings estimates of $11.70 a share, which looks cheap even when you consider that pharmaceutical stocks typically don’t require premium valuations. AbbVie is much cheaper than
S&P 500,
who fetches 17 times earnings and colleagues like
Merk
(MRC) and
Johnson & Johnson
(JNJ), at 15 and 17, respectively. And the pharmaceutical industry as a whole averages about 15 times. AbbVie also has the highest dividend yield among its peers.
AbbVie looks even more attractive in light of the Federal Reserve’s continued interest rate hikes and a potentially slowing economy, which should keep defensive stocks, especially those without major debt maturities ahead, in favor of investors. It’s also one of the cheapest ways to play defense in a market that has rewarded stocks like
PepsiCo
(Pepper
Coke
(KO) with multiples of about 25 times.
“The stock has been held hostage as investors wait for drugs [other than Humira] mature, but this is a great company that will have a strong performance,” says Max Wasserman, founder and senior portfolio manager of Miramar Capital, which counts AbbVie among its top five holdings,
But the appeal of the title is much wider. John Augustine, chief investment officer at Huntington National Bank, says his firm holds AbbVie across three stock strategies, given its many attractive qualities. “The income team talks about yield, the growth team talks about its new products, and the core team talks about its reasonable valuation. They come at it from different angles, but all three have it.
In such a volatile market, that’s just what the doctor ordered.
Write to Teresa Rivas at teresa.rivas@barrons.com
