Sometimes, a single worry grows so large that it obscures all the good things happening at the same time. That’s the case with the stock of pharma giant
whose blockbuster drug Humira faces patent expirations.
Humira is an immunosuppressive that’s racked up nearly $200 billion in sales since its 2002 approval. 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 increased competition from biosimilars in the U.S., beginning next year.
But there’s a lot more to AbbVie than Humira. The company has profitable products that have begun to fill the gap left by Humira’s decline. Investors who preferred to wait out the transition from Humira may have erred—AbbVie stock is up by more than 19%, to a recent $162, so far in 2022. Moreover, the stock looks cheap and has a handsome dividend yield. It’s worth owning—now.
“There are a lot of market participants who are myopically focused” on the Humira sales trough, and they don’t want to own it before then, says Marshall Gordon, a senior research analyst for health care at ClearBridge Investments. “It actually doesn’t matter.”
That might seem 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 to boot. But AbbVie is developing its hematologic oncology, or blood cancer franchise, which is projected to notch $7.6 billion in sales by 2025, up from an expected $6.8 billion this year. The company is also seeing rising sales from two newer drugs, Skyrizi and Rinvoq, which treat psoriasis and arthritis, respectively, and are expected to account for $7.7 billion in 2022 revenue—13% of the drug maker’s total.
These products should be around for a while: AbbVie doesn’t face another loss of exclusivity on a key pharmaceutical until 2029. Management thinks that its two new big stars combined can offset 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.
“You don’t need to believe in the pipeline, though AbbVie does look like it has a good one, because Skyrizi and Rinvoq are already out there delivering,” says Richard Sherry, portfolio manager at Kayne Anderson Rudnick, who owns the stock in two income-focused funds.
That means AbbVie’s earnings should hold up better than expected. Wall Street estimates call for 2023 sales of $54.32 billion, down 7%, year over year, as Humira revenue shrinks from an expected $21.2 billion in 2022 to less than $13 billion next year. That should be the trough for overall sales, even if Humira’s contribution continue to erode. By then, Skyrizi and Rinvoq will be ramping up, driving year-over-year top-line growth of around 4.7% in 2025. And the revenue low point could even get pushed out to 2024 if AbbVie can squeeze more profit than expected from Humira’s U.S. sales next year, through factors like favorable contracts or biosimilar supply problems.
Investors on the sidelines would therefore miss a period of stronger-than-expected results, which could boost the stock even more. “If, for some reason in 2023, AbbVie ends up with more cash flow and 2024 is the bottom…that makes the company more valuable, not less,” says ClearBridge’s Gordon.
Kayne Anderson Rudnick’s Sherry also notes that with $22 billion in free- cash flow in the past year, Abbvie’s dividend—it currently yields 3.7%—is ironclad, and ithe company still has the wherewithal to make acquisitions like its 2020 purchase of Allergan, which helped reduce AbbVie’s dependence on Humira and has outperformed expectations. The aesthetics business, which includes Botox, Juvederm, and cool sculpting, now accounts for nearly 10% of AbbVie sales.
Despite 2022’s big run, AbbVie has what seems to be an undemanding multiple. The stock trades for 13.8 times 2023 earnings estimates of $11.70 a share, which looks cheap even when considering that pharma stocks don’t typically command premium valuations. AbbVie is much cheaper than the
which fetches 17 times earnings, and peers such as
Johnson & Johnson
(JNJ), at 15 and 17, respectively. And the pharma industry as a whole averages around 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, particularly those without big debt maturities on the horizon, in favor with investors. It’s also one of the cheapest ways to play defense in a market that has rewarded stocks like
(KO) with multiples around 25 times.
“The stock has been held hostage as investors wait for drugs [other than Humira] to mature, but this is a great company that’s going to be a solid performer,” says Miramar Capital founder and senior portfolio manager Max Wasserman, who counts AbbVie among his top five holdings,
But the stock’s appeal is much broader. John Augustine, chief investment officer at
Huntington National Bank,
says his firm holds AbbVie in three equity strategies, given its many appealing qualities. “The income team talks about the 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 own it.”
In such a volatile market, that’s just what the doctor ordered.
Write to Teresa Rivas at email@example.com