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Nathan Parsh
Nathan Parsh
Articles (144) 

The Market Continues to Undervalue AbbVie

The stock trades with a single-digit multiple despite strong growth rates from products outside of Humira

The last time I looked at AbbVie Inc. (NYSE:ABBV) was following my early February purchase of the stock. At that time, I felt that shares had at least 30% upside. AbbVie recently reported earnings results, and nothing in the report has changed my thesis on the stock. I still believe that shares can offer at least a 30% increase in share price.

Quarterly highlights

AbbVie reported second-quarter earnings results on July 31. The company’s revenue increased 26.3% to $10.4 billion, beating Wall Street analysts’ estimates by almost $290 million. Adjusted earnings per share improved 8 cents, or 3.5%, to $2.34. This was 14 cents ahead of what the market had expected and 21 cents ahead of the company’s own guidance.

Results included a partial quarter of contributions from Allergan as the acquisition closed on May 8. The legacy AbbVie business had sales growth of approximately 8.5% for the quarter. Allergan also added 11 cents to earnings per share results.

The Covid-19 pandemic did weigh on results as key brands experienced lower demand due to fewer visits to health care providers. AbbVie estimates that the virus negatively impacted revenue results by more than $900 million. The company stated on the conference call that total business had achieved more than 90% of pre-Covid levels by the end of June.

Humira sales of $4.7 billion were flat for the quarter. While flat sales for what is currently AbbVie’s most important product may not be impressive, this is still better than the 6% decline Humira had in the second quarter of 2019. International sales were down 20%, but this wasn’t unexpected given the loss of patent exclusivity that Humira has in most regions outside of the U.S. AbbVie did say that biosimilar competition wasn’t as fierce as expected.

Humira did perform well in the U.S., as sales improved 4.8% to nearly $4 billion for the region. The pandemic did reduce demand slightly, but a large installed patient base more than offset this weakness. AbbVie losses patent protection in the U.S through 2023, but should continue to provide sizeable contributions until this time.

Imbruvica sales grew more than 17% to $1.3 billion due to the products market leadership in the area of chronic lymphocytic leukemia.

Allergan also contributed to sales once the acquisition was completed.

Neuroscience, which includes Allergan’s Botox Therapeutic and Vraylar, added $735 million to results. Despite the pandemic, demand for Vraylar, which is used to treat schizophrenia and bipolar disorder, remains strong and the product should achieve peak sales of more than $1 billion by the early part of this decade.

Botox Therapeutic sales were down 20% as a result fewer office visits, but sales are almost back to pre-pandemic figures.

Aesthetics, which consist of Allergan’s Botox Cosmetic and Juvederm Collection, contributed $481 million of sales. Aesthetics as a group is the best-selling franchise as a group, but did see some weakness due to the closure of health care providers due to the coronavirus. U.S. revenues have nearly returned to pre-Covid-19 levels.

In total, the Allergan businesses are expected to add 70 cents to earnings per share during 2020.

While Humira remains the most important product for AbbVie, there are other smaller but promising drugs that also had solid growth rates during the quarter. While none of these products on their own will likely make up for the loss of Humira, as a group they have the potential to produce billions in peak sales

There are four in particular that I mentioned in my last article on the company that continue to look like long-term winners for AbbVie.

Net sales for Skyrizi, used to treat psoriasis, totaled $330 million. This product did see some new patient delays due to the virus, but 30% of new and switching patients were prescribed Skyrizi during the quarter. Peak sales are expected to reach $5 billion.

Venclexta, which treats patients with relapsed leukemia, had revenue of $303 million for the quarter. This was nearly 80% higher than the prior year. International sales more than doubled. This product could earn as much as $3 billion in annual sales.

Rinvoq, which treats moderate and severe rheumatoid arthritis in adult patients, added $149 million to sales, the vast majority of which came from the U.S. Sales were up 70% sequentially. This product has only been on the market since September 2019, but already treats 15% of patients with rheumatoid arthritis. Rinvoq could contribute more than $6.5 billion in peak sales.

Orilssa, which is used by women to treat pain related to endometriosis, added $31 million to second-quarter sales, a 58% improvement year over year. Peak sales for Orilssa is seen at $2 billion.

These products generated nearly $1.6 billion in sales for the first half of 2020 compared to $1.3 billion for all of 2019. They are on pace to generate $3.2 billion for the full year.

Humira sales are flat for the time being, but will eventually fall off as patent protection is removed at the end of 2023. These four products cannot replace Humira’s annual sales on their own, but together they have the potential for peak sales of $16.5 billion.

The decline in Humira’s sales have weighed on the stock, but I believe the market is undervaluing AbbVie. These products, and others, look to solid bets for the company, which should mean a higher valuation.

Valuation analysis

As announced on the conference call, AbbVie expects adjusted earnings per share in a range of $10.35 to $10.45, up from $9.61 to $9.71 previously.

Using Friday’s closing price of $94.91 and the midpoint for updated guidance, AbbVie has a forward price-earnings ratio of 9.1. Using data from Value Line, the stock has an average price-earnings ratio of 13.2 since 2013.

While shares are cheap compared to the historical average, AbbVie trades with a valuation below many of its peers as well. Listed below are the peers I compared AbbVie to in a prior article as well as each stock’s forward price-earnings ratio.

Of these names in the health care space, AbbVie has the lowest forward valuation.

As I stated previously, I have a targeted price-earnings ratio range of 12 to 14 for AbbVie due to the company’s prospects beyond just Humira. Using earnings estimates for 2020, this would give a price range of $125 to $146, which would be a 32% to 54% return from the most recent price. Not included in this is AbbVie’s 4.9% dividend yield, which is more than 2.5 times that of the average yield of the S&P 500.

Final thoughts

AbbVie had a very strong quarter even without the addition of Allergan. Humira sales were flat, but had solid growth rates in the U.S. The Allergan businesses were immediately accretive to results. AbbVie also has several products with very high rates of growth that are expected to produce more than $16 billion in combined peak sales.

Even with all of these positives, AbbVie still trades with a single-digit multiple. This is likely due to the expected decline in sales for Humira once U.S. patent protection expires. This seems like a market overreaction given the expected sales for just a sample of the remainder of AbbVie’s portfolio.

Investors who see that AbbVie is much more than Humira could be rewarded with excellent returns simply by the stock expanding to low double-digit figure. This makes AbbVie a highly compelling buy.

Disclosure: The author is long AbbVie, Amgen, Johnson & Johnson and Pfizer.

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About the author:

Nathan Parsh
I am originally from Detroit, Michigan, before moving to Maryland to begin a career as an educator. This is my 14th year teaching. My wife and I have two young children who keep us on our toes.

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