AbbVie Inc (ABBV, Financial) has generally been associated with Humira since the company was spun off from Abbott Laboratories (ABT, Financial) in early 2013. Humira has been one of the world's best-selling drugs over the past few years, but it is experiencing patent expirations in certain markets and will also see its U.S. patent expire very soon.
Biosimilar competition to Humira is the primary reason that shares have been trading with a low valuation recently. While I understand investors' trepidation to pay up for a company whose top grossing product is set to lose patent exclusivity in all markets, I continue to focus on AbbVie's pipeline, which has a number of promising products that should more than replace Humira's revenues over the next few years.
Recent earnings results
AbbVie reported first-quarter earnings results on April 30. The company cleared Wall Street analysts' estimate on both the top and bottom lines and, more importantly, represented strong gains from the prior year. Revenue grew 51% to $13 billion, $230 million above estimates. Adjusted earnings per share of $2.95 was a 53 cents, or 22%, improvement year-over-year.
As with the prior quarter, much of the growth was due to the acquisition of Allergan, though comparable sales did rise more than 5%.
Immunology grew nearly 13% to $5.74 billion. Humira grew 3.5% to $4.9 billion as a 6.9% gain in the U.S. was only partially offset by an 8.3% decrease in international markets. International revenues are expected to continue to decline due to the presence of biosimilars in the market.
Skyrizi, which is second only to Humira in terms of psoriasis treatment market share, reported revenues of $574 million while Rinvoq generated $303 million. Rinvoq has achieved 15% of the rheumatoid arthritis market share. Combined results were more than twice that of last year's result.
Hematologic oncology was higher by 8% to $1.67 billion. Sales for Imbruvica advanced 3% to $1.27 billion, with U.S. sales coming in just under $1 billion. Venclexta improved 28% to $405 million.
Aesthetics grew almost 35% to $1.14 billion. Botox Cosmetic sales were up 45% to $477 million. Neuroscience more than doubled to $1.25 billion, with comparable sales rising 10.9%. Botox Therapeutic improved 7% with Vraylar growing 21.2% to $346 million.
AbbVie ended the quarter with $150.5 billion in total assets, including $26.6 billion of current assets and cash and equivalents of $9.8 billion. Total liabilities came to $136.8 billion, with current liabilities of just under $32 billion. Total debt was $85.5 billion, with $11.3 billion of debt maturing within the next year. While debt is high, AbbVie has a strong cash position and generated free cash flow of nearly $18 billion over the last twelve months. Even subtracting dividends, free cash flow still totaled $9.5 billion during this period of time.
AbbVie also raised its full year guidance and now expects adjusted earnings per share of $12.37 to $12.57 for 2021, up from $12.32 to $12.52 previously. At the midpoint, this represents an 18.1% improvement from the prior year.
Takeaways
AbbVie's success over the years as long been associated with Humira. With the drug having already lost patent protection in most international markets, Humira is set to lose exclusivity in the U.S. in 2023.
However, while the drug continues to contribute more than a third of annual revenues, AbbVie's pipeline should help to compensate for this decline. Skyrizi and Rinvoq, which treat psoriasis and moderate to severe rheumatoid arthritis respectively, are the likely keys to pulling this off. Both have shown higher efficacy and safety rates over Humira in the approved indications.
Both products appear destined for bigger things. For example, AbbVie submitted applications seeking approval for use of Skyrizi in active psoriatic arthritis to the U.S. Food and Drug Administration and European Medicines Agency during the past quarter. This follows two Phase 3 studies that demonstrated that the product proved very effective in fighting the disease. Safety matched Skyrizi's safety profile in plaque psoriasis and no new risks were observed.
Rinvoq is under consideration for use in moderate to severe atopic dermatitis, with AbbVie submitting the required information to the FDA during the first quarter. Rinvoq and Skyrizi are also both in the process of conducting phase 3 studies for use in Crohn's disease, with data expected near the end of the year.
These latest approval submissions follow last year's entrance into the rheumatology and inflammatory bowel disease markets, estimated at $40 billion and $20 billion respectively, for Skyrizi and Rinvoq. These two areas of treatment are showing that the products' high growth rates are likely to continue.
Combined sales for Skyrizi and Rinvoq are expected to reach $4.5 billion in 2021, up 96% from last year. Given the market share gains and additional approvals for use, both products should produce high peak sales, including $6.5 billion for Skyrizi, up from the prior expectation of $5 billion, and $7.5 billion for Rinvoq by 2025.
Hematologic oncology will also be a source of strength going forward. Imbruvica, AbbVie's second highest grossing product, is expected to reach peak sales of more than $7 billion, up from $5.3 billion last year. Venclexta, which recently achieved a favorable opinion from the EMA for use in treatment of patients with acute myeloid leukemia who are ineligible for intensive chemotherapy, is projected to earn nearly $4 billion by the middle of the current decade after posting sales of $1.3 billion last year.
Elsewhere, the neuroscience business should experience strong growth rates from Botox Therapeutic and Vraylar, leading to an expected 150% in revenues by 2025.
These are just a few examples of AbbVie's robust pipeline that could lead to future growth. The company expects to bring to market more than a dozen new products or indications over the next two years.
As stated previously, Humira, which has been the world's top selling drug, is already facing significant headwinds from biosimilar competition in international markets and will see the same pressure in the U.S. shortly. This was the knock against the company and stock for several years, helping to keep a lid on the share price and valuation.
Still, AbbVie expects that the product will still contribute just under $6 billion in annual sales five years from now. More importantly, AbbVie expects to have at least 10 other products providing at least $1 billion in annual revenues by 2026, greatly offsetting any weakness from Humira declines and furthering diversifying the company's business.
Valuation
With the stock closing Tuesday's trading session at $114.56 and expected earnings per share of $12.47 for 2021, AbbVie has a forward price-earnings ratio of 9.2. Nearly every other large pharmaceutical company trades with a valuation in at least the low teens. Examining the company's pipeline leads me to believe that AbbVie should trade with a similar multiple at the very least.
AbbVie has an average price-earnings ratio of approximately 12 since becoming a standalone entity in 2013. Applying expected earnings per share by this average earnings ratio results in an estimated intrinsic value of just under $150. Reaching this price target would mean a 31% return. This doesn't even include the stock's current dividend yield of 4.5%, which is roughly three times that of the average yield of the S&P 500.
Final thoughts
AbbVie's most recent quarter showed growth in nearly all areas. Comparable sales were solid, with AbbVie's most important newer products showing excellent growth rates. Humira even showed growth despite the headwinds it is facing.
The company's pipeline is starting to gain traction, with many products expected to see very high sales by the middle of this decade. Led by Skyrizi, Rinvoq, Venclexta and others, AbbVie's pipeline should more than make up for potential declines from Humira.
And yet, the market appears to penalize AbbVie for Humira's coming declines, resulting in a single-digit valuation. As seen from a collection of approvals, AbbVie's product pipeline is just scratching the surface on the number of indications that can be treated. If the growth rates for these products occurs as projected, then AbbVie is likely very undervalued today. With a potential total return of more than 30%, I remain long AbbVie and would be a buyer at the current price.
Author disclosure: the author has a long position in AbbVie and Abbott Laboratories.
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