For a business that seemed to be oft-maligned when it was still part of Abbott Labs (NYSE:ABT), AbbVie (Nasdaq:ABBV) has done pretty well on its own and sports a relatively high valuation amidst its pharma peers. Due in part to the huge influence of one drug (Humira) on AbbVie's results, there's a wider range of outcomes than with many large-cap drugs stocks. Even so, while I think the current valuation is a little steep, I can see numerous ways AbbVie could exceed present expectations and do well for shareholders in the coming years.
Good Margins, Despite A Tiny Shortfall In Humira
Revenue at AbbVie rose 4% as reported this quarter, or about 5% on an "operational" basis. Not surprisingly, performance was once again led by Humira, where sales rose almost 13% in constant currency to over $2.6 billion (about 1% short of estimates). At over 55% of sales, Humira clearly continues to dominate AbbVie's performance, though Niaspan was up 10% and ahead of expectations, and Kaletra was likewise stronger than expected.
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Even with the lack of Humira outperformance, AbbVie's gross margin was substantially higher than expectation – growing four and a half points, and surpassing expectations by three and a half points. AbbVie ended up spending a lot of that in SG&A and R&D, though, and while operating income rose 22% and beat estimates by 5%, the operating margin outperformance was less than a point.
Humira Isn't Done Yet
Even though this market-leading biologic continues to grow nicely, the talk on Humira is almost always negative. Not only are analysts worried that oral drugs like Pfizer's (NYSE:PFE) Xeljanz and Celgene's (Nasdaq:CELG) apremilast will chew into its market share, but also that biosimilars from companies like Mylan (NYSE:MYL) and Hospira (NYSE:HSP) will seriously erode the sales.
I think those fears may be a little premature. First, it seems as though biosimilars will in some respects be treated more like new competitors than substitute products, and the pathway to biosimilar approach and market acceptance in the U.S. is still untested. Second, it's worth remembering that Humira has almost twice as many approved indications as rivals like Enbrel (co-markted by Amgen (Nasdaq: AMGN) and Pfizer) and many of its indications are less than 30% penetrated.
A Pipeline That's More Than Hep-C
Given the market's obsession with the emerging hepatitis C (HCV) market, I can appreciate why so much attention is focused on AbbVie's HCV prospects. While Gilead (Nasdaq: GILD) still looks like the leader, it would seem that AbbVie will be a very strong second place in what should be a multi-billion dollar market. But as investors have seen all too many times in this market, most recently with Vertex (Nasdaq: VRTX), safety and long-term efficacy issues can appear relatively suddenly in these drugs and I wouldn't count the revenue until its in hand.
Beyond hep-C, I think AbbVie's pipeline may be underrated. The company's partnership with Galapagos could bear fruit in the form of AbbVie's own oral RA treatment, and the partnership with Neuroscrine Biosciences (Nasdaq: NBIX) could have a potential blockbuster for endometriosis (and later uterine fibroids), Elagolix, on the market in a few years' time. At the same time, AbbVie has partnered with some quality oncology companies (Bristol Myers (NYSE: BMY) and Roche (Nasdaq: RHHBY) to begin its first serious efforts in oncology.
AbbVie also has a very high-reward/high-risk option in neurology. ABT-126 has shown encouraging early efficacy in Alzheimers, and this is a market badly starved of new effective compounds. While it would be unwise to project any future contributions from this drug at this point in time, it could be a multi-billion dollar source of revenue by the end of the decade if AbbVie gets very lucky.
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The Bottom Line
At over 50% of revenue, AbbVie is extremely vulnerable to any disruptions in Humira, and that's a relatively uncommon problem in big pharma, as Amgen, Lilly (NYSE: LLY), and AstraZeneca (NYSE: AZN) have only half as much reliance on any single drug/platform. I consider this to be a fully recognized risk, though, and I see more upside (slower progress with biosimilars, new indications/more market penetration) than downside at this point.
All of that said, AbbVie is not strikingly cheap right now. Even with an above-peer long-term revenue growth forecast of more than 3%, it's hard to generate a fair value beyond the low $40s right now. Bulls can reasonably argue that success with pipeline drugs in HCV, endometriosis, cancer, and Alzheimers could make those estimates look much too conservative, but I'd like to see a bigger discount to fair value before buying with my own money.
Disclosure – At the time of writing, the author owns shares of Neurocrine Biosciences and Roche.
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