Investment Thesis

When I last updated on AbbVie (NYSE:ABBV) back in July, its stock price had momentum and had just touched $100 – its highest price since May 2018. After the mid-March stock market sell-off caused by the coronavirus outbreak dropped the pharma’s price from $95 to $65, AbbVie recovered its losses more rapidly than its Big Pharma sector rivals, and I felt that this could be a turning point for the company, which traded at a significant discount to my calculated fair value price of >$145.

Instead, AbbVie’s momentum stuttered and then reversed – over the past 3 months, the stock price has declined by 14% – only Gilead Sciences’ (GILD) shares have fared worse over the same time period.

AbbVie stock price performance past 3 months vs sector rivals & S&P 500. Source: TradingView.

In my last note, I compared AbbVie with Bristol Myers Squibb (NYSE:BMY). Both companies have recently made a mega-money acquisition – in BMY’s case, it was the $74bn acquisition of Celgene, and in AbbVie’s case, a $63bn deal for Allergan – and as a result, both companies carry a significant amount of debt on their balance sheets – BMY reported total liabilities of $79.3bn as of Q120, whilst AbbVie reported a figure of $110bn as of Q220. Like AbbVie, BMY stock – valued at $60 at the time of writing – also trades at a significant discount to my calculated fair value price of ~$100.

It seems that AbbVie’s momentum has been checked by the same market negativity that prevents BMY stock from breaking out beyond the $60-$65 range, as I believe it should do, which casts doubt over whether AbbVie stock can break out beyond its own glass ceiling of $100 – at current price of $85, this may seem less likely than it did a few months ago.

The reality is that investors are having a hard time seeing beyond a debt to equity ratio of 5.9x – comfortably the worst in the Big Pharma sector – despite the >$15bn per annum boost to revenues that the Allergan acquisition is expected to bring in. Allergan – a loss-making company with a mixed bag of assets – may boost the top line, but could have a detrimental effect on the bottom line – as it did in Q220, AbbVie’s first loss-making quarter (on a GAAP basis) since Q418.

At the same time, investors do not seem to be buying into AbbVie’s efforts to compensate for the sales deficit that will be created when its $19bn per annum, globally best-selling immunology drug Humira goes off patent in the US in 2023, by launching 2 new treatments into the same markets – Skyrizi and Rinvoq.

AbbVie bears would argue that the long-term investment case for AbbVie looks grim – can 2 drugs that earned a combined $480m of revenues in Q220 compensate for the decline of one that earned $4.8bn over the same period? And how many years will it take before AbbVie finally sheds its >$82bn debt burden?

Bulls will see things differently and argue that as Humira’s massive market share declines, sales of Skyrizi and Rinvoq will pick up the slack, by covering the same indications, and presenting a superior safety and efficacy profile to their generic competitors.

They will also believe that being highly leveraged is a sacrifice worth making when the Allergan acquisition will give the company access to new markets in aesthetic surgery, neuroscience, eye care and women’s health, helping AbbVie achieve operating cash flows >$19bn, and sector leading annual revenue growth of 7-10% (as forecast by AbbVie management). And besides, they could add, although generics will bite hard at Humira sales, the drug could be a $10bn per annum revenue driver for a decade to come.

AbbVie is also famous for its generous dividend, which currently yields 5.4% – the highest in the pharma and biotech sector – and may be hiked further still by management. That is a nice fillip for investors, although, in the long run, AbbVie’s shareholders ought to expect more from the company’s share price performance – any price <$100 can be considered underperformance, in my view.

It’s important to consider all of the above when thinking about what price AbbVie’s share price will trade at in a year’s time, or even in 5 years’ time. Is an acquisition hungry management team making the right moves, or will AbbVie, with the Humira cash cow unable to operate at full capacity for much longer, fail to retain its status as one of the world’s 10 biggest pharma concerns?

With a critical Q320 results readout due in a couple of weeks’ time, now is an optimal time to be asking these questions. Despite analysts’ best efforts, it is very difficult to quantify the impact that Allergan’s assets are having and will have on the company’s long-term outlook with less than one quarter’s financial data to go on, and with pandemic headwinds adding to the uncertainty.

So much rests on the ability of Skyrizi and Rinvoq to compensate for falling Humira sales, and whether management can realise the cost synergies that will make Allergan’s franchises profitable. The company’s approved cancer treating drugs Imbruvica and Venclexta also have a significant role to play, as does a pipeline that is not overly diversified at the late stage level, but offers hope through exciting opportunities in Alzheimer’s, Parkinson’s and a host of clinical, preclinical and discovery stage oncology assets.

The inevitable decline in Humira revenues is the biggest challenge that management has faced since AbbVie was spun out of Abbott Laboratories (NYSE:ABT) in 2012. Arguably, coping with the patent expiration of Humira in the US is the biggest challenge faced by any big pharma company at the present time, but as I will argue in this overview of AbbVie’s business and strategy, I think the company and its management are looking beyond Humira – and the market ought to follow suit.

In my view, AbbVie is a company that does not do things by halves and isn’t afraid to make, and sometimes lose, multi-billion dollar bets on new drugs and franchises. The company’s philosophy seems to be based on “being greedy when others are fearful” – better to buy the assets and risk failure, than to hand a first-mover advantage to a rival.

This young company must keep shareholders onside, however, and management is being forced to walk a tightrope in this respect. A poor sales quarter will be heavily punished – there was much to celebrate about the recent Q220 results, but investors were not satisfied by an overall GAAP net loss – which makes it imperative that AbbVie shows outperformance in Q3 and FY20. I think management can do this, and therefore, I believe the thesis I outlined in my last post still holds true – perhaps even more so now that the company is available to buy a 15% discount.

Buy for the dividend and hold for the progress this company can make as it attempts to turn around a failing but highly promising pharma in Allergan – one that is helpfully domiciled in Ireland, just like AbbVie itself, benefitting from the country’s generous ~11% per annum taxation regime – and to grow its recently commercialised assets into blockbusters that can compensate for the eventual decline in Humira sales.

The more convinced the market becomes that AbbVie is capable of achieving these goals, the higher the stock price will rise, and I believe that Q3 and FY20 results will go a long way to easing investors’ fears. My DCF analysis suggests AbbVie shares are worth >$135, but based on recent performance, I would settle for a stock price of ~$100 by YE, and if that can be achieved, the company can target >$120 in 2021.

READ ALSO  MPs accuse Amazon of broadcasting antisemitic content through Alexa

A failure to maintain high single digit ex-Humira revenue growth could see AbbVie shares trade at a similar price to Bristol Myers Squibb – ~$60 – but AbbVie is a younger company with more assets at the beginning of their sales cycle than at the end, Humira notwithstanding, and presents the strongest investment case of all the big pharma giants, in my view – with the possible exception of foreign entities Novartis (NYSE:NVS) and Novo Nordisk (NYSE:NVO) – whilst paying the highest dividend.

In the remainder of this article, I will try to answer the three biggest questions pertaining to the company’s likely near and long-term share price performance, and highlight what to look out for in the company’s Q3 and FY20 results.

1. The Humira Question

Any company that earns >40% of its revenues from a single asset will face questions about its long-term stability if that asset faces a significant threat to its market dominance, but in fairness to AbbVie, the company has moved quickly and decisively to tackle the issue.

In Skyrizi and Rinvoq, AbbVie management believes they have 2 drugs that can earn >$20bn of revenues between them, but in order to do that, they must secure the approvals – in Europe and the US – that will allow them to target as wide an addressable market as possible, and cover off the markets in which Humira is currently approved. The full list is imposing: Humira is approved for rheumatoid arthritis, psoriatic arthritis, ankylosing spondylitis, Crohn’s disease, ulcerative colitis, plaque psoriasis, hidradenitis suppurativa, juvenile idiopathic arthritis, axial spondyloarthropathy, pediatric Crohn’s disease, and pediatric enthesitis-related arthritis.

But the progress so far has been impressive. In April 2019, Skyrizi was approved for treatment of plaque psoriasis, which is the most prevalent autoimmune disease in the US, affecting ~7m people. The drug is an interleukin-23 (“IL-23”) inhibitor, and IL-23 – a cytokine that causes an inflammatory effect, is thought to play a role in a host of immune-mediated diseases.

Skyrizi aced its clinical trials – 75% of patients treated with the drug achieved 90 percent skin clearance after 16 weeks, and after 1 year, the figure increased to 81%, with ~57% of all patients achieving completely clear skin. Furthermore, Skyrizi beat 1 of its main rivals – Novartis’ ~$4bn-selling IL-17 inhibitor Cosentyx – in a head-to-head trial in plaque psoriasis, helping 87% of patients achieve 90% skin clearance over a 1-year period, whilst Cosentyx could only manage a figure of 57%. Skyrizi also has a more convenient once-every-12-week dosing regimen than Cosentyx and another of its main rivals – Johnson & Johnson’s Tremfya – which need to be administered once per month, and once every 6 weeks, respectively.

Skyrizi has got off to a blistering start sales-wise, too, defying even the most optimistic of analyst and even management projections, to be on track for >$1bn of sales in FY20, having posted revenues of $555m in the US, and $75m in Europe, in H120 – up by >1,200% year on year.

The drug is now in registrational phase 3 trials for ulcerative colitis, Crohn’s Disease, and psoriatic arthritis, and phase 2 trials for Atopic Dermatitis, and Hidradenitis Suppurativa. The list price looks to be in the region of $15k for 3 months’ worth of treatment – ~$60k per annum, with Medicaid patients paying $20 or less per dose, and Medicare patients between $800 and $3,000, depending on coverage type.

Rinvoq – a once-daily, orally administered JAK inhibitor – was approved in August 2019 as a second line treatment (for patients with an inadequate response or intolerance to methotrexate) for Rheumatoid Arthritis after meeting primary and secondary endpoints in a trial of ~4,400 patients across five studies. The drug is also in phase 3 registrational trials for the same indications as Skyrizi, plus Ankylosing Spondylitis, Non-radiographic Axial SpA, and Giant Cell Arteritis.

Sales of Rinvoq have not been as impressive as Skyrizi, but nevertheless, H120 global sales of $235m suggest that Rinvoq will exceed consensus analyst expectations of $342m for the full year. Rinvoq will be priced similarly to Humira and Skyrizi in the US – around $60k per annum. According to data relating to a recent bonus approval in Rheumatoid Arthritis (“RA”) in the UK, the drug will cost just ~$10k for a year’s worth of treatment.

Rinvoq comes with a boxed warning for risks of infections and thrombosis, which may impair its ability to compete against its major rivals, such as Regeneron (NASDAQ:REGN)/Sanofi’s (NASDAQ:SNY) Dupixent – which the 2 companies hope will break $10bn in annual sales – Eli Lilly’s (NYSE:LLY) JAK inhibitor treatment Olumiant – thought to cost around half as much as Rinvoq – Pfizer’s (NYSE:PFE) Xeljans – which will cost roughly the same as AbbVie’s drug and Bristol Myers Squibb’s Orencia – which Rinvoq outperformed in a recent head-to-head trial – with 30% of Rinvoq patients achieving remission, compared to 13% of patients treated with Orencia.

Analysts have forecast $11bn of global sales for Skyrizi and Rinvoq combined, whilst AbbVie’s management is crossing its fingers and hoping for a Humira-beating peak of $20bn per annum. Importantly, during the company’s Q220 earnings call, AbbVie’s CEO and Chairman of the Board Rick Gonzalez told analysts that Skyrizi has a leading 30% market share of the in-play market for psoriasis – i.e. new or switching patients, with Rinvoq claiming a 15% in-play share in RA – the same as Humira.

Long term, AbbVie investors can take some comfort from the fact that, thanks to Humira, the company has built up excellent insight and access into key sales and marketing channels, and distribution networks, within the immunology market, plus there are numerous reports of physicians favouring the use of Rinvoq and Skyrizi based on the relationships of trust built up over years of prescribing AbbVie’s products, and dealing with its staff.

Snapshot of AbbVie immunology division performance as of H120. Source: my table using company data via Haggerston BioHealth)

To summarise, if replacing Humira’s $19bn of annual sales wasn’t such a Herculean task, then AbbVie’s performance to date in bringing Skyrizi and Rinvoq to market, and pushing for approvals in the majority of Humira’s 11 approved markets, looks impressive.

But investors don’t seem to be satisfied. Even though Humira still has 2 full years of sales in the US that will be unchallenged by generics, bears will point to the 30% – or $2bn ($6.3bn to $4.3bn) – decline in Humira’s revenues in Europe between 2018 – when its patent expired – and 2019, and the 15% year-on-year decline in Q120, and 17% decline in Q220. If US sales decline at the same rate from 2023, then peak global sales could drop to as low as $5.1bn by YE25, and <$1bn in Europe.

That leaves Skyrizi and Rinvoq with a mountain to climb, and there are many variables to consider. How will generic market entrants affect sales of other drugs, like Skyrizi and Rinvoq, but also rival treatments, competing in the same markets? Will all drug manufacturers be forced to lower their prices to compete? Will Skyrizi and Rinvoq show long-term efficacy and not encounter any issues with safety? What other treatments could emerge between today and 2025?

All things considered, there may only be an outside chance that Skyrizi and Rinvoq will be able to fully replace Humira’s lost sales, and it is worth considering what happened to Gilead Sciences’ (GILD) share price once its lead HCV franchise assets ran out of patients to treat. The company lost some $30bn in annual sales revenues which it has never fully replaced, and its share price has declined from $108 in early 2016, to $63 at the time of writing.

READ ALSO  Judge Blocks Certification Of 'Remaining' Pennsylvania Election Results; Boockvar Appeals To PA Supreme Court

Personally, however, I feel optimistic that AbbVie will not suffer the same fate. Firstly, because the treatment market is not shrinking as was the case with HPV, secondly because Skyrizi and Rinvoq have at least 2 more full years to get up to peak sales volumes and secure further approvals before Humira loses its patent exclusivity, thirdly because Humira exercises significant influence over the sales and marketing channels in the target markets, fourthly because both drugs are presenting best-in-class efficacy profiles, and finally, because Humira revenues may not decline as fast as the market seems to think, which means that if Skyrizi/Rinvoq sales hit the midpoint of analyst and company sales forecasts – ~$15bn per annum – sales of AbbVie’s legacy assets ought to continue climbing.

What I think will happen is that AbbVie will earn ~$19bn from Humira in 2021 and 2022 before slashing the drug’s price to compete with generics. The company has been incrementally increasing the price of the drug every six months or so, increasing it by ~20% between 2018 and 2020 – in order to prolong its useful sales life.

Price hikes will not be sustainable in the medium to long term, however, and the decision was probably taken in response to falling Humira sales in Europe, and possibly out of fear of presenting declining sales data to the market – another example of the disconnect that exists that between the company and its investors, at the present time. Which brings us to the Allergan purchase.

2. The Allergan Acquisition

Ever since the deal was first announced in June 2019, AbbVie’s acquisition of Allergan has been viewed with a mixture of admiration and suspicion by investors and market watchers.

One way of looking at the deal is that AbbVie effectively paid $63bn up-front in order to bring in-house a portfolio of assets that together, will account for ~$4bn less than global per annum Humira sales between 2017 and 2019. Not only that, Allergan was a loss-making business – between 2017 and 2019, the company made losses of >$4bn per annum – and if AbbVie had complete faith in Skyrizi, Rinvoq, and its other assets, was there any need to take on a crippling debt burden to gain access to markets in which it is not an experienced operator?

If the acquisition was a knee jerk response to market fears concerning Humira’s patent expiry, it can certainly be judged to be overblown and unnecessary, but I believe that AbbVie’s management sees a genuine opportunity to take a struggling company’s assets and reignite profitability by leveraging its established and successful in-house sales operations.

Allergan business & market opportunities at a glance. Source: AbbVie acquisition plan slideshow.

As we can see above, the opportunities are plentiful. Botox and injectable dermal filler Juvederm have been a huge success in the cosmetics industry, making sales >$5bn in FY19, and AbbVie believes that the growing acceptance of aesthetic surgery will create a long-term sales uptrend, plus, Botox is finding a new market within the hard-to-penetrate, but highly lucrative ($3.7bn by 2023, according to some estimates) migraine space. Ubrelvy is another newly launched product in the migraine space for which management has high hopes.

Neuroscience is another market with high barriers to entry and is the toughest market (besides oncology) in which to secure an FDA approval (~15% chance of making it through phase 1-3 trials). Vraylar is an approved and fast growing antipsychotic that AbbVie management believes is on track for blockbuster (>$1bn) sales and is currently growing revenues at a double-digit quarterly rate.

Eye care is also a highly lucrative market – witness Regeneron’s $4.6bn selling Eylea treatment for advanced macular degeneration (“AMD”). Led by $700m per annum-selling Restasis, AbbVie expects to earn $2.1bn from this division in FY20, plus ~$1.8bn from Allergan’s gastrointestinal division, which is complementary to assets that Humira already has.

The challenge will be managing costs. AbbVie believes it can realise pre-tax cost synergies of $2bn per annum after year 3 of the acquisition, and the company will certainly need to if it wants to earn a forecast 10% accretion to EPS in year 1, and peak accretion >20%. $2bn per annum may not be enough if the costs of running Allergan’s franchises continue to run to a >$4bn per annum loss. A projected revenue growth rate of between 7% and 10% will help, and make AbbVie the fastest growing pharma on the market – the average growth rate amongst peers, management says, is 3.3%.

3. Other Assets & Pipeline

Snapshot of AbbVie hematologic oncology franchise. Source: my table using company data via Haggerston BioHealth)

AbbVie’s oncology division is yet another arm of the company generating mega-blockbuster sales and one that is strongly outperforming. Imbruvica, developed in collaboration with Johnson & Johnson (JNJ) and indicated primarily for chronic lymphocytic leukemia (“CLL”) and small lymphocytic lymphoma (“SLL”) grew sales by 30% between 2018 and 2019, to $4.67bn and by 18% on a year-on-year basis in H120, to $2.5bn. The drug has secured 10 FDA approvals since launch in 2013, and is in registrational trials for a further 5.

Venclexta – developed in collaboration with Roche – is also approved for CLL and SLL, plus acute myeloid lymphoma (“AML”) as part of a combination therapy. The orally administered B-cell lymphoma-2 (BCL-2) inhibitor grew sales by 94% yoy in H120, to $620m worldwide, and has 4 registrational trials ongoing.

AbbVie pipeline as at Feb ’20. Source: company presentation.

It has to be said that Rinvoq, Skyrizi, Imbruvica and Venclexta dominate the company’s late stage pipeline, which gives an indication of what will dictate the company’s near-term fortunes and share price.

Navitoclax – a small molecule inhibitor of Bcl-2 family proteins targeting myelofibrosis (“MF”) – looks a decent bet for an accelerated approval in combination with Ruxolitinib – a standard-of-care JAK inhibitor marketed by Incyte (INCY) that earned revenues of $1.7bn in FY19, although this market is competitive, with numerous treatments in late stage trials.

ABBV-951 – a subcutaneous delivery system for Levodopa/Carbidopa in Parkinson’s, and Elagolix – already approved for treatment of endometriosis in women under the brand name Orilissa, and now approved for heavy menstrual bleeding associated with uterine fibroids as Oriahnn – has been earmarked for peak sales of ~$350m.

Veliparib, however – a poly ADP ribose polymerase (“PARP”) inhibiting breast and frontline ovarian cancer treatment – has been a disappointment for the company, and CEO Gonzalez revealed on the Q2 earnings call that there will no further regulatory submissions until more mature overall survival data is available. The company is losing the PARP inhibitor race to rivals like GSK’s Tesaro, and this is not the first misstep the company has made developing oncology treatments.

In April 2016, AbbVie acquired Stemcentrx for up to $9.8 billion to gain access to Rova-T, an antibody drug conjugate that was thought to offer a multi-billion peak revenue opportunity in lung cancer, but the drug did not perform as expected in clinical trials and in the end, AbbVie was forced to record an impairment charge of ~$4bn after abandoning all of its trials. Even Imbruvica’s success comes at a significant cost, given the company paid $21bn to acquire Pharmacyclics in 2015, primarily in order to acquire the hematological oncology-targeting BTK inhibitor.

Nevertheless, investors can expect a raft of data readouts from earlier stage assets over the next 12-18 months, most of which will be oncology related, including tilts at treating prostate cancer, non-small-cell lung cancer (“NSCLC”) and solid tumors, although 2 assets (AL002 & AL003) targeting Alzheimer’s were described as a potentially “very, very meaningful opportunity” by CEO Gonzalez on the recent earnings call.

READ ALSO  Big Banks Virtue Signaling Is Irrelevant For Arctic Oil

Finally, a partnership with Genmab (GMAB) agreed in June to develop and commercialise 3 next-generation, bi-specific antibody candidates targeting hematological oncology, looks to be good business, based on Genmab’s world-class DuoBody development platform, and deal structure, which will see AbbVie pay Genmab $750m upfront, and up to $3bn in milestones, plus tiered royalties on global sales.

Recent Performance & FY20 projections

As I have suggested in this article, it seems that for AbbVie to grow its share price, only strong outperformance across all of its operations will be good enough for investors, which brings us to the upcoming Q3 results – due on 28th October, and FY20 projections.

Only the bravest of accountants would try to make sense of AbbVie’s Q220 results, given that Allergan assets only contributed revenues from the beginning of May, and given management’s tendency to quote adjusted, rather than GAAP figures, and the substantial (but understandable) difference between the two. The complexity of the company’s leveraged debt and balance sheet muddies the waters still further.

Goodwill and intangibles, for example, rose from $15.6bn and $18.2bn, respectively, in Q120, to $42.6bn and $76.4bn in Q220, whilst long-term debt grew from $63.2bn to $82bn. Net cash from investing activities was $129m in Q120, and -$35.8bn in Q220, with the company booking a $38bn acquisition of business charge.

What probably caught the market’s eye and contributed to the share price downtrend the most, however, was the loss the company made. Net income on a GAAP basis was -$739m, down from +$3bn in Q120, and +$2.8bn in Q419, which may explain why AbbVie’s share price has had a difficult last 3 months.

Total revenues grew to $10.4bn, with an estimated $2bn contribution from Allergan assets, but operating expenses rose from $5bn in Q120, to $9.7bn – 93% of total sales – versus 58% of total sales in Q120. EPS fell from $1.7 in Q120, to -$0.4. AbbVie’s net profit margin declined from 35%, to -7% sequentially.

AbbVie adjusted earnings reporting Q220. Source: AbbVie press release.

As we can see above, on an adjusted basis, management reported earnings of $4.3bn, and EPS of $2.34, which supports the company’s forecast that Allergan would add >$0.1 of EPS accretion, and also includes $0.1 of outperformance by legacy assets, led by Skyrizi, Rinvoq, and Humira – whose sales dropped by just 0.7% year-on-year thanks to a 5% year-on-year uplift in the US.

On its Q220 earnings call, management issued FY20 guidance for EPS of $10.35 – $10.45 on an adjusted basis, with a $0.7 accretion attributed to Allergan (annualized contribution of 11%), which excludes $6.23 of intangible amortisation. FY revenues are expected to come in at $45.5bn, with Humira sales up 8% year-on-year (to ~$20.7bn), and aesthetics, neuroscience and eyecare contributing $2.4bn, $3.5bn, and $2.1bn, respectively.

Adjusted R&D and SG&A expenses are forecast to be $5.8bn (-9.47% yoy), and $9.9bn (+42.6%), which leaves costs of sales, which increased from $1.94bn in Q120, to $3.7bn in Q220, owing to the addition of Allergan costs. If this figure is similar in Q3 and Q4, costs of sales in FY20 could rise to >$13bn, compared to $7.4bn in FY19.

Management is forecasting sales of $12.8bn in Q3, which implies sales of $11.85bn in Q4, and FY20 OPEX of ~$28.8bn, giving the company an operating income of ~$16.7bn – not far off its $19bn target. With interest expense forecast to be $2bn, and tax at 11%, net income would be $13.1bn, and EPS $7.4.

This calculation falls somewhere between management’s GAAP and adjusted forecasts and implies a high net profit margin of 29% (vs 24% in FY19). When I plug operating cash flow minus interest expense into a DCF model, using a top line revenues growth rate of just 1%, beta of 1.1, expected market return of 10%, and risk free rate of 1.6%, and accounting for depreciation, CAPEX and working capital, I am looking at a fair value price for AbbVie shares of $134, and a firm value of $237bn (vs market cap at time of writing of $149bn).

Conclusion

To summarise the 5-year investment case for AbbVie in just a couple of sentences, the most important question is, how rapidly will Humira sales decline after 2023, and how rapidly will AbbVie’s legacy and Allergan’s assets grow? If the latter nets off the former, then AbbVie is a stock worth backing, but if not, the share price will, at best, remain where it is now – in the mid-80’s – for the foreseeable future.

If AbbVie can post revenues >$45bn for the next 5 years, even as Humira sales decline, then it will earn sufficient cash flows to achieve its goals of “net debt-to-EBITDA ratio of 2.5 times by the end of 2021 with further deleveraging through 2023”, and make the company a very attractive investment opportunity. If Humira revenues decline at a rate of 30% per annum in the US as they have done in Europe, however, it may be very hard for AbbVie to stay profitable, and the share price will slide.

In this article, I have tried to cover all of the variables at play, and as you can see, it’s a complex picture. In the end, the decision on whether to invest has to come down to whether you trust management, which, in my opinion, will keep making big bets and acquisitions, complicating the picture still further, and keeping investors and analysts guessing as to future cash flows, and net profits.

The only thing that is not dynamic or challenging about AbbVie currently is its share price, and perhaps that suggests a disconnect between the way management wants to operate the company, and the way investors would like to see it run – more clarity, fewer acquisitions, more predictable cash flows, less debt.

That is not going to happen, however – because that isn’t how major pharmaceuticals operate – and the pay-off currently is the high-yielding dividend. The best strategy is to pay close attention to management’s forecasts, despite the GAAP/non-GAAP differentials, trust management, and hope that rising sales of Skyrizi, Rinvoq and Imbruvica, Botox/Juvederm, and one or two new approvals are secured, providing the price catalysts to push AbbVie closer to its fair value price of >$120.

I like the company and its ambitious outlook, and I am bullish, but it can feel as though management is gambling with the company’s share price, and cannot afford too many more expensive R&D failures. When you have an asset like Humira facing long-term decline, however, gambling is probably the best strategy.

If you like what you have just read and want to receive at least 4 exclusive stock tips every week focused on Pharma, Biotech and Healthcare, then join me at my marketplace channel, Haggerston BioHealth. Invest alongside the model portfolio or simply access the investment bank-grade financial models and research. I hope to see you there.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ABBV over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



Via SeekingAlpha.com