From Barron....
When the medical-products giant Abbott Laboratories split into two separate companies earlier this year, its old pharmaceutical business, rechristened AbbVie, was widely regarded as the less desirable of the two stocks.
AbbVie (ticker: ABBV) was poised for slower earnings growth, and it sported a higher dividend yield – now 3.6% – than the new Abbott Labs (ABT). Analysts were concerned about patent expirations, which could wipe out roughly $1 billion in cholesterol drug sales next year. And a bigger hit comes in 2016, when AbbVie's $9 billion-per-year arthritis drug Humira loses U.S. patent protection.
Yet so far, investors don't appear too worried.
At $46, AbbVie has climbed 33% since the start of the year, drastically outpacing not only Abbott, but also the broader pharmaceutical industry as income-hungry investors flocked to the stock. And there's more to AbbVie than its dividend payment.
Fears about Humira sales drying up are overdone. In fact, the drug, already the world's biggest-selling prescription medication, may reap another $1.5 billion in annual sales as regulators approve new uses for the medicine.
Add to that a string of new drugs that could generate as much as $6 billion in annual sales by 2020, and the stock deserves better than the 14.4 times 2014
earnings it now fetches.
"People are being taken by surprise because they do not understand the duration and growth prospects of Humira and the depth of AbbVie's pipeline," says Jefferies & Co. analyst Jeffrey Holford, who sees the stock climbing to $51 in the next 12 months. That's roughly 16 times 2014 earnings estimates, a slight premium to the industry.
Others share his optimism. Last month, Morgan Stanley analyst David Risinger upgraded AbbVie to Overweight. And on Wednesday, Cowen & Co. analyst Steve Scala initiated coverage at Outperform.
With revenue of $18.4 billion last year, AbbVie manufactures medications for autoimmune diseases, as well as prostate cancer, thyroid disorders and high cholesterol.
Humira is its life blood, however. Used to treat immune system and inflammatory diseases including rheumatoid arthritis, psoriasis and Crohn's disease, it generates half of AbbVie's revenue and 70% of its bottom line.
Under CEO Richard Gonzalez, AbbVie is dedicated to returning cash to shareholders, primarily by hiking its dividend payment. And in February, AbbVie disclosed a $1.5 billion share-repurchase program.
Meanwhile, the company continues to build out its pipeline, looking to develop new products to help it climb out of Humira's shadow.
The Parkinson's disease drug Duopa is awaiting Food and Drug Administration approval, which is expected to come later this year. From 2014 to 2017, another 12 drugs could be submitted to the FDA for approval, according to Jefferies' Holford. A three-drug hepatitis C cocktail is the closest of those compounds to reaching the market, though not until early 2015.
Meanwhile, the company wants to expand Humira's use by getting it approved as a treatment for other diseases and grabbing a bigger share of existing markets. It also wants to boost demand outside the U.S., where sales totaled almost $4.9 billion last year.
Despite the arrival of newer drugs on the market, AbbVie sees Humira sales growing in the low double digits during 2013, offsetting patent expirations hitting other drugs to keep its top line flat around $18.4 billion. And by 2017, Humira sales could reach $13.9 billion, according to Cowen's Scala.
That same year, generic rivals will be able to enter the U.S. market. But Humira is a biologic, which means it's derived from living cells rather than chemical combinations. Generic versions of these drugs, already hard to manufacture and difficult to develop, will probably face tougher demands from FDA regulators than what's required for traditional generic drugs.
Add the 200 patents protecting Humira's manufacturing procedures, and generic rivals have a steep wall to climb.
"Everyone was deathly afraid that this was a one-drug company, but if you have to have one drug, Humira is the one to have," says Goldman Sachs analyst Jami Rubin.
To be sure, AbbVie faces its share of challenges. Disappointing Humira sales or failed clinical trials could send the stock falling. And its experimental hepatitis C compound faces stiff competition from therapies being developed by Gilead Sciences (GILD) and Bristol-Myers Squibb (BMY).
Still, hepatitis C is a $20 billion market opportunity, and analysts agree that AbbVie could take a significant chunk of the action. Combined with its growing dividend, share repurchases and the possibility of double-digit earnings growth in the next few years, and AbbVie remains an easy pill to swallow.
When the medical-products giant Abbott Laboratories split into two separate companies earlier this year, its old pharmaceutical business, rechristened AbbVie, was widely regarded as the less desirable of the two stocks.
AbbVie (ticker: ABBV) was poised for slower earnings growth, and it sported a higher dividend yield – now 3.6% – than the new Abbott Labs (ABT). Analysts were concerned about patent expirations, which could wipe out roughly $1 billion in cholesterol drug sales next year. And a bigger hit comes in 2016, when AbbVie's $9 billion-per-year arthritis drug Humira loses U.S. patent protection.
Yet so far, investors don't appear too worried.
At $46, AbbVie has climbed 33% since the start of the year, drastically outpacing not only Abbott, but also the broader pharmaceutical industry as income-hungry investors flocked to the stock. And there's more to AbbVie than its dividend payment.
Fears about Humira sales drying up are overdone. In fact, the drug, already the world's biggest-selling prescription medication, may reap another $1.5 billion in annual sales as regulators approve new uses for the medicine.
Add to that a string of new drugs that could generate as much as $6 billion in annual sales by 2020, and the stock deserves better than the 14.4 times 2014
earnings it now fetches.
"People are being taken by surprise because they do not understand the duration and growth prospects of Humira and the depth of AbbVie's pipeline," says Jefferies & Co. analyst Jeffrey Holford, who sees the stock climbing to $51 in the next 12 months. That's roughly 16 times 2014 earnings estimates, a slight premium to the industry.
Others share his optimism. Last month, Morgan Stanley analyst David Risinger upgraded AbbVie to Overweight. And on Wednesday, Cowen & Co. analyst Steve Scala initiated coverage at Outperform.
With revenue of $18.4 billion last year, AbbVie manufactures medications for autoimmune diseases, as well as prostate cancer, thyroid disorders and high cholesterol.
Humira is its life blood, however. Used to treat immune system and inflammatory diseases including rheumatoid arthritis, psoriasis and Crohn's disease, it generates half of AbbVie's revenue and 70% of its bottom line.
Under CEO Richard Gonzalez, AbbVie is dedicated to returning cash to shareholders, primarily by hiking its dividend payment. And in February, AbbVie disclosed a $1.5 billion share-repurchase program.
Meanwhile, the company continues to build out its pipeline, looking to develop new products to help it climb out of Humira's shadow.
The Parkinson's disease drug Duopa is awaiting Food and Drug Administration approval, which is expected to come later this year. From 2014 to 2017, another 12 drugs could be submitted to the FDA for approval, according to Jefferies' Holford. A three-drug hepatitis C cocktail is the closest of those compounds to reaching the market, though not until early 2015.
Meanwhile, the company wants to expand Humira's use by getting it approved as a treatment for other diseases and grabbing a bigger share of existing markets. It also wants to boost demand outside the U.S., where sales totaled almost $4.9 billion last year.
Despite the arrival of newer drugs on the market, AbbVie sees Humira sales growing in the low double digits during 2013, offsetting patent expirations hitting other drugs to keep its top line flat around $18.4 billion. And by 2017, Humira sales could reach $13.9 billion, according to Cowen's Scala.
That same year, generic rivals will be able to enter the U.S. market. But Humira is a biologic, which means it's derived from living cells rather than chemical combinations. Generic versions of these drugs, already hard to manufacture and difficult to develop, will probably face tougher demands from FDA regulators than what's required for traditional generic drugs.
Add the 200 patents protecting Humira's manufacturing procedures, and generic rivals have a steep wall to climb.
"Everyone was deathly afraid that this was a one-drug company, but if you have to have one drug, Humira is the one to have," says Goldman Sachs analyst Jami Rubin.
To be sure, AbbVie faces its share of challenges. Disappointing Humira sales or failed clinical trials could send the stock falling. And its experimental hepatitis C compound faces stiff competition from therapies being developed by Gilead Sciences (GILD) and Bristol-Myers Squibb (BMY).
Still, hepatitis C is a $20 billion market opportunity, and analysts agree that AbbVie could take a significant chunk of the action. Combined with its growing dividend, share repurchases and the possibility of double-digit earnings growth in the next few years, and AbbVie remains an easy pill to swallow.