Note from Daily Trade Alert: The following article first appeared in The Growth Stock Advisor, a premium newsletter offered by Investors Alley.
With the coronavirus pandemic still going on, our bodies’ immune systems are still front and center.
The very worst cases of COVID-19 occur when a person’s immune system overreacts to the virus. This runaway response is called a cytokine storm and is often fatal.
There are less-severe immune system overreactions too—some of which have nothing to do with the coronavirus itself, but are triggered by the resulting infection.
These overreactions can cause a range of diseases known collectively as autoimmune conditions. Examples range from arthritis to the skin disorder psoriasis.
The prevalence and long-term nature of these diseases has spawned a large and growing immunology sector within the pharmaceutical industry.
More than 25 million people globally receive treatment for autoimmune diseases. This has turned the immunology pharma sector into a business worth an estimated value of $80 billion annually.
And the market leader in the sector—AbbVie (ABBV)—is a major beneficiary.
AbbVie: Humira and Much More
AbbVie was split off from Abbott Laboratories (ABT) eight years ago, allowing Abbott to focus on diagnostics, medical devices and generics. Meanwhile, AbbVie focused its attention on research-based pharmaceuticals— more specifically, on chronic autoimmune diseases and virology.
The company has thrived since it was spun off. Its revenues have risen at a compound annual rate of 13.5% since 2013. Gains have been propelled by its top-selling drug, Humira, which is used to treat autoimmune illnesses across the fields of rheumatology, dermatology, and gastroenterology.
And AbbVie believes there is still huge unmet demand in these fields.
Humira remains the number one medicine in the worldwide immunology space. In 2020 alone, it brought AbbVie $19.8 billion in net revenues, representing more than 40% of total sales. The risk, however, of relying too heavily on one specific product is that demand for it might begin to fall. Particularly when alternatives emerge from other pharmaceutical companies.
Internationally, Humira is already facing direct competition from biosimilars. These are medicines that are highly similar to already-approved therapies. These same pressures will bite in the U.S. (Humira’s largest market by revenue) starting in 2023, whwn AbbVie will lose exclusivity and rival pharma groups are able to launch their own versions of the drug.
AbbVie management is well aware of this. Rather than standing idly by, the company is diversifying its pipeline to prepare for the onset of intensifying rivalry.
It helps that Abbvie’s cash resources mean it can continue spending on research and development. Despite the pandemic, AbbVie still plowed more than a tenth of its net revenues into R&D in the final quarter of 2020 alone.
With Humira likely on the decline, AbbVie has increasingly focused its immunology efforts on two new drugs that debuted in 2019: Skyrizi for psoriasis and Rinvoq for rheumatoid arthritis.
Revenues for both remain relatively small, but the opportunity for growth is enormous. The company said in December that it expects their joint net sales to reach more than $15 billion by 2025, higher than its earlier prediction of $10 billion and up significantly from the $2.3 billion in sales achieved in 2020.
In dermatology alone, AbbVie reckons that Rinvoq’s high level of skin clearance and itch relief should be a boon in the atopic dermatitis market. And it expects Skyrizi’s best-in-class efficacy and long-lasting skin clearance to continue driving demand in psoriasis.
Meanwhile, the company believes the two medicines can also be used to treat ulcerative colitis and Crohn’s disease—gastroenterological conditions with high levels of unmet need.
At the last count, AbbVie’s overarching R&D pipeline included 29 late-stage phase III drug applications, including four relating to Rinvoq and three for Skyrizi.
But beyond immunology—and as a further sign of AbbVie’s diversified revenue streams—the company also had various other phase III studies ongoing for the oncology drug Imbruvica, its second-largest product by sales.
And of course, let’s not forget its $63 billion purchase of Allergan in May 2020.
The Allergan deal brought AbbVie a stronger base in neuroscience, enhancing its existing portfolio with therapies for migraine and psychiatric conditions. It has also injected new life into the group’s revenues and cash flows with a leading medical aesthetics business led by the wrinkle-remedy Botox.
AbbVie: Dividend Aristocrat
Now, let’s look closer at AbbVie’s financials.
The company’s cash balance stood at $8.4 billion at the end of December, and it expects to generate free cash flow of roughly $21 billion in 2021. Its latest reported results topped analysts’ sales and earnings expectations, signaling resilience in the face of an unprecedented global pandemic.
Fourth quarter sales of $13.9 billion were helped by a single-digit improvement for Humira as U.S. sales growth offset declines overseas. The group’s revenue guidance of $55.7 billion for 2021 also exceeded earlier market projections of $54 billion.
As the company’s primary money maker, Humira has helped AbbVie sustain strong operating cash flows. These cash flows exceeded $13 billion in both 2018 and 2019. If you are an income-seeking investor, this is good news. This cash generation has allowed the company to maintain consistent shareholder payouts. Based on current projections, its forward yield stands at an attractive 5%.
AbbVie has raised its dividend every year since its split from Abbott making it—in my eyes— a dividend aristocrat.
Yet, despite all these positives, AbbVie’s shares trade at just eight times forward earnings, even lower than the multiples commanded by peers such as Pfizer (PFE). Wall Street worries over Humira are weighing on the stock.
Yet, Abbvie’s market value has risen more than 10% over the past six months, suggesting that many believe AbbVie’s longer-term prospects are strong, underpinned by diversified sales and strong cash generation.
I’m giving AbbVie a strong 4-star rating. It can be bought at any price up to $120 a share.
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Source: The Growth Stock Advisor