AbbVie: Big Gains in Small Molecule Drugs

10/22/2020 5:00 am EST

Focus: HEALTHCARE

Tom Hutchinson

Editor, Cabot Dividend Investor

AbbVie (ABBV) is a cutting-edge company specializing in small molecule drugs; the company has grown into the eighth-largest pharmaceutical company in the world, notes Tom Hutchinson, growth and income expert and editor of Cabot Dividend Investor.

The stock is cheap. ABBV is selling about 30% below the 2018 high. It is also selling at a microscopic 8 times forward earnings. It’s cheap because of issues with its blockbuster drug, and therein lies the opportunity.

The company has grown primarily on the strength of its blockbuster biologic auto immune drug Humira, the world’s number one drug by far with annual sales of about $19 billion.

But Humira is facing increasing competition overseas and will face generic competition in this country (which accounts for three quarters of sales) in 2023. The stock is discounted because of fears that it might not be able to make up the revenue lost from patent expirations.

But I believe AbbVie has more than enough in the hopper to fill the void. The company has one of the very best pipelines of new drugs in development in the industry as well as hugely promising, newly launched drugs.

The company believes recently launched cancer drugs Imbruvica and Venclexta can generate $9 billion in annual sales by 2025. It also launched two drugs last year that were rated among the top three launched of the year by EvaluatePharma, and AbbVie thinks they could bring in another $10 billion a year by 2025.

To further diversify away from its dependence on Humira, AbbVie purchased Ireland-based Allergan (AGN) for $63 billion last year. The company is about half the size of AbbVie and features blockbuster facial treatment drug Botox. The acquisition will diversify the company away from Humira in the near term while the stellar pipeline gains traction.

I believe investors are realizing that AbbVie’s ability to overcome Humira competition had been underestimated. Having fallen 50% from the 2018 high, ABBV rallied 50% from the summer of 2019 until just prior to the pandemic bear market.

It then quickly rebounded from the March lows to a new 52-week high this past summer, has since taken a breather and consolidated from the summer highs, yet still remains in an uptrend.

The recent hiccup and an uncertain market present an excellent opportunity to get into the stock while it’s still cheap. It’s also worth noting that ABBV pays the highest dividend in all of big pharma, with a yield that is currently 5.4%.

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