AbbVie: The Forest for the Trees

10/01/2019 5:00 am EST

Focus: HEALTHCARE

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Investors ignore the forest to focus on the trees, and one tree in particular – Humira. Indeed, Humira is the "redwood" in pharmaceutical forest at AbbVie (ABBV), suggests Ian Wyatt, editor of High Yield Wealth

Humira accounts for more than half of AbbVie’s annual revenue. That’s a concern. Humira loses its U.S. patent protection in 2023. To fill a possible revenue void when Humira loses its monopoly, AbbVie turned to another drug maker, Allegan (AGN). AbbVie will buy its rival in a stock-and-cash deal valued at $63 billion.

Investors were hardly approving of the deal. AbbVie shares swooned 17% lower after the merger was announced. We’re more optimistic than the crowd. The new combination will continue to benefit from Humira revenue and cash flow through 2023.

Botox, a lead Allegan drug, also generates significant cash flow. AbbVie executives say that the companies both have experience with large-scale transactions. They see little integration risk.

AbbVie has an overlooked collection of promising drugs, consisting of internal candidates and licensed drugs, in oncology, inflammation, and neuroscience.

For instance, revenue from hematological oncology drugs advanced by 39% to $1.27 billion year over year. This category will continue to grow impressively, driven by new indications for both Imbruvica and Venclexta.

Newly introduced Skyrizi, for psoriasis, had sales of $48 million and management forecast 2019 revenues to approximate $250 million.

AbbVie is unquestionably cheap for new investors. Its shares trade at seven times projected earning compared with 15 times for the S&P 500 Pharmaceuticals, Biotechnology & Life Sciences industry group.

The stock offers a historically high dividend yield of 6.5%. The dividend appears safe. Projected cash flow points to continued dividend growth. We find AbbVie’s risk-reward paradigm compelling. At least one insider sides with our assessment.

Jeffrey Ryan Stewart, AbbVie’s senior vice president of U.S. commercial operations, paid $1 million for 15,552 shares. He now owns 65,304 shares. Insiders sell for many reasons. They buy for only one — to make money. 

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