AbbVie Is a Great Short-Term Investment but Long-Term Is More Complicated

Over the last five years, AbbVie shares are up about 130 percent. It’s generally viewed as a volatile stock—although to be fair, almost all biopharma stocks are—but some have argued that although AbbVie is a great stock short-term, other, less-volatile stocks, like Pfizer, would be better investments long-term. Dividend Sensei, writing for Seeking Alpha, makes the argument that AbbVie will dominate the market for the next decade or longer.

Dividend Sensei notes that the company has a strong executive team, especially Rick Gonzalez, the company’s chief executive officer, and Bill Chase, its chief financial officer. “The reason that such deep industry experience is essential is because top quality management is capable of navigating the treacherous and fast-changing waters of this industry and generating strong returns on capital for shareholders.”

Most of AbbVie’s growth, which is considerable, has been driven by Humira, it’s mega-blockbuster drug for a variety of autoimmune diseases such as arthritis, psoriasis, Crohn’s disease and ulcerative colitis. It has about 25 percent market share for its approved indications. The company has projected Humira sales to hit $21 billion by 2020.

But the company also has a strong pipeline. It expects to get approval for elagolix for endometriosis-associated pain in this year’s third quarter. It has submitted an application for risankizumab for plaque psoriasis, and has upadacitinib, another autoimmune disease drug, that might be approved in 2019.

It should be noted that there’s quite a bit of competition coming down the road for AbbVie in the JAK inhibitor market. Physicians are increasingly prescribing JAKi after Humira.

Dividend Sensei appropriately notes, “Many investors have worried that Humira is AbbVie’s Achilles heel because it lost patent protection in 2017 in the EU and a key U.S. patent expired in 2016. Fortunately, the company has been able to strike deals with Amgen and Samsung Bioepisin recent months that means it won’t face any biosimilar competition until 2023.”

Looking a bit further down the road to 2025, Dividend Sensei notes that the company is expecting its neurological drugs for Alzheimer’s disease, Parkinson’s disease and multiple sclerosis to begin launching. That might be wildly optimistic. Alzheimer’s is where drugs go to die; it’s a desert wasteland of failed Phase III clinical trials with well over 127 drugs having failed in that arena in the last decade or so.

One negative for AbbVie is its debt, which is $37.3 billion, almost double the industry average. Dividend Sensei doesn’t seem particularly concerned about that because of a very strong investment grade credit rating, and an extremely low corporate tax rate—9 percent this year, increasing to 13 percent over the next couple years—and a high free cash flow minus dividend cost.

So Dividend Sensei is definitely a fan of AbbVie. Pfizer is less flashy, but more stable and reliable. While Humira makes up almost 60 percent of AbbVie’s total revenue, Pfizer had eight blockbuster drugs in 2017. It has a deep pipeline with 28 late-stage programs and an exceptionally strong vaccine program.

And in a January 2018 comparison of Johnson & Johnson to AbbVie, The Motley Fool’s Brian Stoffel, likes J&J a little bit better. He noted, “On the surface, these two are pretty evenly matched. Their price-to-earnings and free cash flow ratios are virtually identical. And both have very solid dividends, with only half of their free cash flow being eaten up to make the quarterly payments to shareholders. But when growth is taken into consideration via the PEG Ratio, AbbVie trades at a significant discount to Johnson & Johnson. That’s enough for me to give AbbVie the nod here…. Perhaps I’m being a bit more conservative by siding with the slower growth company, but I believe Johnson & Johnson’s moat and financial fortitude are enough to give it an edge over AbbVie’s drug portfolio and attractive price tag.”

AbbVie looks very strong for the short-term and probably strong for the long-term. What could go wrong? Humira sales could fall apart more quickly than expected. Biosimilar competition will begin later this year in Europe and in early 2023 in the U.S.

There is always the possibility of pipeline failures. The company already had disappointing Phase II results for Rova-T for small cell lung cancer, and betting on any company’s prospects in Alzheimer’s and Parkinson’s disease seems like a longshot. However, Keith Speights, writing for The Motley Fool, says, “While there’s always a chance that AbbVie will underperform the S&P 500 in the coming years, I think the odds are definitely in favor of AbbVie beating the market.”

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