Abbvie: Biotechs Sleeping Giant

We’ve seen a surge in interest from financial pros lately for Abbvie (ABBV).

This caught us by surprise since there wasn’t any big news that drove the search volume. It was simply spontaneous.

At first glance, Abbvie doesn’t look that cheap. But as we dug deeper into the company, we found a sleeping giant.

Abbvie’s Business

Most folks don’t realize this, but Abbvie is the 6th largest biomedical company by revenue.

You probably know it best by Humira, a drug used to treat various autoimmune diseases and accounting for more than a third of the company’s revenues.

Source: Abbvie Q1 2023 Earnings

In fact, immunology drugs make up more than half of revenues.

With Humira’s exclusivity ending in 2023, investors are rightfully concerned about the company’s prospects. Sales are expected to drop by 30% this year and then 25% each year thereafter until it stabilizes somewhere around 2027, or roughly 30% of current levels.

However, the company expects its Rinvoq and Skrizi to deliver $17.5 billion in revenues by 2025.

Source: Abbvie JP Morgan Healthcare Conference Presentation

That’s roughly double the current levels for those two products. At that level, combined with Humira’s projected loss, the company would be up slightly in total revenues from its current position.

However, the company holds a huge pipeline of potential drugs that any one individually could lend some serious revenue growth.

Source: Abbvie February Pipeline Update

AbbVie’s recent FDA approval for Linzess (linaclotide) expands it into gastrointestinal therapeutics and opens up a market of nearly 50 million persons in the U.S. alone.

Financials

Source: Stock Analysis

Humira has been around since 2003. In that time, Abbvie’s grown sales of its flagship product and added a wide array of other drugs that now account for almost half its revenues.

As competition increases against Humira, gross margins will decline.

The question is whether their expectations for Rinvoq and Skrizi meet expectations and if other drugs are blockbusters.

Given the headwinds, it’s safe to assume margins across the board will decline throughout 2023 and potentially into 2025.

The company’s nearly $60 billion in debt, which is down significantly from $78.6 billion in 2020 and a result of the company purchasing Allergen that same year for $63 billion.

The acquisition expanded Abbvie’s presence in new therapeutic areas, such as aesthetics, eye care, women’s health, and neuroscience, with products such as Botox, Juvederm, Restasis, and Vraylar.

Management is using the $20 billion in free cash flow to bring the debt-to-EBITDA ratio down to 2.5x by the end of 2023.

Valuation

Source: Seeking Alpha

Relative to other pharma companies, ABBV isn’t particularly cheap whether you’re looking at its P/E or price-to-cash-flow ratio.

Pfizer (PFE) trades at a discount now that it’s losing demand for its Covid Vaccine. But Bristol Meyers Squibb (BMY) trades at a cheaper P/E and a slightly higher P/cash flow ratio.

Growth

Source: Seeking Alpha

It appears all the companies listed here are likely to see flat to negative growth, with the exception of Eli Lilly (LLY).

Additionally, the CAGR for net income, EPS, and other profitability metrics don’t adequately capture further growth given the cycle of drugs coming off patent while new ones come to market.

Therefore, its best to look at revenue growth as well as inspect each company’s drug pipeline.

Profitability

Source: Seeking Alpha

Regarding profitability, pharma companies typically run high margins that wane as drugs come off patent.

R&D is their highest cost initially, which is why many choose to buy out other drug companies.

We can’t say much from the metrics above other than ABBV is middle of the pack, which isn’t good or bad.

Our Opinion 8/10

Abbvie looks expensive given its headwinds.

However, we asked ourselves one simple question – what would you pay for a business that’s the same as it is now in two years, with less debt?

10x operating cash isn’t bad if revenues stabilize, especially if it can pull just one blockbuster from its pipeline.

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