AbbVie (NYSE: ABBV) surprised the market this quarter, the first after it began trading in January this year and posted a net income of nearly $1 billion - $968 million to be exact -3% more than what analysts had forecast. The results were even more surprising as at the time it was separated, it was generally believed that Abbott's (NYSE: ABT) old pharmaceutical business, now AbbVie, would be a slow growing company considering forthcoming patent expirations - roughly $1 billion in 2013. The biggest hit was expected in 2016 when the patent on its blockbuster rheumatoid arthritis drug, Humira, expired.
However, things have turned out much differently - the stock has gained more than 33% since it started trading on January 2, 2013, which is not only more than most of the other companies in the industry but also more than the broader market. Abbott, on the other hand, fell more than what AbbVie gained.
AbbVie is a good investment for the income-oriented investor, but it is not about dividend only.
AbbVie's tryst with patent cliff
The patent cliff has been the pharmaceutical industry's biggest challenge in recent times as some of history's most profitable drugs go off patent. Abbott lost patent protection for its cholesterol drug Tricor in 2012. AbbVie will see patent on its other cholesterol drug, Niaspan, expire in September this year.
Most of the negative sentiment at the time of separation from Abbott centered round Humira because AbbVie was to focus primarily on patented drugs. Humira was responsible for almost 20% of Abbott Laboratories' revenues in 2011, and the problem with AbbVie was that its success hinged on it as more than half of its revenue was to come from Humira.
Much to the surprise of the doomsayers, AbbVie reported revenue of $4.33 billion for the quarter ended March 30, 2013, earnings per share of $0.68 and continued with its dividend program. Since it started trading as a separate entity, the company has paid two quarterly dividends of $0.40 per share in January and April.
At CMP of $47.17, it has a yield of 3.6%, which is comparable to that of pharmaceutical giants such as Merck & Co (NYSE: MRK) and better than the healthcare conglomerate Johnson & Johnson (NYSE: JNJ). On top of it, in February, the company announced a $1.5 billion share buyback program.
The Humira effect
Overdependence on a single drug is indeed a big problem, but if one has to, Humira is THE product - a worthy jewel in the crown. Humira is indeed AbbVie's life and blood but evidently analysts erred in understanding the potential of the drug's growth.
That Humira still had adequate potential was clear from the company's Q4 results, which showed sales of Humira at $2.7 billion, a 23.1% increase in sales on year-on-year basis. Global annual sales in 2012 were $9.3 billion, ranking Humira among the best selling pharmaceutical product in the industry.
Humira (adalimumab) is a TNF inhibitor and was approved by the FDA in 2002 to treat rheumatoid arthritis. Subsequently, the FDA approved it for psoriatic arthritis (2005), ankylosing spondylitis (2006), Crohn's disease (2007), plaque psoriasis (2008) and juvenile idiopathic arthritis (2008). In September 2012, Humira was approved for treating moderate-to-severe ulcerative colitis in adults.
Adalimumab is a biologic and not a chemical compound. A biologic is derived from living cells that are used as therapeutics for curing disease. Developing and manufacturing a biologic medical product is not only difficult, the FDA also has stricter norms for approval of generic versions of biologics than it has for generics of chemical compounds. Moreover, Humira is further protected by numerous patents for its manufacturing processes, which will make it even more difficult for generic drug makers to come up with cheaper alternatives soon.
A pipeline that is as strong as it comes
However, AbbVie's biggest strength is its pipeline. It has 10 development programs in Phase III clinical trials and plans to submit 15 candidates for approval between now and 2017. To its advantage, 30% of its development programs focus on biologics. FDA approval for the company's drug for Parkinson's disease, Duopa, is expected later this year.
In addition, AbbVie also plans to expand the use of Humira and seek approval for treatment of more diseases and is also working to boost its efforts on trials for finding a successor for Humira. The company announced recently of the extension of its clinical development collaboration for GLPG0634, the experimental program that it is working with Galapagos NV, to include Crohn's Disease. Galapagos is to fund a Phase 2 program of the drug and after completion AbbVie will $50 million and take over the development program beyond Phase 2.
As on March 30, 2013, the company had adequate cash (almost $7 billion) to fund development of its pipeline products. In addition it enjoys a healthy cash flow situation and a 20% profit margin.
Analysts expect the company to maintain its top line and forecast an EPS of $3.13 for 2013 and grow to $4.05 per share by end of 2016.
All indications are that AbbVie is sliding down the patent cliff comfortably. Despite the 3% plus gain in stock price, it is still trading at 13.91 P/E, which is lower than most of the other large pharmaceutical companies, including Sanofi (NYSE: SNY), Johnson & Johnson, Novartis (NYSE: NVS) and GlaxoSmithKline (NYSE: GSK). Considering the growth potential and current yield, it deserves a higher forward P/E (2014) than 14.35. In my opinion, at CMP AbbVie is undervalued and definitely a strong buy.