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AbbVie (ABBV), a spun off unit of Abbott Laboratories (ABT), has generated returns around 30% to investors since its formation. AbbVie is a pharmaceutical-research company focusing on entering in the Hepatitis C virus, or HCV, market with its new HCV drug, which is expected to strengthen its product pipeline. It also has an opportunity in endometriosis, a disease affecting women, that the company is running its second phase III trial. We expect the success of both these drugs will drive the company's future earnings, and may result in upsurge of its stock price.

High growth potential in HCV market

After experiencing success in the phase II trial, where it was able to cure Hepatitis C patients with eight weeks of medication, AbbVie is now expecting to launch its new-generation all-oral HCV vaccine before its competitor Gilead Sciences (GILD). AbbVie's unnamed multidrug therapy for HCV is on the verge of FDA approval as the company is running the trial phase of its HCV drug. This multidrug therapy will enhance the immunity of the HCV patients. In its phase II trial, this drug was able to successfully treat 90% of the patients who completed their eight-week dose regimen. The company is working to eliminate severe problems related to virus and bacterium attacks on the liver through its HCV drug, and it's focusing on improving the cure rate while also shortening the treatment duration. After reporting success in its phase II trial, we believe the company has a good chance of receiving FDA approval earlier than its expectation.

According to WHO, there are nearly 203.2 million, or 3% of the total world's population suffering from HCV. More than 5 million people in Europe and around 3.2 million in the U.S. suffer from HCV. Currently, the global market for HCV drugs is around $5 billion, and the success and approval of HCV drugs is expected to raise this market to $20 billion. If AbbVie's HCV drug receives FDA approval sooner, then we expect the company has a strong opportunity to grab a major chunk of this HCV market.

On the other hand, in May 2013, Gilead received marketing authorization of its HCV drug, "Sofosbuvir" in the 27 European Union countries, and it will be available by the first half of 2014. The company has also applied for FDA approval, and in June 2013, the FDA granted priority review status to Sofosbuvir in combination with its other HCV drug "ribavirin". FDA grants priority review status to those drugs that have shown significant improvements in the treatment of diseases compared to existing options. Review is expected on December 08, 2013. The combination therapy is far more effective than Sofosbuvir alone. In the trial phase, Sofosbuvir was able to cure 95% patients after the eight-week dosing. In combination of ribavirin it was also able to cure some of the critical HCV cases. Gilead is expecting to treat around 150,000 people per year during Sofosbuvir's peak sales period.

In our previous article, we estimated the peak sales of Sofosbuvir in its initial period to be around $3.3 billion, and it will be one of the company's blockbuster drugs.

Phase III trial for Endometriosis

On August 29, 2013, Neurocrine Biosciences (NBIX) announced the second phase III trial of elagolix, a drug used to treat endometriosis, in collaboration with AbbVie. Endometriosis causes chronic pelvic pain throughout the menstrual cycle, and may result in infertility. The second phase III trial is expected to announce late-stage results in the third quarter of 2014 and is expected to complete in 2015. In previous trials, elagolix wasn't able to treat the patient successfully with the 50mg. However, patients who took 100mg dose for two weeks reported meaningful improvement in their immune system and found 100mg dose more effective in addressing the ailment without any significant side effects. The company will conduct the second phase III trial at more than 200 sites globally and will evaluate the safety and efficacy of this drug in women who are suffering from moderate-to-severe endometriosis related pain.

According to a survey by The World Endometriosis Research Foundation there are nearly 100 million women globally who are suffering from endometriosis. The annual healthcare cost and the productivity loss related to endometriosis is around $4,000 per patient and the endometriosis-related healthcare cost in the U.S. alone is expected to exceed $20 billion annually. The company plans to run mid-stage trials with its 100mg or higher doses to evaluate its effects on endometriosis patients and expects to spend around $8 million-$10 million on this trial phase. As there is no available treatment for this disorder, we expect the success of elagolix in the trial phase and the FDA approval would generate an enormous opportunity for the companies to grow in the future.

After reporting failure in treating endometriosis patients with its 50mg dose of elagolix on September 10, 2013, Neurocrine's stock dropped around 30%, and to date the stock price hasn't recovered from this carnage. We suggest a hold strategy here, and advise waiting until the success of the second phase III. We expect it to post positive results since the drug hasn't demonstrated any significant side effects at the 100mg dose, and positive results will drive its stock price higher.

Conclusion

AbbVie has a strong return on equity, or ROE, ratio of 80.80%, and the dividend payout of 61.30%. Further, it has the price-to-earning growth ratio of 0.99, with P/E multiple of 13.8 compared to industry's P/E of 15.8. Therefore, we consider AbbVie a good buy opportunity for the long term.

The company is focusing on tapping the opportunities present in the HCV market and expects to post successful trial phase results of its HCV drug. The collaboration with Neurocrine to run the second phase trial of elagolix will also support the company's future growth.

Source: Why AbbVie Is A Solid Buy

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Satya Prakash, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.