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Investors in AbbVie (NYSE:ABBV) have seen further upside after the firm received a big upgrade from analysts at Goldman Sachs.

While AbbVie has a promising pipeline, new drug introductions will have a lot to make up for. With Humira, which currently generates revenues north of $10 billion per annum, facing expiration in 2016 there are headwinds on the horizon.

Given the premium valuation, these medium term headwinds and modest build up in leverage, I remain cautious and stay on the sidelines. I don't share Goldman's conviction buy rating.

Goldman's Upgrade

Analyst Jami Rubin at Goldman Sachs (NYSE:GS) placed AbbVie on the Conviction Buy list. Rubin attaches a price target of $60 per share, suggesting some 24% upside potential from Monday's levels, the day before the upgrade has been released.

Rubin notes that AbbVie has an $18 billion revenue base and a much greater pipeline leverage than most other mid-sized biopharma peers. The company is entering a long period of robust clinical trial read-outs, starting in the fourth quarter.


AbbVie ended its third quarter with $9.0 billion in cash and equivalents. Total debt stands around $14.8 billion, for a net debt position of around $5.8 billion.

For the first nine months of 2013, AbbVie generated revenues of $13.7 billion, up nearly 4% on the year before. GAAP earnings fell by fifth to $3.0 billion, on the back of higher income tax expenses.

At this pace AbbVie is on the trajectory to generate revenues of $19 billion, while reporting earnings of $4.1 billion this year.

Trading around $50 per share, the market values AbbVie at $79 billion. This values the operations at 4.2 times annual revenues and 19-20 times annual earnings.

AbbVie currently pays a quarterly dividend of $0.40 per share, for an annual dividend yield of 3.2%.

Some Historical Perspective

AbbVie was spun-off from Abbott Laboratories (NYSE:ABT) which became effective at the start of this year. Shares started the year around $33 per share, and have risen by nearly 50%, currently trading at highs around $50 per share. Solid growth and an improved pipeline have been the factors supporting shares going forwards. Also note that AbbVie thereby has vast outperformed Abbott Laboratories whose shares have risen some 15%.

Between 2009 and 2012, AbbVie has increased its annual revenues by a cumulative 29% to $18.4 billion. Earnings rose by some 14% to $5.3 billion.

Investment Thesis

Following the spin-off, investors in AbbVie have seen very solid returns. The attractive dividend and continued success of top selling drug Humira are key attractions to the stock. Note that Humira is expected to breach the $10 billion sales barrier this year for the first time, after the arthritis treatment drug has already been introduced in 2002. While these are the good times at the moment, Humira and its investors are facing a costly expiration in 2016, when the drug will lose its US patent protection.

As such, investors might see good times for another three years. Yet analysts are quick to point out that competing drugs may take longer to arrive, given the greater difficulties to create generics for "biosimilar" forms of competing drugs. Yet the current window of let's say four year's time should provide significant cash flows, partially to be used to further improve the future pipeline. The company is already focused on new hepatitis C treatments, as well as focuses on blood cancer drugs.

While Goldman might be very optimistic about the future pipeline of AbbVie I have to be a bit more cautious. Sales of Humira are more then ten times as large as those of its second best selling drug AndroGel. It furthermore takes more than a few introductions, and possibly quite some blockbusters to replace roughly $10 billion worth of lost revenues going forward.

Therefore, I am a bit more cautious. The promising pipeline is a strong point, but I doubt whether it can make up for the lost revenues at this point in stage from revenue shortfalls of Humira in the future.

On the back of this reason, the fairly high valuation at 19 times earnings after this year's momentum, and the net debt position of $6 billion, I remain a bit more cautious and do not share Goldman's conviction optimism.

Source: AbbVie - Unlike Goldman I Don't See AbbVie As A Conviction Buy