The decision to sell a company should never occur due to haste or through fear such as the leg down Friday due to the Brexit vote. Instead, careful reflection to the various risk factors affecting a company's prospects should be undertaken. The article below will detail my sell thesis on AbbVie (NYSE:ABBV).
ABBV generates over 60% of its revenue via its blockbuster immunology franchise Humira. Humira remains one of the top-selling products the world over. As we can see from the table above, with the exception of Imbruvica, which remains in its infancy, the stable of goods remains uninspiring. To say the least, the long term viability of Humira is critical for any five years discounted cash flow analysis to have merit. As currently configured ABBV cannot withstand a biosimilar challenge to its cornerstone franchise. Management has assured us the intellectual patent estate is incredibly durable leading to their confidence it can withstand the legal onslaught of a patent challenge. Let's review some of the management's recent comments to determine whether faith is warranted. The much hyped Hepatitis C treatment Viekira Pak continues to stumble along with its market share at risk from Merck's (NYSE:MRK) newest treatment. Keep in mind the HCV space was viewed as a significant organically grown profit driver that would further diversify ABBV revenue stream. I found the following quote pertaining to the pricing dynamics of the HCV market quite revealing. Quote courtesy of the Sentieo research platform.
Marc Goodman, UBS - Analyst 
Yes, morning, maybe we can talk a little bit about just the business for a sec, VIEKIRA was a little bit weak, maybe you can talk about the US versus international, how Japan is doing, US seems to be falling off quite a bit, I mean, are we just losing share? Give us a sense of what's going on there.
Rick Gonzalez, AbbVie - Chairman and CEO 
So this is Rick. I'll take VIEKIRA, and Bill can take the HUMIRA question, and we'll have Mike cover the ASCO question. So, VIEKIRA, let me start with Japan. Japan is continuing to track consistent with our expectations. So I think there's nothing all that remarkable in Japan, it's a good market, and our profile within that market is a good profile.
The US has certainly been more challenging, I would say that it's a combination of several factors -- some volume loss, as well as some price loss. As Merck has entered the market, we know that they set the list price lower than the other products in the marketplace. That strategy initially, I think, we interpreted as a strategy that would go after medical exceptions, because medical exceptions historically are in at more of a list price point. And so they had the lowest price essentially on a medical exception basis, and they have been somewhat successful in gaining some of those medical exceptions. So that's part of the issue.
The second part of the issue though is, they have been more aggressive than we anticipated from a pricing standpoint, particularly in the public segments, the VA in particular. And as we looked at that, we ultimately made the decision that we were not going to compete with the lowest overall price in the VA. We did adjust our price down, but we didn't adjust it down to the very lowest price, and that has caused us to, obviously, lose price, but also lose volume, and we had a fairly significant share of VA.
So I think it is those factors playing out, and I would say that, based on where the US is going, it is unlikely that we will achieve the $2 billion number that we described earlier. I think a number that you should be thinking about now is more in the [$1.6 billion] range, globally I'm talking about.
And you can look at this quarter as an example. Even though VIEKIRA was weaker than we expected, we obviously beat our EPS number and achieved our revenue numbers, so it talks to the strength of the rest of the business -- that's the nice thing about our business, is we have good balanced performance across a number of different assets, and so when one thing doesn't go as well as we had hoped, then others can pick up the slack.
So we will not be changing our guidance based on this. We factored that into our going-forward guidance in 2016, and we are comfortable with the guidance that we provided you. But those are the facts around VIEKIRA.
Yikes. Management had high hopes for this compound, and it simply will never gain much traction nor market share. Then along comes a competitor in MRK, trying to justify how it missed out on Pharmasset(lead compound Sofosbuvir the backbone of Gilead Sciences (NASDAQ:GILD) HCV franchise) with a new treatment that is poised to take share from ABBV product. Thus far GILD retains 90% of the lucrative HCV market with ABBV and MRK fighting for scraps.
I am impressed with ABBV aggressive use of cash to diversify their pipeline. A recent article, detailed the Stemcentryx purchase holding it up as a model which GILD should emulate. The recent ABBV analyst day was well received with the stock hitting new highs for the year as illustrated below. The analyst community was hyped for data from the recent acquisition. To say the least, the presentation underwhelmed leading to questions whether or not ABBV overpaid once again for an acquisition.
From a technical perspective, the shares hit an important near-term top at the beginning of June with the R&D day serving as the catalyst. The momentum quickly dissipated once the less than stellar results of Rova-T, the lead product acquired from Stemcentryx. I penned a recent article post the announcement from the patent office that Coherus Biosciences (NASDAQ:CHRS) legal challenge on Humira may proceed. I mentioned patience is needed as the earliest possible biosimilar that may come to market is mid-2018. The primary reason for the optimism is ABBV late-stage pipeline coupled with management's aggressive use of cash to fill in the holes of their clinical pipeline.
The less than stellar phase 1 results of Rova-T has shaken my confidence; the need for caution is warranted. ABBV is highly exposed here; a biosimilar to Humira would negatively affect the value of the company. At a current share price at the time of writing above $60, the prudent course of action is to sell and lock in a very appealing profit of over 20% in a holding period of less than a year. A successful patent challenge would lead to a roundtrip right back to the high $40's with the upside here rather mixed due to the lack of faith in the near term pipeline. In some ways, the lack of enthusiasm is what led to the opportunity to acquire shares on the cheap, which I am thankful for. I find it quite telling that management needs to spend an inordinate amount of time explaining itself to generate some enthusiasm. Either the analyst community is way off, or the skepticism is warranted. At this point, my intuition leads me to conclude it could go either way. I believe the time for risk management is at hand hence the sale. Happily, the recent turbulence has led to some excellent bargains with a special report released to subscribers of the Undervalued Gems service detailing my top pick for 2017. The dividend yield is roughly on par with ABBV negating the potential loss of income with a far more stable path for share price advance. I would like to thank you for reading, and I look forward to your comments.
Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.
Disclosure: I am/we are long GILD.