AbbVie Appears Ready To Reverse And Outperform

Summary

• AbbVie recently sustained a substantial decline after label changes created concerns over a small but fast growing drug.
• This follows AbbVie getting scapegoated over patent and tax matters.
• These risks appear priced in, and AbbVie appears substantially oversold.
• AbbVie's dividend and cash flow remain underappreciated.

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AbbVie (NYSE:ABBV) shares appear to present a strong relative bargain. Shares have performed poorly over the last two quarters. The company posted its worst single day loss since March of 2020 after the FDA updated safety warnings on Janus kinase (JAK) inhibitors, including ABBV's Rinvoq. Despite this, the company's strong current earnings, debt repayment, and a substantial dividend remain desirable attributes for a long term allocation. I believe shares present a strong risk/reward profile here below $110 per share.

JAK risk to Rinvoq appears minimal

The recent warning from the FDA regarding JAK inhibitors was due to noticing the increased risk of certain heard conditions that are correlated and possibly caused by taking Xeljanz. That drug is not made by ABBV, but rather by Pfizer (PFE), but the FDA wants revisions to warnings for all JAK inhibitors, which includes ABBV's Rinvoq.

While this risk is a clear concern to takers of these medications, their use still appears likely to grow over time. Moreover, it is not clear whether some JAK inhibitors may be able to differentiate themselves on this safety profile. Rinvoq is a relatively new medication that may actually take greater market share from Xeljanz going forward. Rinvoq made about $731 million in sales in 2020 and still has the potential to become a blockbuster.

The reaction to this notice to ABBV shares appear to be worth more than Rinvoq in its entirety.

Data by YCharts

This sharp decline is mostly unwarranted and likely to self-correct in the near term. Similarly, at least some of AbbVie's apparent recent discount is due to political risk. Congress essentially pilloried AbbVie twice this spring. In May, the House Oversight Committee complained about how AbbVie use patents to protect and extend the longevity of its intellectual property. The Senate Finance Committee also demanded information on AbbVie's use of international corporate domiciles and tax laws to shield income from U.S. taxation.

AbbVie also continues to benefit from their 2019 acquisition of Allergan. That deal was not appreciated by the market, and it remains under-appreciated. Allergan provided needed diversification from Humira for AbbVie, and that diversification is also profitable.

Allergan was a great acquisition, which brought over $2 billion in revenue from eye care, and almost $2 billion in gastrointestinal revenue. Allergan also contained a women's health division that is likely to grow. Allergan was best-known for its aesthetic and/or cosmetic treatments, such as Botox, Juvederm, and CoolSculpting.

(Source: AbbVie's The Combination of AbbVie and Allergan presentation)

Allergan also provided a promising neuroscience division that included Vraylar, which is the fastest-growing atypical antipsychotic in the United States. Vraylar could be a future blockbuster, and its revenue is wholly differentiated from AbbVie's historic core revenue drivers.

AbbVie returns to support

AbbVie has been consolidating a recent trading range for most of 2021. I thought it was likely to finally break out of that range, but it broke down instead.

Source: Finviz.com

AbbVie is a Dividend Aristocrat that is likely to increase its quarterly payout this quarter. At its current price range, AbbVie is already yielding around 4.9 percent. AbbVie's dividend is also well covered, with less half of the company's estimated 2021 EPS covering the payout. Last year, AbbVie increased its quarterly dividend from $1.18 to $1.30, and the company is likely announce a 5-15% increase to the quarterly payout within the next few months.

AbbVie is also a repurchaser of shares. That makes it easier to cover the dividend. It is also reasonably probable that the company will add to its share repurchase plan within the quarter.

Risks

AbbVie is sensitive to political risk, and was already dragged before congress earlier this year. Increased congressional scrutiny could result in a serious gap down in share price. It appears that the company already absorbed much of this risk, but it is unclear when that risk will fully resolve itself. Focus could increase, though that seems unlikely here. Declines of 20% or more are reasonably possible to even the largest of drug companies when the headlines get negative.

AbbVie's continued dependence upon Humira remains its most frequently discussed risk. Humira accounts for roughly 30% of AbbVie's total revenue, and it has the potential to continue growing, though at a declining rate. Nonetheless, biosimilar competition has the strong potential to eventually affect margins and take substantial market share. So far, Humira remains extremely profitable and a key source of revenue for funding the company's future, as well as paying its debt obligations.

Conclusion

AbbVie appears to be one of the more undervalued large biopharmaceutical companies. The market also continues to under-appreciate AbbVie's acquisition of Allergan, which provided scale and diversification. The company should appreciate in the coming years, and also has a dividend that currently yields around 4.9 percent, with probable annual increases through the next several years. ABBV shares appear a strong bargain below $110 per share.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of ABBV, PFE either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.