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Abbvie And The Fight For Hepatitis C

Jan. 16, 2014 2:59 PM ETABBV, GILD
Eric Chiu profile picture
Eric Chiu's Blog
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Biotech, Healthcare

Seeking Alpha Analyst Since 2013

My name is Eric Chiu, a recent graduate from Western University (UWO) and CFA level 2 Candidate. I am particularly interested in the healthcare sector and within it, the research and development of pharmaceuticals. From the community at Seeking Alpha, I hope to generate thoughtful discussion and ideas in the analysis of small and large cap healthcare / pharmaceutical companies.

There are approximately 150 million people worldwide with Hepatitis C and 2.7-3.9 million people infected each year1. Abbvie has been able to develop an oral treatment that has shown an impressive 96% cure rate last month, which have similar results to the Gilead drug, Sovaldi. When it comes down to it, ABBV's sales will be largely dependent on the benchmark price of $84,000 ($1000 a pill wholesale) that Gilead offers. In the US alone there are approximately 3.2 million people suffering from Hepatitis C2, making me a firm believer that the market is still large enough to sustain high revenues for both companies. To give a snapshot into future revenues, there are currently 2 protease inhibitors on the market released for 2 years with longer cure times and lower cure rates. Vertex's drug Teleprevir sells at $49,200 and has generated $1.16 billion in revenue in 2012 which is approximately 90% from sales in the US and Merck's drug Victrelis sells at $26,400-$48,400 lead to $502 million in 20123. If Abbvie's Hepatitis C drug was priced the same as Sovaldi, it would require sales to <1% to generate $1.6 billion of the US population with Hepatitis C. Market accessibility will only improve with the future implementation of Obamacare. This leads me to believe that Alex Arfaei, an analyst at BMO capital markets has a plausible if not conservative estimate of a $1.6 billion peak in 20174.

In response to the release of Abbvie's drug, Gilead may be looking to undercut in price or invest more into its marketing strategy which should not pose a threat because of the large market.

The Financial Statements

Taking a look at the some highlights of the 3rd 10-Q we see that Humira (Abbvie's Tuberculosis drug) makes up 60% of sales at $7.2 billion and has increased 15% LTM. The patent is set to expire in early 2017 however it is estimated to have an extra few years before a generic can be created due to its complex nature. There has also been a 24% increase in selling, general and administrative spending of which we will see positive results in future fiscal periods. On the assets side, there has been a 70% decrease in short term investments and 52% increase in cash to a total of $8.975 billion, a substantially healthy amount for production of its Hepatitis C drug and future acquisitions.

Looking Forward

Already having experienced 59% increase in stock price this year, Abbvie is looking promising as Humira sales continue to rise and uphold profitability. This new Hepatitis C drug will be an annual billion dollar titan diversifying its portfolio and alleviating dependence on Humira. There is currently no other single drug on Abbvie's roster that generates over $750 million annually. The future is bright for this medium cap pharma as it goes into the future with deep pockets looking for more research and development opportunities.





Disclosure: I am long ABBV.

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