Why you should buy AbbVie Inc. shares

AbbVie (NYSE: ABBV) is Big Pharma multinational, that was spun-off from Abbott in 2013. ABBV’s flagship product Humira generated sales of $19.8 billion or 45 per cent of revenues in CY20. The blockbuster revenues are expected to diminish in the next 3 years as Humira has lost exclusivity outside its home turf from 2018 and from 2023 in the US. Meanwhile, Rinvoq and Skyrizi in the immunological franchise are geared to plug the Humira-gap along with other large products in oncology.

Given this backdrop, investors with moderate risk appetite may find this a good time to enter the stock that is trading at 7.8 times CY22 earnings and an EPS CAGR of 14 per cent between CY20 and CY22 (Bloomberg). The stock price bears the overhang of Humira loss and execution risk of Rinvoq and Skyrizi while ignoring the growth potential of newly-launched products and pipeline potential. ABBV’s acquisition of Allergan in 2020, meanwhile, can help sustain strong cash flows and an attractive dividend yield of 4 per cent.

Immunology options

Humira’s (TNF based Biologic) major therapies include rheumatoid arthritis, psoriatic arthritis and ankylosing spondylitis under rheumatology; atopic dermatitis and psoriasis in dermatology; and Crohn’s disease and ulcerative colitis in gastro.

Humira’s wide scope of therapies is being slowly addressed by Rinvoq and Skyrizi. Rinvoq (a janus kinase (JAK) inhibitor) has been approved for rheumatoid arthritis in the US in 2019 and additionally for atopic dermatitis in Europe and is in advanced stages for filing in atopic dermatitis (US), psoriatic arthritis and ankylosing spondylitis. Similarly, Skyrizi (IL-23 inhibitor) has been approved for psoriasis and is filing in gastro indications. Rinvoq and Skyrizi, launched in 2019, generated combined sales of $2.3 billion in CY20 and ABBV expects to generate around $15 billion by CY25 (peak sales expected around CY30). Rinvoq and Skyrizi have so far generated strong Phase 3 data for most indications under regulatory review including better safety profile. But a recent post-marketing safety study on a competing JAK (tofacitnib) has revealed elevated cardiac and cancer risk which may apply on Rinvoq as well. A clarity on label with upcoming atopic dermatitis review should address safety concerns. But even otherwise, Rinvoq application in second line of treatment (30 per cent share) should imply a patient population with higher risk tolerance.

ABBV has a strong hematologic oncology portfolio with Imbruvica ($5.3 billion in CY20) and Venetoclax ($1.3 billion) - which is expected to add a few more line extensions as it ramps towards peak sales estimate of $3 billion.

Line extensions of the two immunological assets can fill the gap of Humira, while the other 50 mid/late-stage pipeline assets can drive growth for ABBV. Through acquisition of Allergan, ABBV added a migraine portfolio which can generate around $2 billion in peak sales consisting of recently approved Qulipta (episodic migraines), and Ubrelvy (acute migraines). Allergan’s Vraylar approved for three anti-psychotic diseases is expected to generate peak sales of $4 billion by the next few years from $1 billion in CY20. ABBV also has an Alzheimer’s portfolio in mid-stage development and it expects improved cognitive function compared to adacanumab from Biogen. In immunology, the most noteworthy pipeline asset is a TNF/steroid conjugate ABBV-3373 with positive results from studies in Phase-2a for rheumatoid arthritis. Antibody drug conjugates combine the specificity of earlier generation with the toxicity/effectiveness of conjugates.

Allergan was an once an acquisition target for Pfizer in a proposed $160 billion deal in 2015-16 which however did not go through. It subsequently sold to Abbvie for a third of the consideration. Its well-established aesthetics business (Botox fillers) complemented by neuroscience portfolio have been the main draws from a product perspective and favourable taxation domicile in Ireland also has a positive pull. But replacing Humira cash flow could have been the main draw behind the acquisition. Allergan reported high operating cash flow to revenue ratio of 37.5 per cent at the time of the deal. The company was acquired for purchase consideration of $63 billion (cash component of $39 billion and stock component of $29 billion ) in a deal announced in mid-2019 and concluded in mid-2020.. Generic threat to Botox has been perennial but the complex nature and established brand presence can protect the franchise. ABBV intends to leverage its large international presence and therapeutic sales ability to Allergan’s products.

Financials

ABBV reported sales of $45.8 billion in CY20 including consolidation of Allergan acquisition mid-year. Adjusted for a comparable base, revenue would have been $50.5 billion and $49 billion in CY20 and CY19, respectively. ABBV’s EBITDA margins have been volatile at 25-46 per cent as R&D costs have ranged between 14 and 31 per cent in the last three years. Sales and other expenses were impacted by weak new patient starts the previous year which impacted Allergan operations as well. Its performance in the current year (1H CY21) has recovered to report 12 per cent comparable growth in revenues. . The two immunology assets are expected to deliver $5 billion revenues in CY21 and ABBV had guided to an EPS of $12.57 at the mid-point for CY21.

ABBV’s net debt to EBITDA is higher at 4.34 times as half of the Allergan acquisition was financed by debt. ABBV intends to paydown the debt in the next 5 years. With $18 billion in annual operating cash flows, ABBV should address its $80-billion debt .

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