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Why AbbVie's Global Alliance With Galapagos Is Good News for Investors

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Since becoming an independent company late last year, AbbVie (NYSE: ABBV  ) has been making significant progress. AbbVie shares have been among the best performers in the health care sector this year, gaining nearly 31% year-to-date. The gains have come as AbbVie has registered strong performance in the first six months as an independent company. In addition, the company has been taking steps to further boost its performance. One such step is the global alliance with Galapagos to discover, develop and commercialize therapies for cystic fibrosis.

Meeting unmet medical need
This certainly seems to be AbbVie's mission. Last week, AbbVie announced that it entered into a global alliance with Galapagos to discover, develop, and commercialize novel potentiator and combination therapies in cystic fibrosis. An inherited chronic disease, cystic fibrosis affects some 70,000 people globally.

With the global alliance, Galapagos is looking to capitalize on AbbVie's ability to commercialize the therapies on a vast scale once they are approved by regulators.

Under the terms of the alliance, AbbVie will be making an upfront payment of $45 million to Galapagos for rights related to the global alliance. On successful clinical development and regulatory approval, AbbVie will be in charge of commercial activities. Meanwhile, Galapagos will retain exclusive rights in China and South Korea and co-promotion rights in Belgium, the Netherlands, and Luxembourg.

According to GlobalData, the cystic fibrosis therapeutics market across the U.S. and western Europe was valued at $1.2 billion in 2012. More importantly, the market is expected to rise at a compound annual growth rate of 31.9% to reach $4.6 billion by 2017. Given the expected increase in the cystic fibrosis therapeutics market in the next few years, AbbVie and Galapagos have a tremendous opportunity. However, they face competition from the likes of Vertex Pharmaceuticals (NASDAQ: VRTX  ) and Novartis (NYSE: NVS  ) .

AbbVie and Galapagos are expected to face competition from Vertex's VX-661, which is currently in phase 2 clinical trial. VX-661 has already shown statistically significant results when used alone or in combination with Kalydeco, which was also developed by Vertex.

AbbVie is also expected to face competition from Novartis' TOBI, which is the only FDA-approved inhaled antibiotic for the treatment of cystic fibrosis. TOBI Podhaler was approved by the FDA in March this year after the treatment's effectiveness was established in a study of 95 pediatric and adult patients with cystic fibrosis.

While AbbVie and Galapagos face competition in the cystic fibrosis treatment market, Galapagos' cystic fibrosis programs have shown promise. In addition, as Jim Sullivan, AbbVie's vice president of pharmaceutical discovery, noted, there is significant unmet medical need in cystic fibrosis therapeutics market. The alliance, therefore, is good news for AbbVie investors.

Creating value for shareholders
Since becoming an independent company, AbbVie has done well. In the second quarter of 2013, the company's worldwide sales stood at $4.692 billion, up 4.4%. For the first half of 2013, the company saw better-than-expected sales growth, according to AbbVie's CEO. In addition, the company also raised its diluted adjusted earnings per share guidance for the full-year 2013 to $3.07-$3.13 from $3.03-$3.13. Not surprisingly, AbbVie shares have outperformed the S&P 500 so far this year. Despite posting significant gains this year, AbbVie shares are trading on a P/E ratio of around 14, which is reasonable given the company's growth prospects.

Through the alliance with Galapagos, AbbVie is making sure that it will continue to see robust sales growth in the future and create value for shareholders in the long term.

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