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AbbVie (NYSE: ABBV ) is an odd duck among its large pharma peers, as no company relies more on a single drug than AbbVie relies on Humira. That should be changing soon, though, as AbbVie looks to challenge Gilead (NASDAQ: GILD ) in the new market for next-generation hepatitis C (HCV) therapies. Although I'm bullish on AbbVie's prospects in HCV, I do have some concerns that the company has under-developed its pipeline and that Street expectations may already be pretty demanding.
A So-So Fourth Quarter
AbbVie didn't end 2013 on an especially high note with its financials. Revenue was in line with expectations, as sales fell 2% from last year. Humira continues to perform quite well (up 13%), but it remains a dominantly part of AbbVie's business (60% of sales) and the next three largest drugs all saw year-on-year declines in revenue.
AbbVie saw gross margin improve two and a half points from the year-ago level, though the result was about a half-point below sell-side expectations. Management basically made up the difference through operating spending, though, and the 3% decline in operating income was on par with expectation, as was the half-point decline in operating margin.
In HCV, There Is Room For At Least Two
Sell-side analysts have been characterizing the emerging next-gen HCV treatment market as a winner-takes-all market, but I doubt that will prove to be the case. Gilead ought to see some meaningful advantages from its head start in time-to-market and its better dosing – in GT1 treatment-naive Gilead's regimen calls for one pill, once a day, while AbbVie's calls for a total of six pills taken twice (four in the morning, two in the evening).
Even with those advantages, AbbVie's regimen should be competitive given that its combo therapy has shown a similar cure rate. Both Gilead and AbbVie have delivered SVR rates well above 90% across a variety of patients. There are some edges to Gilead in the data (lower breakout rates, for instance), but not so much that I think AbbVie will need to price aggressively to establish market share. Merck's once-daily combo will likely be a threat down the line (and perhaps Johnson & Johnson as well), but don't forget that AbbVie still has compounds in the clinic that could offer lower pill burdens as well.
Is The Rest Of The Pipeline Deep Enough?
If you look at other large pharmaceutical companies like AstraZeneca, Bristol-Myers Squibb, Lilly, Merck, and Pfizer (NYSE: PFE ) , AbbVie looks like a laggard in terms of the depth of its Phase II and Phase III pipeline. While most of those companies have more than 20 compounds in those stages of development, AbbVie's roster numbers in the high teens.
This could be a case where depth is secondary to quality. AbbVie's HCV pipeline has, in my opinion, above-average odds of generating over $2 billion in revenue by the end of this decade. Other drugs like Elagolix and daclizumab also address meaningful potential markets, and AbbVie isn't known for moving low-probability drugs into expensive late-stage tests. Even so, there are "buts" here – the success of Elagolix and daclizumab will both be shared with partners and the company's position in oncology is not robust today.
Humira Not Done Yet
Although AbbVie's dependence on Humira is frequently cited as a weakness for the company, I believe there is quite a bit of potential left in this drug. J&J's Remicade and Amgen's Enbrel have only about half the approved indications that Humira has, and AbbVie is still pursuing additional follow-on indications. Considering that Humira's penetration is likely less than one-third in many markets and that developing biosimilars has thus far proven more difficult than would-be generic rivals expected, I think there is an argument for meaningful sales for some time.
Pfizer's going to fight hard, though. Pfizer co-promoted Enbrel and has its own oral rival Xeljanz. While Xeljanz is well behind in terms of indications, data on psoriasis and ulcerative colitis are coming. The oral availability of Xeljanz is appealing, but safety risks may stymie Pfizer's efforts to develop it into a front-line therapy. That would be good news for AbbVie, though the fact that more than 20% of patients fail TNF therapies should leave plenty for Pfizer to develop Xeljanz into a commercially successful drug.
The Bottom Line
A lot has to go right for AbbVie to be particularly cheap today. I'm bullish on Elagolix and AbbVie's HCV program, but I'm less certain that compounds for kidney disease, MS, Alzheimer's disease, and oncology will deliver the hoped-for revenue that some analysts are projecting for 2020. The long-term revenue growth I'm looking for from AbbVie (about 4%) is actually pretty strong compared to other Big Pharma companies, but it only gets me to the mid-to-high $40s in fair value.
At today's price, I would expect AbbVie to offer a total return close to what I expect from the broader market. That's not terrible, it's just not the sort of bargain I usually try to look for when buying a new stock.
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