AbbVie (ABBV -0.41%) stock has been on a roll. The biotech's share price recently hit a 52-week high and is within striking distance of breaking its all-time record high.
Will AbbVie's momentum continue? It's possible that the stock will soon run out of steam. However, I think there's a compelling reason to think that AbbVie should go even higher.
Image source: Getty Images.
Simple logic
Why will AbbVie stock go higher? The logic is simple and based on two assumptions. The first assumption is that the biotech's earnings will increase significantly. The second assumption is that AbbVie's valuation isn't likely to go much lower than it is now. When you put these two assumptions together, you have a stock that is headed higher.
I'll delve more into why AbbVie's earnings will increase significantly later. For now, know this: I'm not the only one who thinks this will happen. The company itself forecasts adjusted earnings growth of 13% to 15% for 2017. The consensus among Wall Street analysts is that AbbVie will grow earnings by an average annual rate of over 14% during the next five years.
As for the second assumption, consider that AbbVie stock currently trades at less than 11 times expected earnings. That's cheaper than plenty of other drugmakers with much lower growth prospects than AbbVie has. If earnings are solid, I seriously doubt that the stock's valuation will deteriorate.
But what about Humira?
The most important objection that could be made to these two assumptions is that Humira is in danger. Amgen (AMGN -1.76%) has already won approval of a biosimilar to Humira. Coherus Biosciences (CHRS -4.95%) recently won a ruling from the U.S. Patent and Trademark Office that invalidated one of the patents for Humira.
Around 63% of AbbVie's total revenue stems from the drug. If Humira sales fall, AbbVie's earnings will fall. And if that happens, both of the stated assumptions would be blown out of the water.
But how much danger does Humira really face right now? Yes, Amgen won FDA approval for Amjevita, the first Humira biosimilar to be approved in the U.S. However, Amjevita isn't on the market yet. AbbVie is fighting Amgen in the legal system, alleging infringement of 61 patents that are still in force for Humira. The trial doesn't even begin until November 2019.
Image source: Getty Images.
And while Coherus succeeded in its effort to have one of Humira's patents invalidated, AbbVie will employ the same legal strategy against the company that it did with Amgen. Coherus might state publicly that it intends to launch a Humira biosimilar in 2018, but the reality is that the biotech will almost certainly be bogged down in court for a few years.
AbbVie thinks that it will be able to fend off biosimilar rivals to Humira until 2022. Wall Street analysts don't think any biosimilar to the drug will launch in the U.S. prior to 2021. That's at least four or five years of continued revenue and earnings for AbbVie from its top-selling drug.
More revenue and earnings coming
Although AbbVie depends on Humira for most of its revenue now, that should be about to change. The company has multiple opportunities for revenue and earnings growth.
Put Imbruvica at the top of the list. The cancer drug generated sales of more than $1.8 billion last year for AbbVie. AbbVie thinks that Imbruvica could reach peak annual sales of $7 billion. Even if it doesn't hit that mark, there's plenty of revenue and earnings growth ahead from the drug.
Venclexta won approval in 2016 for treating chronic lymphocytic leukemia (CLL). Several other indications could be on the way if clinical studies go well. The cancer drug could reach peak annual sales of $3.5 billion.
AbbVie claims other pipeline candidates with similar or even greater potential. Experimental cancer drug Rova-T could make as much as $5 billion annually at peak if approved. Psoriasis drug risankizumab has the potential to generate annual revenue of $4 billion per year. Rheumatoid arthritis treatment upadacitinib could make AbbVie $3.5 billion annually in the future.
Going higher
Again, the logic is simple. If AbbVie's earnings keep rising, so will the stock. I don't see why the biotech's earnings won't continue to increase, therefore I predict AbbVie's momentum isn't about to end.
Of course, it's possible that the overall market will undergo a major correction. In that event, AbbVie stock will likely fall like most other stocks. When biosimilars to Humira hit the market, AbbVie could be in trouble if Imbruvica, Venclexta, and its pipeline candidates don't produce as expected. That's a few years off, though. As of right now, all signs appear to point to AbbVie stock keeping the good times rolling.
