Please ensure Javascript is enabled for purposes of website accessibility

AbbVie Has the Most Valuable Late-Stage Pipeline -- But Is Its Stock a Buy?

By George Budwell - Jun 28, 2017 at 8:04AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Can AbbVie's top-notch clinical pipeline overcome the company's hefty risk profile?

According to a recent report from EvaluatePharma, AbbVie (ABBV 1.91%) has the most valuable late-stage clinical pipeline among the major drug manufacturers. Specifically, the company has four drug candidates landing in the top 20, totaling a net present value of $23.8 billion. 

Drug

Stage Target Indication(s) Net Present Value
Rova-T Phase 2 Small cell lung cancer $8.5 billion
Upadacitinib (ABT-494) Phase 3 Rheumatoid arthritis $6.3 billion
Elagolix Phase 3 Endometriosis, uterine fibroids $4.9 billion
Glecaprevir and
pibrentasvir
Filed Hepatitis C  $4.1 billion

Data source: EvaluateGroup.

Of course, AbbVie's management has been trying to convey this positive message for months now, but it's been largely drowned out by the concerns over Humira's patent expiration. In fact, this drugmaker's shares are trading at a forward price-to-earnings ratio of 11.1, one of the lowest in the industry -- despite also sporting one of the fastest-growing dividends and top lines over the past four years, and despite owning the most valuable late-stage clinical pipeline as well.

With this theme in mind, let's consider if AbbVie's positives outweigh the risks presented by the biosimilar threat to Humira.

Two green street signs, one reading "safe" and the other "risky," point in opposite directions.

Image source: Getty Images.

The bull case

Another interesting tidbit of EvaluatePharma's report is that it has Humira's revenue remaining fairly steady until 2022, whereas other analysts have suggested that Amgen's (AMGN 0.45%) FDA-approved biosimilar Amjevita, and perhaps others, will start to carve into the drug's enormous market share by as early as 2019.

The issue is basically how long AbbVie can extend the legal challenges to Humira's intellectual property to lengthen its exclusivity period in the U.S. and abroad. AbbVie has said that 2022 is a likely cut-off point, but there have already been some setbacks on the legal front that suggest a biosimilar threat could materialize by 2019 to 2020. 

If we take EvaluatePharma's outlook, AbbVie's shares would appear be trading at around 3.2 to 3.4 times its 2022 revenue. This estimate also assumes that the company's pipeline delivers on at least two of these four experimental drugs, which appears likely, given that its hep C combo of glecaprevir/pibrentasvir is already under FDA review, and its next-generation anti-inflammatory drug, upadacitinib, is producing stellar results in its late-stage program.

In sum, this bullish case implies that AbbVie's top line can continue to grow at a healthy compound annual growth rate of around 5% from 2016 to 2022. If this line holds, AbbVie would be in the upper tier of large-cap biotech stocks in terms of revenue growth. Equally as important, though, this level of growth should be sufficient to at least maintain its outstanding dividend program at current levels. 

The bear case

If you're a pessimist, you probably still have to bake in the revenue from both glecaprevir/pibrentasvir and upadacitinib, based on their likelihood of approval. But if Amgen's Amjevita breaks into the market by 2020, AbbVie's 2022 annual revenue could drop off by perhaps $4.7 billion relative to the more bullish outlook.  

So if Amjevita or other Humira biosimilars were to enter the market in 2020, AbbVie's shares would be trading right now at around 3.8 to 4 times its 2022 revenue. That's fairly good news, as AbbVie's shares are basically trading at this level right now. 

The bad news is that AbbVie's top-notch dividend might not be safe if its top line stagnates. A big reason the company has such a promising pipeline, after all, is that AbbVie's management has aggressively used debt financing to bring in new blood. The net result is that the company has leveraged its balance sheet out to worrying levels -- meaning debt is going to play a substantial role in its capital allocation strategy moving forward.

The drugmaker's 12-month trailing payout ratio of 60.88 implies that it can increase its dividend even further. However, this metric might be grossly misleading in light of its jaw-dropping debt-to-equity ratio of 746. In other words, AbbVie must continue to grow its free cash flow at a respectable clip to both service its debt obligations and raise its dividend at the same time. 

Investing takeaway

AbbVie's shares may look cheap at the moment in comparison with other high-flying biopharmas. But a deeper dive shows that the company simply can't afford any setbacks in its legal defense to Humira. If Amgen's Amjevita or other biosimilar threats materialize earlier than 2022, for example, AbbVie may struggle to grow its dividend in light of its massive debt load. And its shares may turn out to be fairly valued at best if a biosimilar does come into play in 2020.  

Bottom line: AbbVie's clinical pipeline and longer-term growth prospects may look great on paper, but its unsightly debt load will almost certainly compound any headwinds arising from a slowdown in Humira's double-digit sales trajectory. So if you're a long-term-oriented investor, this stock's risks might outweigh its rewards.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

AbbVie Inc. Stock Quote
AbbVie Inc.
ABBV
$151.96 (1.91%) $2.85
Amgen Inc. Stock Quote
Amgen Inc.
AMGN
$253.01 (0.45%) $1.12

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
322%
 
S&P 500 Returns
116%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.