AbbVie Inc. (NYSE:ABBV) and Vertex Pharmaceuticals (NASDAQ:VRTX) significantly outperformed the S&P 500 in 2017, but a stock market correction has caused their shares to drop. Both companies recently unveiled optimistic plans that suggest their sales and profits can continue climbing, so is now a good time to buy these stocks?
In this episode of The Motley Fool's Industry Focus: Healthcare, analyst Kristine Harjes and Motley Fool contributor Todd Campbell discuss the stock market's recent correction and what could be in store for AbbVie and Vertex Pharmaceuticals' investors.
A full transcript follows the video.
This video was recorded on Feb. 6, 2018.
Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. We're talking healthcare today, Feb. 7. My name is Kristine Harjes, and I have Motley Fool healthcare contributor Todd Campbell joining me on the phone. What's new, Todd?
Todd Campbell: Kristine, did you get a chance to watch the Super Bowl?
Harjes: I was in a room where it was playing, yeah.
Campbell: I have to tell you, between the Patriots' loss and the stock market's craziness, the last couple of days have been a little bit challenging for me. But we will persevere.
Harjes: Yeah, I assume you were watching the Super Bowl pretty closely?
Campbell: Absolutely. I know most of the nation is cheering at the Patriots' loss. But, credit where credit is due, that was a heck of a game. And Foles, wow, the quarterback for the Eagles, he was just wonderful, I couldn't believe how composed he was under pressure. They deserved the win, absolutely.
Harjes: This is such a big thing of you to say. Good for you.
Campbell: [laughs] It's easy for me to say that. But I'm sure the Philadelphia Eagles fans are absolutely on cloud nine. They deserve to have that win. And the Patriots still remain a great franchise, and we'll be back again soon, I promise, much to the chagrin of many. The stock market, the same underpinnings that supported it before remain in place. I think we'll get through all of this.
Harjes: It's been a crazy week so far. Warning, we're actually filming this on Tuesday, so it's only the 6th as we're recording. But yesterday, Monday, the Dow Jones Industrial Average lost 1,175 points, which is the most number of points it has lost ever. And for me, that's the largest percentage drop that I've seen since I've been in this business. The last time we had a drop that was this large in terms of the percentage of the Dow was in August 2011, during the euro debt crisis. And I don't know what it was like for you and the conversations you were having, Todd, especially since you're working remotely, but around the office there was a lot of buzz. It reminds me of how fortunate we are to have a Foolish, long-term philosophy, because the sentiment was mostly positive. People across The Fool are cheering at the fact that stocks are going on sale.
Campbell: I have enough gray hair on my head to remember the 2011, the 2008, the 1999. We have seen this before. I think, to put things into context for listeners, a 4.1% drop on Monday is scary as far as the S&P is concerned, but it's certainly not unprecedented. I went back, Kristine, and I crunched the numbers. Since the market's low in 2009, March of 2009, the S&P has fallen on 17 different occasions by 3% or more. Seventeen. So, it's tough to look at a down-4% day, and you start going, "Oh my God, am I owning the right things?" It throws a lot of curveballs at your willingness to stay Foolishly focused. But this is not new territory. Despite all of the 17 times that we've been here before since 2009, we still went on to put in new highs on the stock market. So staying focused on great stocks for the long haul, that's the best approach.
Harjes: To loosely quote Motley Fool co-founder David Gardner, stocks will go down a lot faster than they go up, but over a long enough amount of time, they will go up way more than they'll go down. So, like you said, Todd, this is not terribly unusual. Another interesting stat that I came across is, the S&P 500 has had 35 drops of at least 10% since 1950. That's about one every two years. The last correction we had was about two years ago. So you could kind of surmise that we're due. This is not terribly surprising, and it's not really a bad thing. It's just how this all works.
Campbell: 10% corrections, like you said, they're pretty common. And if you look at the S&P and where it peaked in January, we almost got down to the 10% correction point over the course of a couple trading days. I think it was 2,587. So, within a hair.
Harjes: And who knows what's going to happen the rest of today, Tuesday, or tomorrow, Wednesday, when the show gets released. We might be crossing over that threshold.
Campbell: And it can be sloppy trading, Kristine, but I even did the numbers over the course of the ensuing 30 days following those 17 drops that we've seen since 2009, and even if you just look out 30 days, the average in the median return a month later is still between 3% and 5%. Patience is typically rewarded, and it could be rewarded as quickly as within a month, if that helps our investors stay Foolishly focused.
Harjes: And speaking of being patient, The Motley Fool as a whole is working on putting together a comprehensive set of tools to help our readers and listeners and members think about a market crash. So stay tuned, we'll be sure to let everyone know how you can access these materials as soon as we have it ready. But do know that we have you guys in mind, and we'll be putting out something in the very near future.
That being said about the broader market, today we're going to talk about two specific stocks, because it doesn't really matter so much what the whole market is doing, it's always a good time for investors to be thinking about individual companies and their business models and their catalysts that are coming up. The two stocks that we want to cover today are AbbVie and Vertex, they're two of the largest biotechs. They both recently reported earnings. Up first, let's do AbbVie. Todd, what's the latest?
Campbell: One of the reasons I want to talk about these two companies is, they're companies that are on my personal watch list for an opportunity like this. They were both very big movers in 2017. AbbVie, for example, was up 60% last year, which is pretty remarkable for a company of its size. If you look at, are there any blue light specials, do I want to go out and buy, now might be a good time to consider a stock like AbbVie, because its shares have fallen about 12% from their peak on Jan. 26. And January was a news-packed month for this company, where they rolled out a lot of long-term plans that really are quite encouraging.
Harjes: I think first and foremost, we should probably discuss Humira, that is their lead drug. It encompasses 65% of the company's sales. They reported sales of $18.427 billion, which was up 14%. That's very encouraging. And that was for the full year, by the way. They expect that the sales will continue to grow to $21 billion by 2020, which is not terribly new news. That's something that we learned during the J.P. Morgan Healthcare Conference. This is important, because there had been a lot of questions regarding the Humira patent, and whether or not this flagship drug will be able to continue to perform. I think the news that came out of this company in January is fairly promising for the stability of this important driver of their business.
Campbell: Absolutely. 65% of their sales. And I think up until the fall of last year, when they got a favorable patent decision, people were really wondering what's going to happen when Humira biosimilars start entering the market. As a refresher, last September, they did indeed get a positive verdict on a patent challenge that was brought by a competitor, and that prompted a non-exclusive license with Amgen that will keep biosimilars to Humira off the market until 2023 in the United States. I think that's one of the big reasons that AbbVie has been such a winning stock over the course of the last four or five months, is that people are starting to look at it and say, that gives AbbVie a lot of running room to develop new drugs that can get launched and pick up the slack once Humira does start to face off against those challengers over the course of the next decade.
Kristine, if you look at the numbers that the company put up in 2017 and the potential growth for those non-Humira drugs through 2020 and even 2025, there's a lot for investors to like. [In] 2017, the company's sales were $28.2 billion, and that was up 10%. Growing 10%, for a big company like this, that's pretty remarkable. And even better, they have really good operating leverage. That means they're translating more of those sales into bottom-line profit. Their bottom-line earnings per share were $5.60 in 2017, and that was up 16%. There's nothing to dislike about those figures.
Harjes: Yeah. And you look at their 2018 guidance and it just gets stronger. They're guiding for an operating margin of 44%, which is 150 basis points higher than 2017. Their adjusted EPS guidance is now a range of $7.33 to $7.43, which is up $0.96 from the previous range that they had given for 2018. You might think that's all because of the tax reform, but $0.08 of that is due to stronger operating dynamics. So this is a company that's looking at some pretty strong growth in some of its key drugs aside from just Humira, and also some exciting things coming up in the pipeline.
And I do want to talk about those pipeline drugs, but first, really quick, to hit one some of their key drugs that are already on the market, Imbruvica, which is a drug that the company co-markets with Johnson & Johnson, had sales of $2.6 billion, and that was up 40%. Meanwhile, their hepatitis C market is doing really well. This actually shocked me, their main hepatitis C drug has a market share of 32%. I did not realize it was that high. Of course, that franchise's sale was up 62% year over year.
Campbell: They think those hep C sales can climb to $2.5 billion in 2018, which would be pretty remarkable, considering that in 2017, those hep C sales were $1.3 billion. That's all because of Mavyret. If you look at Mavyret, I think that's probably the stiffest challenge yet that Gilead Sciences has faced in the hepatitis C. It should still be able to provide billions of dollars in revenue for AbbVie over the course of the next few years. And then, with Imbruvica, still being able to grow that quickly on such a high base of sales, that's due to label expansions. As this drug is getting used earlier and earlier in treatment, and also into other indications, such as graft-versus-host disease, which it won approval for last August, those are really driving sales higher. The other thing people should remember with Imbruvica is that they share that drug with Johnson & Johnson. So the fact that they're reporting $2.6 billion in 2017 in sales just goes to show you just how important that drug is overall, considering that Johnson & Johnson shares that with them.
Harjes: Yeah, absolutely. Let's look forward a little bit. What are you watching in the pipeline?
Campbell: There's a few different drugs that I think could move the needle meaningfully over the course of the next few years. Venclexta, which is a drug for CLL [chronic lymphocytic leukemia], they put out some pretty impressive combination-study trial results using it alongside Rituxan in people who were relapsing or refractory, that's the chronic lymphocytic leukemia indication. And that's an indication that Imbruvica is already improved in, but Imbruvica is moving up in earlier lines of treatment. So this could fit in now behind it. And that could turn that drug into a multibillion-dollar seller over time. But even bigger are the opportunities associated with Rova-T, I don't even want to pronounce the names of these so I'm just going to use the old name, ABT-494 and another drug called risankizumab, [laughs] which are autoimmune disease drugs that are in the pipeline and fast approaching the market.
Harjes: Yeah. I'm staring at the name of ABT-494 right now, and I'm going to give it a shot, it's upadacitinib.
Harjes: So, take note of that one.
Campbell: That works. Those drugs -- upadacitinib and risankizumab -- those are potential Humira successors. Upadacitinib just put up really good data last year in rheumatoid arthritis. They think they can get that into the market sometime in 2019. Risankizumab just put up good data recently in psoriasis. They think that could also land in the market in 2019. And they're projecting that upadacitinib and risankizumab could generate [about] $6 billion and $5 billion, respectively, in peak sales over time. So those are important drugs. They also have another drug for endometriosis that is at the FDA awaiting approval. If that gets approved this year, that could be a billion-dollar seller at some point, too.
Harjes: And let's not forget that this is also a company that's offering a 2.5% dividend yield. So I could see why it's on your watchlist, Todd.
Campbell: And that dividend, Kristine, has increased by about 77% since they got spun out of Abbott. I think when you look at their effective tax rate falling to 9%, their guidance is for operating margins to climb over time to 50% from the mid-30s where they've been historically, I think you have a lot of tailwinds for future dividend increases that make it even more exciting.
Harjes: Yeah, absolutely. As promised, we want to next dive into Vertex Pharmaceuticals, which we talked about at the end of 2017, highlighting them as one of the best-performing healthcare stocks of that year. They ended up being up 103% over the course of 2017, bringing them to a market cap of around $40 billion today. They reported earnings about a week ago, on Jan. 31. Todd, what stood out to you?
Campbell: If you're kicking yourself for not getting involved in this company last year, maybe you get an opportunity to get involved in it here in 2018. Shares are down about 10.7% since Feb. 1 close. That's a pretty solid decline for the company. Of course, nothing has changed to this story. They remain probably one of the most innovative companies out there, specifically within the area of cystic fibrosis, which, you may recall from prior shows, is a hereditary disorder that can cause the buildup of mucus in the lungs. Infections that occur can damage respiratory systems and unfortunately lead to a premature death. Sadly, there have not been a lot of treatment options available to cystic fibrosis patients in the past. But that's changed thanks in part to Vertex, and as a result, the company's sales and profitability, now, are growing really quickly.
Harjes: They've had cystic fibrosis drugs on the market for many years now, but they've been able to steadily expand the number of patients that these drugs, and hopefully, going forward, others, will be able to treat. And they're hoping that eventually, their drugs could help up to 90% of cystic fibrosis patients. But they do have a handful of catalysts coming up very soon that could meaningfully expand the number of people that they're currently able to help.
Campbell: Before I dive into those, I want to give a quick and dirty on what the final quarterly results were, the final full-year 2017 results were, for our listeners. Sales last year were $2.5 billion, or $2.49 billion. That was up 46%. Earnings per share were up $1.95, or 129%. There are two drugs that they have in the market right now: Kalydeco. sales of that drug increased 20% year over year to $845 million. And Orkambi. Sales of that drug increased 35% year over year to $1.32 billion. Now, what's interesting about this company is, at the end of this month, there's an FDA decision that's expected on a two-drug combination. If that two-drug combination of ivacaftor and tezacaftor, if that gets approved, that'll increase the addressable patient market by another 1,500 patients. Right now, Kalydeco and Orkambi can treat about 29,000 of the 75,000 or so cystic fibrosis patients that are out there. So increasing that by another 1,500 is a bullish thing, that's a very good thing. If they win approval for it, that two-drug combo can then act as a fundamental underpinning for these other combination studies that they're conducting to come up with a triplet therapy that could theoretically get us to that point that you were talking about previously, where we could get to 90% of the cystic fibrosis patient population.
Harjes: Yeah. So the way to think about this, Kalydeco and ivacaftor, that's the same thing, the duo that they're looking at with the Feb. 28 PDUFA date is a combination of Kalydeco and tezacaftor. They're also looking at adding a third one of these drugs into that mix, or in various other combinations, with a handful of phase 3s that are starting this year. So these are all incremental changes that can hopefully address more and more patients, because this disease takes a lot of different forms, so it's not like you can just have a drug approved for cystic fibrosis. It's always much more specifically, narrowly defined. But as I mentioned earlier, Vertex does think that its drugs could eventually help up to 90% of this entire patient population, which is pretty incredible.
They have three main categories of goals that they laid out at J.P. Morgan, and only one of them is cystic fibrosis related. The first goal is, achieve the company's vision in CF. But then, beyond that, it's, expand the pipeline outside of cystic fibrosis. And the third category of goals is, build financial strength. So this is a company that does clearly believe it's only just getting started. They've made a lot of progress in CF, and I'm looking forward to seeing what they do beyond that, as well.
Campbell: These drugs, when they originally got approved, they were approved for older patients. And as additional study data has come out, the labels have been expanded to include younger and younger and younger patients. That's one of the reasons now that you see so many people that can be helped by these drugs. I think you look at this and you say, they're doing $2 billion in sales now, and that's only by treating for less than half of the addressable market. What could happen from there?
In 2018, they haven't said what their guidance for sales and earnings are yet. They're going to wait until the FDA weighs in with the decision on the two-drug combo at the end of the month, but it may be helpful for listeners to know that industry watchers are predicting $2.98 a share in earnings this year, and that's up from $2.85 90 days ago. So, yes, you have operating leverage here as these drugs are getting more and more widely used. That's translating into profits for this company that it can then use to reinvest into different projects in its R&D pipeline, including, they have one trial they're conducting alongside Johnson & Johnson for a therapy for flu-related complications in people who are hospitalized. They also have a pain drug in mid-stage trials. And I'm sure we're going to hear, over the course of the next 12 to 18 months, a lot more about what their plans are to expand beyond cystic fibrosis.
Harjes: Absolutely. As we wrap up, better buy: Vertex or AbbVie?
Campbell: I have to go with AbbVie. I think they just have more shots on goal right now than Vertex. The other thing that makes me a little nervous about Vertex, and investors should be paying attention to this, AbbVie is actually working with Galapagos, which is another company, on their own cystic fibrosis drugs, their own combination trials, and data should start coming out of that this year. So, theoretically, Vertex may not have this market all to itself come 2020.
Harjes: I'll also add to that that Vertex is partnered with CRISPR Therapeutics, which is a gene-editing company. They're looking at one-time cures for cystic fibrosis as opposed to, right now, treatment is chronic. So they could also be working themselves out of a market there, too. Which is, of course, a very good problem to have, but it's something to keep an eye on.
Campbell: That would be amazing, wouldn't it, Kristine? Wow.
Harjes: Yeah. I'm personally super bullish on gene therapy, and incredibly excited by all the advancements that we're seeing in the different diseases that these companies are tackling. But that's a topic for another day. Todd, thank you so much for joining me today!
Campbell: My pleasure to be here. Thank you for having me!
Harjes: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is produced by Austin Morgan. For Todd Campbell, I'm Kristine Harjes. Thanks for listening and Fool on!
Kristine Harjes owns shares of Gilead Sciences and Johnson & Johnson. Todd Campbell owns shares of Gilead Sciences. The Motley Fool owns shares of and recommends Gilead Sciences and Johnson & Johnson. The Motley Fool recommends Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.