AbbVie (ABBV 0.54%) and Abbott Laboratories (ABT 0.29%) were born of the same parent but separated at birth. In 2013, Abbott Laboratories split into two companies, one primarily a medical device maker (which retained the parent's name) and the other a pharmaceutical company. That's where the similarities end, however.
The siblings have since had very divergent paths -- at least in terms of their share prices. Whereas Abbott Labs has been steadily hitting new highs, AbbVie peaked in 2018 and has since fallen close to 30%.
For much of its history, AbbVie was the better horse to back than Abbott Labs. In the first five years after the spin-off, Abbvie rose over 200% while Abbott increased 78%. AbbVie's fortunes took a turn for the worse in 2018, and since then, relative stock performance has reversed with Abbott rising close to 50%.
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A one trick pony?
The source of AbbVie's initial outperformance, as well as its ensuing decline, relates to its mainstay drug Humira, which treats various autoimmune diseases and also happens to be the world's best-selling drug. The success of Humira has been staggering. In the six years since AbbVie's inception, Humira's sales doubled from $10.6 billion in 2013 to $19.9 billion in 2018. With the drug accounting for close to 60% of sales and a higher portion of profits, AbbVie's fortunes have been inextricably tied to Humira's.
It's not surprising then that AbbVie's share price peaked in anticipation of the expiration of the European Union (EU) patent on Humira, which took place on Oct. 16, 2018. Three biosimilars of Humira launched immediately after the patent expired: Novartis' Hyrimoz, Amgen's Amgevita and Biogen's Imraldi. Although the U.S. still accounts for the vast majority of Humira's sales, the patent expiration put at risk the $6 billion that Humira generates internationally.
These risks have been borne out. In AbbVie's third-quarter results, Humira's international sales fell more than 33%. While US sales continued to grow, the impact of the fall in international revenue was enough to drag Humira's overall sales down nearly 4%. Extrapolating the impact of the EU patent expiration, it is not surprising then that investors worry about what will happen after 2023 when Humira's US patent expires.
Hedging its bets
AbbVie has not been sitting idly by waiting for the Humira patent expiration story to play out. The company has been actively developing a strong pipeline of next-generation immunology and oncology drugs, such as Imbruvica and Venclexta to treat blood cancer and Skyrizi to treat psoriasis.
AbbVie's pipeline includes 60 compounds or indications in clinical development, including 30 which are in mid- to late-stage development. Indeed, the company's most recent results reflect the success of these efforts -- Q3 worldwide net revenues rose 3% to $8.5 billion despite the decline in Humira's sales and AbbVie raised its 2019 full-year adjusted earnings per share (EPS) guidance.
To cement its efforts to diversify away from Humira, AbbVie went one step further. In June, the company announced that it would acquire Allergan (AGN), a specialty-drug manufacturer known for blockbuster drugs such as Botox and Restasis, for $63 billion.
The acquisition brings a number of benefits. With $16 billion in annual revenue in mostly unrelated therapeutic markets, Allergan's addition will further wean AbbVie off of dependence on Humira's franchise. The deal would be immediately accretive to earnings, contributing 10% to adjusted EPS in the first year with peak accretion in excess of 20%. The acquisition would also create immediate scale, with the combined entity ranking fourth in overall revenues and third in operating cash flow.
Operating cash flow, in addition to helping pay off the additional debt incurred in the acquisition, should also facilitate further dividend increases. In the third quarter, AbbVie continued its impressive streak of dividend hikes by announcing a 10.3% increase, boosting its accumulated dividend increase since separating from Abbott Labs to 195%.
Too cheap to ignore
At a price-to-earnings ratio of less than nine times forward earnings, AbbVie looks like a bargain compared to the market multiple of over 17 times expected earnings. It's high time for AbbVie to regain its luster as the better-performing sibling. In the meantime, AbbVie remains a great dividend stock with solid growth prospects that's too cheap for investors to ignore.
