With the stock market down about 8% so far this year -- and briefly entering correction territory last week -- investors are on the lookout for shares of quality companies that have dropped into bargain territory. AbbVie's (ABBV 0.36%) stock, however, has been moving up rather than down so far in 2022. Is it a buy?
Before approaching the question of AbbVie's valuation directly, let's look at where the company plans to go over the next few years, as well as its recent performance.
Image source: Getty Images.
A look at the numbers
For AbbVie, business is proceeding as planned. In the fourth quarter of last year, it made $14.8 billion in global net revenue, which was 7.4% more than the total from Q4 of 2020. Thanks to sales of its many medicines, its quarterly revenue and net income have risen steadily over the last five years, and its dividend payment has more than doubled.
ABBV Revenue (Quarterly) data by YCharts.
It has dozens of late-stage programs, many seeking to expand the indications of its already commercialized medicines. In late February, one of these medicines, Vraylar, concluded a phase 3 trial investigating an expanded indication for major depressive disorder (MDD). Now, regulators will need to weigh in on whether the drug can be used for MDD in addition to its existing indications for schizophrenia and bipolar disorder.
If the indication is approved, it could mean as much as another $4 billion in annual revenue, according to management. The drug is expected to make $2.2 billion this year, so the approval would bring a significant increase. But the extra billions wouldn't make a huge impact on AbbVie's total revenue, as its trailing-12-month sales were in excess of $56.2 billion.
Management continues to expect the company's rate of revenue growth to take a hit after losing exclusivity protection in early 2023 for one of its biggest earners, arthritis drug Humira. In Q4 of 2021, Humira brought in $5.3 billion globally, so losing market share to generics might be more devastating than the benefit of expansion of drugs like Vraylar.
Nonetheless, management is confident that working to expand the indications of its medicines Skyrizi and Rinvoq, which target the same markets as Humira, will lead to sales growth by 2025.
During the Feb. 2 conference call with analysts, CEO Richard Gonzalez said that "following the U.S. Humira [loss of exclusivity] event in 2023, we expect to quickly return to growth in 2024 and deliver a high single-digit growth from 2025 to the end of the decade.
Early sales data indicate that this can happen, but there's still a lot of time between now and then. The uncertainty over whether AbbVie can actually pull off this transition away from Humira might well be a factor in keeping investors from buying the stock.
Are the shares worth it?
Now that I've addressed AbbVie's present and its potential future, it's time to consider whether shares are worth the price the market is asking for them.
The first thing to recognize about its valuation is that AbbVie's shares have gained 9% so far this year while the broader stock market has fallen by 8%.
AbbVie's shares are trading with a trailing-12-month price-to-earnings (P/E) ratio of 22.3. That's a touch lower than the pharmaceutical industry's average P/E of 25.8, but it's nothing to write home about.
Other valuation metrics like price-to-free-cash-flow (FCF) don't make things look significantly cheaper. AbbVie's price-to-FCF multiple is 11.1, whereas the industry's average is just over 16.
So AbbVie's shares do look slightly undervalued compared to others in the industry, though that seems to have nothing to do with the market correction. If I had to pick one reason, it'd be the expectation that Humira's revenue will tank in 2023, which management has a plan to address.
Pairing this with catalysts from expanding the market for other medicines, it's possible that investors who buy the stock now could be sitting on some decent gains in a few years.
