With its diluted earnings per share (EPS) collapsing by nearly 55% in the third quarter to reach $1, it's easy to see why now might not seem like a good time to buy AbbVie (ABBV -4.58%) stock. To make matters worse, its share prices are down by more than 9% this year so far, badly underperforming the market. Despite the bumps in the road, there's reason to believe that this company's fortunes will soon start to look up.
Does this potential for improvement make AbbVie stock a buy right now, given that its turnaround clearly hasn't started yet? Let's dive in and explore why AbbVie is underperforming -- and why that might not matter in the long run.
AbbVie's problems are temporary
The third quarter was a tough three months for AbbVie. Thanks to mild to moderate contractions in its immunology, aesthetics, and oncology segments, its revenue fell by 6%, arriving at $13.9 billion. Global sales of Humira -- its psoriatic arthritis drug, and one of the best-selling medicines of all time -- imploded by 36%, bringing in only $3.5 billion.
As Humira is now over the patent cliff, and generic copies are free to gobble up its market share, the losses are expected, and they're likely to continue until there's nearly nothing left to lose. Management doesn't expect top-line growth to recover from the drug's decline until 2025, when newer medicines (and therefore newer revenue drivers) will be operating in full force to capture the same markets that Humira once led.
Humira's decline isn't the only transient problem. The business also claimed a pre-tax impairment charge of $2.1 billion for its oncology drug Imbruvica. In its rationale for claiming the impairment, management cited the Inflation Reduction Act (IRA), which gives the U.S. government's Centers for Medicare & Medicaid Services (CMS) the ability to negotiate the prices of certain medicines. As CMS will now be free to negotiate and therefore lower the selling price of Imbruvica, AbbVie expects to make less money on it in the future (which is reflected in its finances as the impairment). The chance of more new legislation driving further significant losses is not zero in the long term, but there doesn't appear to be any momentum for anything similar at present.
In fact, management is decidedly bullish on the rest of 2023. It updated and increased its guidance for its adjusted diluted EPS from a low of $10.70 to a minimum of $11.00. It also hiked its dividend by 4.7% annually. That means it's signaling to investors that the worse-than-expected results of the third quarter won't repeat in Q4 and that its finances are still strong enough to make enduring financial commitments to shareholders. Though Humira soon won't have enough market share to account for a meaningful proportion of the top line, those messages from AbbVie's leaders are likely correct.
AbbVie's recovery plan is already in full swing, and it's working
So the basis for AbbVie's poor performance last quarter is rooted in factors that won't be relevant a year from now. In other words, there's no reason to think that there's an enduring set of headwinds that'll hamper shareholder returns. But what's the argument for actually buying the stock?
All of the company's struggling segments are expected by management to return to growth within roughly 18 months. To accomplish that, AbbVie will attempt to commercialize expanded indications for its existing set of medicines, while also advancing new medicines to consideration by regulators. Six regulatory submissions requesting permission for commercialization are planned for 2024 alone. Its neuroscience segment will continue to perform strongly in the meantime, thanks to deepening market penetration with key products like its antipsychotic medicine Vraylar.
For 2025, Wall Street analysts project that AbbVie's EPS will return to growth. This will follow a brief period of stagnation, forecast as early as two years ago based on the lapsing of Humira's manufacturing exclusivity protections. Yet soon enough, that will be in the rearview mirror.
And people who buy the stock now will get the advantage of the market's lukewarm sentiment when things start to pick up down the line. Even if it takes a bit longer than expected, shareholders will still get to collect AbbVie's tasty dividend, which currently yields 4.2%.
Therefore, if you're looking for a relatively safe blue chip stock that's likely to return to steady and slow-to-moderate growth, AbbVie is a solid choice. It's unlikely to crash abruptly or fall victim to an unforeseen earnings rout. At the same time, this stock isn't the right option for investors seeking big and near-term returns -- it's one of the world's biggest pharmaceutical businesses, not a hot software company.
