Drug patents don't last forever, so pharmaceutical companies are constantly looking for the next big treatment to broaden their total portfolio of offerings.
When it was clear a few years ago that biosimilars for AbbVie's (ABBV 0.81%) Humira would be hitting the market, management knew it had work to do. Humira is the best-selling prescription drug in history, putting AbbVie on the map. But nothing lasts forever, and the company began taking steps to ensure its future success.
First, AbbVie completed the blockbuster $63 billion acquisition of Allergen in 2020. That brought commercial-stage drugs, like Botox and Juvederm, to AbbVie. It also brought knowledge from Allergen's long research and development (R&D) programs in aesthetics, neuroscience, and eye care.
Before this, AbbVie's expertise was immunology and oncology. Aesthetics, neuroscience, and eye care brought in $3.9 billion last quarter alone, 28% of AbbVie's total revenue.
Then, AbbVie developed two new blockbuster immunology drugs: Skyrizi and Rinvoq. The company expects annual sales of these to reach $17.5 billion in 2025 and more than $21 billion in 2027. This will equal or eclipse peak Humira sales of $21 billion in 2022.
It's easy to see in the chart below how AbbVie's sales ballooned after the Allergen acquisition but have dipped a bit recently on the pullback in Humira.
ABBV revenue (TTM) data by YCharts; TTM = trailing 12 months.
What does ImmunoGen bring to AbbVie?
The time is right to expand AbbVie's business with its $10 billion acquisition of ImmunoGen (IMGN +0.00%).
ImmunoGen is a commercial-stage oncology company focused on developing antibody-drug conjugates (ADCs) for various cancers, including ovarian. Current five-year survival rates for ovarian cancer are just 50%, and AbbVie predicts the market could increase from $3 billion today to $12 billion in the next decade. Clearly, there is a need for more effective treatment.
ImmunoGen's flagship drug, Elahere, was approved in late 2022. It is the only ADC currently approved to treat ovarian cancer and produced $105 million in sales in the third quarter for a run-rate of $420 million already. AbbVie expects sales to increase and has identified nine other potential cancers that could one day be treated this way, including lung, kidney, and pancreatic forms.
ImmunoGen also brings to AbbVie a robust portfolio of drugs in various phases of clinical trials, along with years of research knowledge and other assets.
Did AbbVie overpay for ImmunoGen?
AbbVie paid $31.26 per share for ImmunoGen, nearly double what the stock was trading for before the announcement. Many investors see this and automatically believe a company has overpaid, but this is not the case.
The difference is the market value of the stock (what it trades for) and the company's intrinsic value (what the company is actually worth). Nealy all acquirers must pay well over the market price to buy out other companies.
AbbVie isn't investing in ImmunoGen, like Berkshire Hathaway when it buys Apple stock. AbbVie will own it, including all of its assets, research knowledge, products, and other attributes. Here are the assets that add value for AbbVie:
- Cash: ImmunoGen has $736 million in cash and receivables against just $261 million in total liabilities. AbbVie will also receive $86 million in other assets. In total, AbbVie walks away with $562 million more in assets than liabilities, and much of this is cold, hard cash.
- A clinical pipeline: ImmunoGen has several drugs in various stages of approval, including phase 3 (the final stage).
- Knowledge: ImmunoGen has been researching for decades and will bring this knowledge to AbbVie, which spent $6.5 billion in 2022 alone on R&D. Sometimes, buying know-how is a bargain.
- Cost synergies: Many general and administrative costs (like payroll, accounting, and sales) can be leveraged. AbbVie already has its systems, so expenses related to ImmunoGen will decline after the integration. This makes ImmunoGen more profitable than it is on its own, and thus more valuable.
These are just some of the items that companies consider when looking at the intrinsic value of an acquisition. AbbVie is getting more than meets the eye.
Is AbbVie stock a buy now?
Since AbbVie is a dividend growth stock, I value it using the price-to-free-cash-flow (P/FCF) ratio. Free cash flow (the money left after a company pays for its expenses and equipment) represents the money available to pay dividends and repurchase shares. It also allows the company to raise the dividend. AbbVie has raised the dividend every year of its existence, as shown below.
ABBV dividend data by YCharts.
The P/FCF is 11 right now, a hair above its five-year average of 10.5, so it appears fairly valued. The dividend yield is just under 4%. AbbVie is an excellent stock to backstop a portfolio.
Growth and tech stocks are volatile, as are consumer discretionary companies. However, pharmaceuticals are recession-resistant since medication is generally essential. This makes AbbVie a terrific stock for the long term.
