Back in early 2013, there was considerable speculation about how Abbott Laboratories' (NYSE:ABT) then-new spin-off AbbVie (NYSE:ABBV) would fare on its own. That speculation was answered by AbbVie's stock performance. Shares have surged around 65% since then. Meanwhile, Abbott Labs' shares climbed around 25% -- not bad, but small in comparison to AbbVie's successful run.
Solid results from blockbuster drug Humira continued to power AbbVie's stock upward this year. However, it could be time for more speculation. Will AbbVie's stock soon begin to slide after the positive momentum experienced over the last couple of years? Perhaps not, but there are three reasons the answer could be yes.
1. Regulatory roadblock
Many celebrated AbbVie's announcement in July that it planned to combine with Shire plc (NASDAQ:SHPG). The company stated that transaction would enable the "new" AbbVie to be domiciled in the United Kingdom and drastically lower its effective tax rate through what is known as a tax inversion. A merger with Shire also would help AbbVie diversify its product lineup, which is currently heavily dependent on Humira.
There's at least one potentially huge roadblock that could prevent the deal from materializing, though. European Union regulators must first agree to the merger. A decision is expected by Oct. 16.
At this point, the odds seem in favor of regulatory approval, but it's certainly possible that the deal could be blocked. If that happens, AbbVie's stock will no doubt take a hit.
2. Inversion implosion
Even if the European regulators give their blessing to AbbVie's merger with Shire, the U.S. might have just pronounced something close to a curse over the move. Earlier this week, the U.S. Treasury Department announced new rules that make tax inversion transactions significantly less beneficial.
The worst scenario resulting from the rule changes would be AbbVie backing out of the deal with Shire. That option seems unlikely, since the company would have to fork over as much as $1.6 billion to Shire if it decides against moving forward.
Plowing ahead, though, carries its own negative implications. One major problem is that the new rules won't allow AbbVie to use a "hopscotch loan," a term used to describe where the foreign subsidiary loans money to the parent company. That could make financing the $54 billion acquisition of Shire more costly. Don't be surprised if AbbVie's stock feels more pain as additional details unfold about how the rule changes will affect its plans.
3. Market malaise
Suppose, though, neither of the above possibilities prove to be as disastrous as they could be. European regulators give a thumbs up to the Shire merger. AbbVie figures out a way to move forward without jeopardizing much of the financial benefits. Unfortunately, shares could still fall due to external factors.
The stock market has become more jittery this week. All of the major indexes fell hard on Thursday. Volatility, as measured by the CBOE's S&P 500 Volatility Index shot up by 20%. World tensions combined with other factors appear to have investors worried.
Could AbbVie's stock go up even if the overall market goes down? Sure. Don't count on it, though. AbbVie's share prices tend to correlate with movement of the S&P 500.
Long-term investors don't care as much about temporary states of affairs as they do the prospects of a business over multiple years. With that future-oriented perspective in mind, there are reasons to be more optimistic about AbbVie's fortunes.
Any level of tax savings from the Shire merger will free up money to pour into other products. Shire also brings several winners to AbbVie's lineup, including Vyvanse, Replagal, and Firazyr. All three drugs saw double-digit sales growth in the second quarter.
AbbVie also has its all-oral hepatitis C combo waiting in the wings. If the regimen gains approval as many expect, the hep-C combo could ultimately add annual revenue of at least $2 billion. And don't expect the hefty contribution from Humira to dry up anytime soon, even though the drug loses patent protection in 2016.
Do roadblocks, implosions, and malaise lie ahead for AbbVie? Maybe. But then again, a lot of money has been made over the years by smart and successful investors who didn't worry too much about maybe scenarios that come and go.
Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.