Streetwise for Sunday, April 8, 2018

If you are short on investment ideas, one company you might want to consider as a research candidate is AbbVie (ABBV), this despite its recent decline in share price.

When I last wrote about the company a year ago, my 2017 earnings estimate was $5.50 per share with a projected 12-month share price of $71, for a 10 percent capital gain, plus the 3.94 percent dividend yield. So how did the company do?

Earnings came in at $5.60 per share and the shares recently closed at $92.94. Therefore, question now is whether the company will post a similar performance in 2018.

AbbVie’s mainstay product is Humira, a biologic therapy approved for several autoimmune diseases, including rheumatoid arthritis, psoriatic arthritis, ankylosing spondylitis, adult Crohn’s disease, and ulcerative colitis. To that end, Humira contributed approximately 65 percent of AbbVie’s total revenues in fiscal 2017.

As a result, AbbVie’s revenues in 2017 came in at $28.2 billion, as compared to $25.6 billion in fiscal 2016. In addition to Humira’s strong performance revenue growth was also driven by Imbruvica, Creon, and Duopa.

Imbruvica sales were up 40 percent due to its growing desirability as a first-line treatment for patients with chronic lymphocytic leukemia, or CLL, as well as favorable pricing.

Creon maintains market leadership in the pancreatic enzyme market. Its increase in sales was the result of both overall market growth and AbbVie’s ability to capture a greater share of that market.

Duopa is an intestinal gel for the treatment of advanced Parkinson’s disease. Revenues from Duopa increased 20 percent in fiscal 2017.

AbbVie spent approximately $5 billion on research and development activities in 2017, as compared to $4.4 billion in 2016. As a result, the company’s pipeline now includes more than 60 compounds focused on specialties like immunology, oncology, and neurology, along with targeted investments in cystic fibrosis and women’s health.

What is key is that AbbVie currently expects several its phase two programs to transition into phase three programs in fiscal 2018.

Wall Street’s key concern is whether AbbVie can diversify away from Humira before its patents expire. Yes, AbbVie has undertaken a few small acquisitions in addition to some organic growth in the arena of new drug development. At the same time, AbbVie does have an impressive portfolio of what are referred to as de-risked pharmaceutical assets, meaning formulations that are in Stage 3 or later in the FDA approval process.

As a result, the company should be able to plug the financial gap resulting from Humira coming off patent in 2020 and will likely continue to increase its revenue base because of new drugs such as Imbruvica, Venclexta, Rova-T and ABT-494.

Between March 19 and March 26, 2018, AbbVie’s share price declined 14 percent. The downfall resulted from the announced results of a phase 2 study of Rova-T for the treatment of patients with relapsed small cell lung cancer on March 22.

The company decided not to seek accelerated approval of Rova-T for that application, which in turn eroded $20 billion of AbbVie’s market capitalization.

Although confidence in the company’s ability to diversify itself and continue to grow could be thought of as a leap of faith, in the past AbbVie has had far fewer things in its pipeline than it does now.

Meanwhile, AbbVie’s 2018 guidance is good. Midpoint earnings per share guidance calls for a 13.9 percent growth, with top line revenue set to increase another 10 percent.

Yes, the increase was led by Humira, which increased worldwide sales by over 16 percent. Nevertheless, AbbVie generates considerable excess cash and the dividend is just a little over 50 percent of trailing free cash flow.

The intrinsic value of the shares using a free cash flow to the firm model is approximately $102. My earnings estimate for 2018 is $7.50 per share with a projected 12-month share price of $113, for a 10 percent capital gain, plus the 2.59 percent indicated dividend yield.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.