INVESTMENT THESIS
We are reaffirming our BUY rating on AbbVie Inc. (NYSE: ABBV), which has diversified its revenue and substantially expanded its product portfolio through the acquisition of Allergan. Our revised target price is $130, raised from $115.
RECENT DEVELOPMENTS
AbbVie delivered strong 3Q20 results as adjusted EPS rose 22.5%. GAAP net income was $2.308 billion or $1.29 per share, compared to $1.884 billion or $1.26 per share a year earlier. The adjusted results exclude the amortization of intangibles related to the Allergan transaction and associated integration costs.
Net revenue rose to $12.9 billion. This was the first full quarter to include the Allergan business, which was acquired in May.
Among the legacy AbbVie businesses, revenue from the immunology portfolio rose to $5.790 billion (+14.8% reported; +15.0% operational). U.S. Humira revenue was $4.189 billion (+7.7%). Overseas Humira revenue was $951 million (-8.0% operational), due to competition from biosimilars.
The immunology and hematology/oncology portfolios include recently launched drugs such as Skyrizi, Rinvoq, Imbruvica and Venclexta that are seeing strong growth. These products are expected to help offset the eventual decline of Humira, which faces the loss of exclusivity in the U.S. in 2023. AbbVie is also pursuing clinical studies to expand indications for these products.
For Rinvoq, AbbVie expects to receive approvals in 2021 for three additional indications: psoriatic arthritis, ankylosing spondylitis, and atopic dermatitis. In 2021, it expects to seek regulatory approval for Skyrizi as a treatment for psoriatic arthritis. It will also seek approval for both Rinvoq and Skyrizi for the treatment of inflammatory bowel disease.
Among the products acquired through the Allergan transaction, global revenue from the aesthetics portfolio was $967 million (-3.1% operational). Global Botox cosmetic revenue was $393 million (-2.2% operational). Global Botox therapeutic revenue was $523 million (-1.8%).
While aesthetics revenue has not yet returned to 2019 levels, revenue showed robust sequential growth in 3Q, indicating a V-shaped recovery.
The company expects to report trial results in the second half of 2021 and to file for regulatory approval shortly thereafter if the results are favorable. The additional indication for MDD would expand Vraylar’s addressable market.
One other important pipeline asset is ABBV-3373, for moderate to severe rheumatoid arthritis. Based on positive top-line results from a proof-of-concept trial, AbbVie plans to advance this drug candidate to clinical trials in RA and other immune-mediated diseases. (ABBV-3373 is based on the anti-TNF ADC platform; TNF is tumor necrosis factor and ADC is antibody drug conjugate.) AbbVie sees 3373 as a potential successor to Humira.
By measures of profitability, the 3Q adjusted gross margin was 81.7%, down 30 basis points. The adjusted pretax margin was 44.3%, down 50 basis points.
EARNINGS & GROWTH ANALYSIS
The company lifted its 2020 guidance. The updated guidance includes accretion from the Allergan transaction.
Based on the strong 3Q20 results, we are raising our adjusted EPS estimates to $10.49 from $10.45 for 2020 and to $12.40 from $12.30 for 2021.
FINANCIAL STRENGTH & DIVIDEND
We rate AbbVie’s financial strength as Medium, the midpoint on our five-point scale. The balance sheet is highly leveraged as the company issued debt to fund the acquisition of Allergan. As of the end of 3Q20, AbbVie had $7.9 billion of cash and $82.3 billion of debt. It had a debt/total capitalization ratio of 85%, compared to 112% at the end of 4Q19. Cash flow from operations for the first nine months of 2020 was $12.734 billion, compared to $10.049 billion a year earlier. The company plans to use cash flow from operations to pay down debt.
The company intends to pay down $15-$18 billion of combined company debt by the end of 2021. It expects to achieve a net debt/EBITDA ratio of 2.5 by the end of 2021, with further deleveraging through 2023.
In addition to paying down debt, AbbVie’s capital allocation priorities include supporting a growing dividend, M&A, and the in-licensing of drug programs, as well as developing mid- to late-stage pipeline assets.
The current annualized dividend is $5.20 per share, for a yield of about 4.9%. Our dividend estimates are $5.20 (raised from $4.72) for 2020 and $5.40 (raised from $4.88) for 2021.
RISKS
AbbVie faces a range of risks. The development of new drugs from initial discovery to final approval may take several years and cost hundreds of millions of dollars. Many drugs do not make it through this process.
The company faces integration risks as it folds in the Allergan merger. In the integration process, it is working to minimize operational disruptions as it realigns sales, marketing, manufacturing and R&D.
COMPANY DESCRIPTION
AbbVie, a research-based biopharmaceutical company, was spun off from Abbott Laboratories in January 2013. The company is based in suburban Chicago. The shares are a component of the S&P 500.
VALUATION
ABBV shares trade at 8.5-times our 2021 EPS estimate, below the average multiple of 11.9 for our coverage universe of large-cap biotech/pharmaceutical stocks. Given the strength of the combined AbbVie-Allergan portfolio, we believe that the post-merger company has multiple growth drivers and that the stock is favorably valued at current levels. We are reaffirming our BUY rating with a revised target price of $130.
On December 8 at midday, BUY-rated ABBV traded at $107.85, up $2.01.
Source: Argus
