AbbVie Inc.: The Bear Case From a Bull

By Keith Speights Markets Fool.com

It's not hard to find reasons to like AbbVie (NYSE: ABBV) stock. There's the impressive revenue and earnings growth. And, of course, who wouldn't like the biotech's high dividend yield?

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I have a positive view about AbbVie and even own the stock. However, I also recognize that there are several challenges facing the company. Here's the bear case for AbbVie -- from someone who is an unabashed bull.

Image source: Getty Images.

Humira could be in trouble

The single biggest argument against buying AbbVie stock is that Humira could face serious headwinds in the near future. Amgen (NASDAQ: AMGN) won approval in 2016 for Amjevita, the first biosimilar to Humira to be given a green light from the U.S. Food and Drug Administration (FDA). Amjevita also received European regulatory approval in March.

AbbVie filed a lawsuit in a U.S. district court alleging that Amgen's biosimilar infringes on several of its patents for Humira. Rick Gonzalez, AbbVie's CEO, has stated that the company believes it will be able to hold off U.S. competition through 2022. However, many observers expect competition from European biosimilars by the fourth quarter of 2018. And there's no guarantee that AbbVie will be successful in its attempts to fend off Amgen and others in the U.S. for too much longer.

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It's not just biosimilars that AbbVie has to worry about. The autoimmune disease market is becoming quite crowded with new drugs that could steal some of Humira's market share.

Humira generated sales of more than $16 billion last year. That's a whopping 63% of AbbVie's total revenue. The investing case for AbbVie hinges on the company being able to preserve much of that block of revenue while it rolls out new drugs. It's fair to say that there are significant doubts about whether AbbVie can do so.

AbbVie's pipeline might not be so solid

There are several new and existing drugs that AbbVie is counting on to replace revenue that will be lost to Humira's competition at some point. Blood cancer drugs Imbruvica and Venclexta play key roles in the company's strategy. Both are already approved for initial indications, with additional clinical studies in progress targeting other indications.

AbbVie also has high hopes for Rova-T, a drug gained in the company's acquisition last year of Stemcentrx. Rova-T is currently being evaluated in a pivotal study as a third-line treatment for small cell lung cancer (SCLC) and in another study in combination with Bristol-Myers Squibb's (NYSE: BMY) Opdivo and Yervoy as a second-line SCLC treatment. The drug is also the focus of an early-stage study targeting treatment ofneuroendocrine tumors.

In addition, AbbVie's pipeline includes a couple of candidates that could potentially join Humira. ABT-494 andrisankizumab are in late-stage studies for rheumatoid arthritis and psoriasis, respectively.There are other important candidates as well, especially experimental cancer drug veliparib and elagolix, which is in late-stage studies for treatment of endometriosis and uterine fibroids.

The risk, though, is that AbbVie's pipeline isn't as solid as it might seem. Hepatitis C drug Viekira hasn't been nearly as successful as the company hoped. At one point, some analysts were projecting that multiple myeloma drug Empliciti, which was co-developed by AbbVie and Bristol-Myers Squibb, would become a blockbuster by 2018. That now seems highly unlikely.

The reality is that promising drugs don't always deliver on their promise.That could be a problem for AbbVie because of its dependence on its pipeline producing significant revenue.

Debt could be a constraint

AbbVie gained several of its drugs through acquisitions, including Imbruvica, Rova-T, andrisankizumab. Making additional acquisitions could be more challenging because of the company's debt of more than $36 billion.

After AbbVie added significantly to its debt last year, both S&P Global Ratings and Moody's Investor Service lowered the company's credit rating. These lower ratings could be another factor that limits the company's ability to do much more on the acquisition front.If AbbVie's pipeline candidates run into problems, constraints on making acquisitions could turn into a serious issue for the company.

Still a bull

These are all legitimate risks that AbbVie faces. However, as I said earlier, I'm still bullish about the stock. I think the potential rewards from owning AbbVie outweigh the risks.

Humira's sales will no doubt decrease at some point, but my view is that revenue will taper off rather than drop off a cliff. That will give AbbVie time for its other drugs and pipeline candidates to flourish. While there's always the possibility that some won't perform as well as expected, I think that many of them will be huge winners.

If I'm right, AbbVie won't have the need to make big acquisitions in the near term. However, the company's solid cash flow should allow it to continue looking at smaller opportunities.

Even though there are questions about AbbVie's future, I'm not the only one who thinks the stock is a solid pick. The consensus among Wall Street analysts is that AbbVie will be able to grow earnings by an average annual rate of nearly 15% over the next several years. That's a pretty bullish outlook.

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Keith Speights owns shares of AbbVie. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.