According to a recent report from EvaluatePharma, AbbVie (NYSE: ABBV) has the most valuable late-stage clinical pipeline among the major drug manufacturers. Specifically, the company has four drug candidates landing in the top 20, totaling a net present value of $23.8 billion.
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|Stage||Target Indication(s)||Net Present Value|
|Rova-T||Phase 2||Small cell lung cancer||$8.5 billion|
|Upadacitinib (ABT-494)||Phase 3||Rheumatoid arthritis||$6.3 billion|
|Elagolix||Phase 3||Endometriosis, uterine fibroids||$4.9 billion|
|Filed||Hepatitis C||$4.1 billion|
Of course, AbbVie's management has been trying to convey this positive message for months now, but it's been largely drowned out by the concerns over Humira's patent expiration. In fact, this drugmaker's shares are trading at a forward price-to-earnings ratio of 11.1, one of the lowest in the industry -- despite also sporting one of the fastest-growing dividends and top lines over the past four years, and despite owning the most valuable late-stage clinical pipeline as well.
With this theme in mind, let's consider if AbbVie's positives outweigh the risks presented by the biosimilar threat to Humira.
The bull case
Another interesting tidbit of EvaluatePharma's report is that it has Humira's revenue remaining fairly steady until 2022, whereas other analysts have suggested that Amgen's (NASDAQ: AMGN) FDA-approved biosimilar Amjevita, and perhaps others, will start to carve into the drug's enormous market share by as early as 2019.
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The issue is basically how long AbbVie can extend the legal challenges to Humira's intellectual property to lengthen its exclusivity period in the U.S. and abroad. AbbVie has said that 2022 is a likely cut-off point, but there have already been some setbacks on the legal front that suggest a biosimilar threat could materialize by 2019 to 2020.
If we take EvaluatePharma's outlook, AbbVie's shares would appear be trading at around 3.2 to 3.4 times its 2022 revenue. This estimate also assumes that the company's pipeline delivers on at least two of these four experimental drugs, which appears likely, given that its hep C combo of glecaprevir/pibrentasvir is already under FDA review, and its next-generation anti-inflammatory drug, upadacitinib, is producing stellar results in its late-stage program.
In sum, this bullish case implies that AbbVie's top line can continue to grow at a healthy compound annual growth rate of around 5% from 2016 to 2022. If this line holds, AbbVie would be in the upper tier of large-cap biotech stocks in terms of revenue growth. Equally as important, though, this level of growth should be sufficient to at least maintain its outstanding dividend program at current levels.
The bear case
If you're a pessimist, you probably still have to bake in the revenue from both glecaprevir/pibrentasvir and upadacitinib, based on their likelihood of approval. But if Amgen's Amjevita breaks into the market by 2020, AbbVie's 2022 annual revenue could drop off by perhaps $4.7 billion relative to the more bullish outlook.
So if Amjevita or other Humira biosimilars were to enter the market in 2020, AbbVie's shares would be trading right now at around 3.8 to 4 times its 2022 revenue. That's fairly good news, as AbbVie's shares are basically trading at this level right now.
The bad news is that AbbVie's top-notch dividend might not be safe if its top line stagnates. A big reason the company has such a promising pipeline, after all, is that AbbVie's management has aggressively used debt financing to bring in new blood. The net result is that the company has leveraged its balance sheet out to worrying levels -- meaning debt is going to play a substantial role in its capital allocation strategy moving forward.
The drugmaker's 12-month trailing payout ratio of 60.88 implies that it can increase its dividend even further. However, this metric might be grossly misleading in light of its jaw-dropping debt-to-equity ratio of 746. In other words, AbbVie must continue to grow its free cash flow at a respectable clip to both service its debt obligations and raise its dividend at the same time.
AbbVie's shares may look cheap at the moment in comparison with other high-flying biopharmas. But a deeper dive shows that the company simply can't afford any setbacks in its legal defense to Humira. If Amgen's Amjevita or other biosimilar threats materialize earlier than 2022, for example, AbbVie may struggle to grow its dividend in light of its massive debt load. And its shares may turn out to be fairly valued at best if a biosimilar does come into play in 2020.
Bottom line: AbbVie's clinical pipeline and longer-term growth prospects may look great on paper, but its unsightly debt load will almost certainly compound any headwinds arising from a slowdown in Humira's double-digit sales trajectory. So if you're a long-term-oriented investor, this stock's risks might outweigh its rewards.
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