Throughout this year, AbbVie (ABBV) tried, but failed, to break out above the $90-100 level. At a recent price of $86, markets value the drug manufacturing giant at a price-to-earnings of 10 times. And at a 5.37% dividend yield, the company has billions of free cash flow to satisfy income, value, and growth investors.
Since July, AbbVie peaked at $100 and fell into a downtrend. Money flow back to COVID-19 vaccine makers and a 10% correction in technology stocks in September hurt ABBV stock, too. So, what should patient buy-and-hold investors expect from the company in the year ahead? The firm’s cosmetics division rebounded back to COVID-19 levels. It forecasts billions in additional revenue in the year ahead.
There are three reasons why AbbVie will resume its outperformance in the next 15 months.
1) Atopic Dermatitis Drug
CEO Rick Gonzalez set a $1 billion annual revenue target for Rinvoq for atopic dermatitis patients alone. The drug already captured 15% of in-play rheumatoid arthritis patients. Next year at the earliest, it will prove why the drug is a good alternative to Regeneron’s (REGN) Dupixent. Regeneron stock, which has already doubled since I recommended it to readers, will start facing meaningful competition from AbbVie.
Below: Rinvoq is an oral drug treating RA. Its pill format may win Dupixent patients who inject Dupixent, a biologic.
AbbVie will hold a head-to-head study against Dupixent later this year. Although investors will not get any data readings from the comparison, chances are good that Rinvoq, a JAK inhibitor, will fare well against the injected drug. Gonzalez said:
We feel very confident about our ability to perform in that study. We designed that study based on estimations of effect size from Phase II. And as I’ve said, our Phase III results across the three topline studies exceeded that. So, that only increases our confidence.
Regeneron targeted the adult patient group for its AD drug. It then expanded the indication to adolescents and children. If AbbVie follows the same path, the revenue potential for the drug will expand. Expect AbbVie to raise its revenue forecast post launch.
2) Skyrizi Potential
AbbVie has three launches in 2021 and more to follow in 2022 for both Skyrizi and Rinvoq. In its model, it assumed a market share in the high single digits (8-9%). That forecast will prove too conservative. Skyrizi is getting around 30% of in-play patients. Rinvoq also gets around 15% of in-play RA patients. So, chances are high that the company will increase its revenue guidance.
Previously, AbbVie forecast revenue from Rinvoq and Skyrizi totaling over $10 billion on a risk-adjusted basis in 2025.
3) Growing Cash Flow
Combined with Allergan, AbbVie generates around $20 billion in cash flow. This gives management plenty of flexibility in increasing shareholder value. If the company pays down its debt, markets will be less nervous about its debt/equity ratio, which stands at ~6 times (per Finviz). A quick check with SA Premium would indicate how big the debt is at:
(Source: SA Premium)
Management is committed to paying down its debt by $15 billion to $18 billion by the end of next year. By comparison, Similarly, Teva Pharmaceutical (TEVA) and Bausch Health (BHC) are both paying down debt. Unfortunately, neither firm has consistent cash flow growth like AbbVie. So, Teva and BHC tend to underperform. AbbVie stock has the best chance of trading at new highs.
AbbVie said that it could grow the dividend, too. The CEO conceded that the dividend may not grow as fast as before. Still, at a dividend that yields around 5.4%, income investors should appreciate the careful balance between debt reduction and dividend payments.
AbbVie did not rule out an acquisition in the $2 billion range. It set that amount aside for external innovation efforts. For example, the company’s recent Genmab deal is the kind of opportunity that will sustain its research & development ambitions.
According to Stock Rover, AbbVie has a fair value of $110.66:
These scores are consistent with those posted on SA Premium:
The low P/E multiple reflects investor concerns over AbbVie’s debt and future growth potential. Dividend income investors should use the market’s folly of having a short-term memory to buy the stock.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.