From a fundamental perspective, it’s difficult to find anything wrong with AbbVie Inc (NYSE:ABBV). Friday morning’s fourth-quarter results beat consensus on the top and bottom lines for the fourth straight quarter. The midpoint of updated 2018 guidance implies 32% per-share earnings growth in 2018. And yet, AbbVie stock trades at less than 16 times that guidance, even after gaining 9% in early trading Friday.
AbbVie’s multiple of 16 and its growth of 32% suggest a so-called PEG (price/earnings-growth) ratio of 0.5x — a figure not found often, or ever, in this bull market. To top it off, ABBV stock still yields 2.6%. The combination makes AbbVie stock look like an incredible deal, even with the stock up 65% just since August. And with momentum strong coming out of the report, and 2018 results likely to be solid, that may be the case in the near term.
But as strong as recent results have been, and as good as 2018 looks, there’s a case to take profits at this point. There are a number of risks here, and looking backward in the pharmaceutical industry is a dangerous way to invest.
ABBV does look cheap, but most pharmaceutical stocks do from time to time, and as recent performance has shown, they can get a lot cheaper.
ABBV Crushes Earnings
To be sure, Q4 earnings themselves show little reason for caution. Revenue rose 13.8%, more than three points faster than analysts suggested. Adjusted EPS of $1.48 was 4 cents ahead of the Street. And 2018 guidance is impressive, with AbbVie projecting EPS of $7.33 to $7.43, raised from a prior $6.37-$6.57.
Corporate tax reform is helping on that front, but more than half of the EPS growth is expected to come from the operating business. That operating business contributed 8 cents of the guidance increase as well.
The news looks good on a more granular business. Abbvie’s 7 largest drugs all grew sales year-over-year. The largest drug, arthritis treatment Humira, saw revenue rise 12.6% in constant currency. Sales of second-place Imbruvica rose nearly 39%. Operating margins expanded nearly 90 basis points, but AbbVie also increased its R&D spending 19% on an adjusted basis.
The fourth quarter looks like nothing but good news, but questions remain for ABBV stock holders.
Will the Gains Hold?
The Q4 gains don’t necessarily come as a surprise.
AbbVie has been a phenomenal performer since its late 2012 spinoff from Abbott Laboratories (NYSE:ABT), gaining 236%. But, again, in the pharma space, it’s dangerous to look backward — because patent protection and regulatory impacts can have a huge effect on earnings.
And ABBV does have a few reasons for caution. The most obvious is that it remains heavily reliant on Humira. The drug drove a whopping 65% of total 2017 sales. And as seen at Gilead Sciences, Inc. (NASDAQ:GILD), whose sales have been heavily weighted toward its hepatitis C treatment Solvadi, that kind of revenue concentration can be dangerous.
AbbVie no doubt is better-positioned that Gilead was at Sovaldi’s peak. The rest of its pipeline looks stronger. Humira, unlike Solvadi, doesn’t cure the disease – and lead to an end of treatment. But Humira will come under some pressure.
A patent dispute settled with Amgen, Inc. (NASDAQ:AMGN) allows Amgen a non-exclusive license to Humira in Europe starting Oct. 16. (Roughly one-third of 2017 sales of Humira came from outside the U.S.) U.S. competition will follow in 2023. AbbVie still will make a royalty from Amgen products – but it likely will have to cut prices for Humira as a response, hurting sales and margins.
And before that, after 2018, corporate tax reform actually will move AbbVie’s tax rate up, per the Q4 release, presenting a modest headwind until U.S. competition arrives.
ABBV Stock Is Cheap, But Not Cheap Enough
AbbVie has a pair of drugs in the pipeline that hopefully will cushion any declines in Humira. Upadacitinib, an immunology drug, should be launched for multiple indications by 2022. Psoriasis treatment risankizumab showed strong phase 3 results last year.
But the lesson of the drug space is that it’s difficult to truly replace a blockbuster drug. GILD is down over 30% from its 2015 highs – though it looked cheap as Sovaldi came to market. Stocks across the space have been crushed when sales weaken: Valeant Pharmaceuticals Intl Inc (NYSE:VRX), Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA), and Mallinckrodt PLC (NYSE:MNK) all have been seen huge declines in the last few years.
ABBV is not VRX or TEVA, to be sure. It doesn’t have the same debt, and it has a much more stronger and more diversified portfolio. But the broader point is that drug stocks usually look cheap on the way up – and quite often struggle once revenue peaks.
That peak isn’t necessarily here for AbbVie. If Humira holds up and the pipeline assets drive revenue, overall sales and profits can grow well into the next decade. But as good as Q4 earnings look, investors need to be careful. Everything looks positive for ABBV at the moment — but at some point, the path will get rockier.
As of this writing, Vince Martin has no positions in any securities mentioned.
