Since topping over $120 a share three distinct times since February, shares of AbbVie Inc. (NYSE:ABBV) are still down around 25 percent. Whether the stock was perfectly priced or investors wanted an excuse to lock in profits, ABBV stock still has tremendous value and growth ahead. The pause in the stock’s rally could just be temporary.
On March 22, AbbVie reported disappointing Phase 2 data for its Rova-T study that sent its shares lower. The 16-percent response rate for a subgroup of patients for Rova-T in third-line relapsed/refractory small cell lung cancer (SCLC) suggests the overall response rate was lower.
But with around 70 percent of institutional ownership for the stock, the sell-off could be shaking out the weak, speculative hands. Institutions tend to ride out the near-term volatility by holding on to the shares. Any accumulation in the stock, especially when it is valued at a 16.6 times price-to-earnings ratio and 10.5 times forward P/E, will slow any further drop in the stock markets.
Strong Fourth-Quarter Results Forgotten
AbbVie’s stock rose in January when the company reported earnings and revenue that beat consensus estimates. Revenue grew 13.8% year-on-year to $7.74 billion. The adjusted earnings per share of $1.48 represented year-on-year growth of over 23 percent. The latest disappointment in the Rova-T study will have a small impact on the business should it fail. Considering AbbVie has not one, but three major drivers for growth — Humira, Imbruvica, and Mavyret — investors may expect steady upside in the company for 2018.
AbbVie has a solid history of outperformance behind it. The latest quarterly earnings report once again confirmed how healthy its business is since earnings and sales grew at a double-digit rate. For the year, sales of Imbruvica grew 41 percent. Mavyret ended the year with 32-percent market share.
Future Upside for ABBV Stock
Pivotol trial results for AbbVie’s upadacitinib, which treats rheumatoid arthritis; risankizumab, for treating psoriasis, a skin disease; and Murano, which treats patients with relapsed/refractory chronic lymphocytic leukemia (CLL), collectively ensure AbbVie will have a strong pipeline ahead.
This makes the stock market’s strong negative reaction to disappointing Rova-T more puzzling. Markets could be re-pricing the stock’s fair value in anticipation of Rova-T not contributing to the company’s revenue in late 2018 to 2019 as management previously forecast. The clinical results are also a setback when management expected Rova-T would add “significantly” to the business.
Despite that one unknown, upadacitinib holds special promise. The drug is in clinical development for six indications. This includes dermatology (eczema), GI, and rheumatology. Crohn’s disease and psoriatic arthritis are some of the diseases it treats. The addressable market for the drug is clearly a big one for AbbVie. For now, the clinical results look very promising.
Upadacitinib earned a breakthrough designation in atopic dermatitis based on its Phase 2 data. Since this disease is prevalent in North America, AbbVie has a potential winner if it gets the drug to market soon. Only Pfizer Inc. (NYSE:PFE) and Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN) are ahead of AbbVie in developing non-steroidal drugs that treat this skin disease. But for investors, ABBV stock holds a distinct advantage from a valuation perspective. Pfizer and Regeneron both trade at P/E multiples that are higher than that of AbbVie’s stock.
Takeaway on ABBV stock
The market potential for drugs treating lung cancer is big, so the set-back in AbbVie cannot be dismissed. For value investors, AbbVie’s stock trades at a discount to its peers, so the stock already more than discounts temporary disappointments from its clinical studies.
As a group, biotechnology is underperforming the markets as investors shy away from risk. If that sentiment changes, ABBV stock will be one of the first stocks to recover.
Disclosure: Author does not own shares in any of the companies mentioned.