Abbott Laboratories (ABT), AbbVie Inc (ABBV): Profit From The Market’s Misunderstanding Of This Spinoff Company

What About The Business?

AbbVie’s key drug is Humira, an anti-inflammatory product used primarily for rheumatoid arthritis. In 2012, Humira accounted for around half of AbbVie’s $18.4 billion pro forma revenues. Last year, the drug accounted for about 50% of the market for rheumatoid arthritis drugs, which is expected grow to more than $25 billion in 2017, up nearly 40% from  2012.

One concern is the fact that Humira will lose patent protection in 2016 in the United States and in 2018 in Europe. However, AbbVie’s total research and development (R&D) pipeline has more than 20 compounds in Phase II or Phase III development, including five key products planned for launch before 2016.

Humira is also approved for a number of other uses, which includes HIV, Crohn’s disease, psoriatic arthritis and several other ailments. These uses and the drugs in AbbVie’s pipeline should help AbbVie offset any fall-off in Humira revenues.

AbbVie, which gets more than half its revenue from outside North America, has a number of growth opportunities in the U.S. and internationally. Emerging markets should see tailwinds from increased spending on health care, and in the U.S., the Affordable Care Act (aka Obamacare) is expected to provide coverage for more than 30 million uninsured Americans next year. All in all, the company has company- and industry-specific tailwinds for which the market appears to be mispricing ABBV.

Risks to consider: As with any pharma company, there are risks that patents will be challenged or the company will fail to produce new revenue-generating products. AbbVie faces patent expirations for its top drug Humira in the next several years, which could be a negative if its other products fail to come to market in a timely fashion.

Action to take –> Consider buying shares of AbbVie, which has a well-developed R&D pipeline and a cheap valuation. With just a modest 20 times P/E multiple on AbbVie management’s 2013 EPS forecast of $3.10, the stock should trade north of $60. Its solid cash position and robust dividend also give the stock some downside protection.

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