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AbbVie Inc (ABBV) Has Much More Upside Reward Than Downside Risk

For investors viewing AbbVie Inc (NYSE:ABBV) as a value play since its spin-off from Abbott Laboratories (NYSE:ABT), it is time to think again. The management has always viewed AbbVie as a long-term growth play that still has strong potential from Humira and AbbVie’s pipeline.

AbbVie Inc (NYSE:ABBV)

Since its separation from Abbott Laboratories (NYSE:ABT) on Jan. 2, AbbVie Inc (NYSE:ABBV) has been operating smoothly with a simple business model and dedicated priorities. The company is focused on Humira growth and developing its pipeline continuously. Despite the patent expiration of its lipid franchise, AbbVie Inc (NYSE:ABBV)’s management believes that the company will return to growth in 2015 and beyond.

What is AbbVie doing?

The management anticipates the increase of research and development as a percentage of sales to sustain its growth in the long-term. With the continuous growth of Humira, some margin expansion is expected. However, the overall selling, general and administrative expenses may increase first before coming down as the company continues to launch a new pipeline. The company is taking several initiatives to improve margins, including streamlining its supply chain. As the royalty burden starts to disappear, the margin will improve further.

Humira update

Xeljanz, Pfizer Inc. (NYSE:PFE)’s potential star to compete with Humira, has had a bumpy start. While earlier projections forecast peak annual sales of $3 billion, analysts are now saying that it may only hit about $1.6 billion by 2016. AbbVie Inc (NYSE:ABBV)’s management states that Xeljanz was playing out similar to its modeling. With Humira’s strong efficacy and solid safety record, there is no reason to switch a well-tolerated patient into a new therapy. The management believes Xeljanz will have a difficult time penetrating the sweet spot of the anti-TNFs.

To make things worse, Pfizer Inc. (NYSE:PFE) was stunned by Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency’s negative opinion of Xeljanz in late April 2013. The committee stated that it “did not believe that a consistent reduction in disease activity and structural damage to joints had been sufficiently demonstrated.” There are also questions about side effects of the drug, including serious infections and malignancies that were observed in the trials. It is expected that Pfizer Inc. (NYSE:PFE) will appeal the decision by the third quarter of 2013.

Hepatitis C pipeline

Hepatitis C attacks the liver and can lead to liver cancer, affecting about 150 million people worldwide. The market for new Hepatitis C pills is estimated at $20 billion. AbbVie Inc (NYSE:ABBV) said it has a good chance to win the race against Gilead Sciences, Inc. (NASDAQ:GILD) to launch a new generation of all-oral hepatitis C drugs.