AbbVie Inc. (NYSE:ABBV) and Bristol-Myers Squibb Company (NYSE:BMY) are navigating a familiar pharmaceutical challenge, which revolves around replacing revenue from established medicines with newer products. Despite that broad similarity, investors are valuing their progress very differently. According to Yahoo Finance’s valuation data, AbbVie trades at 16.39 times forward earnings, compared with just 9.36 times for Bristol Myers.
That difference in valuation raises an important question for investors. Is AbbVie’s stronger growth worth paying substantially more for, or could Bristol Myers offer better returns if its newer medicines continue gaining momentum?
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Bull Case
AbbVie Inc. (NYSE:ABBV) has a compelling argument for its higher multiple. Its second-quarter revenue increased 10.2% year over year to $16.99 billion, while adjusted diluted EPS climbed 22.9% to $3.65. More importantly, the company is demonstrating that its post-Humira growth strategy is working.
Skyrizi generated $5.51 billion in global quarterly net revenue, up 24.4% on a reported basis, while Rinvoq contributed $2.53 billion, growing 24.5%. Together, these two immunology medicines generated approximately $8.03 billion, representing nearly half of AbbVie’s quarterly revenue. Global net revenues from the immunology portfolio, as a whole, were $8.786 billion.
The statistics suggest that AbbVie is no longer relying on expectations that newer medicines will eventually compensate for Humira’s decline. Their existing sales provide evidence of replacement revenue. Read more extensively about AbbVie’s bull and bear case here.
Bristol-Myers Squibb Company (NYSE:BMY), however, is showing progress that its valuation might not fully reflect. Second-quarter revenue increased 6% to approximately $13 billion, while its Growth Portfolio expanded 15% to $7.6 billion. The company also raised its full-year revenue guidance to $49 billion–$50 billion and increased its non-GAAP EPS expectations to $6.75–$7.00.
That creates an interesting opportunity for value-oriented investors. Bristol Myers does not necessarily need to match AbbVie’s growth rate to deliver attractive returns. If its expanding Growth Portfolio can offset declines in older medicines and sustain earnings, even a modest improvement in investor confidence could support a higher valuation multiple.
The discount could therefore offer a potential advantage, where Bristol Myers has more room for its valuation to improve if execution strengthens, whereas AbbVie must continue delivering the growth investors already expect. We meticulously crafted a list of the 7 Best Pharma Stocks to Invest In Now. Access the complete list here.
Bear Case
Keep up with the healthcare sector through our insightful articles covering bull and bear cases. Along with BMY, read our recently published article on Danaher Has Barely Moved in a Year. Is its 25x Earnings Valuation Justified?
Anyway, the problem with Bristol Myers’ cheaper valuation is that its transition remains incomplete. Although its Growth Portfolio is expanding, the company continues to face declining revenue from established medicines, including Revlimid. Its 15% Growth Portfolio increase is encouraging, but investors must consider how much of that growth translates into companywide earnings after legacy-product declines.
AbbVie faces risks of its own. Skyrizi and Rinvoq have become increasingly important to overall performance, leaving future growth more dependent on continued commercial success in immunology. Its oncology portfolio also reported a 1.5% revenue decline in the second quarter, illustrating that growth is not equally strong across its businesses.
Valuation adds another complication in the context of the two stocks. At 16.39 times forward earnings, AbbVie offers less protection against disappointing results than Bristol Myers at 9.36 times.
Which Stock Makes More Sense?
The decision comes down to how much certainty investors are willing to pay for. AbbVie Inc. (NYSE:ABBV) has already demonstrated substantial progress in replacing Humira revenue, which might make its premium understandable. Bristol Myers offers a cheaper route into pharmaceutical growth, but its valuation discount reflects a transition that still needs to prove durable.
For investors prioritizing established earnings momentum, AbbVie presents the more convincing operating story. For those willing to accept greater uncertainty, Bristol-Myers Squibb Company (NYSE:BMY) presents a different opportunity of buying improving earnings prospects without paying for the same degree of confidence.
The deciding factor is not which stock has the lower P/E, but whether Bristol Myers can close its growth gap faster than the valuation gap suggests.
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This article is originally published at Insider Monkey.
