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We remain bearish on the outlook for AbbVie as we do not believe the clinical pipeline will be able to adequately offset the loss of revenue when key product Humira loses patent protection beginning in October as a biosimilar enters the European market.
By Alexander J. Poulos
Key Takeaways
AbbVie remains over-reliant on sales of Humira to drive top-line sales–a major red flag as the worldwide patent protection is about to lapse.
Humira will lose patent protection in Europe, and thus in our view, we think we are about to witness peak Humira sales in 2018.
We feel investors are over-estimating the productivity of the clinical pipeline, and while there is always a chance AbbVie may come out ahead, we’re not expecting much from its shots on goal.
We had been concerned that management executed an accelerated share repurchase scheme earlier this year with the share price trading at all-time highs. It looks like bad timing now.
Our fair value estimate of AbbVie is pegged at $95 per share with a wide fair value range of $71-$119 due in large portion to the uncertainty on how steep the revenue cliff will come from a biosimilar version of Humira.
We remain positive on the progress of AbbVie’s clinical pipeline, but with each subsequent setback, the uncertainty looms large due to the enormous revenue generated by Humira.
We continue to think there are better opportunities in the healthcare and biotech industry than AbbVie.
Overview
We continue to monitor even miniscule changes in the trajectory of the clinical pipeline in the pharma/biotech sector as the productivity of the pipeline offers what could be described as “early warning” system (“canary in the coal mine,” so to speak) of impending challenges to top-line performance as commercialized products begin to lose patent protection.
The poster child for this dilemma is none other than AbbVie (ABBV) as the venerable Chicago-based healthcare giant is about to face the impending loss of patent protection of its top-selling product Humira. While patent losses are “part of doing business” in the pharma/biotech sector, a company even as large as Abbvie will face significant headwinds if a product accounts for a large portion of sales as the ability to offset the loss becomes more difficult.
In the case of AbbVie, the company remains highly exposed to Humira, which accounts for over 60% of sales, a number more often reserved for smaller biotech’s which tend to have one or two commercial products. We do not fault AbbVie for the over-reliance on Humira–instead, it should be viewed as a testament to a stellar product whose time in the sun is about to lapse. In some ways, AbbVie’s risk is a function of its own prior success.
For those veteran industry watchers, think of GlaxoSmithKline (GSK) when it lost patent protection on Zantac or Eli Lilly (LLY) when the Prozac patent lapsed and last but not least Pfizer (PFE) when the all-mighty Lipitor’s time as king of the hill came to an end. Each of these giants of the field struggled as they waited for new products to enter the marketplace. Let’s not mince words here–we are not calling for an end of AbbVie–instead, we feel the equity is poised to underperform as expectations are reset lower.
Pipeline to the Rescue?
We had been surprised the share price of AbbVie accelerated in the back-half of 2017 (and into early 2018) thanks in large part to favorable data in what many as a next-generation version of Humira dubbed Upadacitinib or Upa for short. Upadacitinib is an oral Jak-1 inhibitor that is being studied for development across a wide range of inflammatory conditions. The oral Jak-1 class holds great appeal, but as our astute members will recall, the FDA derailed a similar treatment named Olumiant over concerns over VTE’s, which are known in layman’s terms as “blood clots.”
Olumiant did eventually make its way onto the US market nearly a year later, but at a lower dose which places the product at a competitive disadvantage, something in our opinion that will limit the overall commercial potential of the product. With Oluminat now serving as the test case, each new subsequent Jak-1 will be closely monitored for VTE’s which have plagued Upa in trials thus far. AbbVie recently released data indicating the rate of VTE’s in the UPA trial arm matched the incidences in the control arm (in this case the patient population treated with Methotrexate, which remains a cost-effective front-line therapy in Rheumatoid Arthritis).
We found the rate reassuring which may aid AbbVie’s efforts in offsetting the revenue losses of Humira. The management team at AbbVie has guided for worldwide sales of Upa to clock in at $6.5 billion in 2025 a number we take exception with as it implies dominance in the Jak-1 class–a distinction we believe is not warranted at this time. One of the key verticals UPA will need to explore to hit the lofty sales target is Atopic Dermatitis where Regeneron Pharmaceuticals (REGN) Dupixent has an early head start. To illustrate the volatile nature of pipeline productivity, the share price of Regeneron has crashed from a tad north of $500 to its current perch below $400 upon the threat of UPA making inroads in the treatment of Atopic Dermatitis.
We think the better safety profile of Dupixent with the absence of VTE’s will preclude Upa from taking significant share as clinicians will deem the risk of VTE’s for chronic skin conditions as a risk not worth taking. Clinicians are a cautious group by nature as the threat of litigation always looms large, hence the tendency to choose therapies that are well tolerated even if a slightly more effective therapy exists with a worse safety profile. Side effects sometimes tend to exacerbate what is often witnessed in clinical trials when released into the general public.
We continue to monitor the progress of Filgotinib, a competing product that AbbVie decided to pass on to instead focus on developing Upa. Thus far in phase 2 clinical trials, Filgotinib has posted the cleanest safety profile with the least effect on platelets of the class, thus setting up a potential key differentiator with Upa and Olumiant. If Filgotinib can make it through phase 3 trials (due out in 2019) with a notable absence of VTE’s, we view this as an additional nail in the coffin of the UPA Jak-1 dominance thesis. This won’t be good for AbbVie.
Stemcentryx an Expensive Bust?
We applaud the management team at AbbVie for aggressively expanding/diversifying its revenue base through acquisitions, but the record remains mixed. AbbVie outbid rival Johnson & Johnson (JNJ) to gain partial control of Imbruvica, the leading treatment for chronic lymphocytic leukemia, a cancer of the blood and bone marrow. Imbruvica contributed $2.3 billion in sales after accounting for profit sharing with Johnson & Johnson on international sales, thus offering AbbVie a badly needed dose of diversification from an overreliance on Humira.
AbbVie is wisely seeking a broader prescribing label by moving into additional forms of blood cancers with the next target Diffuse Large B-Cell Lymphoma (DLBCL) as a first line addition to the standard course of therapy. A win in this area would position Imbruvica to scale revenue, but the trial did not show superiority when Imbruvica was added to standard therapy versus standard therapy itself. We generally view the trial results as a disappointment, but we still have a positive view of the expensive, but necessary deal to acquire Imbruvica.
The deal for Stemcentryx, however, is beginning to look more and more as an expensive boondoggle, in our view. AbbVie ponied up $5.8 billion initially with an additional $4 billion in cash to be based on certain milestones, which are looking to be more in doubt with each subsequent data reveal. The crown jewel of the Stemcentryx deal is Rova-T for the initial treatment of third-line treatment of patients with DLL3-expressing relapsed/refractory small cell lung cancer—a relatively small target market.
Small cell lung cancer accounts for roughly 15% of all lung cancer cases–as a quick primer, most patients will opt for a first-line treatment and perhaps a second-line treatment with very few opting for a third line treatment, thus reducing the target market even further. The historical median overall survival rate is 4.7 months—Rova-T posted a median progression-free survival rate of 4.1 months with a median overall survival rate of 6.7 months. The results are very disappointing; thus, in our opinion, we feel AbbVie has grossly overpaid for the asset.
Balance Sheet Considerations
AbbVie has utilized its balance sheet to acquire partial control of Imbruvica and Stemcentryx, but the strains of aggressive M&A are beginning to pressure the balance sheet to the tune of net debt of $27.6 billion as of the end of 2017 ($37.37 billion in short- and long-term debt less $9.78 billion in cash and short-term investments). We remain perplexed by the board’s decision to enter into a Dutch auction to acquire $7.5 billion in shares at an offer price of $103 per share. The share price of AbbVie was trading below $75 well into August of 2017 which in our view makes the timing of this move dubious to say the least.
We suspect the sudden decision to enter such an aggressive Dutch auction is aimed towards shoring up earnings in the coming quarters as management may have started to fear a steeper revenue cliff from a biosimilar version of Humira in Europe. We have witnessed another ill-timed accelerated buyback program of this nature back in 2016 when Gilead Sciences (GILD) entered into an accelerated share repurchase plan in the second quarter of 2016, which in hindsight, did nothing to staunch the share-price decline once its key Hepatitis C franchise entered a state of terminal decline. Gilead, in a similar vein to AbbVie’s Humira, was highly levered to the fortunes of the HCV franchise. We take great exception to utilizing the balance sheet to repurchase shares at what may prove to be peak or near-peak prices (and ones that are above our fair value estimate).
Concluding Thoughts
Our fair value on AbbVie is pegged at $95 per share with a wide fair value range of $71-$119 thanks in large portion to the uncertainty on how steep the revenue cliff will come from a biosimilar version of Humira. We remain positive on the progress of AbbVie’s clinical pipeline, but with each subsequent setback the uncertainty looms large due to the enormous revenue generated by Humira. We continue to think there are better opportunities in the healthcare and biotech industry than AbbVie.
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Heathcare and biotech contributor Alexander J. Poulos is long Gilead Sciences. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.