Mad Money

AbbVie: The comeback story of a pharma stock

A screen displays the share price for pharmaceutical maker AbbVie on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters

Jim Cramer freaked out as he watched the biggest merger of the year go down the tubes recently.

The freak out happened when the big pharmaceutical company Abbvie, announced it was dropping its $54 billion tax-inversion takeover bid for Shire. This was due to new rules from the Treasury Department that were designed to stop tax inversion deals.

However, have no fear. Although it seemed like a terrible idea at the time, it turns out that it might have been the best thing that AbbVie ever did! While the stock was down for a while, it has now been roaring and is back in action.

So what exactly happened, and why is this stock on fire?

In the case of AbbVie, most thought that it was a one trick-pony. It's biggest anti-inflammatory drug, Humira, accounted for 60 percent of the company's total revenue and it expected competition from the generic drugs by 2018.

If the management at AbbVie watched the "Mad Money" segment—"Am I Diversified"—they would have seen red flags all over the place.

That is exactly why it was looking to acquire Shire, for its pipeline of diversification. Plus, they would have gotten the bonus tax break from acquiring an Irish company. That is, until the rules changed.

Before the new rules were announced in late September, AbbVie was trading above $59. The day after AbbVie announced they were reconsidering the Shire deal, the stock dropped to $52 at one point during the day. Friday it closed at $69.

How did that happen?

Well, AbbVie knew it had to do something to boost the stock. So it announced a 17 percent dividend bump. That made it the second-highest yielder in the sector. It also announced a $5 billion buyback.

It also realigned its pipeline, and has shown promising data on its hepatitis C treatment as well.

"Perhaps most important, on the conference call management said they believe hep C could be a $20 billion market, or even larger, and they also said they feel good about their ability to compete and gain market share," Cramer said.

It also has other things in its pipeline, with the expectation of phase 3 results on its treatment for endometriosis. They are also working on a compound for multiple sclerosis, a drug for celiac disease, and formulation for Parkinson's among other things.

With AbbVie being a shareholder friendly company that has a list of positive qualities, it turns out that this stock is a heck of a lot more attractive than initially anticipated.

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"When you are dealing with a high-quality company, don't be discouraged if one plan for value creation falls through. When AbbVie dropped its bid for Shire, a lot of people thought it was a goner, but management just found new ways to bring out value, and some, like the hep C franchise, were there all along if you just had eyes to see them."

With all of this good news, Cramer determined that this company will just keep on going higher for the rest of the year, maybe even beyond.

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