Cramer's Investing Club Stock Profile: Drugmaker Abbvie deserves a lot more love from the market

Published Mon, Jan 24 20224:00 PM ESTUpdated Tue, Jan 25 202212:50 PM EST

Abbvie (ABBV) is a leading biopharmaceutical firm that's transformed itself from a mostly one-drug company to a diversified business after the 2020 acquisition of Allergan. One of the main reasons why Abbvie needed to diversify its business and make a deal is that the strong results from Humira (~57% of 2019 sales) can no longer be counted on. Humira's patent protection expired in Europe in 2018, and 2023 is when biosimilars—lower-cost drugs that are "similar" to the original—will enter the United States market, causing sales to fall off a cliff. Despite the expectation that earnings per share will be lower in 2023 than in 2022, we think AbbVie has built a portfolio and pipeline—both organically and through acquisitions—that's set it up for long-term growth. Immunology While Humira will still be a large part of Abbvie's leading immunology portfolio until it goes off-patent in the U.S., it's not so much a focus drug for us. Within immunology, our attention is on Skyrizi and Rinvoq—two drugs launched in 2019 that are expected to cover all of Humira's major indications. In early January, management confirmed guidance of greater than $15 billion in combined Rinvoq and Skyrizi risk-adjusted sales in 2025. This forecast increased our confidence in Abbvie's earnings power after next year's Humira-driven reset. Beyond this target, management believes Rinvoq and Skyrizi's combined peak sales will exceed the peak revenues achieved by Humira. Aesthetics AbbVie also made a big push to become a global leader in the aesthetics market through its acquisition of Allergan, which was best known for its top-selling toxin Botox. Abbvie recently provided an upbeat outlook for its durable aesthetic franchise, forecasting a high single-digit revenue compound annual growth rate, or CAGR, through 2029. Abbvie expects total aesthetics sales will be greater than $9 billion in 2029, well above current analyst forecasts. Neuroscience Abbvie also owns a leading neuroscience portfolio that helps patients across the migraine spectrum. This portfolio is mixed with recent launches such as Ubrelvy for acute migraine treatment and Qulipta for episodic migraine prevention, along with established drugs like Botox for chronic migraine prevention. Yes, Botox can be used to make people look younger and treat migraines. Abbvie also has a presence in antipsychotics with Vraylar, a drug that management believes could reach peak sales of about $4 billion with its currently approved indications. Robust Cash Flow Means Strong Capital Returns Another compelling aspect of the AbbVie story is management's commitment to growing the dividend. Since Abbvie's separation from Abbott Laboratories in 2013, it has increased the quarterly dividend by more than 250%. Something even more impressive about this dividend growth is that management put through increases while simultaneously paying down the debt from the Allergan deal. Abbvie was able to pull this off because it's one of the leading operating cash flow generators of the entire sector. The company is expected to generate about $23 billion of operating cash flow in 2021, increasing to about $27 billion in 2022 according to FactSet estimates. (It is set to report fourth-quarter 2021 earnings on Feb. 2.) This level of cash flow provides Abbvie with plenty of coverage to pay its attractive ~4.15% dividend yield and achieve a net leverage ratio of ~2.0x by the end of this year. Potential Catalysts Some potential catalysts to look out for are the continued integration of the Allergan acquisition, continued uptake of Rinvoq and Skyrizi, pipeline execution, and increased confidence in the earnings bridge through 2023. Risk Factors A few risk factors to consider are pipeline execution (which cuts both ways), a faster-than-expected Humira loss, aesthetics competition, unfavorable drug pricing, and Food and Drug Administration scrutiny of JAK inhibitors. Bottom Line We believe Abbvie's roughly 10x forward price-to-earnings multiple is too cheap for a company of its quality. Not only does it discount too much risk associated with the Humira loss of exclusivity, but it also doesn't give enough credit to the earnings power post-2023 and the new products that have made the business much more diversified. As we wait for the market to gain more appreciation for Abbvie, the roughly 4.15% handsomely pays us for our patience. (Jim Cramer's Charitable Trust is long ABBV. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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A sign stands outside a Abbvie facility in Cambridge, Massachusetts, May 20, 2021.

Brian Snyder | Reuters

Abbvie (ABBV) is a leading biopharmaceutical firm that's transformed itself from a mostly one-drug company to a diversified business after the 2020 acquisition of Allergan.