Shares look undervalued despite pessimistic Humira outlook.
reported first-quarter earnings slightly ahead of both our and consensus expectations, but we don’t plan any major changes to our fair value estimate. We continue to view the stock as undervalued despite our relatively pessimistic outlook for immunology drug Humira, as we believe investors are underappreciating the company's pipeline. Further, we think AbbVie’s narrow economic moat is intact, supported by a strong pipeline offsetting the likely biosimilar competition to Humira.
Damien Conover, CFA, is director of healthcare equity research and equity strategy for Morningstar.
Humira once again posted strong growth driven by price and volume, and while we expect growth to continue through 2017, we expect biosimilar pressure starting in 2018. By 2020, we project Humira sales of close to $10.5 billion, well below management’s guidance of over $18 billion. We believe patent protection beyond the composition-of-matter patents (December 2016 in the U.S. and October 2018 in Europe) will not stop biosimilar competition. However, we expect that litigation delays will likely mean U.S. biosimilars will not reach the market until 2018.
Offsetting the declining Humira outlook, AbbVie holds a strong late-stage pipeline that should enable stable cash flows over the long term. In 2017, based on strong early-stage data, we expect positive phase 3 data for oncology drug Venclexta (Murano in refractory CLL) and immunology drugs risankizumab and ABT-494. We believe these drugs carry peak sales potential well over $1 billion annually. Also, while likely more risky, we also expect positive registrational data for cancer drugs ABT-414 in GBM and Rova-T in small cell lung cancer in 2017.
Additionally, we believe U.S. tax reform is likely during the Trump administration, but we don’t expect a major impact on AbbVie, since the company already enjoys a low tax rate of close to 20% that's probably due to strategic geographic placement of intellectual property and geographic earnings stripping to reduce the company’s tax rate.
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