Is AbbVie a Buy After the Humira Cliff? Our 7.3/10 Verdict

Key Concepts

• Moneyball Reckoning: A framework for evaluating companies based on specific metrics and performance.
• Patent Cliff: The period when a drug loses its patent protection, leading to increased competition from generics and biosimilars.
• Humira: AbbVie's flagship drug, which was once the world's top-selling pharmaceutical.
• Biosimilar Competition: Generic versions of biologic drugs that are highly similar to the original.
• Acquisitions: The strategy of purchasing other companies to diversify revenue streams and mitigate risks.
• Free Cash Flow: The cash a company generates after accounting for capital expenditures.
• Debt Load: The total amount of money a company owes to creditors.
• Amortization: The gradual reduction of the value of an intangible asset over time.
• GAAP Earnings: Earnings calculated according to Generally Accepted Accounting Principles.
• Dividend King: A company that has increased its dividend payout for at least 50 consecutive years.
• Pipeline Setbacks: Unexpected failures or delays in the development of new drugs.
• Tariffs: Taxes imposed on imported goods.

AbbVie (ABBV) - Moneyball Reckoning

This summary details a "Moneyball Reckoning" evaluation of AbbVie (ticker symbol ABBV) by Motley Fool analysts Anand Chokkavelu, Karl Thiel, and Keith Speights. The evaluation assigns scores across several categories, culminating in an overall rating.

Business Strength

• Overall Score: Karl Thiel: 7/10, Keith Speights: 8/10.
• Key Point: AbbVie has demonstrated a strong ability to navigate the "patent cliff" associated with its former top-selling drug, Humira.
• Humira's Impact: Humira was the world's top-selling drug for years. Its sales have declined significantly, down approximately 80% from its peak of $21 billion in 2022.
• Diversification Strategy: AbbVie successfully reduced its dependence on Humira even before its US patent exclusivity expired in 2023. This was achieved through strategic acquisitions and the development of two successor drugs that are projected to collectively generate more revenue this year than Humira did at its peak.
• Revenue Performance: Despite the decline in Humira sales, AbbVie experienced a 6.4% decrease in revenue in 2023 but has since returned to growth, with current revenues exceeding pre-Humira exclusivity loss levels.
• Risks:
  • Intrinsic Risk of Drug Development: The inherent uncertainty and potential for failure in developing new pharmaceutical products.
  • Tariffs: Potential negative impact of tariffs on pharmaceutical imports to the US, particularly if the Trump administration implements them.
• Valuation: The company is considered to deserve a "slightly premium valuation" due to its performance.

Management

• Overall Score: Karl Thiel: 8/10, Keith Speights: 8.5/10.
• Key Point: AbbVie's management is commended for effectively positioning the company for long-term success following the loss of Humira exclusivity.
• Leadership Transition: The appointment of Rob Michael as CEO, succeeding Rick Gonzalez, is viewed positively.
• Acquisition Strategy: Management has utilized acquisitions as a significant part of its risk mitigation strategy, with generally solid outcomes, although not always perfect.
• Criticism: A minor criticism is leveled against management for employing what are considered "questionable tactics" in defending against biosimilar competition for Humira.

Financials

• Overall Score: Karl Thiel: 7/10, Keith Speights: 8/10.
• Key Strengths:
  • Profitability: AbbVie is highly profitable.
  • Growth: Revenue and earnings are growing.
  • Free Cash Flow: The company generates "really solid free cash flow."
• Key Weakness:
  • Debt Load: AbbVie carries a substantial debt load of approximately $70 billion, primarily incurred through multiple acquisitions.
• Debt Servicing: Despite the high debt, analysts believe AbbVie will have no difficulty servicing its debt obligations.
• Allegan Acquisition (2019): This acquisition was a strategic move to address the "Humira Cliff" and proved successful in diversifying the company's portfolio, though it contributed to the debt load.
• GAAP Earnings Impact: Significant amortization expenses continue to weigh down GAAP earnings.

Valuation and Future Outlook

• Karl Thiel's Projection:
  • Stock Performance (Next 5 Years): High end of the 5-10% range.
  • Safety Score: 7.5/10.
  • Argument: This projection assumes that "Big Pharma" might outperform the S&P 500 in the coming years, a trend not seen recently. It also factors in the navigation of political uncertainties regarding pricing and tariffs.
  • Opportunity: Current pessimism surrounding the sector is seen as a potential opportunity.
• Keith Speights' Projection:
  • Average Total Returns: 10%-15% are considered realistic.
  • Drivers of Growth: Decreasing drag from Humira and increasing contributions from fast-growing products like Skyrizi and Imbruvica.
  • Dividend King Status: AbbVie's status as a Dividend King and its attractive 3% yield are expected to boost total returns and potentially achieve double-digit returns.
  • Safety Score: 6/10.
  • Risks: Possibility of pipeline setbacks and the aforementioned tariff threats.

Overall Score and Conclusion

• Combined Score: 7.3 out of 10.
• Anand Chokkavelu's Take: While a solid score, it is not compelling enough for him to add AbbVie to his personal 100-stock watch list on Yahoo Finance, as it falls short of the 8.0 threshold that would trigger a purchase.
• Future Content: A new scoreboard evaluation will be released every market day at 7:00 PM Eastern. The next segment will focus on GE Healthcare Technologies.