ABBV is in stage #3. The stock is in a sideways move with a slightly downward trend, possibly morphing into stage #4 if the selling continues. As you can see on the weekly chart, the stock was under serious selling pressure during 2018 and 2019 years. Investors were dumping the stock of a fear of something that was yet to come. And all of them who sold the stock off, bought it back at higher prices and those who were buying were laughing. The stock recovered and reached new highs in 2022. Where was the fear of expiring Humira patent back then? And now, history repeats itself. The same story, same fear.

 

 

 
The stock was selling from its highs at $170 a share and we stopped at the lower level of this long-term sideways channel. The reasons for selling could be multitude. One is that this sector was left behind (surprisingly) during the recent rally. The medical and healthcare sector gained 7.62% in 2023 YTD, the tech sector gained 20.34% and Capital Goods 29.76%. ABBV was left behind with the entire sector.

Another fear and most prevalent was a fear of lost revenue due to expired Humira patent. Now many competitors are making copycats of the drug and offering it with up to 85% discount (Organon and Samsung Bioepis). Others have joined too, for example a Swiss drug maker Sandoz or German Boehringer Ingelheim. Humira delivered more than $200 billion in sales over the last 20 years, so the fear of lost revenue could be justified. But that may not be so. In any functional marketplace, when a new competitor emerges with a 90% discount for a high-cost product, “you’d imagine and assume that the doors would be blown off the company and they wouldn’t be able to keep up” with the demand, said Antonio Ciaccia, CEO of drug-pricing research nonprofit 46brooklyn Research. “But that won’t be the case” with the Humira competitors, he said, as many large payers and PBMs “will continue to prefer the high list prices” and big rebates.

But there’s a catch to switching to new biosimilar drugs, some analysts say: Payers trying to switch over to lower-cost Humira biosimilars may actually see their costs rise during the switching period. If an insurance company decides it wants to prefer a biosimilar on its formulary, it may immediately lose all its Humira discounts. So unless the insurer can quickly convert a high percentage of Humira users to the biosimilar, the move may end up costing more money than simply sticking with Humira, Evercore ISI analysts wrote in a recent report. “Overall, we think the costs to switching are pretty high for a payer–and we don’t expect much biosimilar Humira volume adoption until 2025” and beyond, the analysts wrote.

And thus, this selling we have seen lately is probably overblown, as is typical with Wall Street. Yes, the new drugs may rock the calm waters for a while, but it will all stabilize once again. And this may provide a good entry opportunity.

Another reason for the selling pressure is the sudden decline in revenue. On a long-term average basis, the stock saw 8.11% 5-year and 10% 10-year average revenue growth. But lately, it dropped by 16% and -6.42% on a 2-year average base. Should we be worried?

 

 

We need to wait and see if this trend continues, but my view is that this is a temporary decline, and the company improves in subsequent quarters.

The company’s cash flow was always a bit choppy, but mostly going up. Despite the last quarter’s decline, I am still positive.

 

 

The same can be said about earnings. Not very straight-forward but this is a nature of this company:

 

 

ABBV increase its debt in 2019-2020 but since then it started paying it off. Yet, the company has little cash on hand to retire the debt if needed.

 

 

ABBV is paying dividends, and the company increases it by 4.96% on an annual basis. A 5-year average growth is 9.04%. That is also good:

 

 

The company had a steady level of shares outstanding. It had some buy backs during 2018 and 2019 but raised capital again in 2020 diluting investors. It kept the same level since.

 

 

ABBV is undervalued based on the adjusted operating earnings estimates. Analysts expect the company to post negative earnings in 2023 due to Humira expiration and flat 2024. In 2025 they expect the earnings to grow again. Thus, the selling we see is most likely and adjustment for the new earnings estimate. But we, as long-term investors, are looking past these short-term adjustments. We are prepared to hold the company for a long time. And what some consider a disastrous end of the world event, we consider an opportunity:

 

 

We only need to worry about whether the dividend is safe or not. The chart below shows that the company has enough free cash flow to cover the dividend. It always was cash flow positive and even with the 2023 expected cash flow decline, it will have enough to maintain the dividend.

 

 

 

The stock is now AGGRESSIVE BUY
 

This post was published in our newsletter to our subscribers on Sunday, June 30th, 2023. If you want to learn more about our stock technical analysis subscribe to our weekly newsletter.