Getting exposure to health, Botox and a big acquisition
This giant American company has been in an uptrend for many years, but analyst Rodney Hobson believes there’s another chance to buy.
11th December 2024 08:21
by Rodney Hobson from interactive investor
Shares in drugs companyAbbVie Inc (NYSE:ABBV)have come off the boil since peaking above $200 last month. Latest results were mixed, but this could still be an opportunity to buy into a solid, dividend paying stock. However, caution is required.
Abbvie concentrates on immunology and oncology. It has been a steady performer and, while it did not benefit from the Covid vaccine bonanza, it has similarly not suffered from the fall in pandemic cases.
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Its blockbuster has been Humira, the Botox brand, which has lost its patent protection in the United States and is now subject to competition from generic alternatives. So revenue growth slipped into single digits last year, well below the average for the biotech sector.
Other drugs in the portfolio have generally fared well, although it should be remembered that all pharmaceutical companies struggle to get their products through the expensive lottery of testing regimes and into public use.
Things have started to look up, although the latest quarter brought mixed results that hardly justified chief executive Robert Michael’s claim that "we delivered another quarter of strong commercial execution and significant pipeline progress".
Revenue rose just 3.8% to $14.5 billion in the quarter to the end of September, but net earnings slumped 11% to $1.56 billion. On the positive side, full-year guidance for diluted earnings per share was raised from $10.67-10.87 to just over $10.9. The quarterly dividend was increased by 5.8% to $1.64.
The outlook for new drugs is reasonably encouraging. Abbvie has secured marketing authorisation in the European Union for Elahere, the only new treatment for a particular form of ovarian cancer that is resistant to other treatments.
This is a potential major breakthrough that could be of enormous benefit, as most patients suitable for the drug are already in late stages of cancer and options are limited.
On the other hand, two phase 2 clinical trials for schizophrenia treatment emraclidine did not show the necessary results. The drug was acquired as part of the $8.7 billion acquisition of Cerevel which was completed at the beginning of August, a reminder of the risks involved in taking over smaller rivals in this sector.
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The acquisition also included potential treatments for several neurological and psychiatric conditions such as Parkinson's and mood disorders, so there is still a possibility, though not a guarantee, that some part of this deal will come good.
Undeterred, Abbvie has decided to pay $1.4 billion in cash for Boston-based Aliada Therapeutics, a biotech firm working on diseases affecting the central nervous system, including a treatment for Alzheimer's disease. The acquisition should be completed by the end of this year.
Abbvie shares hit $203 on 1 November but lost impetus and are now back down to $175.50, where the price/earnings ratio is admittedly at an eye-watering level above 60, but the yield is an attractive 3.5%. That leaves an awful lot of good news priced into the stock, but at least the dividend is some consolation if there is further slippage.
Source: interactive investor. Past performance is not a guide to future performance.
Hobson’s choice: I last commented on Abbvie in March last year when I described it as a credible alternative to some better-known names in the pharmaceutical sector. I rated the shares a hold a month earlier at just above $150, and those who stayed in have enjoyed a small capital gain and a decent dividend since.
The downside looks limited to $164, which has been both a ceiling and a floor in the past. Investors should, however, be aware that there could be serious resistance if the shares move back above $180. The hold recommendation stays but if the shares slip below $170 that rating becomes a buy, or above $180 a sell.
Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.
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