- By Alberto Abaterusso
As reported by Barron's, AbbVie (ABBV) increased the price of Humira by 8.4% last Friday. Humira is the pharmaceutical company's most profitable product and its sales account for more than 60% of the total sales.
The intrinsic value of ABBV
The pharmaceutical company that spun off of Abbott Laboratories (ABT) in 2013 usually increases the price of Humira twice per year. In fiscal 2016 ,the first price increase was 9.9% in January. The second hike of 7.9% was in June. According to Barron's, the price of Humira's pen injector increased by more than 13% per year over the last decade, from $1,258 to $4,441. The box contains two syringes.
Humira, the brand name under which adalimumab is sold, is an anti-inflammatory drug used to treat patients with a variety of conditions, ranging from rheumatoid and polyarticular juvenile idiopathic arthritis to ankylosing spondylitis, Crohn's disease and psoriasis.
Since Humira is AbbVie's flagship product with sales forecasted to be $17.6 billion this year, the company's valuation depends on its ability to protect its sales from competition. Some analysts believe the company's series of patents will allow it to preserve the business until 2020, even though the main one covering Humira's sales expired last year.
Other analysts believe that competition from other companies' biosimilar products, such as Boehringer Ingelheim's BI 695501 and Amgen's (AMGN) Amjevita (adalimumab-atto), have already begun to erode AbbVie's revenue for 2018.
At Jefferies, sales from Humira are seen as protected until 2022 and the firm "calls AbbVie a top pick with a price target of $90," as reported by Barron's. The price target set by Jefferies represents a 47% upside from the current share price and the upper limit of the analysts' target price range. The lower limit is $49 per share and the average price is $69.94 per share.
Currently, AbbVie is trading around $61.15, down 23 cents or -0.37% from the last Friday's close.
The recommendation rating is 2.5, between a buy rating (2.0) and a hold rating (3.0). There is one significant factor that can persuade investors to reconsider the mean recommendation rating on AbbVie and move the balance higher towards Jefferies' recommendation on the stock. The difference is the meaning between the words "biosimilar" and "interchangeable" products.
According to the U.S. Food and Drug Administration:
"There are two new types of biological products - biosimilar and interchangeable. Biosimilars are a type of biological product that are licensed (approved) by FDA because they are highly similar to an already FDA-approved biological product, known as the biological reference product (reference product) and have been shown to have no clinically meaningful differences from the reference product.
"An interchangeable biological product, in addition to meeting the biosimilarity standard, is expected to produce the same clinical result as the reference product in any given patient."
And in terms of safety:
"The risk in terms of safety and effectiveness of alternating or switching between the interchangeable and the reference product is not greater than the risk of using the reference product without alternating or switching."
"No clinically meaningful differences" from the reference product means that any Humira biosimilar is not identical to AbbVie's product in terms of clinical results. It would be different if Humira had to face the competition with interchangeble products that are identical in terms of clinical results and safety.
Furthermore, it will take time for Humira biosimilars to gain market share. Doctors tend to prescribe the reference product and not the biosimilar in order to avoid the higher risk of patients developing side effects or obtain clinical results that are "similar" but not identical to the reference product.
For this reason, investors can be confident the company will be able to support the dividend growth at least until 2022.
Currently, the trailing price-earnings ratio is 16.53, the price-book ratio (mrq) is 15.36 and the EV/Ebitda (ttm) ratio is 11.52.
Disclosure: I have no positions in any stock mentioned in this article.
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This article first appeared on GuruFocus.
The intrinsic value of ABBV