Last year, pharmaceutical giant AbbVie (ABBV) lost patent exclusivity for its biggest cash cow, immunology medicine Humira. The drugmaker has rebounded quite nicely since. AbbVie returned to top-line growth in the second quarter, much earlier than many anticipated. Everything should be going swimmingly for the company.
However, on Nov. 11, its shares dropped by about 12% following a clinical setback. Though the market’s reaction is understandable, this decline represents an excellent opportunity to pick up AbbVie’s shares from the discount bin.
$9 billion down the drain
In August, AbbVie acquired Cerevel Therapeutics, a drugmaker specializing in neuroscience, for $8.7 billion in cash. Cerevel had a pipeline with several promising candidates, none more so than emraclidine, a potential medicine for schizophrenia. AbbVie had big hopes for emraclidine, with the company projecting that it could become a meaningful growth driver well into the next decade.
Alas, this master plan is now in serious doubt. On Nov. 11, the pharmaceutical giant reported that emraclidine failed to meet its primary endpoints in a pair of phase 2 studies. AbbVie vowed to continue analyzing the data to determine the next steps.
Realistically, though, the most likely next step is to give up on this project instead of wasting more resources. That’s what typically happens in cases like these. It is in anticipation of this outcome that the sell-off happened. Let’s not mince words: AbbVie may have wasted $8.7 billion, or something close to it, given these latest developments.
AbbVie has been here before
Developing therapies from scratch is incredibly expensive and risky. That’s why well-established pharmaceutical companies often acquire smaller ones with promising assets in clinical trials. Clearly, this strategy comes with its own set of risks, but AbbVie already knew that. In 2016, the company acquired a small drugmaker by the name of Stemcentrx for $5.8 billion in cash and stock, and up to $4 billion in cash in potential milestone payments.
The key asset from that transaction was a promising lung cancer drug called Rova-T. Turns out, Rova-T might have been worse for patients than existing chemotherapy. AbbVie halted a lung cancer phase 3 study for the medicine after patients taking it showed worse survival rates than those in the control group, who were taking topotecan, a type of chemotherapy.
So, the $5.8 billion AbbVie dished out to get its hands on Stemcentrx went down the toilet. In inflation-adjusted dollars, that’s about $7.63 billion today, or roughly $1 billion less than AbbVie’s acquisition of Cerevel. Still, the company survived the Rova-T setback. AbbVie’s shares fell hard in late March 2018 following a clinical failure from Rova-T. The chart below shows how its shares have performed since April 1, 2018, with dividends reinvested.
That’s not bad, and if not for the recent drop, AbbVie’s performance would be slightly above that of the S&P 500 over this period. Although the company hoped that Rova-T would help it move beyond Humira, Skyrizi and Rinvoq — two immunology superstars — have taken up that role. Furthermore, AbbVie acquired Allergan and its Botox franchise in 2020 to help fill the gap.
The dividend is safe
It’s also worth pointing out that AbbVie’s financial results have been pretty stable since the Rova-T debacle.
The bottom line has been up and down due to various factors, including acquisitions. But overall, there’s nothing to be worried about today. And throughout it all — the Rova-T setback, the massive increase in debt due to the Allergan acquisition (which cost $63 billion), the loss of patent exclusivity for Humira in Europe in 2018 and in the U.S. last year — AbbVie has continued to grow its dividends.
The company’s payouts are up by 131% since Jan. 1, 2018. AbbVie is still a Dividend King with 52 consecutive years of payout increases under its belt. This latest headwind won’t change that situation. To be clear, challenges will happen. But excellent companies have what it takes to overcome them. Investors with a long-term mindset know to stay the course even when good corporations experience substantial market losses.
AbbVie’s robust business and innovative capabilities should allow it to move past this obstacle and continue rewarding its shareholders with dividend hikes for years, just like it did following previous setbacks. Dividend investors should jump at the chance to acquire the company’s shares while they are down.
— Prosper Junior Bakiny
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Source: The Motley Fool