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AbbVie's Not as Vulnerable as the Street Believes

NEW YORK (TheStreet) -- It has now been three full quarters since health care conglomerate Abbott labs (ABT - Get Report) separated its drug business into a new entity called AbbVie (ABBV - Get Report). Since that split, shares of AbbVie, which have outperformed Abbott, have soared more than 45%.

Now, although the spinoff, which was originally announced in late 2011, was a long-anticipated move, the Street seems surprised that AbbVie has performed so well on its own. Truth be told, I am surprised, too. And with AbbVie's valuation having surpassed large-cap rivals, like Pfizer (PFE), AbbVie's pipeline, which includes blockbuster drug Humira, has suddenly come into question. Not only do I believe these fears are overblown, but I also think -- expensive or not -- investors can still do well in AbbVie stock.

First, I will grant that it's within the Street's right to compare AbbVie's third-quarter results to the company's July and April quarters. I will also admit that unlike its previous reports, AbbVie's revenue and margin growth weren't as compelling. What I did notice was that AbbVie is still delivering on key initiatives as promised by management upon the Abbott separation.

Revenue advanced 3.3% to $4.66 billion, which easily beat estimates of $4.52 billion. As has been the case for some time, rheumatoid arthritis drug Humira, which posted worldwide growth of close to 20%, did all of the heavy lifting. I won't debate the fact that AbbVie relies on Humira quite a bit, which has raised some concerns. That's also the case for many Big Pharma rivals that have produced flagship products.

Take, for instance, Johnson & Johnson (JNJ). As diversified as JNJ strives to be, it is JNJ's drug business that carries all the torque. And within that segment, JNJ's growth is being lead by cancer drug Zytiga, which recently grew by 70% year over year. Somehow the Street doesn't have a problem with JNJ's overreliance. This is even as the company struggles with organic growth.

In the case of AbbVie, what's interesting is that over the past couple of quarters, I've heard nothing but complaints from analysts about Humira's long-term performance. The concern continues to be that rival products -- Xeljanz from Pfizer and Apremilast from Celgene (CELG) -- would eat into Humira's growth and apply margin pressure.

Given that Humira recently generated third-quarter revenue of $2.77 billion, which is roughly 60% of AbbVie's global sales, the Street must explain how this could have happened. If not, we must appreciate that Humira's growth is as "healthy" as ever. The good news here is that Humira's strength was able to offset AbbVie's weak performing drugs, like Trilipix and TriCor, which suffered due to patent expirations.

From an operational perspective, with gross margins coming in 79.7%, which is almost 10% higher than both Merck (MRK) and Novartis (NVS), I believe AbbVie's management deserves plenty of credit. They've been able to achieve this even as expenses grew. What this means is that AbbVie operated more efficiently this quarter, which led to the company beating non-GAAP earnings in convincing fashion.

What's more, the fact that management raised its full-year earnings guidance signals the level of confidence the company still has not only in Humira, but also in the company's other drugs, like AndroGel. This is even though AndroGel produced one-tenth of Humira's revenue.

All told, it was not a breathtaking quarter, but to the extent it justified the Street's perpetual bearishness, I don't believe it does. Now, at around $47 per share and a price-to-earnings ratio of 17, AbbVie stock is certainly not cheap when compared to Pfizer, which has a P/E of 8. But with improving cash flows AbbVie stock should climb toward the mid- to high $50's before Humira runs out of steam.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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