AbbVie Deserves More Respect

NEW YORK (TheStreet) -- Ever since Abbott Labs (ABT) spun off its drug business as AbbVie (ABBV), the latter company has had a hard time proving to analysts that it can operate as well as its "older brother." It's now been a year since the split.

Despite concerns about AbbVie's pipeline, management continues to deliver on several key initiatives -- not the least of which is better diversification among the company's drugs and other assets. For some critics, this hasn't been enough. Complaints about AbbVie's perceived eroding pipeline continue to dominate the discussion.

When analysts aren't lamenting blockbuster drug Humira, which is used to treat rheumatoid arthritis, they're pressing the panic button about rival products from Pfizer (PFE) and Celgene (CELG). This is even though AbbVie's management has raised guidance, showing investors the confidence they've always had in their ability to deliver revenue growth. And AbbVie's fourth-quarter earnings results show that the Street's concerns were overblown.

With adjusted gross margin improving 2.5% year over year to 77.1%, there's no question that the company ended its fiscal year on a strong note. AbbVie's lack of profitability has been a popular cited bearish argument even though the company has delivered margins that the likes of Merck (MRK) and Novartis (NVS) would kill for.

What's more, AbbVie met the Street's expectations on several other important metrics, including operating income and revenue. What was equally impressive was that the company demonstrated a strong level of efficiency even as management incurred higher operating expenses.

All told, research and development spending was roughly 16% of total revenue in the quarter. Management attributed the increase to the company's mid-stage and late-stage pipeline assets. And this goes back to how confused some analysts appear to be when assessing what or where AbbVie is.

On the one hand, the company is punished for its perceived lack of "fiscal awareness." On the flipside, it gets hammered for what some believe is an eroding pipeline. You can't have it both ways. The fact is, it costs money to put resources towards research and development to grow those pipelines.

In that regard, it's worth noting that Humira sales, although slowing, continue to do well. Revenue was up 13% in the quarter. The fact that year-over-year sales growth remain in double digits is a testament to how dominant this drug has been and will likely continue to be. And when you consider that Humira sales grew 18% in the U.S. despite the threats from cheaper generics, you have to question the logic behind the bearishness.

Richard A. Gonzalez, the company's chairman and CEO said:

"We achieved all of the objectives we set forth for 2013, exceeded our original earnings guidance, and established a solid foundation for the future. We intend to build on this momentum in 2014 as we invest in our key products, advance our pipeline, and prepare for significant product launches that will drive growth in 2015 and beyond."

I tend to agree. If there is one thing to be concerned about, though, it's that Humira still accounts for roughly two-thirds of AbbVie's annual revenue. The company can benefit from some better diversification. While I'm willing to applaud Humira's strength, AbbVie's other drugs such Trilipix and TriCor continue to post sedated results due to expiring patents.

Still, that's not enough to avoid the stock. Not when management continues to raise guidance. AbbVie is in the same situation as Johnson & Johnson (JNJ), whose growth continues to be led by sales of blockbuster cancer drug Zytiga, which continue to expand at close to 65% year over year. But I haven't heard anyone calling JNJ a bad company.

I'm not suggesting that AbbVie is a flawless company. But I don't believe it deserves much of the criticism analysts chronically use as talking points. With AbbVie stock trading at around $50 per share, the company is a sure bet to reach the range of $55 to $58 by the second half of the year.

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


This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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