Are post-merger AbbVie shares 'unsustainably cheap'? One analyst thinks so

With its megamerger with Allergan finally in the books, AbbVie is officially a colossus with a bustling drug portfolio and a few strategic hurdles in its immediate future. But the new AbbVie will be stronger than ever, one analyst argues—and investors haven't picked up on that yet. 

An abundance of cash flow and a portfolio no longer as reliant on megablockbuster Humira make AbbVie worth more than its share price would suggest, SVB Leerink analyst Geoffrey Porges wrote in a note to investors Monday. In fact, "unsustainably cheap" is how he described AbbVie shares now that Allergan is pitching in.

On Friday, AbbVie and Allergan officially closed their $63 billion merger after an Irish High Court ruling. When the numbers for 2020 are tallied up, the new AbbVie will likely be the world's fourth-largest drugmaker. AbbVie itself predicts the new company's combined revenue will hit $50 billion in 2020 with a higher cash flow it can use to pay down debt and drive up dividends. 

But those mammoth revenue numbers are only the tip of the iceberg, Porges said. SVB Leerink figures AbbVie will hit peak revenues of $56 billion in 2023––when U.S. biosimilars to Humira are expected to hit the market––and hover in that range through 2028. 

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That alone would be a boon for AbbVie, which relied on Humira for 58% of its 2019 revenues, but Porges' estimate assumes "no additional pipeline contributions other than currently marketed products and their incremental indications." That could leave the door open for further growth if the new company's R&D stable turns out any winners.

Even better: Humira––and its $19.2 billion in sales in 2019––will only make up around 36% of the new company's revenues, with Allergan bringing blockbuster Botox into the mix, Porges said. 

Despite Porges' high marks, it's not all sunshine for AbbVie as it faces an uncertain future post-Humira––and some of those problems will come from trying to bring Allergan into the fold. 

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AbbVie will have to contend with lagging revenues from Allergan's aesthetics business, which has been doubly hit by a dip in profitability and by COVID-19, which has kept patients away from elective procedures. 

Earlier this month, AbbVie CEO Rick Gonzalez attempted to soothe analysts' concerns that the coronavirus pandemic would permanently affect the new company's aesthetics unit, saying the hit “while likely substantial, will be transient."

However, concerns about Allergan's aesthetics portfolio were significant enough to prompt AbbVie to pull in the business as a separate unit, dubbed Allergan Aesthetics, rather than integrating it fully. The decision didn't quite answer some analysts' worries that the business would be a drag on revenue, but it could make the unit easier to sell—as some pharma watchers have advocated in the past.

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But the future of its new aesthetics business isn't AbbVie's only concern—or opportunity, Porges said. AbbVie could benefit from future pipeline acquisitions, particularly in oncology, where other drugmakers have made major investments in recent years.

Fortunately for AbbVie, a projected $22 billion in free cash flow in 2020 and an estimated $24 billion in 2021 could open the way for strategic investments in those areas, Porges noted. Those figures will likely remain sustainable in the years to come if AbbVie is able to squeeze out $2 billion in operating expenses by 2022 as planned. 

"We remain positive about AbbVie’s overall capital allocation strategy and believe the combined company has a more attractive risk-reward profile than most of its large-cap biopharma peers," Porges wrote. 

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More importantly, AbbVie can already look to a bright future as it adds Botox and soon-to-be-blockbuster antipsychotic Vraylar to its portfolio alongside a pair of recent launches with sky-high expectations.

AbbVie is predicting a potential combined sales peak of $20 billion for recently launched Immunology meds Skyrizi and Rinvoq, Gonzalez said in January. Sales of those drugs alone would offset Humira's all-time peak of $20 billion in sales.