CERE - AbbVie Vs. GSK: Dual Dominance In Pharma

2023-12-23 04:18:53 ET

Summary

• AbbVie and GSK are both solid investment choices in the biopharmaceutical industry.
• AbbVie's financials and forward outlook show strong performance alongside solid partnerships, which hint at growth potential.
• GSK's current financials, product launches, and strategic investments make it an attractive investment option.

Investment Thesis

In this article, I will analyze the field of biopharma through two industry competitors: AbbVie ( ABBV , ABBV:CA ) and GSK ( GSK , GLAXF ). I aim to illustrate the levels of their operation, which will specifically highlight AbbVie's pursuit to create medical breakthroughs and GSK's strategic abilities in the industry (and much more). We will discuss some valuation metrics to find if there is deep value in either security, too. Their innovation, response to healthcare challenges, and potential to offer more than just medications will each be illustrated in this analysis, and more. My investment thesis is rooted in the belief that these companies are not merely surviving but thriving, adapting, and poised for growth. While there are challenges with each company, I will convey my perspective to why each of company, in this comparative analysis, hold more reward than risk; my thesis stands firm on both AbbVie and GSK as solid investment choices.

AbbVie Rating: Buy

GSK Rating: Buy

Introduction

First, AbbVie is a global biopharmaceutical company, actively engaged in researching and developing a diverse range of innovative treatments. The company focuses on areas with significant unmet medical needs, including immunology, oncology, neuroscience, and eye care. AbbVie's portfolio includes a variety of medications and therapies, some of which have become household names in their respective therapeutic areas. The company aims to deliver effective solutions for improving patients results, and they are also known to be committed to addressing the many complex health challenges. AbbVie strongly emphasizes their strategic partnerships and collaborations, which is what I believe continues to further their R&D activities. This leverages both in-house and their partners advanced technology and scientific expertise in order to expand its impact in healthcare. But to sum up, AbbVie innovates among many divisions in medicine with the same mission in mind: make a difference in people's lives across the globe.

Following, GSK plc, formerly known as GlaxoSmithKline, holds a world-wide presence in the healthcare field based on a past of research, development, and manufacturing focuses. It has a wide range of products in its portfolio, which includes respiratory diseases, HIV/AIDS, oncology, and immunology. GSK is a also a great contributor in the vaccine development space as they address the concerning health challenges across the globe. But overall, they further their mission through the pursuit of innovation in an ethical manor, which accounts to a major positive impact. This is done by investing in tech and collaborating with other organizations to advance such healthcare solutions for their patients and providers.

AbbVie

Current Financials And Forward Outlook

AbbVie’s third quarter 2023 earnings conference call provided worthy updates on the company's current financial standing and future outlook, which I find encouraging for the most part to support my buy thesis (we will talk about the risks later in the article). Rick Gonzalez, AbbVie's CEO, expressed satisfaction with the company's performance during the call; he highlighted that it exceeded his expectations. We always would prefer to be underpromised and overdelivered than the opposite, so this was a positive note.

A key point was the successful management of Humira's U.S. biosimilar erosion as this maintained volume numbers despite price-driven impacts. This screams positive things about AbbVie's management team by strategically navigating said market challenges. Their growth platform, excluding Humira, reported strong double-digit revenue growth, which is great to hear. The portfolio consists of diversified products in immunology, neuroscience, oncology, and aesthetics, so the solid performance was impressive. As you know, Humira is a veteran drug that contributes a substantial amount of revenue compared to much of the other products (as most veteran drugs do). But the diversified growth in big pharma is essential for sustainable success and long-term upside, and I think this aligns perfectly with my buy rating.

Forward-looking, I think the company is in a solid position after management had confidence to raise the financial outlook for 2023. According to Rob Michael, President and COO, the upgraded guidance was a reflection of the strong momentum of their platform. Such growth was led by products like Skyrizi, Rinvoq, Vraylar, and Botox. I view this as a positive indicator in AbbVie's ability to generate continued revenue numbers even with Humira's competition obstacle.

Additionally, the pipeline of R&D programs was talked about in the call as well, which could contribute to revenues later this decade and/or into the 2030s. For long-term investors, this is years out, but I suggest always looking ahead. These would be the next-generation treatments in immunology oncology, and therapies for neuropsychiatric and neurodegenerative disorders. This is most definitely what I see being a factor that sets AbbVie apart from its competitors; They stay committed to constantly innovating, which creates a sustainable company for quite some time future, and therefore solidifying my buy thesis.

BigHat Partnership

The recent collaboration between AbbVie and BigHat Biosciences is something that made me jump for excitement after it was announced. They will specifically be working together in drug development, particularly in oncology and neuroscience-- I think advancing the drug process with AI will enhance accuracy and efficiency. Because of BigHat's AI and its Milliner™ platform, AbbVie's deep expertise will be driven with more automated solutions (or at least parts of it), and I see this being a game-changer. This will truly revolutionize how therapeutic antibodies are developed. I recently wrote an article on Roche Holdings (RHHBY, RHHBF, RHHVF) and how Genentech, a member of the Roche Group, is utilizing Nvidia's chips to enhance drug development with AI. This is very, very similar situation and I recommend you check it out as I still believe there is upward movement in the stock. All in all, I don't think AbbVie is pushing to bring as many drugs to market, but simply redefining the efficiency and effectiveness of drug discovery (finding possible 'breakthroughs').

To speak on BigHat's platform, I think it is particularly intriguing. I found that it is designed to rapidly optimize key parameters in antibody development, and through some research it seems like functionality and developability were of much focus. With the usage of this platform it seems instead of saying it will make company's more efficient (because that's broad), I would suggest it speeds up development times and targets the "better" or "right" therapies. In a field where time is of the essence and precision is critical, this could be a huge opportunity for investors and even future partners to capitalize on.

Moreover, I also thought AbbVie's willingness to invest $30 million upfront was encouraging to hear-- they seem confident about this collaboration. I do want to inform you that they noted in the deal that potential milestone payments and royalties could be made. I think the return on investment for AbbVie could be transformative both financially and in terms of patient impact.

From an investor's perspective, this alone would scream opportunity for me (but we must weigh all opportunity). But to say the least, the collaboration aligns perfectly with AbbVie's mission to tackle serious health issues with innovative solutions. And I see the combination of BigHat's tech and AbbVie's creative desires to further the development of treatments for diseases like never before. I truly believe this is one of the many factors (and with reasons to follow) that position AbbVie at the forefront of medical innovation; this will be, in my opinion, the drive upward in its stock price.

Cerevel Acquisition

In light of the recent acquisition news , I'm confident in my buy thesis in AbbVie as this is something to likely propel the company, too. Their move to purchase Cerevel Therapeutics ( CERE ) for approximately $8.7 billion showcases AbbVie's desire to diversify its portfolio even further, and I think this could be due to Humira's increase in competition. To me, the acquisition isn't just about expanding and becoming a bigger company; it's the effort to stay ahead of the curve, somewhat like a chess game-- calculating and planning five moves in the future to 'win the battle.' Nonetheless, I think it's a notable effort that is coming to fruition.

Cerevel's focus seems to revolve around developing treatments for neurological conditions, like Alzheimer's, Parkinson's, and schizophrenia. I see their experimental drug, emraclidine, could be a significant treatment for schizophrenia, which is in mid-stage trials. The potential is this drug among others is one of the very reasons for this acquisition. It's all about the drugs addressing critical, unmet medical needs, and therefore benefiting AbbVie via profitability and stock growth. And to touch on Humira in this context, I think the timing of this acquisition is perfect because of the arthritis' drug expecting to have declined sales. So this move, from my understanding, is about both maintaining revenue streams and investing in the future of medicine; I see this as yet another reason to why AbbVie will be the leader, if not already in consideration.

The fact that the deal represents a 73% premium over Cerevel's closing share price prior to the acquisition rumors is astounding, but I think it is for a reason. It reflects the high value and potential AbbVie sees in Cerevel's research and development capabilities. I think don't think investors should overlook this aspect. I ask myself, "Why pay such a premium?," and to say the least, AbbVie must see something. Therefore, I believe this was a well-thought-out investment by Abbvie to further their own future with Cerevel on its side.

All in all, AbbVie's strategic decision is a game-changer that not only addresses the immediate need to diversify its product portfolio, but positions the company at the forefront of neurological drug development. This move indicates a strong, forward-thinking management decision, one that I really like. I see it establishing AbbVie as a very attractive investment opportunity (with yet another reason why explained below).

The Recent Genmab Collaboration

I thought I should illustrate all catalysts of AbbVie, but there are quite a few. Comment down below if you think there are more that seemed to overlook! And with that, I found the latest trial data for epcoritamab, presented by AbbVie and Genmab ( GMAB , GNMSF ), very interesting. I thought it was promising and definitely reassured my positive outlook on AbbVie's potential. The 82% overall response rate in relapsed/refractory follicular lymphoma patients is remarkable. And if you are unaware, that is a challenging stage of cancer. What's equally important is the reduced incidence of cytokine release syndrome due to the optimized dosing schedule. Also, I saw the FDA's breakthrough therapy designation last month, and it further validated epcoritamab's potential. This collaboration between AbbVie and Genmab, leveraging Genmab's technology, could be a major game-changer in lymphoma treatment. So, do you see a pattern? I am positive I do. Parternship, after acquisition, after collaboration; AbbVie is building quite the repertoire. The kingdom of meaningful connections (to say the least) indicates a strong future for AbbVie. I think you can identify that this the theme that promotes my buy rating, it may be a singular theme, but it's not like this is one partnership. AbbVie is truly making constant change, and these 'changes' I refer to, are good.

Risks: Patent Expiry, Newer Portfolio, IRA Act

In evaluating AbbVie's position following their third quarter 2023 earnings call, I do see some potential risks definitely emerge. A primary concern that I noted throughout is the ongoing challenge of Humira's. As a substantial revenue contributor, the loss of exclusivity for Humira could significantly impact AbbVie's financials more than currently anticipated. And with that knowledge, we understand that the company's future growth hinges on the success of newer products that we discussed earlier, like Skyrizi, Rinvoq, Vraylar, and Botox. So as I analyze, I think it is important to relay to readers that developmental setbacks or market acceptance issues with these products could negatively impact growth prospects. However, I am confident that Abbvie’s management and operational efficiency will be successful based on past performance and strategic decisions. A broad risk to keep in the back of your head is the competitive landscape in biopharmaceuticals. This includes potential pricing pressures and market share battles, particularly in immunology and oncology. AbbVie does seem to have a strong R&D pipeline, but the unpredictable nature of clinical trials and regulatory approvals illustrate the underlying risks.

Furthermore, based on the December 14th release from the Biden-Harris Administration , for a company like AbbVie, the Inflation Reduction Act introduces a complex challenge. The legislation is designed to address the steep increases in prices that have been affecting the elderly population for a long time, and initially, it seems to benefit the consumers. However, the mandate for drug manufacturers to compensate Medicare through rebates when their prices exceed the rate of inflation puts a financial burden on them. This will likely affect AbbVie’s financial health, particularly in light of the recent identification of 48 Medicare Part B medications that have increased their prices more rapidly than the inflation rate. And according to the Seeking Alpha news article , products from the following company’s (along with some others) could be subject to inflation penalties: Abbvie, Amgen ( AMGN ), and Pfizer ( PFE ).

However, in rebuttal, AbbVie's history of effectively managing market changes and its strategic planning cannot be overlooked. The company has a track record of navigating patent expirations successfully, something that is always noteworthy in the current situation with Humira. With their current diverse portfolio, coupled with innovative R&D efforts, I think it counters the risks I stated above in an effective manor.

GSK plc

Current Financials and Forward Guidance

To get straight into it, the impressive double-digit growth in sales and profits is a solid indicator of financial strength, as announced in their latest quarterly results . Excluding pandemic solutions, sales increased 16% to £8.1 billion, and rose 22% in adjusted operating profit to £2.8 billion. I see this reflecting operational execution and a focus within the GSK team.

What particularly makes me excited about GSK is the successful launch of the RSV vaccine, Arexvy (more on this later). But to briefly mention, it achieved blockbuster status in its first year with projected sales exceeding £1 billion. It most definitely signifies a substantial revenue stream and I think it is a reason how GSK can identify and capitalize on market needs.

Moreover, I see diversification due to its broad-based performance across various segments, and this includes Vaccines and Specialty Medicines. To me, this is much needed because it reduces the risk of depending on a single product or market segment.

However, the setback with Blenrep's conditional approval not being renewed in Europe raises concerns about potential impacts on the oncology business (we will dive into this into a couple sections as well). We understand now, if not prior, that regulatory decisions can significantly influence a company's revenue prospects. But nevertheless, GSK's proactive approach to expanding its product portfolio and investing in R&D is evident with developments of Arexvy and Apretude, among others. I view these efforts as a forward-looking strategy to focus the company solely on growth and expansion. Also, what furthers the company's investment thesis is its upgraded 2023 sales, adjusted operating profit, and EPS guidance. In my perspective, I think these are positive elements, and illustrates an entire package of consistent growth and a solid management team.

Ultimately, I acknowledge the risks associated with regulatory approvals, but I see a bright future. GSK's current financial performance, R&D development, and successful product launches present an enticing investment case worth consideration. The company's ability to navigate challenges and capitalize on opportunities when it comes time promotes my buy thesis..

The Arexvy Vaccine And Jemperli Approval

In my opinion, the recent update from GSK about the Arexvy vaccine is a strong indicator of the company's growth potential. The sales forecast for Arexvy has been revised to over £1 billion in its first year. I believe this represents a significant achievement considering that the vaccine received U.S. regulatory approval in May for those aged 60 and above, a rapid movement time-wise.

I saw this as a noteworthy component to include in the article because we realize that it's not only about the financial gains, but the potential market dominance GSK could achieve (something I like the sound of). The company could tap into a broader demographic and further its revenue potential based on GSK's plan to expand the Arexvy label to include 50 to 59 year olds.

Additionally, the context of this success becomes even more pronounced when we consider Pfizer's statement regarding the performance of their RSV vaccine, Abrysvo. The fact that a pharmaceutical giant like Pfizer is acknowledging the superior market performance of Arexvy is wonderful. From my perspective, this suggests that GSK has developed a product that meets a critical healthcare need and has executed an effective commercial strategy (by passing its competitors). Simply, these developments around Arexvy reinforce my confidence in GSK's prospects. To me, by piecing this puzzle together, it looks like the company is setting itself up for sustained growth by launching a successful product that has strategically been able to expand in its market share.

Additionally, the recent approval of GSK's Jemperli in the European Union as a frontline treatment for endometrial cancer marks yet another milestone. This continues my positive stance on GSK as an investment because I see this as a catalyst to push the stock higher. This approval is not just another regulatory success; it represents a breakthrough in the treatment of a challenging cancer type, positioning Jemperli as the first and only treatment of its kind in Europe for patients with mismatch repair deficient (dMMR)/microsatellite instability-high (MSI-H) endometrial cancer. And even earlier this year the US FDA also cleared Jemperli, highlighting its global potential, which I thought was encouraging. The true kicker is that it showed a 71% reduction in the risk of disease progression or death compared to chemotherapy alone in trials is a game-changer. These numbers represent a significant advancement in cancer treatment and if we read into its true abilities, it is a potential lifesaver for many patients (something more significant than the numbers themselves).

Furthermore, the EU's conversion of Jemperli's conditional approval to full approval as a monotherapy for second-line treatment of this cancer type depicts its credibility and market potential. This series of approvals highlights GSK's ability to develop and market highly effective and innovative treatments, and they are quite impactful treatments that I was impressed by. GSK has enhanced its position in the oncology market by expanding the range of available cancer therapies. These developments around Jemperli are no doubt a strength for GSK in the broader pharmaceutical industry; this supports my buy rating.

Risks: Blenrep Goes Down The Drain

The recent developments regarding GSK's blood cancer drug Blenrep pose a risk worth mentioning that current and potential investors should not overlook. The decision by the European Medicines Agency ((EMA)) to not renew the conditional approval for Blenrep, primarily due to data that failed to confirm its effectiveness, is a concern. This move, awaiting formal approval by the European Commission, is a substantial blow to GSK's oncology business, especially considering Blenrep's prominence as the second-largest contributor to this segment in 2022.

The EMA's stance that the risks of Blenrep now outweigh its benefits raises questions about the drug's future and, by extension, the stability of GSK's revenue streams in the oncology sector. When this news was published, the stock dropped 2.9%, illustrating the market's reaction to this setback, but one could say this news is now priced-in. However, Blenrep's withdrawal from the U.S. market last year, due to its failure in a late-stage study, adds to the concerns about the drug's success and market viability. This is something to consider since these factors could indicate underlying challenges in GSK's research and development process.

Contrarily, it's important to note that GSK is actively exploring new treatment options for relapsed/refractory multiple myeloma. Additionally, the fact that Blenrep reached a key goal in a separate late-stage trial last month should not be disregarded. This suggests that, while there are challenges, GSK is committed to overcoming them and may still find success with Blenrep or similar treatments in the future. This ongoing effort to innovate and improve their product portfolio could mitigate some of the notable risks highlighted here.

Which Is The Better Play?

To begin with a baseline, I believe overall that each stock has more reward in comparison to the risks. However, in terms of value I think GSK offers a better play in terms of technical metrics. But again, I think both company's offer value in different ways.

As I delve into the numbers, I will analyze multiple ratios as I believe these are the more important metrics to convey the landscape of value. The forward Price to Earnings ((P/E)), forward Price to Sales ((P/S)), forward Price to Cash Flow ((P/CF)), and the trailing twelve months ((TTM)) Dividend Yield are the metrics I will utilize to paint this picture.

Starting with GSK’s metrics, the forward P/E is at 9.47 , significantly under the sector median of 29.75, which I believe is an indication that the stock is undervalued compared to its future earnings potential. This P/E ratio has earned a Seeking Alpha grade of 'A+', which suggests that earnings growth is on the horizon, or at the very least, that the market hasn't fully appreciated the company's earnings prospects.

The forward P/S ratio is another highlight, sitting at 1.98 versus the sector's 3.96. This 'B' grade metric tells me that for every dollar of sales, investors are paying less than half of what they would typically pay for other companies in the sector. It's like buying a dollar for fifty cents—a bargain by any measure.

Additionally, the forward P/CF, at 8.44 against a sector median of 16.42, and graded 'A-', indicates robust cash flow generation relative to its price. In the language of the market, this stock is a cash-generating machine available at a discount. In my opinon, this signals that the company not only makes money but keeps it too, suggesting financial health and efficiency that the sector, on average, can't match.

Finally, the dividend yield, at a solid 3.80% against a sector yield of 1.67%, is a testament to the company's ability to pay back its shareholders. The 'A' grade speaks volumes as this is a suitable yield for most investors. I think it truly is about the reliability and potential growth of this dividend. This consistent fruit each season is more compelling than the unsustainable dividend that always has you on your toes.

Now, as we move onto AbbVie we find a company that is still undervalued for the most part, but not as much as GSK. Starting with the forward P/E ratio, we're looking at a figure that comes in at a C+ grade according to Seeking Alpha. At 29.10 , it's marginally lower than the sector median of 29.75. This modest discount may not scream 'bargain,' but it does suggest a valuation that isn't stretched thin. It is understood that the market seems to hint at the stock being reasonably priced.

Next we have the P/S ratio, the grade is a solid C, and the ratio itself is 5.03, compared to the sector median of 3.96. Although higher than the median, indicating a premium, this metric needs to be understood in context. A higher P/S can be perfectly justifiable for a company with high growth rates or superior profitability. To me, I think that this is signaling that the market anticipates stronger sales in the upcoming earnings calls. This aligns with my bullish stance, especially when a company's momentum is on an upward swing.

Also, the forward P/CF ratio indicates a B+ grade with a value of 12.58 against a sector median of 16.42. This is where my eyes lit up because a lower P/CF ratio compared to the sector suggests that the stock is undervalued based on its cash flow generation – a key driver of value. The difference of 23.40% in the ratio compared to its peers further solidifies my view that we're looking at a stock that's not only generating solid cash flows but is also available at a discount relative to the sector average.

Lastly, the Dividend Yield ((TTM)) stands out with an A grade. The yield is a robust 3.85%, towering plenty over the sector median of 1.67%. AbbVie has a significant yield that exceeds its competitors by a wide margin. The major difference of 130.56% in the dividend yield illustrates the company's commitment to returning value to shareholders, just like GSK. In a market that poses a fair amount of uncertainty, a strong dividend yield provides a cushion and signals financial health and stability, something that each of these companies possess. Below is a table to compare these metrics hand-in-hand for visual depiction.

These metrics aren't just numbers; they convey the very two stocks that are undervalued. To me, it looks like GSK offers the most value play in comparison, but I think AbbVie’s catalysts, like its major partnerships, will be the main reason for forward growth. But overall, these numbers suggest resilience and an underlying strength that supports both buy theses. I would very much emphasize the quality of each company from a technical perspective. One major thing to note is that your money is made when you buy, not when you sell (let that sink in); I think what I’m emphasizing is that both stocks are currently at great entry points for long positions. A deep value nonetheless, something that the majority of investors are lurking for.

Conclusion

In wrapping up, it's clear that AbbVie and GSK are pivotal players in the biopharmaceutical landscape with substantial contributions to healthcare. My deep dive into their financials, strategic collaborations, and innovative pipelines only strengthens my conviction in AbbVie's growth prospects and GSK's robust value, which both can spur potential upside. Despite the risks inherent to the industry, such as patent cliffs and regulatory hurdles, both companies display a remarkable agility to adapt and thrive. AbbVie's strategic acquisition and GSK's vaccine success are a few of the many reasons that underpin their forward-looking visions, reinforcing my buy stance on both tickers. But to reemphasize, it's about recognizing solid value and seizing the opportunity to invest in companies with a proven track record of turning scientific breakthroughs into tangible, life-changing medical solutions– and therefore much growth to be said on the investment side.

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