Analysis: ABBV PFE LLY

After you receive this Alert, we will be buying 50 shares of AbbVie (ABBV) at roughly $112.09. Following the trade, ABBV will represent 2.96% of the portfolio.

Shares of AbbVie took a big hit Wednesday after the FDA provided an update on Pfizer's (PFE) Xeljanz and the broader JAK inhibitor class. The communication, which you can read more about here, follows the review of a large randomized safety clinical trial on Xeljanz. Based on the study, the FDA concluded there is an increased risk of serious heart-related events such as heart attack or stroke, cancer, blood clots, and death with arthritis and ulcerative colitis medicines Xeljanz and Xeljanz XR. Importantly, the trial's final results also showed an increased risk of blood clots and death with the lower dose of Xeljanz. Previously, this risk was only seen at a higher dose.

Taking a step back for a moment, recall that the FDA's review of Xeljanz has been an overhang on AbbVie all year. On January 27th, ABBV fell 5.5% to $102.70 after a post-marketing safety study for Xeljanz raised concerns about the safety profile of the drug and the broader class. And back in mid-March, we discussed in our Alert here how shares of AbbVie fell hard after the FDA extended the review period for the supplemental New Drug Application for Rinvoq in the treatment of active psoriatic arthritis and atopic dermatitis. The holdup at the FDA was due to its ongoing review of Xeljanz.

The FDA is requiring new and updated warnings for two other arthritis medicines in the same drug class as Xeljanz, called JAK inhibitors. The two drugs are AbbVie's Rinvoq and Eli Lilly's (LLY) Olumiant. Even though both Rinvoq and Olumiant have not been studied in trials similar to what the FDA just reviewed, the FDA is requiring these new warning labels because the drugs share mechanisms of actions with Xeljanz.

One question you may have today is why AbbVie is down so hard while Pfizer and Eli Lilly shares have barely budged? The answer is pretty simple. Rinvoq is one of AbbVie's key growth drivers of the future, while the revenue streams at Pfizer and Eli Lilly are much more diversified and their respectively JAK drugs are less important. Rinvoq and Skyrizi (another key immunology drug at AbbVie) are expected to contribute more than $15 billion in combined risk-adjusted sales by 2025 and replace the bulk of what's lost when Humira goes off-patent in the United States. Any risk to Rinvoq's long-term forecast creates risk to AbbVie's out-year earnings power even as we expect great things from the Medical Aesthetics (Allergan) franchise in the future.

Given this news and the perceived risk to Rinvoq estimates, why are we buying this pullback and upgrading our rating to a One

Despite the FDA's announcement, we remain optimistic about Rinvoq's benefit-risk profile across all indications and doses. Past induction trials have shown no MACE events or malignancies the rates of serious adverse events were numerically lower than placebo. Rinvoq and Xeljanz may be in the same drug class, but the two profiles have always been very different. To this point, analysts at Piper Sandler said this afternoon in a research note that "assuming no Rinvoq-specific safety signals arise, we think docs will continue to view its safety profile as differentiated vs Xeljanz, despite these label updates." Piper also said that they see a "limited impact" in the short term here to AbbVie, while "longer term, we do not believe all JAKs will be painted with the Xeljanz brush forever." 

Plus, Rinvoq is still getting the necessary approvals in Europe (see last week's news here) making the current scrutiny of the JAKs and specifically Rinvoq more of an FDA issue and only specific to the rheumatoid arthritis market. Analysts at JPMorgan estimated in a research note this afternoon that U.S RA says represents ~$3 billion of their ~$8 billion Rinvoq and ~$65 billion 2025 total company sales estimate.

Additionally, analysts at Morgan Stanley wrote in a research note this afternoon that this market reaction is reflecting too much negative news.

"We are surprised at the market reaction to the news, particularly for ABBV. It appears the market believes that Rinvoq's growth is now constrained in the RA setting and that FDA is likely to restrict the use in Atopic Dermatitis to the post Dupixent setting. For RA we had always assumed that the majority of sales would be in the post-TNF setting due to the impending biosimilar launches in the TNF space. At this point we believe ABBV has now priced in a negative outcome for Atopic Dermatitis approval as well," they said.

Lastly, we want to point out that Rinvoq is not too important to AbbVie's current earnings. We don't want to minimize how important Rinvoq is to the company's future, but the drug is expected to do about $1.6 billion in sales in 2021 or roughly 3% of management's total company outlook of $56.3 billion. What this means is that the near-term variability of Rinvoq's numbers presents little risk to current earnings and the company's robust cash flow generation. And please don't forget that there is still so much untapped potential within AbbVie's Botox franchise too. Therefore, earnings will be okay, debt will continue to be paid down, and the huge 4.6% dividend yield should remain safe.

Putting it all together, we are buyers of AbbVie on today's pullback.