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One of the Leading Biotech Stocks Is Now on Sale

Standard & Poor’s lists a whopping 196 biotechnology companies in its database, but AbbVie (ABBV) stands out above the rest. The company is growing rapidly but due to the correction in biotech stocks, it’s now an undervalued stock.

What’s Going On in the Biotech Industry?

Biotechnology uses living things to create and develop healthcare treatments, and includes such new and diverse sciences as genetics, immunology, and the development of pharmaceutical therapies and diagnostic tests.

New products provide the backbone of each company’s success in the biotechnology industry. Many promising products gained FDA (U.S. Food and Drug Administration) approvals in 2015, which will contribute significant sales and earnings for biotech companies in 2016 and beyond, and is thus good news for biotech stocks.

And new treatments and cures for life-threatening illnesses and conditions are in advanced stages of development, aiming to cure various forms of cancer, diabetes, Alzheimer’s, hepatitis, heart problems and other maladies.

All these new products and treatments will lead to extraordinary growth for leading biotechnology companies during the next decade.

But biotech stocks have been on a rollercoaster lately. The NYSE ARCA Biotech Index has dropped 33% during the past 10 months, but since February 11, 2016, the Index has rebounded 13% and is poised to climb higher during the remainder of 2016. The recent correction in biotech stocks has created excellent buying opportunities.

How the Correction Now Offers Value Opportunities

Recently, several biotech mega-mergers have been disapproved and tax inversions (U.S. companies seeking to lower corporate taxes by merging with a foreign company in a country with low taxes) have been challenged. With large mergers and international mergers unlikely during the next few years, the larger biotech companies will likely look to collaborate with or acquire smaller biotech companies with promising new drugs.

The small biotech companies are often willing to collaborate with larger companies or be acquired because they’re are often strapped for cash, whereas their larger brethren possess the resources to complete the development and research process quickly and bring new biotech products to market swiftly and successfully.

But rather than hunt down small biotech companies with promising pipelines, I think it’s smarter for investors to focus on the larger biotech companies that are likely to expand through acquisition.

In fact, the clampdown on mega-mergers and tax inversions could be a blessing in disguise. Larger, successful biotech companies will now focus on devoting more resources to expanding their research and development efforts to produce exciting new products.

And some of these companies will also acquire small companies with promising new drugs.

Another problem that caused investors to abandon biotech stocks was the publicity regarding high prices for certain drugs. Many investors sold their shares of companies that raised drug prices indiscriminately to bolster profits, and that caused biotech stock prices to plummet.

However, the drug price problems are also creating buying opportunities in honest companies that legitimately invest billions of dollars to develop innovative drugs to address our unmet medical needs.

The Leading Biotech is Now on Sale

Standard & Poor’s lists a whopping 196 biotechnology companies in its database, but AbbVie (ABBV) stands out above the rest. The company is growing rapidly but due to the correction in biotech stocks, it’s now an undervalued stock.

Here’s my current research on AbbVie.

AbbVie (Symbol: ABBV) is a research-based biopharmaceutical company spun off from Abbott Laboratories on January 1, 2013. AbbVie focuses on the development and marketing of therapies for complex and serious ailments, such as rheumatoid arthritis, cancer, psoriasis, Crohn’s disease, HIV, hepatitis C, Parkinson’s disease, and chronic kidney disease.

AbbVie’s flagship product, Humira, continues to drive sales, contributing 60% of total sales. Currently approved for several indications, Humira continues to create strong growth in the dermatology and gastroenterology markets. Additional applications and expansion into new markets, including China and Japan, will spur product growth during the next several years.

Management is working diligently to expand AbbVie’s portfolio of products. Other products now contributing to sales include drugs for the treatment of hepatitis C, low testosterone, HIV, cholesterol, thyroid disease, cystic fibrosis, chronic pancreatitis, and advanced Parkinson’s disease. The company also has several drugs in various stages of development targeted for a wide range of diseases and conditions.

AbbVie has partnerships with Neurocrine, Roche, Bristol-Myers, Infinity, and Biogen. AbbVie recently inked a deal with a German drugmaker to develop and market a biologic antibody for psoriasis, which is currently in Phase III trials. The drug is considered to be “best in class” and could add significant revenue, and thereby help AbbVie diversify its limited drug portfolio.

In May 2015, AbbVie acquired Pharmacyclics, maker of Imbruvica, for $21 billion. Imbruvica, used to treat leukemia, has multibillion-dollar potential. Imbruvica is currently in more than 25 company-sponsored studies and has the potential to expand to other treatments.

AbbVie will buy cancer drug-maker Stemcentrx for $5.8 billion plus incentives. Stemcentrx has several drugs in early stage and late stage development, which are expected to add significant sales and earnings starting in 2018. AbbVie expects to close the deal before June 30. Management lowered its forecast for 2016 earnings slightly to account for the initial negative impact of the Stemcentrx purchase.

AbbVie delivered strong results for the first quarter ended March 31. Sales advanced 18% and EPS (earnings per share) surged 22%. Humira sales climbed 15%, while AbbVie’s other drug sales climbed even more. AbbVie’s patents for Humira are being challenged by small companies hoping to copycat the drug before patents run out in 2022. AbbVie will likely be allowed to sell Humira unabated.

My forecast for the next 12 months includes sales and EPS growth of 14% and 16% respectively. AbbVie will continue to introduce new drugs and acquire small biotech companies with the goal of lowering its dependence on Humira.

The current P/E (price to earnings ratio based on latest EPS) of 13.3 and the dividend yield of 3.8% provide excellent value. I expect ABBV’s stock price to rise 50% to my Minimum Sell Price of 90.25 within two years. AbbVie offers an excellent long-term buying opportunity in the rapidly growing biotechnology industry.

You can easily follow AbbVie’s progress and discover additional undervalued biotech stocks in Cabot Benjamin Graham Value Investor. I sincerely hope you will subscribe right now.

Sincerely,

J. Royden Ward

J. Royden Ward has spent his entire career seeking strong investment returns for his clients while keeping risk low. In 1969, he developed a computerized model of stock selection based on formulas created by investment legend—and Warren Buffett mentor—Benjamin Graham, and since 2003, he’s been spreading his wisdom far and wide as chief analyst of Cabot Benjamin Graham Value Investor.