Why Abbvie Stock Crashed
Ask any investor who had money in the stock market last year and they’ll tell you the same thing: 2017 was a good year for equities. CNN Money even called it “the second-oldest and second-strongest” bull market “in history.”
The numbers back them up. Stocks have been on an upward trend for nine years, reaching and even surpassing pre-recession levels.
This optimistic story was doubly true for AbbVie Inc (NYSE:ABBV), a biotechnology stock that outperformed the stock market in 2017—until the company’s share price collapsed last month.
With that in mind, I will explain what happened to the ABBV stock price and establish an AbbVie price prediction for 2018. Let’s dive in.
It doesn’t take a magnifying glass to see when AbbVie stock collapsed. On March 22, the share price lost 12.8%. Those losses deepened in the following weeks, resulting in AbbVie losing almost one-fifth of its market capitalization.
Chart courtesy of StockCharts.com
AbbVie’s fall from grace is no giant mystery.
Here’s what happened: AbbVie wanted its patented lung cancer drug “Rova-T” to receive fast-track approval from the U.S. Food & Drug Administration (FDA) but the FDA said no. (Source: “AbbVie’s lung cancer drug data disappoints; shares slump,” Reuters, March 22, 2018.)
When investors learned about this on March 22, they turned ice-cold on ABBV stock.
After all, AbbVie spent $5.8 billion to acquire this lung cancer drug. Or to be more accurate, AbbVie absorbed the company Stemcentrx, which owned the drug, in the hopes that it could parlay the acquisition into a new suite of cancer treatments.
Some analysts predicted that Rova-T would generate $1.2 billion in annual sales by 2023. Although there’s still a possibility that this could happen, investors were discouraged by the drug’s withdrawal from fast-track status.
Perhaps ABBV stock could have recovered quickly from that setback. We’ll never know though because, a few days later, a judge ordered the company to pay $3.0 billion in the “Androgel” retrial.
If you’re unfamiliar with the Androgel retrial, let me catch you up.
More than 6,000 people are suing AbbVie over the company’s AndroGel testosterone treatment, which they say is harmful in all sorts of ways.
At first, these cases threatened to bury AbbVie under an avalanche of punitive damages. For example, in July 2017, a federal jury ordered AbbVie to pay $150.0 million to an Oregon man named Jesse Mitchell.
Later that year, a federal judge threw out that decision, essentially freeing AbbVie from any responsibility. But Jesse Mitchell was granted a retrial. The Androgel retrial came to a head in March, when a jury awarded him $3.2 million in damages. (Source: “U.S. jury orders AbbVie to pay $3 million in AndroGel retrial,” Reuters, March 26, 2018.)
Looks bad, right? If you just read the headline of the court’s decision, you might think it’s logical that ABBV stock continues to fall. But here’s a silver lining: the jury said AbbVie was “not liable” for Mitchell’s heart condition.
This is an important point. AbbVie has a lot of lawsuits to settle, so it’s useful if the company can point to a decision that, even though it is sympathetic to the plaintiff, renders AbbVie guilt-less.
ABBV Stock Forecast: What’s Next?
I can envision several scenarios that lead ABBV stock to rise to between $130.00 and $140.00 by year’s end. But it’s important to remember that nothing is guaranteed, especially when it comes to risky bets like AbbVie stock. The stock is on a razor’s edge.
Even if you dig into the company’s financials, what emerges is a mixed bag of positives and negatives. Just take a look at the chart below. It compares AbbVie’s price-to-sales (P/S), price-to-earnings (P/E), and (price-to-book) P/B ratios to the industry and sector averages.
AbbVie Stock Statistics
|AbbVie Inc||Industry Average||Sector Average|
Positives: If you look strictly at P/E ratios, you might think that AbbVie is grossly undervalued relative to its peers. You might justify this by adding that AbbVie’s P/S ratio is in line with the industry average, meaning that investors are weighing the stock too much on regulatory and legal risk and not enough on its fundamental strength.
Negatives: You could argue that AbbVie’s P/B ratio reads like a company that’s financially overstretched. It has far fewer assets to liquidate in the event of a bankruptcy. This might not have mattered if Rova-T was on the fast track for FDA approval, but without that guarantee it becomes harder to ignore.
I’m certainly drawn to the fact that ABBV is trading at a 20% discount from earlier in the year, but that’s not reason enough to bet the farm on this biotech stock. The question to ask is: “How much risk can you take?”
AbbVie stock is not for the faint-hearted.
With that in mind, there’s no denying that my AbbVie price prediction shows a significant upside from the stock’s current level. So you have to decide to roll the dice based on one thing and one thing only: your ability to handle risk.