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Stock Analyst Update

AbbVie's Stock Price Decline Overdone

Mixed phase 2 data for Rova-T has rocked the narrow-moat firm's stock price, but the data doesn't end the potential of the drug, only likely delays its pathway to approval.

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 AbbVie (ABBV) reported mixed phase 2 data for small-cell lung cancer drug Rova-T, which will not support an accelerated filing, but we don’t expect any significant changes to our fair value estimate based on the disappointment. The subsequent significant decline in the stock price seems overdone relative to the news, but we had viewed the stock as overvalued, so the decline moves the market valuation closer to our fair value estimate of $94. We don’t expect any impact on our narrow moat rating, although AbbVie’s next-generation pipeline assets are important, as eventual biosimilar competition will erode the company’s leading drug, Humira. However, Rova-T is one of the relatively smaller potential drugs in the pipeline, and the phase 2 data does not end the potential of the drug, only likely delays its pathway to approval.

In the phase 2 Trinity trial for third-line DLL3-expressing small-cell lung cancer, Rova-T produced a 17.5% probability of patients surviving at one year, which is lower than rates seen in earlier studies. However, the probability of survival with current treatment options is close to 12% in this setting, so the data suggests the drug still has activity, although the results are not strong enough to support an accelerated filing. We expect phase 3 data in 2020 to support approval for Rova-T. With 80% of small-cell lung cancer patients expressing DLL3 and very few treatment options available, we estimate over 25,000 patients in this advanced setting in the developed world would be the target size for Rova-T initially. At an estimated price of $150,000 per patient per year, the market potential is over $3 billion annually. We are reducing our probability of approval for the drug to 40% from 50% on the basis of the mixed phase 2 data, and we expect peak sales close to $1 billion annually, but we don't anticipate this minor change and slight delay of approval to have a significant impact on our fair value estimate.

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Damien Conover does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.