2 Billion More Reasons to Buy AbbVie Stock | The Motley Fool (2024)

There are plenty of reasons to buy a leading biopharma business like AbbVie (ABBV -0.99%), and investors just got at least a few more. Thanks to a large acquisition that came out of left field, it could now become a prominent psychiatric-drug company.

Though the area isn't traditionally in AbbVie's wheelhouse, there's reason to believe that its latest bet will turn out well for investors. Here's why.

This new segment could be incredibly valuable

On May 13, AbbVie signed a deal with the biotech Gilgamesh Pharmaceuticals to collaborate on the of novel therapies for psychiatry. Those novel therapies, inspired by some of the supposedly therapeutic effects of certain psychedelic drugs, are intended to promote neuroplasticity.

If you're not familiar with the term, neuroplasticity is the property of neurons (brain cells) that enables them to shore up or scale down their connections to other neurons. A lack of neuroplasticity is implicated in many different mental health issues, as well as in some of the cognitive effects of aging. Psychedelic drugs are known to temporarily but dramatically increase neuroplasticity, which is a big part of why they're being investigated by companies like Compass Pathways to use in treating mental illnesses, in combination with psychological support administered at the same time.

But Gilgamesh's candidates are intended to create the same neuroplasticity-enhancing effects as psychedelics, without also causing hallucinations or other psychedelic sensory phenomena. Furthermore, they're designed to have features like a rapid onset and a relatively brief therapeutic period, both of which the current set of investigational psychedelic medicines lack. So Gilgamesh's products may be more effective or less expensive to administer than psychedelic therapies produced by competitors, because they probably won't require as much monitoring by therapeutic staff.

Per the terms of the collaboration agreement, Gilgamesh will get $65 million in cash up front, and it could receive almost $2 billion in royalties, milestones, and other fees. The biotech currently has two programs in phase 2 clinical trials, with one targeted at depression and bipolar-associated depression, and the other targeted at depression and anxiety.

While AbbVie currently has a neuroscience division, its pipeline is nearly bare of psychiatric medicines. In the first quarter, sales of its neuroscience drugs only brought in about $1.9 billion in revenue out of $12.3 billion in total. Adding a few next-gen programs to the pipeline gives the company a pathway to capturing a larger share of the psychiatry market, especially for massive segments like depression where many patients cannot find a solution that works for them. According to Fortune Business Insights, the market for antidepressants will grow to reach $18.2 billion by 2027.

Overall, the partnership is bullish for AbbVie stock. AbbVie won't be on the hook for the entire amount of the deal unless Gilgamesh's programs advance through clinical trials and get approved for sale by regulators. In other words, if it manages to shell out all the money it agreed to, you can count on the business reaping far larger gains from sales and earnings.

In that light, each dollar spent is another reason to think about buying the stock.

Keep your expectations grounded in reality

The drug development process takes a long time, and the risk of failure along the way is high. That's especially true in a challenging niche like psychiatry, in which patients often need to combine multiple medicines to reduce their symptoms to a tolerable level. It's also true when attempting to develop novel therapies in general, as less is known about their performance characteristics and impacts on patients.

All of this is to say that AbbVie may not be competing in the market for antidepressants anytime soon. It's also definitely too soon to include it in a basket of psychedelic stocks.

Still, with such a lucrative segment clearly of interest to management, the collaboration with Gilgamesh won't be AbbVie's last attempt to enter the space. Nor does the deal diminish the appeal of an investment based only on the many in-demand drugs AbbVie makes, not to mention the myriad of clinical-stage programs in its massive development pipeline.