Solid dividend, promising new drugs and acquisition of Allergen bodes well for AbbVie investors despite threat from biosimilars for its bestselling drug Humira.
AbbVie [NYSE: ABBV] is an American research-based biopharmaceutical company that discovers, develops, and markets both, biopharmaceuticals and small molecule drugs.
It started as a spin-off of the globally diversified American multinational medical devices and healthcare corporation, Abbott Laboratories [ABT] in 2013. Abbott signaled its intentions to separate into two publicly traded companies in October of 2011.
Abbott wanted to concentrate on medical devices, diagnostic equipment and nutrition products, while allowing AbbVie to focus on research-based pharmaceuticals. The drug maker focuses on immunology, oncology, neuroscience, eye care, virology, women’s health and gastroenterology.
The company had a hugely successful start in the industry, netting close to $19 billion in sales in its first year with its blockbuster drug, Humira, leading the charge.
With ten approved uses in the US and more than a dozen around the world, Humira (by far, AbbVie’s biggest sales generator) has emerged as the world’s top-selling prescription drug, accounting for some 60% of the company’s total sales.
Humira is designed to prevent TNF from attacking healthy cells. TNF is a protein produced naturally by the body’s immune system. People with certain autoimmune conditions produce too much TNF. Humira binds the TNF molecules which, in turn, stops them from attaching to healthy cells and attacking them.
A Chicago Tribune article called the star drug “the Swiss army knife of pharmaceutical drugs” because it is approved to treat a slew of conditions affecting the skin, joints, spine and gastrointestinal tract.
The bestseller drug is prescribed by doctors to treat Rheumatoid Arthritis, Psoriatic Arthritis, Crohn’s disease, Ankylosing Spondylitis, Uveitis and Hidradenitis Suppurativa, to name a few.
But the drug comes with a hefty price tag as the medication’s cost could accrue up to $60,000 a year per patient.
Revenue generated by Humira is five times more than that of Imbruvica, AbbVie’s next most lucrative drug, which is used to treat certain types of leukemia and lymphoma.
Several of the company’s pharmaceuticals rake in billions annually. The company’s other key products include Imbruvica, Duopa, Kaletra, Viekira, Norvir, Vicoprofen, TriCor, Lupron and Biaxin, amongst others.
The Lake Bluff, Illinois-based company currently makes and markets more than 30 products and has more than 50 drugs in development. The company generates about 70% of total sales in the US.
Is AbbVie Stock A Buy?
AbbVie stock took a hit after soaring to a 27-month high in July, hurt, in part, by the decision of the U.S. House Oversight and Reform Committee to subpoena AbbVie regarding an ongoing investigation into pricing of AbbVie’s blockbuster drugs Humira and Imbruvica.
However, the company, well-known for indulging in legal stratagems to shelter the patents for its cash cow Humira, got a boost by GOP’s better-than-expected performance in the recently-concluded U.S. elections, where the Republicans holding on to their majority in the U.S. Senate.
This is not surprising, given the fact that the Republicans haven’t shown the same level of enthusiasm as the Democrats for drug price cuts, though observers anticipate some checks and balances ahead.
A four-week supply of Humira, the world’s best-selling drug, has a list price of about $5,174 or more than $60,000 for a year.
The money-spinning drug continues to rake in billions of dollars for the company in the U.S., despite declining sales abroad, owing to the presence of cheaper biosimilar competitors.
The company, facing pressure to diversify its portfolio, recently got a further boost after winning the U.S. antitrust approval to buy Botox maker, Allergan.
AbbVie had announced last year that it had entered into an agreement to acquire Allergan in a cash and stock transaction for a mammoth $63 billion.
This gives AbbVie control over the lucrative wrinkle treatment Botox and allows it to lessen its reliance on the arthritis treatment drug Humira, which is facing intense heat from biosimilar rivals in Europe, and loses patent protection in the U.S. in 2023.
Further, AbbVie is actively working on quite a few coronavirus treatments. The company unveiled its collaboration with Harbour BioMed, Utrecht University and Erasmus Medical Center to test an antibody approach to either cure or prevent the respiratory disease from taking hold.
Further, AbbVie signed a deal with Genmab to co-develop and co-commercialize three cancer drugs.
Earnings & Sales Top Expectations
AbbVie’s quarterly sales have risen in each of the past five quarters. AbbVie’s quarterly revenue in the latest quarter was $12.9 billion, up 51.9% on a year-over-year basis, marking its biggest jump ever, thanks to Allergan.
The company reported $2.83 earnings per share (EPS) for the quarter, a rise of over 20%, marking it the biggest percentage increase since the fourth quarter of 2018.
AbbVie, over the course of time, has been subjected to multiple investigations and criticisms, and has had to deal with a number of lawsuits over aggressive patenting and price strategies for its star drug Humira.
However, the company got a shot in its arm when a judge earlier this year found nothing wrong with AbbVie’s use of patents that are torpedoing Humira’s biosimilars’ entry into the market, long after they are launched in other parts of the world.
Despite the presence of biosimilar competitors outside the US, global net revenue for the drug rose 4.1% year over year to $5.14 billion.
AbbVie’s immunology drugs again put in a strong performance with newer immunology drugs, Skyrizi and Rinvoq, bringing in $435 million and $215 million, respectively.
The company’s blood cancer drugs were the more impressive performers, with sales of Venclexta jumping 59% year over year to $352 million.
Sales for Imbruvica in Q3 totaled $1.37 billion, up 9% year over year.
Acquisition Of Allergan A Revenue Boon
The acquisition of Allergan, and its roughly $15 billion in annual sales, will help AbbVie diversify its portfolio and, to some extent, compensate for the loss the company is set to endure, owing to the entry of Humira copycats, (biosimilars) in the U.S. starting 2023.
Before the purchase by AbbVie, Allergan had in its kitty profitable drugs like Botox as well as eye care, neuroscience and an impressive line-up of women’s health products.
In July, AbbVie’s Allergan unit got FDA’s nod for Botox as a method of treating spasticity in children 2 years and older. AbbVie stated that the acquisition of Allergan will help it expand and diversify its revenue base and complement its existing leadership positions in immunology.
Additionally, Allergan provides new growth opportunities in neuroscience, with Botox therapeutics, and helps it capture a significant pie of the global aesthetics business, with brands that include well-known names like Botox (botulinum toxin type A) and Juvederm.
Even more important are AbbVie’s new-generation rheumatology drugs, including Skyrizi (risankizumab) for the treatment of plaque psoriasis and Rinvoq (upadacitinib) for the treatment of rheumatoid arthritis, drugs expected to replace Humira in the near future.
Moreover, the company has an impressive portfolio of cancer drugs and some neurology candidates in the pipeline that could prove to be another game changer for the company.
To be more precise, the company is pretty optimistic about a few of its leading new products getting a nod from concerned regulatory authorities in the next couple of years.
Meanwhile, investors can also rejoice in the fact that the company generates massive cash flow and its financial strength could help it with acquisitions, new drug developments, debt payments, share buybacks as well as rewarding shareholders in the form of dividends.
In fact, the company has been doing exactly that – tripling its dividend payout (which now stands at 5.3%) ever since it was spun off from Abbott Laboratories in 2013.
A good chunk of that impressive operating cash flow will help AbbVie reduce its debt, which the company plans to cut down by 45% to $18 billion by the end of 2021.
Risks Of Investing In AbbVie
Biopharmaceutical companies know well that the drugs currently generating truckloads of money may fail to repeat the stellar performance in the near future. The logic behind such a phenomenon is not hard to decipher, as expiring patents can cause massive decline in market share of the drug in question.
For instance, expiring patents of AbbVie’s popular dyslipidemia (unhealthy levels of lipids in the blood) drugs like TriCor and Niaspan led to significant reduction of the drugs’ contribution to AbbVie’s revenue.
AbbVie has to contend with problems on other fronts as well. On September 1, the House’s Committee on Oversight and Reform announced plans to issue AbbVie a subpoena related to investigation of pricing practices of AbbVie’s blockbuster treatments Humira and Imbruvica, a blood cancer drug.
Rep. Carolyn B. Maloney, the chairwoman of the Committee on Oversight and Reform, said the subpoena was issued to AbbVie because, for the past 18 months, the Illinois-based company has “demonstrated its unwillingness to comply voluntarily with the Committee’s investigation.” ABBV stock fell 3.7% that day.
In 2019, former committee chairman Rep. Elijah Cummings had signaled the government’s intentions to conduct an investigation into the pricing practices of 12 drug companies responsible for 19 of the most expensive medications sold in the United States.
Threat Of Biosimilars
All these threats and fears, however, pale in comparison to AbbVie’s largest concern: barbarians at the gate of the Humira empire.
The record-breaker drug faces a slew of biosimilar rivals in Europe which has substantially lowered sales for the blockbuster biologic.
The first breach in the fortress occurred in 2016 when its first competitor arrived in India and sold for $200 a vial, whereas the drug was selling for $1,000 a vial in the US at the time. AbbVie moved aggressively to protect its turf, filing additional patents and raising prices.
But cheaper copycat versions, or biosimilars, started arriving in Europe in late 2018, and the international sales of Humira took a hit for the first time ever.
In fact, Humira sales in 2019 declined 27% where biosimilars were available. More worrying is the fact that it loses patent protection in the U.S. in 2023. AbbVie relies heavily on Humira, with the world’s bestselling drug accounting for nearly 60% of the company’s total revenues.
Major competitors like Amgen [AMGN], Novartis [NVS], Mylan [MYL] and Biogen [BIIB] have already launched Humira biosimilars in Europe and biosimilar approvals are now quickly finding favor in the U.S as well.
Copycats, known in the industry as biosimilars, made their debut in Europe in 2006 and in the U.S. in 2015.
The U.S. biosimilar market is currently in its nascent stages, but making forward strides quickly in the country, generating interest from a large number of companies.
Right now, around $60 billion in biotechnology drugs have biosimilars snapping at their heels, with few of the biggest brands facing the maximum heat.
At least seven pharmaceutical and biotech companies are working on biosimilars of Humira. Companies like Biogen, Amgen and Humira have already launched Humira biosimilars in Europe.
The stage is all set for the blockbuster drug’s biosimilars to arrive in the U.S. US in 2023. This makes Humira particularly vulnerable to competition.
Experts predict rapid erosion of Humira sales in the U.S. in 2023 and beyond as patients are sure to flock to cheaper alternatives.
Reports suggest that a biosimilar rival in the first year of its launch in the U.S. will lead to a 15% revenue decline of the biologic product. This could increase more than threefold after three years.
What Are Biosimilars?
According to the RAND Corporation, biosimilars could save the U.S. health system close to $44 billion in the next ten years. A biosimilar is made from a biologic (natural) source, i.e. via living systems or organic molecules.
Pharmaceuticals, on the other hand, largely come from chemicals. Also, biologics are most commonly injected, while pharmaceuticals frequently come in pill form.
They are referred to as “large-molecule” drugs because they are larger and bind to specific cell receptors. Biologic products are very expensive with consumers having to pay thousands of dollars for them due to costs linked to complicated development and manufacturing.
Biosimilars are generally used to treat patients with rarer or hard-to-treat diseases. Companies like Amgen, AbbVie, Gilead Sciences [GILD] and Biogen generally stay on the biologic side.
On the other hand, companies like Pfizer [PFE] and Johnson & Johnson [JNJ] usually are more of pharmaceutical companies.
Also, AbbVie has made its intentions clear from the outset to keep investing in Botox to leverage its growth potential. Despite CEO Rick Gonzalez ruling out the possibility of a biosimilar against Botox for a long time to come, Mylan and Revance Therapeutics have stated they are developing a biosimilar of Botox.
Experts also warn that Botox could face market competition from other toxins such as Jeuveau, a lower-cost alternative to Botox developed by Evolus.
Additionally, in late June, the FDA refused approval for subsidiary Allergan’s eye-disease drug, citing an unfavorable benefit-risk ratio.
On the positive side, AbbVie trades at only a little over eight times expected earnings. A possible reason for it is that AbbVie faces biosimilar competition in the U.S. for its top-selling drug Humira in 2023.
Bristol Myers Squibb also will begin to compete against generic versions of the blockbuster blood cancer drug Revlimid, beginning in 2022. However, AbbVie has some promising drugs in the pipeline that could prove to be solid growth drivers for AbbVie.
Are AbbVie Competitors a Threat?
Humira from AbbVie is one of the best-selling biologics of all time, and the best thing for AbbVie is that it enjoys patent protection in the U.S which means the door for biosimilar competition stays firmly shut, at least for the next couple of years.
And, as such, sans U.S. biosimilar competitors, Humira sales continue to grow in its largest market. International sales of Humira, however, continue to decline which, according to CEO Gonzalez, reflects “the impact of direct biosimilar competition in Europe” and other ex-US markets.
Adding to AbbVie’s concern is the fact that both, biotech and pharma players, are keen on wetting their beak when it comes to biosimilars. Mylan is venturing into biosimilars along with others like Coherus Biosciences. A number of well-established, non-generic players are also keen on testing the waters.
AbbVie is facing heat from a handful of companies working on biosimilars of Humira. Experts see inflammation and oncology as particularly ripe areas for biosimilars and the biggest inflammation biologics obviously is Humira.
Apart from Humira, its competitor Biogen’s growth prospects seem to be in jeopardy after a Food and Drug Administration advisory committee refused approval for its Alzheimer’s disease drug candidate Aducanumab.
On the other hand, Bristol Myers Squibb looks to advance in style with its acquisition of Celgene last year which has put a lot of potential blockbusters in its kitty.
Merck, too, appears to be in good shape with its cancer immunotherapy Keytruda (pembrolizumab), which is used to treat advanced melanoma, lung cancer, head and neck cancer and stomach cancer.
Pfizer is also expected to witness stellar growth, post its merger of the Upjohn business with Mylan.
Is AbbVie Stock A Buy: The Bottom Line
Multinational retail corporations like Walmart [WMT] derive their profits from large volumes with tens of millions of customers. However, it’s a different ball game with large biopharmaceutical companies, which often generate sky-high revenue from developing and marketing a few hugely expensive drugs for a small population.
The more serious or rare ailments it counters, the better profits it brings for the manufacturer. A Humira biosimilar competitor for the US market is still a couple of years away. It means the sales are not expected to suffer, at least for the time being.
Meanwhile, AbbVie aggressively continues to develop other drugs and pharmaceutical avenues, to ensure it has top-selling drugs waiting in the wings to replace biologics whose patents are about to expire.
AbbVie is also expected to profit from its acquisition of Allergan as it lets the company acquire popular products without having to spend on research and development.
For 2020, analysts expect AbbVie to earn $10.44 per share on sales of $45.4 billion, a jump of 17% and 36%, respectively.
The optimism, to a considerable extent, stems from the acquisition of Allergan, which is expected to make a handsome contribution to AbbVie’s revenue.
The company has gained FDA’s approval of its Rinvoq for the treatment of moderate to severe rheumatoid arthritis, and is awaiting FDA’s and the European Medicines Agency’s approval for Rinvoq to treat adults and adolescents with moderate to severe atopic dermatitis. Skyrizi, a treatment for psoriasis, has also got the nod from the FDA.
Also, not to forget is the fact that AbbVie is right there at the top when it comes to a strong, steady cash flow generation with the drug maker boasting of operating cash flow of close to $16 billion over the last 12 months.
All in all, AbbVie is not expected to deliver notable growth anytime soon because of the coming patent battles that pit Humira against copycats from other pharmaceutical companies.
However, the company still is a good investment option with its high dividend yield, and a bevy of potential blockbuster cancer and immunology drugs.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.