How is Abbvie Inc (NYSE: ABBV) Preparing For Life After Humira?
By Kshitija Bhandaru
AbbVie Inc (NYSE: ABBV) stocks rose last week after Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) filing announced a $ 1.8 billion position in Abbvie. Abbvie stock rose 1% the day after the announcement and rose nearly 6% over the past week.
NYSE: ABBV share price as of November 24th (Source: Simply Wall St)
Abbvie, which was spun off from Abbott Laboratories (NYSE: ABT) in 2013, develops and markets products for the treatment of rheumatology, gastroenterology, oncology and neurological diseases such as Parkinson's.
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The blockbuster drug Humira, used to treat rheumatoid arthritis and other diseases, has been the best-selling drug since 2012. The drug accounted for nearly 60% of ABBV's sales in fiscal 2019. Last year, Humira sales peaked nearly $ 20 billion, or nearly 63% of annual sales.
It is therefore not surprising that ABBV defended this money-making money cow with great strength. While Humira's core patents expired in 2016, the company went to great lengths to acquire additional patents, known in the jargon as the “patent thicket,” extending the monopoly on the drug to 2023.
However, Humira could not hold that position as long as competition has intensified. For one, the drug will lose patent protection in the United States in 2023. Second, as the patent expires, several competing pharmaceutical companies such as Amgen (NASDAQGS: AMGN) and Novartis (SWX: NOVN) could launch alternatives or “biosimilars” for the drug in 2023.
What it means for Abbvie to lose his Humira monopoly
The loss of exclusivity towards Humira brings some uncertainty into the business. Humira sales are already declining in Europe, where patents expired in October 2018. In fiscal 2019, European sales of the drug decreased by over 30% due to competition from biosimilars. In the nine months ended September 30, 2020, sales in this segment decreased by almost 15%. With more than three-quarters of Humira's US sales (based on FY 2009 figures), competition could have a significant impact on Humira's sales, as we are already seeing in Europe.
In addition to being exclusive, Abbvie could also lose its pricing power over Humira due to the aggressive competition. The company was accused of unjustified drug price increases by the Institute for Clinical and Economic Review (ICER). Studies show that the price of Humira has more than tripled since 2006. Annual offer prices have currently increased from $ 16,636 to $ 72,000. While the price increases have so far contributed to ABBV's sales, the loss of pricing power through competition, along with the expiration of the patent, can have a dual impact on the company's sales. In Europe, where Humira patents have expired, competing drugs are available at discounts ranging from 10% to 80%.
Abbvie's Humira earnings will no doubt take a hit, but they won't go away completely after 2023. The company would still receive an undisclosed amount of royalties from its competitors under the patent license agreements. ABBV has reached agreements with a total of eight companies (three of which have already received US FDA approval) that will allow them to introduce Humira alternatives in exchange for royalties to Abbvie in 2023.
ABBV's efforts to remedy the loss of Humira revenue
One of the key steps Abbvie took to diversify its earnings away from Humira was to acquire Allergan, a pharmaceutical company best known for its botox treatment, for $ 63 billion in May 2020. During the deal however, its size and scope increased, not to mention the diversification of the company which also brought additional baggage in the form of excessive debt. Abbvie assumed $ 23 billion in Allergan's debt at the time of the deal. The combined company's long-term debt is currently $ 82 billion, up from $ 35 billion in 2018 prior to the acquisition.
NYSE: History and Analysis of ABBV Leverage Versus Equities, Nov. 24 (Source: Simply Wall St)
Still, the transaction is expected to increase Abbvie's fiscal 2020 revenue to approximately $ 30 billion (ex-Humira) and combined revenue to approximately $ 50 billion. Annual revenue in fiscal 2019 was $ 33 billion in 2019.
In addition, the company has pledged to pay off its debt by $ 15 billion to $ 18 billion by the end of 2021 using the combined company's operating cash flows. Additionally, the company intends to focus on that goal through 2023, according to management's comments on the M&A call.
Overall, ABBV's balance sheet is heavily indebted due to the Allergan deal, which certainly makes the deal risky. However, the acquisition has undoubtedly boosted the company's cash flow, which has increased from $ 13 billion in fiscal 2009 to $ 16 billion over the past 12 months. Analysts are forecasting an average free cash flow for the company of around USD 20 billion over the next three years. Given these numbers, management's goal of using free cash flow to free its balance sheet seems reasonable.
NYSE: ABBV Future Growth, Nov. 24 (Source: Simply Wall St)
In addition to the Allergan assets, Abbvie is also deploying Humira's successors Skyrizi and Rinvoq to fill the gap in Humira's lost sales. The company anticipates these drugs could potentially add $ 10 billion to sales by 2025.
While Humira is the company's greatest strength right now, it may also be the company's greatest weakness. Any company that generates more than 50% of its sales with a single product is exposed to enormous risk. Hence, the steps Abbvie has taken to diversify its revenue streams seem logical. The real challenge for the company, however, would be to find a way to replace the inevitable loss of Humira sales with other products.
Abbvie's future will depend heavily on how it moves from owning a high performing drug to a company with several innovative products in the pipeline. For the most part, the priority must be to incorporate and derive value from the assets Allergan acquired and take the bottom line.
Overall, Abbvie appears to have a good chance of sustaining its sales growth beyond Humira. Keep in mind that this deadline is several years away, leaving the company with plenty of time to build its product pipeline and look for further business development opportunities.
Healthcare stocks are typically viewed as a defensive game in the face of economic uncertainty. SWS data suggests Abbvie is an undervalued defensive stock, which in some ways explains why it's currently endorsed by no less than Warren Buffett. If you want to find out more defensive stocks, check out this free list of companies.
Neither the Simply Wall Street analyst, Kshitija Bhandaru, nor the Simply Wall Street analyst hold a position in any of the companies mentioned. This article is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. We want to provide you with a long-term, focused analysis based on fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality materials.
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