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How is Abbvie Inc (NYSE: ABBV) Preparing For Life After Humira?

By Kshitija Bhandaru

Pharmaceutical company AbbVie Inc’s ( NYSE: ABBV ) stock was up last week after Warren Buffett’s company Berkshire Hathaway ( NYSE: BRK.A ) disclosed a  $1.8 billion position in Abbvie in a regulatory filing. Abbvie stock rose 1% a day after the announcement and is up almost 6% over the past week.

NYSE: ABBV Stock price, November 24, (Source: Simply Wall St )

Abbvie, which was spun-off from Abbott Laboratories ( NYSE: ABT ) back in 2013, develops and markets products that are used for treating rheumatology, gastroenterology, oncology, and neurological disorders, such as Parkinson’s disease.

See our latest analysis for Abbvie

Its blockbuster drug Humira, used to treat rheumatoid arthritis and other conditions, has been the best-selling drug since 2012 . The drug accounted for almost 60% of ABBV’s revenues in FY 2019. In the preceding year, Humira revenues peaked at almost $20b, or almost 63% of annual revenues.

As a result, it’s hardly surprising that ABBV has defended this money-making cash cow with great vigor. While Humira’s core patents expired in 2016, the company went to great lengths to win additional patents- called “patent thickets” in industry parlance- which extended its monopoly over the drug to 2023.

However, Humira might not hold that position for long as competition has been heating up. For one, the drug will lose patent protection in 2023 in the US. Secondly, as a result of the patent expiration, several rival pharmaceutical companies such as Amgen ( NASDAQGS: AMGN ) and Novartis ( SWX: NOVN ) would be able to launch alternatives or “biosimilars”, to the drug in 2023.

What it means for Abbvie to lose its Humira monopoly

Losing exclusivity over Humira will bring some uncertainty to the business. Humira sales have already seen a declining trend in Europe where patents expired in October 2018. In FY 2019, European sales for the drug declined by over 30% as a result of biosimilar competition. For the nine months ended September 30, 2020 sales under this segment were down almost 15%.  With over three-fourths of Humira sales coming from the US (based on FY2019 numbers), competition could take a huge bite out of Humira sales, as we’re already seeing in Europe.

Additionally, along with exclusivity, Abbvie might also lose its pricing power over Humira due to aggressive competition. The company has been accused of unjustified price hikes in the drug’s prices by the Institute for Clinical and Economic Review (ICER) . According to studies, the price of Humira has more than tripled since 2006, with one-year supply prices rising from $16,636 to  $72,000 currently. While the price hikes have helped ABBV’s revenues so far, losing pricing power to competition, along with patent expiration can make the impact on the company’s revenues two-fold. For context, in Europe where Humira patents have expired, rival drugs are available at a discount ranging from 10%-80% .

While Abbvie’s Humira revenues will no doubt take a hit, they won’t completely disappear post 2023. The company would still receive an undisclosed amount of royalties from its competitors as a part of the patent licensing agreements. ABBV has signed agreements with eight companies in total (three of which have already received US FDA approval) which lets those companies launch Humira alternatives in 2023, in exchange for royalty payments to Abbvie.

ABBV’s efforts to address loss of Humira revenues

One of the most significant steps taken by Abbvie to diversify its revenue away from Humira was the acquisition of Allergan, a pharmaceutical company best known for its Botox treatment, for $63b in May 2020. However, while the deal did add size and scale, not to mention diversification to the company, it also brought additional baggage in the form of excessive debt- Abbvie assumed $23b of Allergan’s debt at the time of transaction. The combined company’s long term debt currently stands at $82b compared to $35b in 2018, before the acquisition.

NYSE: ABBV Debt to Equity History and Analysis, November 24, (Source: Simply Wall St )

Nonetheless, the transaction is expected to boost Abbvie’s revenues to approximately $30 billion (ex-Humira)  and combined revenues to approximately $50 billion in FY 2020. Annual revenue in FY 2019 was $33b for context.

Additionally, the company is committed to paying down its debt by $15-$18 billion by the end of 2021 using operating cash flows of the combined company. Moreover, it intends to stay focused on that goal through 2023, according to management comments on the M&A call.

Overall, as a result of the Allergan deal, ABBV’s balance sheet is highly leveraged, and this certainly makes the business risky. However, the acquisition has no doubt lifted the company’s cash flows, which is up from $13b in FY2019 to $16b over the past 12 months. Analysts are projecting the company’s free cash flows to average around $20b over the next three years. Looking at those numbers, management’s goal to deleverage its balance sheet with the help of free cash flows seems reasonable.

NYSE: ABBV Future Growth, November 24, (Source: Simply Wall St )

In addition to the Allergan assets, Abbvie is also lining up Humira successors Skyrizi and Rinvoq to fill the gap of loss of Humira sales. The company projects that these drugs could potentially contribute $10b to revenues by 2025 .

Conclusion

While Humira is the company’s biggest strength currently, it’s also potentially its biggest weakness. Any business that has more than 50% of its revenues coming from a single product is at a huge risk. Therefore the steps that Abbvie has been taking to diversify its revenue stream seem logical. However, the real challenge for the company would be to find a way to substitute the inevitable loss of Humira sales through other products.

Abbvie’s future will greatly depend on how it transitions from being the owner of a high-performing drug to a company that has multiple innovative products in its pipeline. For the most part, the priority needs to be integrating and extracting value from the assets it acquired from Allergan and deleveraging its balance sheet.

Overall, It seems Abbvie has a good chance at sustaining its topline growth even beyond Humira. Bear in mind, that deadline is still a couple of years away, so the company still has ample amount of time to build up its product pipeline and seek further business development opportunities.

Healthcare stocks are usually considered a defensive play in the face of economic uncertainty. SWS data suggests that Abbvie is an undervalued defensive stock , which goes some way in explaining why it currently boasts of an endorsement by no less than Warren Buffett. If you are interested in finding out some more defensive stocks, check out this free list of companies .

Neither Simply Wall St analyst Kshitija Bhandaru nor Simply Wall st hold any position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Have feedback on this article? Concerned about the content?  Get in touch with us directly.  Alternatively, email  editorial-team@simplywallst.com.

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