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Shares of AbbVie (NYSE:ABBV) continue to set fresh highs following the spin-off of Abbott Laboratories earlier this year. Strong sales of Humira and an attractive dividend yield continue to push shares upwards.

Given the huge reliance on Humira sales, with patent expiration coming up in a few year's time, I would be cautious at current levels, despite the attractive dividend yield.

Third Quarter Results

AbbVie generated third quarter revenues of $4.66 billion, up 3.3% on the year before, and ahead of consensus estimates at $4.52 billion.

The company reported GAAP earnings of $0.60 per share for the quarter, down from the reported earnings of $1.01 last year. Non-GAAP earnings came in at $0.82 per share, beating estimates by four cents.

CEO and Chairman Richard Gonzalez commented on the third quarter performance, "Our third-quarter performance demonstrates the strength and durability of our product portfolio and the continued execution of our key strategic priorities as an independent biopharmaceutical company."

Looking Into The Results

While reported sales rose by 3.3% on the year before, revenues were impacted by slight currency headwinds which shaved off 0.3% in total revenues.

Growth was driven by global Humira sales increasing by 19.1%, offset by declining sales of TriCor and Trilipix on the loss of exclusivity. AbbVie is still very much reliant on Humira which generated quarterly sales of $2.77 billion, nearly 60% of firmwide sales.

Note that the three biggest products after Humira reported double-digit falls in revenues. AbbVie's second largest drug AndroGel generated revenues of $248 million, just a tenth of those reported by Humira.

Adjusted gross margins came in at 79.7% for the quarter, driven by sales growth and operational efficiencies. GAAP gross margins still came in at a very impressive 76.6%, down a percent point compared to the year before.

Selling, general & administrative expense rose by 3 percent point to 27.1% of total sales. The company also stepped up R&D expenses by some 2 percent to 20.0% of total sales.

Note that income tax expenses totaled $322 million compared to just $19 million last year. As a result, GAAP earnings fell by some 39% to just below the $1 billion mark.

Strong Full-Year Outlook

On the back of the solid results, AbbVie is raising the low end of its full-year earnings guidance. Adjusted earnings are now seen between $3.11 and $3.13 per share, compared to a previous guidance of $3.07-$3.13 per share.

GAAP earnings are seen between $2.54 and $2.56 per share.

Valuation

AbbVie did not provide a balance sheet yet with its third quarter results. The company ended its second quarter with $8.75 billion in cash and equivalents. As the firm holds $14.76 billion in total debt, it operates with a net debt position of around $6 billion.

Revenues for the first nine months of the year totaled $13.68 billion, up 3.9% on the year before. GAAP earnings fell by 19.7% to $3.00 billion, notably on the back of higher income tax expenses. Given the outlook, AbbVie is on track to generate annual revenues of around $19 billion, on which it is expected to report earnings of $4.1 billion.

Trading around $49 per share, the market values AbbVie at $78 billion. This values AbbVie at 4.1 times annual revenues and 19 times annual earnings.

AbbVie currently pays a quarterly dividend of $0.40 per share, for an annual dividend yield of 3.2%.

Some Historical Perspective

Shares of AbbVie have been spun-off from Abbott Laboratories (NYSE:ABT) at the start of the year. Shares started the year around $33 per share and have risen some 44% so far this year, with shares approaching $50 per share.

Between 2009 and 2012, AbbVie has increased its annual revenues by a cumulative 29% to $18.4 billion. Earnings rose by some 14% to $5.3 billion.

Investment Thesis

Shares of AbbVie have already seen very solid returns this year, on the back of the high dividend yield and the continued success of top-selling drug Humira.

Sales of Humira, the arthritis treatment drug, were very strong increasing by some 19% on the year before. The success does have some drawbacks as it increases AbbVie's reliance on the drug.

The drug generated revenues of $9.3 billion in 2012, as sales are expected to surpass the $10 billion mark this year, notably driven by a 15% price hike in the US over the past year. Note that Humira has been introduced already back in 2002, reporting solid revenue growth over time. The headache for investors is the upcoming expiration in 2016, when Humira will lose US patent protection.

This means that revenues are expected to increase for another three years. Analysts, however, believe the impact of competition will take more time than usual as generic drug makers will take more time to develop and get approval for "biosimilar" forms of future competing drugs.

So AbbVie and its shareholders will undoubtedly face expiration fears in the coming years, yet AbbVie stands to make a lot of money in the meantime from Humira, possibly used for deal-activity to boost the pipeline. Internally, the company is developing other drugs including treatments for hepatitis C and treatments for blood cancer.

As such I remain a bit in doubt. AbbVie has a promising pipeline and still a few years to go until the patent expiration of Humira. Yet the valuation is quite high already, even as sales of Humira could increase in the coming years. It is crucial for AbbVie to find some strong replacement drugs, as a violent drop in sales following patent expiration could send shares tumbling, given the very high reliance on Humira.

I remain on the sidelines, despite the very attractive dividend yield.

Source: AbbVie - Humira And Dividends Continue To Propel Shares Higher