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Summary

  • AbbVie's Hepatitis C treatment showed a 99% cure rate in the clinical trial.
  • The company has filed for FDA and EMA approvals for the HCV drug that has a high likelihood of approval by both the agencies by the start of 2015.
  • CDC reports that there are 3.2 million Americans presently living with the HCV virus.
  • In Europe, roughly 17.5 million people are chronically infected with Hepatitis C.

AbbVie Inc. (NYSE:ABBV) reported better-than-expected earnings over the recent quarter; however, the company's stock continues to undergo downward pressure owing to concerns regarding the upcoming patent expiration of its bestselling drug, Humira. The following article discusses whether the company will be able to continue to perform well after the expiration of its major top line contributor, or whether it will be unable to sustain the blow from generic competition.

Dependence on Humira

The drug presently accounts for approximately 58% of the top line of the company, according to the latest earnings report. Moreover, the drug's earnings grew 18% YoY over the first quarter of FY2014 compared to the first quarter of FY2013. Humira's credentials look spectacular on the surface, but weaknesses are revealed as you dig deeper. It is true that the drug's sales are still growing at a double-digit rate, but that growth rate is decelerating. Secondly, the company cannot draw sales from Humira forever, as its patent expires in 2016 in the US and in 2017 in Europe.

Humira advocates argue that the drug is a biological product, thus it is highly unlikely for generic competition to creep in rapidly, since it is hard for generics to make an exact replica of a biologic. What they are missing out, however, is the fact that the Affordable Care Act has changed the situation dramatically by passing the Biologics Price Competition and Innovation Act. A framework for the manufacturing and passing of biosimilars has been laid in both US and Europe that are the major contributors to the company's revenues. In addition to that, substitute Humira drugs by rival companies are there as well, Pfizer (NYSE:PFE)'s Xeljanz, for instance. Amgen (NASDAQ:AMGN) and Novartis (NYSE:NVS) are on that train as well. That said, it is quite apparent that Humira will quit being a major revenue driver for AbbVie after 2017, and considering that it generates more than half the revenues for the company, the threat is very real and very drastic for AbbVie.

When you dig into the drug portfolio presently maintained by the company, there is no other drug that might be relied upon to make up for the said blockbuster's potential drop in sales due to patent expiration. Right now, there are only two more drugs that are reporting revenues of more than $250 million: Synagis and AndroGel, whose sales grew 3% YoY and 6% YoY respectively, as reported in the recent earnings release. The two drugs are doing well, but they are not growing at a pace that might offset the sales dip from Humira after its patent expiration. Therefore, the company's hope rides on its pipeline that has more than doubled over the past few years. The company is spending extensively on its pipeline operations, with about $3 billion allocated to R&D last year. In the first quarter of FY2014, research and development expense escalated 22% YoY.

HCV Treatment

Among the pipeline drugs of the company, Hepatitis C treatment is getting the most attention considering that it indicated highly positive results in its late-stage trial study; the drug showed a 99% cure rate in the clinical trial. The company has filed for both FDA and EMA approvals, and it is highly likely that the drug will be approved by both regulatory agencies by the first quarter of 2015. AbbVie has a strong presence in the developed world, with 57% of revenues attributable to the US and a large part of the remaining revenues drawn from Europe.

I believe that there is a huge potential for the company to generate sales that make up for the potential top line drop due to the expiration of Humira's patents in the US and Europe. Why do I believe so? There is a huge HCV market out there in desperate need of a cure for the disease. CDC reports that there are 3.2 million Americans presently living with the virus. In Europe, roughly 17.5 million people are chronically infected with the disease. Note that AbbVie is a global organization, and the HCV cure could be the basis on which it enhances its global market standing. The World Health Organization (WHO) reports that about 130-150 million people are infected with the virus around the globe, while there are about 3 to 4 million new HCV cases reported each year. As heart-wrenching and grave as the spread of HCV virus is, these market statistics would be extremely beneficial for AbbVie and other market participants developing drugs to fight the disease.

Although market data paints a very favorable picture for AbbVie, but competitors' data is the other side of the coin. Gilead (NASDAQ:GILD) and Merck (NYSE:MRK) are the major threats here. Gilead's Sovaldi has already carved its mark in the HCV market, boasting of a more than 90% cure rate across all classes of patients, and Merck's HCV drug is probably the closest to Sovaldi in terms of dosage and cure rate. However, AbbVie's HCV drug's trial results are nothing less than that of Gilead's and Merck's. True that Gilead will maintain first-mover advantage and Merck will follow close behind it, but AbbVie still has a high likelihood to succeed considering the fact that the market is huge. However, it is quite likely that AbbVie's drug will cost less as compared to Sovaldi, as it requires more pills to be consumed by patients and has a somewhat lower cure rate.

Final Take

Considering that AbbVie's Humira has not yet expired and the HCV drug has a good probability of becoming the company's next blockbuster drug, imagine the returns you, as an investor, will get in the short term. By the time Humira expires, the HCV drug would have captured a substantial share of the market. I base this assumption on the large size of the market discussed above.

AbbVie's Humira would not have as major an impact on the top line of the company as suspected by some investors. The stock seems to be undervalued presently, as indicated by its P/E ratio: a current TTM P/E of the company stands at 20.60, against the industry average of 33.95; with forward P/E projected at 13.71, based on FY2015 projected earnings, the stock price is expected to appreciate as the company's earnings increase. Lastly, AbbVie's earnings are expected to grow at a CAGR of approximately 12% through 2017, as per consensus forecast. With these credentials, I would give the stock a strong buy rating.

Source: Invest In AbbVie's New Blockbuster Drug