AbbVie (NYSE:ABBV) has put in a flat performance so far this year, but the stock has taken off remarkably in the past two months, gaining 12%. However, with competition from Gilead Sciences (NASDAQ:GILD) in the cards, and patents about to expire, will AbbVie be able to sustain its performance going forward? Let's take a look.
A good start
In the recently reported first quarter, AbbVie reported a 5.4% year-over-year increase in revenue to $4.56 billion, exceeding the consensus estimate of $4.32 billion. Also, the company reported an EPS of $0.71, beating the consensus estimate and the year-ago earnings of $0.68 per share. The adjusted gross margin was 78.4%, meeting the estimates, and up 220 basis points from the prior-year quarter.
The first-quarter results were driven by Humira's strong performance, which delivered more than 18% global operational growth. Total global sales delivered by Humira were more than $2.6 billion, up 18.4% on an operational basis. In the U.S., Humira sales increased 25% to $1.2 billion, driven by continued market expansion, share gains, and particularly strong growth in the gastro segment.
The company expects sales of approximately $19 billion this year, up 3.20% from last year. AbbVie should be able to ride the strong sales of Humira going forward, as it is seeing some positive developments.
Humira has got off to a strong start, and is gaining market share across various segments. This top-selling drug continues to boost sales and earnings. Humira is an autoimmune drug, which has been FDA-approved since 2002 and is used in treating a variety of indications, including rheumatoid arthritis and psoriasis. The high patient need for chronic treatment has made Humira the top-selling drug on the planet, with annual sales of more than $10 billion.
While the success of this drug is highly beneficial to the company, it may also be AbbVie's greatest risk, as Humira's U.S. patent is slated to expire in 2016. It seems obvious that the company will face a lot of difficulties once the patents expire, as Humira contributes more than 50% of the total revenue of the company. The company is also going to face problems, as its lower-cost competitor, Novartis (NYSE:NVS), plans on launching a biosimilar, which is under Phase III trial to prove its efficacy and similarity to Humira.
AbbVie is going through a modulation, as its lipid franchise, which includes TriCor, TriLipix and Niaspan, is facing generic competition. The company expects this year to remain challenging as it absorbs the impact of the loss of exclusivity on the lipid franchise.
The launch of the HCV combination therapy later this year is expected to be a major boost for the company. But, AbbVie will have to face tough competition in the HCV market from its primary rival, Gilead Sciences. Gilead's Sovaldi, since its launch in December, has posted sales of more than $2 billion and is a tough competition.
Sovaldi has a 90 percent-plus cure rate with a single daily dose and no side effects, while AbbVie's drug offers the same cure rate, but the therapy proposes intake of multiple pills per day and some probable side effects. It seems pretty obvious that Solvadi is the Holy Grail for hepatitis C patients. Despite the high cost, Sovaldi is very successful and is raking in billions in sales.
This is where AbbVie gets a chance to undercut Sovaldi's price tag. If AbbVie offers deep enough discounts, its drug will make it to the top of the list of authorized treatments for hepatitis C. However, discounting is bound to lower the profit margins on a per-pill basis, but AbbVie can make it up on volume if it captures a bigger share of an enormous market where private health insurers Medicare and Medicaid are driving business toward lower-cost providers.
But currently, the company seems to be inactive on the price-cutting strategy. AbbVie is bound to encounter harsh losses on two fronts that include the patent expiration of Humira and its upcoming HCV drug.
Also, the Centers for Medicare and Medicaid Services recently announced that Medicare will now cover the costs of HCV screening. This announcement will further benefit Gilead, as it will be prescribed more often now that Medicare is covering the costs of HCV screening for about 50 million people that are a part of its program.
On the positive side, AbbVie's all-oral hepatitis C therapy recently got a priority review from the European Union and the U.S. Reuters reported:
"European regulators have validated AbbVie's application for an experimental all-oral regimen for patients infected with the most common genotype of hepatitis C virus and the therapy is now under accelerated assessment.
The U.S. drugmaker said on Tuesday the move by the European Medicines Agency meant that, if approved, its regimen could be available in the European Union in the first quarter of 2015. U.S. regulators have also granted the product priority review."
Although this is good news for AbbVie, the regime isn't expected to hit the market in 2014. By the time AbbVie's regime arrives, it will lose a great proportion of the HCV market to Gilead.
As a result of competition from Gilead and the impending expiry of the patents, AbbVie seems like a risky bet. So, it would be advisable for investors to stay away from AbbVie and instead consider a competitor such as Gilead for their portfolios.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.