Is AbbVie The Next Gilead?

| About: AbbVie Inc. (ABBV)

Summary

Gilead Sciences had a terrible 2016, driven by its decreased hep C revenue.

AbbVie is reliant on its Humira revenue, and it has been under attack by biosimilars. Is AbbVie going to become the next Gilead?

With great protection and growth in other areas, AbbVie is a buy in 2017.

Overview

AbbVie Inc. (NYSE:ABBV) and Gilead Sciences Inc. (NASDAQ:GILD) are both large-cap pharma companies with market caps of $98.84 billion and $91.44 billion, respectively. Both two companies derive a large portion of their revenue from a single area. In 2016, AbbVie derived from 66% of its sales from Humira, a hugely popular drug that is used for several autoimmune diseases. Whereas two of GILD's drugs, Harvoni and Sovaldi, make up 43% of its total revenue. Harvoni and Sovaldi are both drugs focused on hepatitis C. GILD has taken a beating, as that 43% is down from 59% in 2015. Could AbbVie take a similar beating as Humira continues to come under fire from possible biosimilars? Or will the company stay strong through 2017? I believe AbbVie will be a great investment for the year.

Gilead's Recent Demise

GILD has been a drag on portfolios from the second half of 2015 up until the present. If you had bought 1 share of GILD at its all-time high on June 23rd, 2015, for $122, and had taken the dividend payouts and hid them under the mattress, your original investment would now be $72.50. The return on this investment would have been -40.57%. This exercise is to show that a solid dividend is great, but it's difficult to see large gains if the principal of an investment shrinks.

This lesson is hopefully what doesn't happen to ABBV in 2017, because ABBV has a larger yield than GILD, 4.24%. GILD has specifically taken a beating because the company's main revenue driver/growth machine has been its portfolio of hepatitis C meds, which contains Harvoni and Sovaldi.

One of the problems with GILD's hepatitis C drugs are that they work! With patients getting healthy, it has decreased the company's potential market, and thus, its revenue. Secondly, in 2017, there will be pressure from other competitors. For example, Merck's (NYSE:MRK) Zepatier drug, and the possible approval of AbbVie's eight-week dosage regiment with its Glecaprevir/Pribrentasvir medication. With a decreased market size caused by healthier patients and greater pressure by competitors, there will be a continued squeeze in the future on GILD's revenue from the hepatitis C area of its business. The company will need to find a new area to find growth, and to make it so that it is worth a higher valuation than it is today.

GILD may change its story from bearish to bullish sometime in the future, but that's not what I am going to look at in this article. What I am going to look at is whether AbbVie Inc. is the next Gilead Sciences Inc. I would argue it isn't, for a few reasons.

AbbVie Isn't Riskless, but It's Worth It

Humira has been the backbone of AbbVie ever since it separated from Abbott Laboratories (NYSE:ABT) in 2013. 2016 was no different from years past. Global Humira sales posted adjusted net revenue of $16.078 billion, which was an increase of 16.1% compared to 2015. AbbVie's next best selling drug was Imbruvica, which posted operational revenue of $1.832 billion. This is a 143% gain from revenue posted in 2015. The gains are great, but they are not even close to those from the most popular drug in the world, Humira.

The reason I am drawing the comparison to GILD in this article is because if Humira's revenue did start to lag, then 2017 returns would be like the ones GILD investors saw in 2016. I believe 2017 will not be a bad year for ABBV. First, Humira will still be protected for at least the near future. Second, ABBV has a solid drug portfolio which will boost further growth. I will highlight two drugs that I think have strong potential going forward.

Biosimilar Attacks

As mentioned above, while being ABBV's biggest strength, Humira is also its biggest weakness. Eventually, patents on Humira will expire and biosimilars will flood into the market. I believe the most important patent for ABBV is its "135 patent". This patent specifically protects the dosaging of 40 milligrams of the D2E7 antibody, active in Humira, every 13-15 days. The patent is supposed to expire in June 2022. However, it is being discussed in court today (Feb. 16th) whether the patent will be upheld and kept intact until expiration. I, and experts, believe that to be the dam that will hold back any biosimilars from entering the market.

Per Jeffries analyst Jeffrey Holford, "We see the 135 patent as a blocking patent for all potential Humira biosimilars in the U.S., given that it is assumed that all biosimilars must be developed to be dosed at the same concentration and frequency." I believe this patent will be upheld, and that is great news for Humira and AbbVie. Amgen (NASDAQ:AMGN) was the first filer for a biosimilar, thus when the "dam" collapses, it will be the first one into the market. Belief across the industry is that biosimilars will be allowed into the market by 2019, and that is already priced in. If the discussion in court today goes the wrong way, that will give ABBV a similar return as GILD. However, that is very unlikely.

Strong Growth from Other Areas

I believe AbbVie has the potential to see solid gains from two of the drugs within its portfolio. The first being the one listed above, Imbruvica, and the second is Venclexta, which was approved in April 2016. Imbruvica saw huge gains in 2016, and on January 19, 2017, it was approved for its fifth major disease. It is specifically tailored towards cancer, and the most recent addition was for relapsed/refractory marginal zone lymphoma. The company projects Imbruvica global sales will reach $2.4 billion by the end of 2017, another 31% gain.

The second large driver of future revenue, which will be farther out in the future, is Venclexta. This drug is only projected to yield $125 million in revenue in 2017. This is a far riskier drug to hang your hat on, because AbbVie is banking on the fact that the FDA will give the drug a far wider market to target. At present, the available market is only an estimated $300 million, but hopefully that will expand with more approvals.

These two drugs, one near term and one long term, will be drivers of growth for AbbVie in future.

Conclusion

ABBV may not be a great stock to purchase forever, but it's a buy for 2017. Humira's patent defense is stalwart and will hold up for the near term, and it will continue to be a cash cow. However, don't get me wrong, there is still risk with ABBV. There is a possibility that its patents fall and new biosimilars fill the market, but I don't see that happening. AbbVie's new drugs will start to grow and fill the void of Humira's eventual demise. Buy ABBV and enjoy the dividend!

Disclosure: I am/we are long ABBV.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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