AbbVie Is Looking For New Growth Before Generic Competitors Roll In

Summary

• AbbVie is facing generic competition for Humira in Europe and the United States in the coming months and years.
• Humira is the company's top-selling drug with $16 billion in revenue per year and accounts for 60% of revenue, but a new game plan will be needed to keep growth.
• AbbVie has beat earnings estimates the past four quarters because of Humira, but that could all change when biosimilars take shape.
• The CEO has expressed that if the right opportunity comes along, he would not be opposed to a huge $20-30 billion M&A deal.
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AbbVie (NYSE:ABBV) will be in a huge bind in the coming months and years. That's because its top-selling product, Humira, will have generic competition rolling out. That would cause a huge loss in sales, thus, it is scrambling in hopes of potentially acquiring another pharmaceutical company to get another blockbuster drug in its coffers. A host of pipeline setbacks have not helped at all either. However, with the cash on hand, it can definitely strike a good deal. For that reason, I believe AbbVie is a buy.

Reliance On Humira

It is no secret that Humira is a blockbuster biologic that produces as much as $16 billion in revenue per year. It is a huge revenue stream, because Humira on average costs $50,000 per patient. As a matter of fact, sales of Humira account for about 60% of AbbVie's total revenue. There are a few competitors on its heels, i.e., Amgen (AMGN) and Boehringer Ingelheim. The problem is that neither of these companies can sell their biosimilars quite yet. That's because AbbVie is currently in a legal battle with Boehringer Ingelheim over the patent for Humira. In terms of Amgen's biosimilar, AbbVie had decided that both companies should drop the patent lawsuit. In exchange, Amgen agreed not to sell its biosimilar of Humira, known as Amjevita, until 2023 in the United States. That gives AbbVie at least some cushion to build its pipeline in time to avoid heavy losses when its patent expires for Humira.

Recent Earnings

The most recent second-quarter earnings for AbbVie was strong. The company reported EPS of $2 per share, which beat analysts' estimates of $1.98 per share. It produced $8.2 million in revenue, while analysts were expecting $8.21 billion. The good news is that AbbVie has been able to beat earnings expectations for the last four quarters in a row. The problem, as I alluded to above, is that there is a major challenge with respect to Humira. Humira sales grew by 8.2% to $5.19 billion. This was above the expectation that sales would be $5.17 billion. This is all good news, but the problem is that there has to be a new growth driver in place that the company can rely on.

Even though the pharmaceutical companies I listed above can't sell a generic version of Humira in the United States, that doesn't mean they can't do so in Europe. That is because AbbVie made a deal for the European territories with Amgen, Biogen (BIIB), and Mylan (MYL). The stipulation was that these three pharmaceutical companies would be able to sell biosimilars of Humira in Europe, but must pay a royalty to AbbVie for doing so. The bright side is that AbbVie gets a royalty, but at what cost? This brings biosimilars of Humira that will be sold at a 10% to 20% discount to the branded product. However, it is possible that AbbVie will attempt to keep prices similar to the generics to keep profits rolling in. Still, it can't be argued that once biosimilars launch in Q4 2018, there won't be an impact. Even management has acknowledged that the 4th quarter will be an indication of how much revenue is lost for Humira.

Huge Setback

The one product that AbbVie had hoped would help bring in a new blockbuster product for the pipeline would be Rova-T. AbbVie paid about $5.8 billion to acquire Stemcentrx for its Rova-T product. Needless to say, disappointing phase 2 trial results dashed hopes for the product in one indication and its ability to obtain accelerated approval. The company was seeking accelerated approval for Rova-T treating third-line relapsed/refractory small cell lung cancer (SCLC). It is still being explored in combination with Bristol-Myers Squibb's (BMY) Opdivo and Yervoy for earlier-stage trials. These may end up working out, but that remains to be seen until the results are released from these studies.

However, not all is bad news for the company, because AbbVie does have some good products on its hands. For instance, two proven drugs in the pipeline are upadacitinib and risankizumab, both of which have achieved positive results in late-stage studies in immunological disorders, such as rheumatoid arthritis and psoriatic arthritis.

Game Plan

AbbVie has a lot to contend with as Humira nears patent loss in Europe in 3 months and then in the United States in 2023. However, the company has a lot of cash on hand. I believe that it should make some acquisitions soon that could help boost its pipeline. It was noted by the CEO that if the right opportunity came along, he wouldn't hesitate to do a $20-30 billion M&A deal. That's good to hear for AbbVie, because it really needs to find its stride.

In my opinion, the company should probably attempt a different approach. Instead of spending $20-30 billion for one big M&A deal, it should buy a few mid-cap/small-cap biotechs. That's because if some don't pan out in terms of their delivery platform, then the others will pick up the slack. This goes back to the $5.8 billion Rova-T deal. That was a huge chunk of cash for a product that didn't yield the necessary results to be worth the cost. With that $5.8 billion, it would have been more prudent to buy 3 or 4 smaller biotechs instead. I believe that would have been a better strategy then spending $5.8 billion or more for one pharmaceutical company.

Conclusion

AbbVie has beaten expectations for its earnings in the past four quarters, but its reliance on Humira must be altered. The risk remains in that the upcoming Europe launch of biosimilars could diminish sales of Humira in Q4 2018. The good news is that the generic version can't be sold in the U.S. until 2023. That gives AbbVie a lot of breathing room, and the company still has plenty of time to acquire biotechs that could bring in new products into its pipeline. It is good to see that the CEO stated that a big M&A deal could be on the table if it is highly favorable for the company. I believe that AbbVie has a good shot at generating some newer M&A deals, and that's why I think it is a buy.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.