Earnings Roundup: Is AbbVie on Borrowed Time?

AbbVie's (ABBV) posted solid first-quarter results, but that doesn't eliminate long-term risk tied to Humira's patent expiration.

Apr 30, 2014 at 2:30PM

AbbVie's (NYSE:ABBV) better-than-hoped first-quarter earnings has shares rallying since mid-month. However, shares remain down on the year on concerns that its new hepatitis C drug won't live up to expectations and be able to blunt the eventual risk of patent expiration to AbbVie's best-selling drug, Humira.

Given AbbVie's reliance on Humira and the risks presented by Humira's U.S. patent expiring at the end of 2016, let's take a closer look at the company's first-quarter results to see whether AbbVie's other products and its pipeline can keep the momentum going.

ABBV Chart

ABBV data. Source: YCharts.

One big seller with one big risk
AbbVie was spun-out of Abbott Labs in 2013, and as the company's top selling drug, Humira, has continued to boost sales and earnings, shareholders have been handsomely rewarded.

However, Humira's success may also be AbbVie's greatest risk. The autoimmune drug, which has been FDA approved since 2002, treats a variety of indications, including rheumatoid arthritis and psoriasis.

That broad label and patient need for chronic treatment has made Humira the top-selling drug on the planet, with annual sales of more than $10 billion. That represents more than half of all AbbVie's revenue.

For now, Humira's not showing any signs of tiring. In what is typically the weakest quarter for drug sales because of wholesalers buying patterns, Humira's first-quarter revenue grew 18% year over year to $2.6 billion. Growth was led by the U.S., where sales advanced 25% to $1.2 billion.

While that's impressive for such a mature drug, it raises questions over how insulated AbbVie is from the impact of sales that could be lost when Humira's U.S. patent expires in 2016.

The drug, a biologic, won't be easy to copy, but companies like Novartis' (NYSE:NVS) generic unit Sandoz are already working on their version. Novartis reported in December that it was kicking off a 12-country phase 3 trial of its biosimilar to prove its efficacy and similarity to Humira.

Novartis is also working on biosimilars for some of Humira's best-selling competitors, including Amgen's Enbrel and Roche and Biogen's Rituxan. Since Novartis' trials for these biosimilars are all in phase 3, Humira's dominance could soon be challenged by a host of lower-cost competitors.

Filling in the gap
Pressure on AbbVie to diversify its revenue has the company ramping its R&D spending. The company's product pipeline has more than doubled over the past five years, and AbbVie's R&D spending jumped 22% year over year in the first quarter. Last year, AbbVie spent nearly $3 billion, or roughly 15% of its sales, developing new drugs.

That spending is vital given that AbbVie's current product lineup only includes two other drugs with quarterly sales of more than $250 million.

One of those drugs is Synagis, a therapy used to protect at-risk infants from contracting the respiratory syncytial virus. Sales of Synagis grew 6% to $827 million last year and improved 3% to $354 million last quarter.

The other drug is AndroGel, a testosterone treatment that racked up sales of $254 million in the quarter, up 6% from last year. That puts the drug on pace to become a blockbuster this year.

However, since neither of those drugs is fast-growing, AbbVie will need to hope it can get some winners out of its pipeline if it hopes to offset the risk to Humira.

One of the most promising of those possible new drugs is a hepatitis C drug combination. Gilead (NASDAQ:GILD) launched its own next-generation hepatitis C drug, Sovaldi, last December, and in its first full quarter on the market, Sovaldi had sales of more than $2 billion.

That offers hope that AbbVie's three drug cocktails, which it submitted for FDA approval this month, may carve out significant sales as a Sovaldi alternative. However, that remains to be seen. Sovaldi has been widely successful, and Gilead has already filed for FDA approval for its own two-drug, next-generation Sovaldi therapy that may trump AbbVie.

Bristol-Myers (NYSE:BMY) has also filed for approval for its own promising hepatitis C drug, daclatasvir. Daclatasvir was particularly effective when combined with Sovaldi during mid-stage trials and that may suggest that the standard of care may lean toward a Sovaldi and daclatasvir combination, rather than an approach that relies on AbbVie.

Further back in development, AbbVie is also developing Veliparib, a drug for the treatment of non-small cell lung cancer. AbbVie advanced Veliparib into phase 3 trials last quarter. And AbbVie also has elotuzumab for multiple myeloma, and daclizumab for multiple sclerosis, in phase 3 trials, too.

Foolworthy final thoughts
AbbVie continues to post impressive sales thanks to Humira, but investors are right to wonder when Humira will begin competing against biosimilars and what impact those biosimilars may eventually have on its sales.

The company continues to spend to bulk up its pipeline, and may have a potential Humira successor in ALX-0061, a rheumatoid arthritis drug in mid-stage trials. Additionally, AbbVie could see an FDA approval by year-end for its hepatitis C drug and may have potential oncology drugs that could also move the needle.

But while there's a lot of opportunity -- and the risk to Humira is still a couple years away -- there are also a lot of questions. Personally, I'd like to see at least one of these promising new drugs make it to market and win market share to add conviction that this company should remain a part of a long-haul portfolio.

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Todd Campbell has no position in any stocks mentioned. He owns E.B. Capital Markets, LLC, whose clients may or may not have positions in the companies mentioned. He also owns Gundalow Advisors, LLC, whose clients do not have positions in the companies mentioned. The Motley Fool recommends Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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