Since being spun-off from Abbott Laboratories in 2013, AbbVie (NYSE:ABBV) has blossomed into a top dividend growth stock. For instance, the drugmaker has earned the coveted dividend aristocrat status as a result of its strong shareholder rewards program, and it's posted industry-leading levels of revenue growth for most of its short history as an independent entity.
Despite its impressive track record, though, AbbVie is entering a transitional period as a result of having its top-selling anti-inflammatory drug, Humira, go off patent at the end of this year. With this in mind, let's take a deeper look to consider if investors should remain patient with this drugmaker, or whether it's time to hit the exits.
AbbVie's biggest risk factors may not be what you think
Truth be told, Humira's looming patent expiration probably isn't a major risk factor for AbbVie's shareholders right now for a couple of reasons -- although it is the topic that garners the most ink when analysts discuss the stock's risk-to-reward ratio. First, AbbVie has cobbled together an impressive array of additional patents that should keep biosimilars off the market until at least 2022 -- that is, unless the ongoing and presumably forthcoming legal challenges to Humira's IP bear fruit.
Even then, there's a good chance that biosimilars wouldn't make a huge dent in Humira's sales because copycat biologics simply don't come with much of a discount, meaning that doctors have little incentive to prescribe an unfamiliar knock-off drug that hasn't gone through rigorous clinical testing.
That doesn't mean AbbVie's stock isn't risky. In fact, AbbVie's risk profile has ballooned over the past year or so, largely because of management's efforts to fight off the biosimilar threat to Humira. Specifically, the two biggest risks facing AbbVie's shareholders at present are the weak competitive moats of Imbruvica and Viekira Pak, as well as the company's sky-high debt load.
Here's why AbbVie's risk profile has been growing by leaps and bounds
Since becoming an independent entity, AbbVie's management has been tasked with building a portfolio of drugs that could withstand the entrance of biosimilar versions of Humira. To do so, AbbVie initially targeted the high-growth hepatitis C market by launching Viekira -- the drugmaker's answer to Gilead Sciences' (NASDAQ:GILD) megablockbuster hep C franchise composed of Sovaldi and Harvoni.
AbbVie then bought its next franchise-level product by offering $21 billion for a buyout of Pharmacyclics and its Bruton's tyrosine kinase (BTK) inhibitor Imbruvica that's indicated for multiple blood-based disorders. Unfortunately, these two recent additions to AbbVie's product portfolio may not be the long-term answer to Humira's patent expiration.
One competitor that's not making it easy for AbbVie or Gilead to succeed in the hepatitis C market is Merck (NYSE:MRK) and its new hep C drug, Zepatier. Merck decided to significantly undercut both AbbVie and Gilead's stated list prices for their respective hep C drugs in an effort to rapidly gain market share.
As Zepatier offers a superior dosing regimen (1 v. up to 6 pills a day) and a more palatable list price ($54,600 v. $83,319 for a 12-week regimen) compared to Viekira, AbbVie's hep C revenues could drop markedly within the next year or so.
Imbruvica, for its part, is considered to be a game-changing drug for several life-threatening blood disorders such as chronic lymphocytic leukemia, mantle cell lymphoma, and Waldenstrom's macroglobulinemia. However, the drug is known to produce a host of problematic side effects, such as bleeding, rash, and atrial fibrillation. Researchers are thus exploring the use so-called "second-generation" BTK inhibitors that are designed to be more potent and safer than Imbruvica, which poses a major threat to Imbruvica's long-term sales forecasts.
AstraZeneca (NYSE:AZN), for example, recently acquired 55% of privately held Acerta Pharma to gain access to its second-generation BTK inhibitor, acalabrutinib, that's expected to compete directly against Imbruvica across a host of indications. Adding insult to injury, Astra has the right to buy Acerta lock, stock, and barrel for roughly one-third of what AbbVie paid for Pharmacyclics.
Finally, AbbVie hasn't been shy about attempting to buy its way out of the Humira patent cliff, amassing roughly $32 billion in debt in the process. The net result is that AbbVie sports an unsightly debt-to-equity ratio of 687% right now. Putting this metric into context, the average debt-to-equity ratio among major drugmakers stood at 84.8% at the end of the first quarter of 2016, showing that AbbVie has worrisome level of debt, even for a biopharma company.
Despite this heavy debt load, though, AbbVie is still in strong financial shape, evinced by its 12-month, trailing interest coverage ratio of 10.2 that implies the company makes enough money to comfortably cover its interest payments. So, the real question is whether or not the drugmaker can either maintain, or perhaps grow, its current revenue levels to keep its heavy debt load from becoming a problem later on down the road.
Is AbbVie too risky?
While the financial media hasn't discussed these specific risk factors to a large degree, they're not exactly a secret. AbbVie's management, for instance, has repeatedly attempted to refocus investors' attention on its emerging late-stage clinical pipeline that could possibly generate multiple future blockbusters down the road. For example, the company's brass has been touting the experimental JAK1 inhibitor ABT-494 for its tremendous promise as an important new treatment for both rheumatoid arthritis and Crohn's disease.
Even so, AbbVie's $21 billion buyout of Pharmacylics is starting to look like a major misstep that could weigh on the biotech's shares for years to come, and its foray into the hep C market doesn't appear to be a viable long-term value driver for the company. After all, Astra struck a far more favorable deal to acquire the commercial rights to acalabrutinib, and this experimental drug may significantly erode Imbruvica's market share going forward.
The bottom line is that the onus to create long-term shareholder value is now squarely on AbbVie's clinical pipeline, as the drugmaker's peak sales projections for Imbruvica are looking increasingly suspect. That's a risky proposition for a company with as much debt as AbbVie, which is why investors may want to consider watching this dividend aristocrat from the safety of the sidelines for the time being.
George Budwell has no position in any stocks mentioned. The Motley Fool owns shares of and 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.