AbbVie (NYSE:ABBV) is making headway toward diversifying itself away from its best-selling drug, Humira, but Humira still accounts for most of its sales and that makes buying AbbVie, because of its enticing dividend yield, a bit risky.

In this clip from The Motley Fool's Industry Focus: Healthcare, analyst Kristine Harjes is joined by contributor Todd Campbell to discuss how AbbVie is trying to protect itself from Humira competition in the future and if its efforts are enough to warrant buying its shares.

A full transcript follows the video.

This video was recorded on Oct. 4, 2017.

Kristine Harjes: Let's talk about a company that might be a little bit more exciting. They have a slightly higher dividend yield. This one is AbbVie.

Todd Campbell: AbbVie is a very interesting stock, and I think that its higher dividend yield makes it jump out to investors who are looking for healthcare dividend-paying companies. However, there is a caveat to that higher dividend yield.

Harjes: Which is?

Campbell: Humira. Humira represents the lion's share of AbbVie's sales. It's the top-selling drug in the world, with $16 billion in sales in 2016, and it represents something like 62% of AbbVie's sales.

Harjes: Yeah. Humira and what happens with its patents will mean everything. Amgen already won U.S. approval for a biosimilar, which is a generic version to Humira, last year. It hasn't yet launched this biosimilar yet because of a patent lawsuit filed by AbbVie. AbbVie's management says that they're very sure they'll be able to fend off biosimilar competition through 2022. But that's kind of a big question mark -- do we take management's word for that? And even then, it's only through 2022.

Campbell: Right. Humira sales, we did a show on this in early 2016, Kristine, where we talked about it and we were just amazed, how does management come out and actually guide for sales to increase when they lose patent protection? But that just goes to show you the competitive advantage that Humira has. It's a dominant player in and across autoimmune disease. And sometimes, doctors are very nervous about switching patients off of something that works very well to something else. And since it's a complex biologic, that's a whole another story, because then you have to wonder, how similar is a biosimilar to Humira, and how willing am I to move this patient off of it?

I think they're saying that Humira sales could probably climb up until 2018-2020, somewhere in there, then they'll start to trade down. But, Kristine, this is one of those situations where it's not like it's a surprise to AbbVie's management. They've known that they're losing patent protection on this drug, and they've been working very hard over the last three years to try and diversify themselves into other indications, specifically into hepatitis C and cancer, as a way of building out a company that can withstand any threat to Humira.

Harjes: AbbVie has been a thorn in Gilead Sciences' (NASDAQ:GILD) HCV side for a while now. I remember when Viekira Pak first came out: That was the first time that Gilead Sciences faced serious competition to its HCV franchise, and AbbVie has not relented. Just recently, they got approval for a pan-genotypic 8-week hepatitis C treatment, which, if you follow the space, you'll know that that's pretty impressive, and that's the best out there so far. So, that could certainly be a solid revenue driver for them, although there's also the argument that population of hepatitis C patients is dwindling as some of the easiest to treat people have already been treated by some of the earlier drugs.

Campbell: Yeah, but I think you still have the ability for this to be a blockbuster category, and I think you're still talking about billions up for grabs. This is probably their best threat so far to Gilead, and a lot of it will come down to pricing and what kind of deals each one of these companies is willing to make with payers.

But, I think, they're going to be a player in hepatitis C for a few more years, at least. And they've already shown, through their acquisition of Pharmacyclics a couple of years ago, that they want to have a really big presence in cancer. As a refresher, when they bought that company, that landed them 50% of Imbruvica.

Harjes: Yes, which is a drug partnered with Johnson & Johnson, actually. So, yeah, that's a huge drug right now approved for blood cancer. I believe they're also studying it in some label extensions as well.

Campbell: Oh, yeah, absolutely. And I think you have the potential out there, some analysts have said that sales could double from here because of those label expansions for that drug. I think that's something to keep an eye on. They also have some interesting drugs in the pipeline. Rova-T, which is being studied in a form of lung cancer or solid tumor cancers, which is an intriguing drug. They've got some interesting things going on in autoimmune disease that may end up producing a successor to Humira. So, maybe they get to a point where, they've protected Humira until 2020, now they've also got this other drug they can start to transfer some of their patients to that instead. So, there are a lot of different levers that management is trying to move up and down to blunt the risk.

Harjes: Yeah. I think AbbVie's management right now sees its own stock as undervalued. If you look at their share-repurchase history, they have been very generous with the buybacks. I think they're trying to take advantage, a little bit, of some of the market's skepticism that they'll be able to overcome the Humira hurdle, and buy back shares now. Which, if management thinks their own shares are cheap, maybe that's a sign that you might want to as well. They do have a really outstanding pipeline. I've seen it called the third-best pipeline out there in biopharma, for whatever that's worth. They currently have a payout ratio and a cash payout ratio that are similarly just under 60%. They've got a solid amount of cash on the balance sheet. And I've seen analysts say that they should be able to deliver average annual earnings growth of around 14% over the next five years, which is pretty solid.

Campbell: Yeah. If you're a little bit more risk tolerant in your portfolio, in your income portfolio, you can make an argument that the shares are undervalued right now because of the risk to Humira. If so, you get a nice two-pronged attack on growth. You get both the chance for shares to rise back up to where the value "should" be, plus you get that nice yield.

Harjes: One other thing about AbbVie that we haven't mentioned yet: They sort of have 45 years of consecutive dividend hikes. The reason I say "sort of" is because that includes the period before the company was spun off by Abbott Labs. But if you include that history, which most people do, then this is another Dividend Aristocrat.

Kristine Harjes owns shares of Gilead Sciences and Johnson & Johnson. Todd Campbell owns shares of Gilead Sciences. The Motley Fool owns shares of and recommends Gilead Sciences and Johnson & Johnson. The Motley Fool has the following options: short October 2017 $86 calls on Gilead Sciences. The Motley Fool has a disclosure policy.