AbbVie (ABBV 0.39%) and AstraZeneca (AZN -0.26%) have a lot in common -- they're just several years out of sync. While AbbVie is headed toward a patent cliff, AstraZeneca has been languishing somewhere near the bottom of the cliff it fell off years ago.
Which of these big pharma stocks has the best chance of outperforming for your portfolio over the long run? Let's stack them up against each other to see which has stronger prospects right now.
The case for AbbVie
Sales of AbbVie's top-selling drug, Humira hit a high water mark in 2018 at just shy of $20 billion. Late last year, less expensive biosimilar versions of the anti-inflammatory injection began eating into its market share among sufferers of rheumatoid arthritis, psoriasis, and a handful of other chronic autoimmune disorders.
Biosimilars have had a such a hard time gaining traction in the U.S. that investors were caught off guard when AbbVie reported that its international Humira sales in Q1 were 27.9% lower than in the prior-year period.
Humira still accounts for 56.8% of AbbVie's total revenue, so investors should be concerned. Luckily for the company and its shareholders, a thicket of ancillary patents has effectively blocked the drug's biosimilars from the U.S. market until 2023, which explains how domestic sales rose 7.1% to $3.2 billion during the first three months of 2019. Total worldwide sales fell 1.3% compared to a year earlier, and operating profits rose 3% to $3 billion.
While AbbVie has been managing Humira's decline, it has also been plowing the profits the biologic drug generates into a pipeline of new treatments that should offset most of those lost sales. In 2015, the company made a lot of investors nervous by spending $21 billion in cash and stock to acquire a piece of Imbruvica, but that investment is performing even better than expected.
Imbruvica tablets became the first chemotherapy-free treatment option for new patients diagnosed with the most common form of leukemia in 2016, and the drug's sales have been climbing ever since. During Q1, AbbVie's share of Imbruvica sales rose 34% to an annualized $4.1 billion and could reach $7 billion by 2023.
AbbVie also hopes to transition psoriasis patients currently using Humira to its recently approved treatment, Skyrizi , which shouldn't be too difficult. Skyrizi wiped the floor with Humira in a head-to-head study, which led to its Food and Drug Administration (FDA) approval.
AbbVie is now waiting for the FDA to hand down a decision about upadacitinib, a tablet for rheumatoid arthritis patients that outperformed Humira as well. If upadacitinib earns approvals for rheumatoid arthritis later this year and the ulcerative colitis indication in 2022, its annual sales could reach $2.2 billion by 2024.
Investors nervous about AbbVie's ability to offset Humira's upcoming sales declines have pushed the stock price down to just 9.0 times forward earnings expectations. The company generated $12.8 billion in free cash flow last year, and used just 44% of profits to make payments on a dividend that has been yielding around 5.4% recently.
The case for AstraZeneca
It has been almost five years since AstraZeneca CEO Pascal Soriot convinced shareholders to reject a $118 billion buyout offer from Pfizer. Soriot promised to return annual top-line revenue to the previous year's level of $25.8 billion by 2017, but he didn't even get close. In 2018, product sales were just $21.0 billion, due to clinical trial setbacks and competition that proved tougher than expected.
AstraZeneca's market cap is still 16% below Pfizer's final bid, and a rising debt load has lowered the company's book value by 52% in the years since it rejected the offer. If you're surprised Soriot still has a job at AstraZeneca, you're not alone. If there's an explanation, it probably involves recent sales growth from the company's newer oncology products. Imfinzi might not become the $6.5 billion per year lung cancer treatment that management forecast in 2014, but its sales did reach an annualized $1.2 billion during Q1 2019.
Tagrisso became standard care for newly diagnosed lung cancer patients with EGFR-mutated tumors in 2018, and the market for that indication has turned out to be a bit larger than the company anticipated. Tagrisso exceeded all expectations and become AstraZeneca's top-selling drug after first-quarter sales jumped 86% year over year to an annualized $2.5 billion.
Sales of AstraZeneca's PARP inhibitor, Lynparza, soared 99% in Q1 thanks to label expansions for its use in ovarian and breast cancer granted in 2018. Lynparza's sales will surpass the $1 billion mark in 2019, and its growth story isn't finished. Recently, the company reported a statistically and clinically meaningful benefit for patients with pancreatic cancer following first-line chemotherapy. However, the company hasn't released any details yet; we'll need to wait for an upcoming scientific conference to find out exactly what AbbVie means by clinically meaningful.
AstraZeneca describes its dividend policy as progressive even though its biannual payouts haven't progressed since 2012, and the payments have exceeded available profits in recent years. Based on recent prices, this pharma stock is yielding about 3.5%, but it's struggling to cover that dividend at the moment.
With Astra's former top products, Nexium and Crestor, contributing just 13% of total sales, the path is clear for revenue gains ahead. Unfortunately, investors who expect more fireworks from its oncology lineup have driven the stock price up to 21.2 times forward earnings expectations.
The better buy
Based on AstraZeneca's performance over the past five years, and its balance sheet today, buying the stock at its current high multiple is just too dangerous. That said, it has so many new drugs moving quickly in the right direction that it will be an interesting stock to watch from the sidelines.
AbbVie is headed for a patent cliff, but because of its low valuation and strong cash flows, the company and the stock shouldn't suffer much even if things don't work out quite as well as expected with Skyrizi or upadacitinib. That makes AbbVie the better big pharma stock to buy now.