AbbVie (ABBV -0.38%) and Johnson & Johnson (JNJ 0.91%) partner on one of the biggest cancer drugs in the world. At the same time, the two pharmaceutical companies compete tooth-and-nail against each other in the immunology market.
J&J has been the bigger winner so far in 2019 even with its stock down slightly year to date. That's because AbbVie's shares have plunged nearly 30% as investors worry about threats to its top-selling drug, Humira. But which of these two big pharma stocks is the better pick going forward?
The case for AbbVie
AbbVie has known for years that sales for its blockbuster immunology drug, Humira, would one day begin to slip. That day has come, with biosimilars to Humira hitting the market in Europe last year. AbbVie's strategy to overcome the headwinds for Humira has proven to be a pretty good one so far.
The company's 2015 acquisition of Pharmacyclics brought Imbruvica into its lineup. Market researcher EvaluatePharma projects that the blood cancer drug will be the No. 5 best-selling drug in the world by 2024 with annual sales of $9.5 billion. AbbVie will share the revenue with Pharmacyclics' partner, Johnson & Johnson.
AbbVie's investment in research and development has also produced some big wins. These wins include another blood cancer drug, Venclexta, that could generate peak sales of at least $2 billion. AbbVie thinks that Orilissa, which is already approved for treating endometriosis and could pick up another approval in treating uterine fibroids, could deliver another $2 billion in annual sales in the future.
Humira also now has two worthy successors. AbbVie won FDA approval of Skyrizi (risankizumab) in April 2019 for treating plaque psoriasis. It followed up earlier this month with FDA approval for Rinvoq (upadacitinib) in treating rheumatoid arthritis. EvaluatePharma ranked Rinvoq and Skyrizi as the No. 2 and No. 3 biggest new drug launches of 2019, respectively.
AbbVie plans to acquire Allergan for $63 billion to further reduce its dependence on Humira. The deal will enable AbbVie to gain a lineup including blockbuster drug Botox and promising eye-disease candidate abicipar.
Many investors still aren't convinced AbbVie is on the right track, though. As a result, its stock trades at a little over seven times expected earnings. The drop in AbbVie's share price has also pushed its dividend yield to a mouthwatering 6.4%.
The case for Johnson & Johnson
Johnson & Johnson faces its own challenges with its top-selling drug, Remicade. Sales for the immunology drug are sliding in the wake of biosimilar competition. One key difference between J&J and AbbVie, though, is that Remicade currently contributes 5% of J&J's total sales, while Humira contributes nearly 59% of AbbVie's total sales.
This highlights a major strength for Johnson & Johnson -- its diversification. J&J is a big pharma company, but it's also a big consumer healthcare company and a big medical device maker. Even if Johnson & Johnson encounters headwinds with one segment of its business, there are two other multibillion-dollar segments that can help pick up the slack. As a case in point, the company's medical device segment stood out as one of the bright spots in J&J's second quarter.
That's not to say that Johnson & Johnson's pharmaceutical segment is performing horribly. Despite the declining sales for Remicade and prostate cancer drug Zytiga, the segment still continues to generate overall revenue growth.
Sales for immunology drugs Stelara and Tremfya are soaring. Imbruvica's momentum benefits Johnson & Johnson just as it does AbbVie. J&J's multiple myeloma drug Darzalex is already on track to make close to $3 billion this year and could generate peak annual sales of more than $8 billion.
Johnson & Johnson is also able to use its strong financial position to make strategic acquisitions that bolster its growth prospects. The company acquired Swiss drugmaker Actelion in 2017 to get its pulmonary hypertension drugs. J&J acquired Auris Health earlier this year to strengthen its position in the expanding robotic surgical systems market.
We can't discuss the case for J&J without mentioning its dividend. The company's dividend currently yields 2.9%. More importantly, J&J's track record when it comes to dividends is impressive, with 57 consecutive years of dividend increases.
Johnson & Johnson has probably never been a bad pick for investors. The company's stature in the healthcare sector and its long history of growth and dividend hikes are reassuring. However, I think that AbbVie is the better pick right now.
My view is that the market is undervaluing the potential for AbbVie to overcome Humira's declining sales. With its super-high dividend yield, AbbVie doesn't have to deliver much growth in its share price for investors to enjoy solid total returns.