AbbVie Inc (ABBV -1.03%) has been on a downward spiral since early 2018. Year to date, the company's share price has decreased by about 26%. This prolonged slump is unprecedented for AbbVie, at least since the firm spun off from Abbott Laboratories (ABT -0.65%). Despite these headwinds, it is hard to ignore AbbVie's stellar dividend history, and its juicy 6.1% dividend. However, a company's ability to sustain its dividends is a function of its earnings prospects. Can AbbVie continue to generate the income necessary to keep its dividends intact?
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Humira and beyond
AbbVie's recent struggles started with the disappointing results from a study on the effects of rovalpituzumab tesirine, better known as ROVA-T, as a treatment for lung cancer. The negative results meant that AbbVie's nearly $6 billion deal with Stemcentrx was more or less a waste of money. Sure, the deal did include other clinical compounds, but none nearly as promising as ROVA-T. Investors have also been worried about the pharma company's top line exposure to Humira. Though Humira has been AbbVie's top selling drug for a while -- spearheading the firm's revenue growth -- it is now facing stiff competition in Europe. As a result, AbbVie's international revenues will decline in the coming years. However, the company is aware of these obstacles and has made several moves to adjust accordingly.
First, the prophecies of doom regarding Humira's declining prospects may have been a bit exaggerated. The company expects its top selling product to remain one of the leaders in the immunology market, and for that matter, one of the world's best selling drugs, for at least a few more years. This may not be enough to offset Humira's declining revenues in Europe, as we learned when the firm released its latest financial results. US sales of Humira increased by about 8% during AbbVie's second quarter, but its international sales decreased by 35%, resulting in a net decrease of 6% year over year. Still, these figures aren't as bad as one might have expected. Second, AbbVie has other drugs it can count on to keep its revenues afloat, one of which is Venclexta, a treatment for second-line chronic lymphocytic leukemia. Sales of Venclexta in 2018 were $344 million, which was more than double what they were in 2017. Another product AbbVie plans to rely on moving forward is Imbruvica. In 2018, sales of Imbruvica came in at $3.59 billion, a nearly 40% increase from 2017. Year to date, Venclexta and Imbruvica have generated revenues of $320 million and $2.12 billion, respectively. The firm expects both of these drugs to be key growth drivers in the future. Their combined revenues will likely double within the next half a decade or so, according to the pharma company.
AbbVie merges with Allergan
Perhaps the biggest move AbbVie made recently was its blockbuster merger with Allergan (AGN) in a cash-and-stock deal valued at $63 billion. Allergan has had its own problems in recent years. The Botox maker's revenues have been declining with no signs of better things to come. From AbbVie's perspective, this merger will help achieve one major goal, namely to decrease its top line exposure to Humira. Synergy issues between the two companies aside, detractors will argue that Allergan suffers from the same problem that has plagued AbbVie: an over reliance on one product line (its Botox business). There are also concerns over whether AbbVie may have paid a bit too much for this acquisition. The $63 billion price-tag included a $20 billion premium on Allergan's market value. While all these objections carry some weight, the deal has a strong upside potential. AbbVie's diversification into new areas of the pharmaceutical market by way of this acquisition is commendable. It will help the firm pursue entirely new avenues to keep its earnings growing.
Should you buy?
AbbVie has increased its quarterly dividend payouts by 167.5% since it split from Abbott in 2013, and the company generates more than enough cash to cover its dividend payments. Although sales of Humira will decline abroad, and will eventually encounter competition in the US, the firm possesses several up-and-coming drugs that will generate billions of dollars in sales, and an entirely new portfolio of products via its merger with Allergan. Clearly, AbbVie isn't for every investor, but with a (relatively) attractive future earnings potential, the pharma company still looks like an excellent pick for those looking for top dividend stocks.
