For savvy investors, trading stocks around the earnings cycle is a risky but common tactic. Especially for companies with highly reliable revenue, buying in before a major earnings report can often secure you a small bargain. In that vein, the pharma juggernaut AbbVie (NYSE:ABBV) reports its first-quarter earnings for 2021 on Friday, and investors will get new insights on how its pivot away from its blockbuster arthritis drug Humira is progressing.
But traders beware: The most likely scenario is that the stock barely budges. After all, AbbVie is a massive company, and the majority of its business will continue to perform in line with its long-running trends, with a few important exceptions. But for newer investors, understanding the business and making an informed decision on when to buy stock is important.
Oncology and immunology sales probably keep booming
The strongest argument in favor of buying AbbVie before the earnings report is that revenue growth from its immunology drugs like Skyrizi and Rinvoq will be robust for the foreseeable future. Last year, net revenue for Skyrizi was $1.59 billion, and net revenue for Rinvoq was $731 million.
But management expects that revenue from the pair will only peak sometime in the early 2030s. In the medium term, Skyrizi and Rinvoq could net as much as $15 billion by 2025, which means that each earnings report between now and then will need to show tremendous growth if the company's own estimates are going to be met.
The report will also contain more precise timelines on when the next clinical data readouts will come out. And, if they're lucky, investors might get a sneak peek at a summary of some of the data. That would likely buoy the stock price, even if it's hard to imagine an effect beyond a percentage point or two.
How much longer can Humira be a cash cow?
Despite the prospect for good news stemming from hot sales in its immunology and oncology portfolios, the specter of ebbing Humira revenue still casts a long shadow over AbbVie. Biosimilar competition to Humira is in full force in markets outside the U.S., and over the course of 2020, international net revenue from the drug fell by 13.6%, reaching $3.72 billion. Investors should expect revenue from it to keep falling, and the only question is how fast. In 2023, exclusivity in the U.S. will end, further accelerating the loss of revenue.
The more rapidly that biosimilars eat Humira's market share, the less time AbbVie will have to bring its replacement programs online and preserve its overall revenue and earnings growth. So far, the company's efforts to get new indications approved for Humira have tempered the downward trend by creating small pockets of new growth, but the drug's peak revenue is firmly in the rearview mirror.
However, the market could still get spooked by a faster-than-expected contraction, which would harm shareholders who bought the stock right before the earnings report. On the other hand, if the rate of Humira revenue decay seems to be slowing down, it'll be seen as a positive sign.
Don't try to time the purchase
The takeaway message for potential buyers is that the upcoming earnings report isn't going to make or break the stock. Even if Humira revenue shrinks faster than expected or if the immunology and oncology portfolios outperform, the company's competitive positioning isn't going to change substantially.
And the general expectations about its shifting revenue base over the next few years will remain the same, which is far more important than the results of any given quarter. In other words, it probably won't make much of a difference whether someone buys AbbVie before or after the earnings report because any stock reaction will likely be small and temporary. It's a better strategy for investors who want to open a position in AbbVie today to buy and hold the stock for the long term.