Despite the market downturn, pharma giant AbbVie (ABBV -0.99%) has performed well this year. The company's shares are up 8% in the past 10 months, easily beating the broader market. But can AbbVie maintain this pace? One of the bears' favorite arguments is that the healthcare company will lose U.S. patent exclusivity for Humira, its best-selling drug, next year.
That could be catastrophic for AbbVie as Humira has been its most important asset since it spun off from its former parent company, Abbott Laboratories, back in 2013. But despite this risk, there are excellent reasons to be bullish on AbbVie. Let's consider three of them.
1. Passing of the torch
AbbVie has tried to plan for the inevitable Humira patent cliff by pulling several moves. The company's blockbuster 2020 acquisition of Allergan was one of these moves. It allowed AbbVie to expand both its lineup and pipeline. Another important part of AbbVie's strategy to replace Humira has been the rest of the company's immunology lineup: Skyrizi and Rinvoq.
Between them, these two medicines treat many of the same conditions Humira targets. Their sales continue to grow rapidly, and AbbVie's CEO, Rick Gonzalez, recently made a bold prediction: "Skyrizi and Rinvoq have established outstanding launch trajectories across existing and new indications, giving us a high degree of confidence in the collective potential of these two assets to ultimately exceed the peak revenues achieved by Humira."
Exceeding Humira's peak sales would be a big deal. It is the most lucrative drug in the history of the industry. Last year, Humira achieved $20.7 billion in annual sales, its highest total ever for a single year. Skyrizi and Rinvoq don't seem close to that total, at least not yet. In the first nine months of the year, they generated a combined $5.3 billion in sales.
However, they have continued to earn label expansions and will probably win more. That will help them improve their sales. If these two products continue on the trajectory they have shown in the past few years -- and approach or exceed Humira's peak sales as Gonzalez predicts -- investors have little to fear from Humira's patent cliff.
2. Dividends matter
Counting its time spent under the wing of Abbott Laboratories, AbbVie is a Dividend King. It has raised its payouts for 50 consecutive years. In fact, the company recently announced a 5% dividend increase. AbbVie's cash payout ratio of 43% shows that it generates more than enough free cash flow to cover its current dividend and be able to afford even more increases.
Further, AbbVie offers a highly competitive yield of 4.03%, which is more than twice the S&P 500's average of 1.82%. Reliable, dividend-paying companies can help investors get through severe downturns or economic troubles. They can be a good source of passive income and smooth out market losses. AbbVie is a great option to consider for income-seeking investors.
3. So does valuation
Although AbbVie is flying high right now, the company remains reasonably valued. AbbVie's forward price-to-earnings ratio currently stands at 10.6, compared to 18.6 and 13.8 for the S&P 500 and the pharmaceutical industry, respectively. Although a low valuation can sometimes signal that a company's prospects aren't too bright, that's not the case for AbbVie.
The company is well on its way to replacing Humira thanks to Skyrizi, Rinvoq, and the products it got through the Allergan acquisition, including its Botox franchise. In other words, AbbVie isn't a value trap.
Buy and forget
There is much more to love about AbbVie. The company has a rich pipeline and will continue to earn approval for brand-new products. As a drugmaker, its products are must-haves for its clients, which makes it likely to get through challenging economic times with its business relatively unscathed.
And last but not least, long-term trends will only favor companies like AbbVie. With an aging population, we will need more innovative medicines in the future. All these factors, combined with AbbVie's dividend and a reasonable valuation, make it an ideal stock for investors to hold on to for a while.
