The week that ended Jan. 13 was a relatively good one for the stock market overall. But AbbVie (ABBV 0.34%) shares weren't invited to the party. The dividend-paying pharmaceutical stock ended the week 7.8% lower.
NYSE: ABBV
Key Data Points
Is AbbVie's recent dip the first of many, or could it be an opportunity to scoop up a high-yield dividend stock at a discount? To answer those questions, we need to start with the reason it fell in the first place.
Why AbbVie stock fell
The first thing any investor should know about AbbVie is that its most significant revenue stream, Humira, is under pressure. The FDA first approved the inflammation-controlling injection way back in 2002, and it's finally beginning to experience competition from lower-cost biosimilar versions.
U.S. Humira sales reached a stunning $4.96 billion during the quarter that ended Sept. 30. That works out to 42% of AbbVie's total revenue stream, and we have a pretty good idea of what could happen over the next few years.
Biosimilar versions of Humira became available in the EU during the fourth quarter of 2018. International sales of Humira fell 31% in 2019, and a similar collapse is expected in the U.S. this year.
AbbVie's recent stock market dip came in response to a slight change to the company's forward guidance provided during a recent investor conference. Instead of providing forward-looking guidance for 2023, management simply told investors it was well positioned to absorb the impact of biosimilar competition for Humira and that it anticipated a path to strong sales growth in 2025.
AbbVie's recent comments are close but not exactly the same as its stance a year earlier. Last February, the company predicted a return to growth in 2024, and a growth rate at a high-single-digit percentage from 2025 through the end of the decade.
Image source: Getty Images.
Is it worth the risk?
At recent prices, shares of AbbVie offer a 3.9% dividend yield, which is more than twice the average yield on stocks in the benchmark S&P 500 index. Despite raising the payout by 270% over the past decade, AbbVie has a well-funded dividend.
AbbVie's pharmaceutical sales operation generated a whopping $21.9 billion in free cash flow over the past year. Loss of market exclusivity for Humira will sting, but it probably won't stop the company from maintaining and raising its dividend payout in the years ahead. The company was able to meet its dividend commitment with less than 45% of the free cash flow it generated over the past year.
As the bottom falls out from under Humira sales, more recently launched products are in a position to pick up the slack. Rinvoq and Skyrizi are treatments for arthritis, and psoriasis, respectively, that both launched in 2019. These two drugs are flying off pharmacy shelves so fast that their combined sales reached an annualized $8.4 billion in the third quarter of last year.
At the same conference where AbbVie disappointed investors by pushing back its expected return to sales growth, management shared an improved outlook for its new immunology drugs. Now, the company expects combined Skyrizi and Rinvoq sales to pass $17.5 billion in 2025. A year earlier, this estimate was $15 billion.
Buy the dip
Total revenue will contract heavily in 2023 and perhaps again in 2024, but this pharma stock's best years are more than likely up ahead.
Rinvoq and Skyrizi will more than offset Humira losses on their own, and they aren't the only products in the company's lineup with rapidly growing sales. Vraylar, a drug for bipolar disorder, earned a label expansion last December that makes it a first-in-class treatment for the much larger population of Americans with major depressive disorder.
With multiple growth drivers to overcome Humira's loss of exclusivity, this stock has a good chance to deliver a market-beating performance over the long run.
