Pharmaceutical giant AbbVie (ABBV 0.25%) is known for its top-selling drug Humira and its lucrative dividend that yields more than 4% at the current share price. This week Humira, which treats autoimmune diseases, is facing the first of a flood of biosimilar generics hitting the market at lower prices.
Humira is a longtime blockbuster that has generated billions in profits for AbbVie, so it's fair to wonder how competition will impact AbbVie's bottom line. More specifically, will the company's beloved dividend come under pressure if profits fall?
Answering these questions will require understanding the foundation of AbbVie's dividend payout and what other products might help make up for the potential drop in Humira sales.
Humira is a big piece of the puzzle
Humira's strong performance helped grow the company over the years; it made $12.5 billion in sales in 2014, approximately 62% of AbbVie's total revenue that year. Sales rose to $19.1 billion in 2019, 57% of total revenue.
Knowing Humira would eventually face generic competition, management acquired Allergan in 2020 to diversify its business. Humira's 2021 sales were $20.7 billion, a more minor (but still significant) 37% of AbbVie's total sales.
ABBV revenue (TTM) data by YCharts. TTM = trailing 12 months.
AbbVie generated nearly $22 billion in free cash flow over the past year on $57.8 billion in sales, converting about 39% of its revenue to cash profits. Given Humira's contribution to sales, I'll hypothetically assume that Humira contributes the same ratio to free cash flow (meaning AbbVie's margins are the same across products). In other words, Humira is bringing in roughly $8.1 billion in cash for the company.
Stress-testing the dividend
Nobody might know how Humira's new generic competition will impact sales for a few years. The U.S. healthcare system is notoriously complex, with multiple layers of players in how pharmaceuticals make their way to patients.
A news report on Amgen's biosimilar, the first to launch in the United States, noted that it would come in two pricing tiers: one at just a 5% discount to Humira and another that was about half the price but would be less favored by pharmacy benefit managers (PBMs), who influence insurance coverage.
However, we can look at the dividend and stress-test the payout using some scenarios. Below you'll see that AbbVie's dividend costs the company nearly $10 billion annually, a payout ratio of 45%.
ABBV cash dividend payout ratio data by YCharts.
An analyst from SVB estimated that Humira's 2023 sales could still hit $14.5 billion this year. Assuming the company's 39% free-cash-flow conversion rate, the resulting $5.6 billion in cash profits would be a $2.5 billion reduction from what Humira did in 2021. Even if Humira's sales went to zero, Humira's remaining $13.9 billion in profits would cover the payout. However, it would be much tighter than it is today.
Nine generic biosimilars are scheduled to hit the market in 2023, which could mean that Humira's sales will fade over the next several years. But AbbVie is not standing pat; the company has gone on the offensive to backfill those lost sales as much as possible.
Rise of Rinvoq and Skyrizi
Humira treats a broad range of inflammatory health conditions across rheumatology (inflammation of bones, joints, and internal organs), dermatology (skin), and gastroenterology (digestive system).
AbbVie brought two new immunology drugs to market in 2019, Rinvoq and Skyrizi. You can see below how these drugs overlap with many of the same conditions Humira treats and expands treatment to new ones.
This could help AbbVie retain some of Humira's lost sales with new revenue from these drugs. Management believes sales for the two drugs could reach $17.5 billion by 2025 and $21 billion by 2027.
Image source: AbbVie.
All of this sits within the immunology portion of AbbVie's portfolio; it doesn't factor in potential growth from the Botox brand acquired with Allergan or AbbVie's incoming pipeline of some oncology products with high potential.
Thanks to a conservative dividend payout ratio, Skyrizi and Rinvoq, and AbbVie's strong pipeline outside of immunology, the company's dividend seems dependable. Investors should feel confident holding AbbVie as a long-term investment until the numbers say otherwise.
