At first glance, AbbVie (ABBV 1.06%) might look like a stock that's reasonably valued or even a cheap buy. It even has the added bonus of an attractive dividend yield of 3.7%. But there are some risks under the hood that should give investors some second thoughts about owning this pharmaceutical stock.
Here's why this year could be a challenging one for the company, and whether you should consider buying the stock despite the obstacles it's facing.
Humira's sales will nosedive this year
Investors have been hesitant about buying AbbVie stock because its top-selling drug Humira is losing some of its patent protection. That reality is hitting hard this year, as AbbVie projects that 2023 sales from its rheumatoid arthritis drug will fall by 37% due to competition from biosimilars. Company management doesn't see things stabilizing until the end of 2024, which means it might be difficult for investors to get a gauge of just how bad things will get any time soon.
AbbVie does have other immunology drugs, Skyrizi and Rinvoq, gaining some traction and the two combined could eventually make up for the loss in revenue. But it could take years before they hit their revenue-generating peaks. And the gap right now is big.
| Drug | 2020 Revenue | 2021 Revenue | 2022 Revenue |
|---|---|---|---|
| Humira | $19.83 billion | $20.69 billion | $21.24 billion |
| Skyrizi | $1.59 billion | $2.94 billion | $5.17 billion |
| Rinvoq | $0.73 billion | $1.65 billion | $2.52 billion |
Source: Company filings.
Together the two newer drugs generated just under $7.7 billion in revenue in 2022 -- not even near half the sales that Humira brought in. For AbbVie, it could be a bumpy ride as it tries to grow sales of these products.
IPR&D expenses to chip away at earnings
The Humira revenue drop will hurt, and so will the $150 million in added expenses due to in-process research and development expenses (IPR&D) and milestone payments. These are expenses that are normally due to acquisitions and are non-recurring in nature. AbbVie announced multiple acquisitions in 2022, including U.K.-based biotech company DJS Antibodies and Syndesi Therapeutics, which is a Belgian-based business that focuses on cognitive disorders.
As a result of the additional expenses, AbbVie management had to trim its forecast. For 2023, its adjusted earnings will be within a range of $10.62 to $11.02, which is a modest drop from the range of $10.70 to $11.10 that it was projecting previously.
A worsening payout ratio could turn off risk-averse investors
Another consequence of lower sales and profit numbers is that the company's dividend may look riskier to investors. Although AbbVie is technically a Dividend King, its track record for increasing dividend payments stems back to when it was part of Abbott Laboratories.
Currently, its payout ratio of 85% is fairly high, and if there isn't a big improvement on earnings this year, the healthcare stock could find it difficult to attract risk-averse dividend investors, who may see the yield as too risky. At 3.7%, however, AbbVie's dividend yield is a full two points better than the S&P 500 average of 1.7%.
What's encouraging is that free cash flow has totaled $24 billion over the trailing 12 months, which is more than twice the $10 billion the company has paid out in dividends. However, with a steep drop in sales from Humira, that buffer is likely to shrink significantly this year.
Is AbbVie stock a buy?
This year is going to be a challenging one for AbbVie, but in the long run, this still makes for an excellent investment. Revenue from Humira will decline, but it won't go to zero. And with impressive free cash flow, the company has resources that it can put to use to help grow its operations, which includes investing into a robust pipeline that features more than 90 projects currently in development.
At a forward price-to-earnings multiple of 15 (which is based on analyst expectations), AbbVie's stock is also trading below the healthcare average of 18, and it even leaves a bit of a buffer for investors in case things go worse for the company than expected.
