AbbVie (ABBV -0.85%) has been a top growth and passive-income machine for investors since splitting off from parent company Abbott Laboratories (ABT -1.55%) in 2013. Speaking to this point, the drugmaker has grown its annual revenue by a healthy 215% and its dividend payout by 270% since becoming an independent entity.
As a result of its rapid top-line growth and ever-rising dividend payout, AbbVie has been one of the best-performing Dividend King stocks over the past 10 years. To wit: The company's shares have delivered a staggering 637% total return on capital (when including dividends) over this period.
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As a refresher, a Dividend King is a company that has raised its payout for at least 50 consecutive years. AbbVie falls into this bucket thanks, in part, to Abbott's long track record of annual dividend increases.
AbbVie's success has centered around the anti-inflammatory biologic medicine Humira, which has topped $20 billion in annual sales each of the past three years. It accounted for 37% of the company's total net revenue in 2022.
The end of an era
Humira's sales are in sunset mode due to the therapy's recent patent expirations in both the E.U. and the United States. To overcome this headwind, the company has been rapidly expanding the approved indications for its interleukin-23 (IL-23) inhibitor Skyrizi, as well as the reversible JAK inhibitor Rinvoq.
Taken together, AbbVie expects these two next-generation immunology products to generate over $17.5 billion in annual sales by 2025. What's more, these two drugs are expected to eventually exceed Humira's peak sales in the back half of the current decade.
If true, Humira's anticipated sales decline over the next three years won't be all that big a deal for shareholders. The good news is that management has given shareholders some solid reasons to believe in its ability to maintain a top-shelf position in immunology, despite this key patent expiration.
For example, it has consistently faced fierce competitive threats in immunology from elite drugmakers such as Bristol-Myers Squibb, Johnson & Johnson, Pfizer, and Takeda Pharmaceutical. While some of these rivals have carved out a profitable niche in this $200-billion-a-year space, AbbVie has nonetheless maintained a top-shelf market share in several key indications, such as rheumatoid arthritis and inflammatory bowel disease (IBD), among others.
A new competitive threat could flip the script
AbbVie's dominance in immunology might nevertheless wane in the back half of the decade. The key reason is Merck's (MRK -0.49%) decision to lean into immunology through a $10.8 billion buyout of Prometheus Biosciences (RXDX). This buyout centers around a novel anti-inflammatory medicine known as a tumor necrosis factor-like ligand 1A (TL1A). Merck's newly acquired TL1A therapeutic is currently dubbed PRA023.
This drug is presently in trials for ulcerative colitis and Crohn's disease, two common forms of IBD. However, a deeper dive shows the drug could have a best-in-class efficacy profile in several other immune-mediated diseases such as rheumatoid arthritis, psoriatic arthritis, and ankylosing spondylitis.
AbbVie, for its part, is relying on these additional indications to push its next-generation immunology meds beyond Humira's high-water point from a commercial standpoint. If Merck does indeed pursue these indications with PRA023, as most industry insiders expect, AbbVie might have to contend with a serious competitive threat to its immunology franchise in the second half of the decade.
AbbVie has other problems, too
In 2015, AbbVie paid $21 billion to acquire the groundbreaking blood-cancer medicine Imbruvica. Although the drug has indeed been a star from a growth standpoint since this deal took place, Imbruvica's sales have started to falter in response to the launch of new competitors in the space. In the most recent quarter, for instance, global Imbruvica sales fell by a worrisome 19.5%. It was originally billed as a key pillar for growth in the post-Humira environment for the drugmaker, but that thesis might no longer hold water.
And AbbVie spent a whopping $63 billion for the medical-aesthetic specialist Allergan in 2020. This deal, in many ways, centered around the wrinkle treatment Botox. Like Imbruvica, Botox has been a key growth product for AbbVie since this transaction. Again, though, it is also facing new competitive threats that could undermine its commercial opportunity in the near future.
More importantly, though, AbbVie's decision to buy additional revenue through these two high-dollar deals wasn't exactly budget friendly. At last count, the company had more than $63 billion in outstanding debt on its balance sheet.
While the drugmaker has been quickly de-leveraging in recent years, the bulk of the cash flows responsible for AbbVie's ability to do so have stemmed mainly from Humira. With Humira, Imbruvica, and Botox sales under threat, it might become harder for the company to carry out its de-leveraging plan within the next two to three years.
ABBV total long-term debt (annual) data by YCharts.
The big picture
AbbVie's management has earned a vote of confidence from shareholders. Its collective ability to shepherd Humira to the pinnacle of the immunology world in the face of enormous competition is a rare feat.
In fact, the only other two pharma companies that have maintained an overwhelmingly dominant position in their core area of expertise in the last 20 years are Gilead Sciences in HIV and Vertex Pharmaceuticals in cystic fibrosis. The reason is that rapid innovation in the space makes it nearly impossible to fend off competition forever.
Now, AbbVie has so far stayed ahead of the curve with the advent of Skyrizi and Rinvoq. But Merck and a slew of other companies do appear to have designs on wrestling market share away in the years to come. What's more, AbbVie's high debt load could limit the drugmaker's ability to pursue additional bolt-on acquisitions in the event its post-Humira growth plan starts to unravel.
All told, AbbVie's goal of returning to high levels of top-line growth by 2025 is far from a sure thing. This stated goal will heavily depend on the clinical development of rival therapies in key therapeutic areas such as immunology and oncology, as well as the company's ability to hit on additional value drivers in its earlier-stage pipeline. Since clinical trials are inherently unpredictable, AbbVie's risk-to-reward ratio could be tilting in the wrong direction. Time will tell.
