When patent protection expires on pharma companies' biggest sellers, it can be devastating for their finances. Due to the highly competitive nature of the pharmaceutical industry, it is no easy task to replace the aging stars in a drug portfolio.
Teva Pharmaceutical (TEVA -3.04%) illustrates this point nicely. In the middle of the last decade, Teva lost exclusivity for its multiple sclerosis medication Copaxone. And after a failed attempt to offset that drug's declining sales through a large bolt-on acquisition, Teva's shares wilted. As a result of that encounter with the patent cliff, Teva's stock price is down by nearly 90% from its all-time high.
Right now, biopharma heavyweights AbbVie (ABBV 0.25%) and Amgen (AMGN -0.50%) are both in the midst of their own patent cliff scenarios. AbbVie lost exclusivity for its flagship medication Humira in the U.S. earlier this year, and Amgen is struggling with a host of patent expiries within its legacy portfolio of biologics. Despite several tangible R&D wins, AbbVie and Amgen are both trading at bargain-basement valuations of less than 13 times forward earnings. But which of these top pharma stocks is the better buy now?
The case for AbbVie
AbbVie sports a high degree of revenue concentration risk. Humira, after all, has historically provided nearly 40% of its total annual sales. To offset the anticipated revenue decline stemming from Humira's loss of exclusivity, AbbVie plans to expand market access for its next-generation immunology drugs Skyrizi and Rinvoq, further build out its hematology franchise, and maximize the value of its established medical aesthetics portfolio. AbbVie also appears to be on the hunt for a mid-sized bolt-on acquisition, although the desired therapeutic area remains unknown.
AbbVie's management believes these efforts will result in high-single-digit-percentage annualized revenue growth over the course of the back half of this decade. If it achieves that, the drugmaker should have no trouble maintaining its top-shelf dividend, accelerating its ongoing deleveraging process (its debt-to-equity ratio is 4.69), and adding new pipeline candidates via licensing or collaboration agreements.
The catch, if you will, is that Humira's decline might be faster than originally anticipated due to the upcoming launch of an ultra-low-priced biosimilar. Complicating matters further, AbbVie is expected to face stiff competition in immunology later this decade, and its hematology franchise is already losing market share due to the entrance of novel competitors. As a result, AbbVie might be forced to take on even more debt to secure its next growth driver.
The case for Amgen
Amgen is battling against one of the steepest patent cliffs in the industry right now. The company has been working to move beyond a suite of legacy biologic therapies that includes anemia drugs Epogen and Aranesp, neutropenia drugs Neupogen and Neulasta, and faces numerous competitive threats to its flagship immunology medicine Enbrel.
Amgen has fought back by buying anti-inflammatory blockbuster Otezla, leveraging its potent bone care franchise, and launching several products such as migraine drug Aimovig, lung cancer medicine Lumakras, cholesterol treatment Repatha, and asthma medication Tezspire.
The biotech would also like to splurge on a buyout of Horizon Therapeutics (HZNP) -- late last year, it announced a $28 billion offer for the company. The Federal Trade Commission (FTC) has since moved to block this high-dollar deal, but this bold business development move shows that management is willing to put a large amount of capital in play to address the issues created by its patent overhang.
Today, there are too many moving parts to accurately estimate Amgen's top-line growth prospects for the second half of this decade. Enbrel's sales may also be negatively impacted by the launch of a relatively cheap biosimilar for Humira, the Horizon deal remains in question, and Lumakras' sales have yet to live up to expectations.
On the plus side of the ledger, Amgen's coveted dividend program appears safe, and the company does have an intriguing obesity medication under development.
The verdict
Overall, Amgen appears to be the better bargain buy right now. Although neither company has successfully transitioned into the next phase of its life cycle yet, it seems to be further along in the process than AbbVie. Buying Horizon could plug a number of holes in Amgen's leaking value proposition, and if this deal ultimately gets nixed, the biotech should be able to quickly pivot to another acquisition target. There are numerous potential pharmaceutical takeover targets in the $20 billion to $30 billion range, after all. AbbVie's next acquisition, on the other hand, may be limited by the highly levered balance sheet it wound up with due to its prior efforts to compensate for Humira's loss of exclusivity.
