Analyzing AbbVie Ahead of Its Third-Quarter Earnings

In a previous article, I discussed Abbott Laboratories' impressive growth across all four business segments in the third quarter, which allayed some concerns that the company would stop growing after spinning off its branded pharmaceutical business, AbbVie (ABBV 0.89%), last year.

AbbVie has comfortably outperformed both Abbott and the market since the beginning of the year.

Source: YCharts.

On Friday, AbbVie is scheduled to report its third-quarter earnings. What should investors expect from the company, best known for its blockbuster rheumatoid arthritis treatment, Humira?

Looking back at AbbVie's second quarter
Last quarter, AbbVie's earnings fell 15.7%, but its revenue rose 4.4% from the prior-year quarter. Its top line growth was fueled many by five drugs -- Humira, Synthroid, Creon, Zemplar, and Duodopa, which together accounted for 63% of AbbVie's total sales.

Sources: AbbVie second-quarter report, author's calculations.

Humira, which accounts for more than half of AbbVie's revenue, is clearly its most important product. The drug generated $9.3 billion in sales in 2012, compared to $7.9 billion in 2011 and $6.5 billion in 2010.

In the first two quarters of 2013, Humira has already generated $4.8 billion in sales, putting it on track to post even higher sales for the year.

Will investors get cut by this double-edged sword?
However, Humira's growth is a double-edged sword. Humira's patent will expire in 2016 and could leave a gaping hole in AbbVie's top line.

Abbott Laboratories knew that AbbVie was too dependent on Humira, and by spinning the high-growth business off, it traded stronger top line growth for stability.

Treatments for rheumatoid arthritis are in high demand, with three main leaders -- AbbVie, Johnson & Johnson (JNJ 0.82%) and Amgen (AMGN 1.11%) -- firmly in control of the market.

Source: Company annual reports.

As seen in this chart, Humira is not the only blockbuster biologic rheumatoid arthritis treatment to face a patent cliff -- Johnson & Johnson's Remicade, which it co-markets with Merck (NYSE: MRK), already faces generic competition in Europe from Hospira's Inflectra.

Amgen was much more fortunate -- it was granted a new patent on Enbrel in the U.S. in 2011, which extended its patent protection from 2012 to 2028. However, that hasn't stopped Novartis from developing a generic version of Enbrel, which is currently in phase 3 trials. 

Planning for life after Humira
To steadily replace Humira, AbbVie is aiming for 15 regulatory approvals between 2013 and 2017. Its late-stage pipeline consists of treatments for hepatitis C, immunology, multiple sclerosis and endometriosis, among others.

One of AbbVie's most promising treatments is a combination hepatitis C treatment that is going head-to-head against Gilead Sciences' (GILD 0.28%) sofosbuvir. Both AbbVie's treatment and sofosbuvir are considered next-generation hepatitis C treatments, since both are orally administered and do not contain interferon. Current hepatitis C treatments are mostly injected and contain interferon, which can cause flu-like symptoms. However, AbbVie's treatment requires three pills in the morning and one at night, compared to Gilead's once-a-day pill.

Due to promising phase 3 results, Gilead's sofosbuvir was granted a fast track designation by the FDA, which means that the drug could be approved by next year. However, AbbVie hasn't given up on being first to the market yet, stating in June that its treatment could possibly arrive before Gilead's. AbbVie will report full phase 3 results of its combination regimen before the end of the year.

Analysts believe that sofosbuvir could generate $3.8 billion in peak sales for Gilead, which bodes well for AbbVie if its combination treatment is also approved.

Other opportunities for growth
However, even if AbbVie's hepatitis C treatment achieves peak sales on par with Gilead's drug, it still would only be enough to partially offset the loss of Humira. Therefore, AbbVie is pursuing the expansion of Humira to treat more diseases, as well as the FDA approval of its Parkinson's drug, Duodopa, which is already approved in Europe.

Other key projects to pay attention to include a collaboration with Galapagos NV to treat Crohn's disease, and another one with Ablynx for the use of nanobody medicines to treat inflammatory diseases such as rheumatoid arthritis.

The Foolish takeaway
Deciding to invest in AbbVie really comes down to two simple questions:

• Will AbbVie achieve its goal of 15 regulatory approvals before Humira's sales start to fade?

• Will any of these new drugs fill the huge gap left by Humira, now the fastest selling drug in history (by cumulative sales from the first ten years)?

If you answered "yes" to both questions, then AbbVie could be a sound investment that should continue soaring higher. Moreover, the loss of Humira could actually be a blessing, allowing the company to offer a more diversified portfolio of drugs which would be better shielded from individual patent expirations. To top all that off, AbbVie offers a forward annual yield of 3.3%, compared to Abbott's yield of 2.4%.

However, AbbVie's ability to diversify its portfolio is mostly speculation at this point. When the company reports its third quarter earnings this week, investors should keep an eye on its pipeline progress and sales growth from other drugs besides Humira.