Pharmaceutical company AbbVie(NYSE: ABBV) has been a double-deal of price growth and dividend income over the past five years. It achieved 129% in total returns in that time, outpacing the S&P 500.
The company is transitioning after losing patent protection for its top-selling drug Humira, which drove the years of growth that benefited shareholders. AbbVie has shown encouraging signs, but the stock has been flat over the past year.
Is AbbVie poised to regain its spark, or is the stock's epic run ending?
AbbVie overall sales are holding steady as Humira fades
It's common for pharmaceutical companies to hit on a single product, often called a blockbuster, and rely on it for years of growth. Drugs are patent-protected, meaning competitors can't copy them until the patent expires. Humira was AbbVie's best product for years, but its U.S. patent protection expired in 2023. Humira's sales were $21.2 billion of AbbVie's $58 billion total revenue in 2022, approximately 36%.
In AbbVie's most recently reported quarter, Q3 of 2023, Humira made $3.5 billion in sales, 25% of the company's total $13.9 billion. Lower-priced generic competition has already had a notable effect on sales. This should get worse as more generics hit the market. Humira has been among the most prescribed drugs worldwide, so it had a big target on its back when the patent ran out.
Fortunately, AbbVie did a good job preparing for this. Growth from newer, similar products in Skyrizi and Rinvoq has helped fill that hole in sales. It also spent $63 billion in cash and stock to acquire fellow pharmaceutical company Allergan in 2020. Allergan is best known for owning Botox.
Revenue is roughly flat between 2022 and now, so while AbbVie hasn't collapsed, it's not growing anymore. The drop in Humira sales is canceling out the growth from other products.
Will AbbVie's growth come back?
This could be a headwind for some time. Since 2024 will be the first full year Humira generics are on the market, Humira sales will likely continue to fall. At some point, that should level out. But nobody can say when that will happen or how far Humira will decline.
AbbVie is still making moves to set up long-term opportunities. It recently announced it will acquire Cerevel for $8.7 billion in cash and Immunogen for $10.1 billion. These companies have pipelines aimed at neurological and psychiatric disorders (Cerevel) and cancer treatments (Immunogen). However, management estimates the acquisitions won't contribute to earnings until later this decade.
The debt AbbVie has added will tie up its financials for a bit. Management affirmed a goal of paying down debt, projecting it will hit its goal by the end of 2026. It will continue paying and increasing its dividend. That likely means no share repurchases, which can help a company grow its earnings per share (EPS).
Without any growth or repurchases, earnings growth will be a challenge. Analysts have lowered their consensus growth estimates to zero. That could change as AbbVie improves its balance sheet and long-term projects begin contributing, but there could be a few years where there's not much going on.
Is AbbVie stock a buy?
Investors who buy AbbVie will get a solid dividend that yields 3.8% at the current share price. Without growth, investment returns could rely on the stock's rising valuation. In other words, is AbbVie stock cheap enough to expect a higher valuation?
You can see below that the stock's price-to-earnings ratio (P/E) has been rising for some time now.
Management hasn't yet issued formal guidance for next year's earnings, but it did comment that they will be at least $11 per share. Using that, AbbVie is trading at nearly 15 times 2024 profits. That seems like full price for a company that could generate little growth over the next few years. It may even be expensive here, but what Wall Street will do with the stock is anyone's guess.
Either way, it's hard to see the appeal of getting into the stock today. It's hard to see the upside, and the stock could just as easily fall in a volatile market without a good investment story. AbbVie could eventually regain its groove when new additions flourish, but that's still too far into the future as we begin 2024.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
