AbbVie: Managing Humira Drug Concentration to Pay Safe Dividends
AbbVie was formed in 2013 when healthcare giant Abbott Laboratories spun off its branded biopharma business. However, the company's roots trace back to the late 19th century when 30-year-old Dr. Wallace Abbott was among the founders of the scientific practice of pharmacy.
Since becoming an independent company, AbbVie has remained focused on branded drugs, an industry with high barriers to entry and excellent profitability. Major pharma players invest billions of dollars yearly in research and development to commercialize breakthrough medicines.
While the success rate is low, a successful drug can generate billions of dollars in monopolistic profits that are protected for many years thanks to the intellectual property owned by the manufacturer. Medications are also recession-resistant products because consumers still need to treat their conditions regardless of how the economy is doing.
However, many pharma companies still have less predictable business models. Protected drugs eventually lose market exclusivity, and sales quickly erode as competitors launch rival products. As a result, these businesses must develop new drugs to replace those sales and maintain profitability.
Despite the industry's challenges, Abbvie has raised its dividend every year since being spun off, continuing Abbott's streak of paying higher annual dividends since 1973.
AbbVie's historical key to success was Humira, an anti-inflammatory drug used to treat arthritis, psoriasis, Crohn's disease, and other conditions. Humira was the world's best-selling drug for years, ballooning from less than $8 billion in revenue in 2011 to about $20 billion in 2018 as it gained regulatory approval to treat additional conditions.
This success fueled years of earnings and dividend growth for AbbVie but also created a diversification problem. Humira, at one point, accounted for over two-thirds of AbbVie's profits, and the blockbuster drug faces a loss of exclusivity in the U.S. in 2023.
To reduce its dependence on just a single sales and profit source, AbbVie invested heavily to expand its drug pipeline. It made several significant acquisitions, including a 2019 deal to buy diversified healthcare company Allergan for more than $80 billion.
These efforts reduced AbbVie's exposure to Humira from 60% of sales to just under 40%. Coupled with the firm's BBB+ investment-grade credit rating and moderate payout ratio, AbbVie has positioned itself to protect the dividend in 2023 and beyond when Humira-related headwinds hit results.
That said, the drugmaker's portfolio will remain concentrated even as Humira shrinks. Management expects relatively new drugs such as Skyrizi (treats psoriasis) and Rinvoq (rheumatoid arthritis) to generate around 30% of firm-wide sales in 2025. Imbruvica, a cancer drug, could contribute another 15% of revenue.
Simply put, AbbVie will still depend on the success of a handful of treatments. And predicting which drugs will become blockbusters, sizing up their peak sales potential, weighing regulatory risks, and monitoring patent expirations across the portfolio make long-term projections challenging.
These aren't necessarily reasons to avoid the stock, but they could result in a more volatile future for AbbVie, for better or worse.
As conservative investors, we generally prefer to own pharma companies with more diversified drug portfolios, reducing their dependence on any single product's success. Johnson & Johnson and Pfizer are two examples.
Since becoming an independent company, AbbVie has remained focused on branded drugs, an industry with high barriers to entry and excellent profitability. Major pharma players invest billions of dollars yearly in research and development to commercialize breakthrough medicines.
While the success rate is low, a successful drug can generate billions of dollars in monopolistic profits that are protected for many years thanks to the intellectual property owned by the manufacturer. Medications are also recession-resistant products because consumers still need to treat their conditions regardless of how the economy is doing.
However, many pharma companies still have less predictable business models. Protected drugs eventually lose market exclusivity, and sales quickly erode as competitors launch rival products. As a result, these businesses must develop new drugs to replace those sales and maintain profitability.
Despite the industry's challenges, Abbvie has raised its dividend every year since being spun off, continuing Abbott's streak of paying higher annual dividends since 1973.
AbbVie's historical key to success was Humira, an anti-inflammatory drug used to treat arthritis, psoriasis, Crohn's disease, and other conditions. Humira was the world's best-selling drug for years, ballooning from less than $8 billion in revenue in 2011 to about $20 billion in 2018 as it gained regulatory approval to treat additional conditions.
This success fueled years of earnings and dividend growth for AbbVie but also created a diversification problem. Humira, at one point, accounted for over two-thirds of AbbVie's profits, and the blockbuster drug faces a loss of exclusivity in the U.S. in 2023.
To reduce its dependence on just a single sales and profit source, AbbVie invested heavily to expand its drug pipeline. It made several significant acquisitions, including a 2019 deal to buy diversified healthcare company Allergan for more than $80 billion.
These efforts reduced AbbVie's exposure to Humira from 60% of sales to just under 40%. Coupled with the firm's BBB+ investment-grade credit rating and moderate payout ratio, AbbVie has positioned itself to protect the dividend in 2023 and beyond when Humira-related headwinds hit results.
That said, the drugmaker's portfolio will remain concentrated even as Humira shrinks. Management expects relatively new drugs such as Skyrizi (treats psoriasis) and Rinvoq (rheumatoid arthritis) to generate around 30% of firm-wide sales in 2025. Imbruvica, a cancer drug, could contribute another 15% of revenue.
Simply put, AbbVie will still depend on the success of a handful of treatments. And predicting which drugs will become blockbusters, sizing up their peak sales potential, weighing regulatory risks, and monitoring patent expirations across the portfolio make long-term projections challenging.
These aren't necessarily reasons to avoid the stock, but they could result in a more volatile future for AbbVie, for better or worse.
As conservative investors, we generally prefer to own pharma companies with more diversified drug portfolios, reducing their dependence on any single product's success. Johnson & Johnson and Pfizer are two examples.
