AbbVie-lutely fabulous

The immune system is like the body's army. When it functions well, its specially trained cells and organs rally together to fight off enemy microbes and prevent infection.

But the battle does not always go to plan. Sometimes, the body overreacts. It may even attack its own component parts by accident. In turn, such friendly fire can cause a range of diseases known collectively as autoimmune conditions, with examples ranging from arthritis to the skin disorder psoriasis.

The prevalence and long-term nature of these ailments has spawned a vast and growing ‘immunology’ sector with an estimated value of $80bn (£58bn). More than 25m patients globally receive treatment for immune mediated diseases. But market-leader AbbVie (US:ABBV) believes there is still huge unmet demand.

New-York listed AbbVie demerged from Abbott Laboratories (US:ABT) eight years ago. The spin-out allowed Abbott to focus on diagnostics, medical devices and generics while AbbVie fixed its attention on research-based pharmaceuticals – specifically chronic autoimmune diseases and virology.

AbbVie has thrived since embarking on its solo journey. Group revenues have risen at a compound annual rate of 13.5 per cent since 2013, spurred by its top-selling drug Humira, which is used to treat autoimmune illnesses across the fields of rheumatology, dermatology and gastroenterology.

Cashing in

As AbbVie’s main money maker, Humira, has also helped the group to sustain strong operating cash flows – exceeding $13bn in both 2018 and 2019. And in good news for income-seeking investors, such cash generation has allowed AbbVie to maintain consistent shareholder payouts.

Indeed, reflecting the quality of AbbVie’s business model, it has raised its dividend every year since its split from Abbott – giving it a firm footing on the S&P 500’s ‘Dividend Aristocrat’ register, which includes companies that have increased their annual dividend for at least a quarter of a century.

Based on current projections, the group’s forward yield stands at an attractive 5 per cent – although readers should note that withholding tax applies to US dividends. UK investors holding shares in an individual savings account (Isa) or outside a tax wrapper can receive dividends on their Stateside stocks net of 15 per cent withholding tax if they submit a W-8BEN form with a qualified broker.

Humira remains the number one medicine in the worldwide immunology space. In 2020 alone, it brought AbbVie $19.8bn in net revenues, representing more than two-fifths of total group sales.

But the risk of relying too heavily on a specific product is that demand might wane, particularly when alternatives emerge from other companies’ research labs.

Internationally, Humira has already endured direct competition from biosimilars – medicines that are highly similar to already-approved therapies – for a couple of years. The same pressures will bite in the US, Humira’s largest market by revenue, from 2023 onwards when AbbVie loses exclusivity there and rival pharma groups launch their own versions of the drug.

However, rather than standing idly by, AbbVie is diversifying its pipeline to prepare for the onset of intensifying rivalry across the Atlantic.

It helps that the group’s cash resources mean it can continue spending on research and development (R&D). Despite the uncertainty wrought by the coronavirus pandemic, it still ploughed more than a tenth of net revenues into R&D in the final three months of last year.

With Humira’s future hanging in the balance, AbbVie has increasingly focused its immunology efforts on two new drugs that debuted in 2019: Skyrizi for psoriasis and Rinvoq for rheumatoid arthritis. Revenues for both remain relatively small, but the opportunity for growth is enormous. AbbVie said in December that it expects their joint net sales to reach more than $15bn by 2025, higher than its earlier prediction of $10bn and up significantly from the $2.3bn achieved in 2020.

In dermatology alone, AbbVie reckons that Rinvoq’s high level of skin clearance and itch relief should be a boon in the atopic dermatitis market, while it expects Skyrizi’s best-in-class efficacy and long-lasting skin clearance to continue driving demand in psoriasis. Meanwhile, among other illnesses, the group believes the two medicines could be used to treat ulcerative colitis and Crohn’s disease –gastroenterological conditions with high levels of unmet need.

At the last count, AbbVie’s overarching R&D pipeline included 29 late stage (phase three) drug applications, including four relating to Rinvoq and three for Skyrizi. But beyond immunology – and in a further sign of AbbVie’s diversified revenue streams – it also had various other phase three studies in motion for the oncology drug Imbruvica, its second-largest product by sales.

Injecting new life

Such internal drug development should help to temper Humira’s declining revenues. But AbbVie has gone even further to broaden out its revenue base and bolster cash flows. In May 2020, it completed the $63bn mega acquisition of Allergan.

The Allergan deal has brought AbbVie a stronger base in neuroscience, enhancing its existing portfolio with therapies for migraine and psychiatric conditions. It has also injected new life into the group’s revenues and cash flows with a leading medical aesthetics business fronted by wrinkle-remedy Botox.

AbbVie hopes that the significant cash generated by the combined companies will fuel further investment in research, while servicing its borrowings and underpinning continued shareholder returns.

Encouragingly, the group’s cash balance stood at $8.4bn at the end of December and it expects to generate free cash flow of roughly $21bn this year. Management noted that this fully supports the dividend while giving it hope that it can pay down $8.4bn in debt, on top of $8.6bn paid last year.

AbbVie’s latest reported numbers topped analysts’ sales and earnings expectations, signalling not only the early benefits of the Allergan deal but also resilience in the face of an unprecedented global crisis. Fourth-quarter sales of $13.9bn were helped by a single-digit improvement for Humira as US sales growth offset declines overseas. The group’s revenue guidance of $55.7bn for 2021 also exceeded earlier market projections of $54bn.

Admittedly, the medical aesthetics portfolio took a hit from lockdowns in the early stages of the coronavirus pandemic, with cosmetic Botox net sales falling more than two-fifths in the second quarter alone. But growth of 9.1 per cent to $493m in the three months to New Year’s Eve supported management’s observation of a V-shaped recovery.

The need to treat autoimmune illnesses and cancers and the popularity of youth-sustaining cosmetic jabs mean that AbbVie should enjoy continued demand for its expanding medicine cabinet. But its investment case is not without risks. Humira sales may drop at a faster rate than anticipated. The group’s newer drugs may not deliver on its ambitions. Likewise, AbbVie might run into unexpected problems as it integrates Allergan. Moreover, as it is wont to do, the pandemic may throw another spanner in the works. Its course has hardly been predictable so far.

That’s all before mentioning the potential for US President Biden’s new administration to tighten rules around drug pricing; a hotly contested issue that has sat atop the Washington agenda for years.

It is for those reasons, perhaps, that AbbVie’s shares trade at just eight times forward earnings – lower than the multiples commanded by peers such as Pfizer (US:PFE). Still, the group’s market value has risen more than a tenth over the past six months – suggesting that many believe AbbVie’s longer-term prospects outbalance the threat of short-term obstacles, underpinned by diversified sales and strong cash generation.