NVSEF - AbbVie: Clouds Keep Thickening Due To Lack Of Revolutionary Drugs

Summary

• Humira's international sales were $603 million in Q3 2022, down 25.7% year-over-year, and this is mainly due to increased competition from biosimilars in Europe.
• AbbVie's EBITDA was $7,235 million in Q3 2022, up 2.8% year-on-year.
• The largest contribution to the company's revenue was made by medicines aimed at combating autoimmune diseases and also Botox, used both for aesthetic purposes and in neuroscience.
• AbbVie's total debt continues to decline quarter-on-quarter to about $70 billion at the end of Q3 2022, down $7.6 billion from the end of 2021.
• I expect 2023 to be a reshaping and testing year for AbbVie as the company's management continues to rejuvenate its product portfolio and increase the number of product candidates.

On October 28, 2022, AbbVie (ABBV) released its Q3 2022 financial report showing sales of most of the company's medicines falling short of Wall Street analysts' expectations. Despite this, the revenue of the company's two key drugs, namely Skyrizi and Rinvoq, continues to grow at a significant pace, instilling confidence in their ability to replace the loss of sales of Humira, which will face serious competition from biosimilars in 2023 in the United States. Moreover, even without actively resorting to the company's share buyback program, Richard Gonzalez-led AbbVie continues to show improved margins year on year, resulting in a lower P/E ratio that is 32.7% below the average for the healthcare sector.

AbbVie Approved Medicines Portfolio

AbbVie focuses on six therapeutic areas, namely immunology, aesthetics, hematologic oncology, neuroscience, ophthalmology, and women's health, and some of the company's products have significant advantages over competitors, which is reflected in the high growth rates of their sales. AbbVie's total revenue was $14,812 million in Q3 2022, up 3.3% year-over-year.

The largest contribution to the company's revenue was made by medicines aimed at combating autoimmune diseases and also Botox, used both for aesthetic purposes and in neuroscience. Collectively, these products generated about 60.7% of the company's total revenue for AbbVie, and as a result, they have priority status for analysis.

AbbVie's EBITDA was $7,235 million in Q3 2022, slightly up year-on-year but showing a larger quarter-on-quarter decline. The main reasons for this are the strengthening of the US dollar against the euro and the Japanese yen, and also the increase in the cost of production of raw materials for the company's medicines, caused by the disruption of supply chains and military actions in Eastern Europe, which lead to higher inflation in the European Union.

However, despite the decline in this financial indicator in Q3 relative to Q2 2022, AbbVie's EBITDA margin is one of the largest among the top 10 pharmaceutical companies and thus indicates that the company's management has perfectly integrated Allergan's business after its acquisition in 2019. In addition, Richard Gonzalez's innovative ways of doing business help offset the negative impact of the loss of exclusivity of some of the company's blockbusters on its financial position. So, for example, AbbVie’s EBITDA margin was 48.8% in the 3rd quarter of 2022, which is significantly higher than the average for the healthcare sector, but also exceeds by 14%, 8.1%, 3.6% EBITDA margins of Johnson & Johnson (NYSE: JNJ ), Merck (NYSE: MRK ), and Bristol-Myers Squibb (NYSE: BMY ), respectively.

AbbVie Immunology Portfolio

The company's immunology portfolio consists of three drugs, namely Humira, Skyrizi and Rinvoq, which generated $3,701 million for AbbVie in Q3 2022, accounting for 51.7% of the company's total revenue. At the same time, the cumulative sales of these medicines increased by 13.6% compared to the previous year, despite the increase in the number of Humira biosimilars in Europe.

Humira is a mastodon starting to create problems for the company

Humira (adalimumab) is a humanized monoclonal antibody whose mechanism of action is based on binding to a specific TNF-? protein, which is present in significant amounts in autoimmune diseases, with subsequent neutralization of its biological activity. In addition, Humira has been shown to inhibit the release of various pro-inflammatory cytokines and, as a result, effectively combat immune?mediated inflammatory diseases and improve the quality of life of millions of patients for more than 19 years since its first approval.

This drug is approved for more than 15 indications, and at the same time, this pharmaceutical brand is known all over the world in the same way as Pfizer's Viagra (NYSE: PFE ) and Merck's Keytruda. As a result, this allows AbbVie to remain a globally recognized leader in immunology, which makes it easier for the company's management to replace Humira with Rinvoq and Skyrizi, which have higher efficiency.

The share of Humira in the AbbVie portfolio has continued to be stable in recent quarters, despite opposite sales dynamics in the US and international markets. At the end of Q3 2022, Humira accounted for 37.5% of AbbVie's total revenue, up slightly from 2021.

While Humira has been AbbVie's unrivaled powerhouse for years, generating billions of dollars in cash flow, it can't go on forever. Thus, Humira's international sales amounted to $603 million in the 3rd quarter of 2022, down 25.7% year-on-year, and this is mainly due to increasing competition from biosimilars in Europe. Between 2018 and 2022, the EMA approved biosimilars from companies such as Amgen (AMGN), Novartis (NVS), Biogen (BIIB), and Viatris (VTRS).

The opposite trend was noted in the US, in which sales of Humira amounted to $4,956 million in Q3 2022, an increase of 7.4% compared to the previous year. The main reason for maintaining the positive dynamics of sales of this drug in this region is the lack of competition from biosimilars until mid-2023.

In my research, it was found that after the loss of brand exclusivity, its sales on average declined from 15% to 22% on an annualized basis in the first five years after the launch of generics or biosimilars on the market. However, given the large US patient base, I expect a milder downward trend in Humira sales until 2027.

As a result, sales of other drugs in the immunology portfolio should grow by at least $1.36 billion in 2023 to offset the loss of Humira revenue. In my opinion, the likelihood of such an outcome is high, but at the same time, investors should take into account that the growth of the company's total revenue will be low at least from 2023 to the first half of 2024, which will somewhat cool investment interest in the company.

Rinvoq and Skyrizi are the saviors of AbbVie

Skyrizi (risankizumab) is a drug that was first approved in 2019 and whose mechanism of action is based on the inhibition of interleukin-23, which in turn is a key cytokine that stimulates various inflammatory responses. Sales of Skyrizi were $1,397 million in Q3 2022, up 75.5% year-on-year.

Risankizumab's sales growth was due to a significant increase in the number of prescriptions and the share of the therapeutic market aimed at combating autoimmune diseases. In addition, the positive dynamics of sales of Skyrizi on a quarterly basis were due to an increase in the number of indications for the use of this medicine and also a geographical expansion in recent quarters.

Rinvoq (upadacitinib) is a drug first approved in the same year as Skyrizi and whose mechanism of action is based on the inhibition of intracellular cytoplasmic JAK enzymes, which are involved in various immune-mediated inflammatory disease processes. Rinvoq sales were $695 million in Q3 2022, up 53.4% year-over-year.

Rinvoq's sales growth was due to a significant increase in market share focused on the treatment of rheumatoid arthritis and also an increase in the number of indications for the use of this drug over the past year.

In my estimation, sales of Rinvoq will be more modest relative to Skyrizi due to the warning about its safety profile and partial restriction of its use. Thus, the FDA included information that the use of Rinvoq increases the risk of serious cardiovascular disease, blood clots, and cancer.

In addition, in 2021, the FDA restricted the use of this medicine to patients who had previously used TNF inhibitors, but the therapeutic effect was not achieved.

Conclusion

AbbVie is one of the largest global companies whose medicines are leaders in therapeutic areas focused on the fight against immunology, neurological, oncological, and other diseases, which together generated about $5 billion in operating income in the 3rd quarter of 2022, which 2.5% more than a year earlier. Thanks to the successful integration of Allergan into the company's business structure, this has reduced the financial risks associated with the loss of exclusivity of the pharmaceutical industry's mega-blockbuster Humira and increased the number of next-generation product candidates that could strengthen AbbVie's position in the eye care and medical aesthetics market.

Despite increased competition in the aesthetic medicine market and restrictions on the export of certain toxins to Russia and Belarus, Botox Cosmetic continues to lead the market, earning $637 million in Q3, up 16.9% year-over-year. The main reasons for the significant growth of this medicine, whose share in the total revenue of AbbVie is 4.3%, are its expansion of indications for use and the status of one of the most recognizable brands in the world, which is in high demand from hundreds of thousands of women and men.

However, things are not going well for the company with its oncology portfolio of medicines, for example, Imbruvica sales fell by $239 million in Q3 2022 year-on-year as a result of lower market demand for it. And also, the company's product candidates in clinical trials have lower efficacy relative to medicines in reducing mortality, tumor size and other metrics, casting doubt on AbbVie's ability to reduce the impact of the immunology portfolio on total revenue in 2023. As a result, this increases financial risks and AbbVie's dependence on 3-4 medicines, which may encourage investors to look for pharmaceutical companies with a more diversified product portfolio, with drug sales shares more evenly distributed relative to each other.

From the point of view of Elliott wave theory, AbbVie shares are completing movements within wave X of the corrective pattern W-X-Y and may rise to $170 per share. However, after that, I expect the company's shares to decline to a strong support zone, namely in the range of $138-140 per share.

In conclusion, I want to note that in 2023, with a high degree of probability, AbbVie's EPS will continue its trend to exceed the expectations of Wall Street analysts. However, due to the increase in the number of approved Humira biosimilars in Europe and their launch in the US in mid-2023, this will negatively affect the company's ability to outperform the S&P 500 (SPY) next year. However, thanks to the growing sales of Skyrizi and Rinvoq, the company's total revenue will begin to grow again and should attract investors from all over the world as early as 2024.

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