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Patents. It’s what makes the healthcare industry go ’round and ’round. But unfortunately, those lucrative patents do have a downside: they expire. And when they do, many healthcare firms are faced with declining revenues, profits, and sometimes even dividend growth.
For the largest pharmaceuticals and biotech stocks, that so-called patent is fast approaching. For dividend all-star AbbVie (ABBV ), that cliff could be coming as soon as the end of 2016.
This threat of losing one of the biggest-selling drugs of all time has caused shares of ABBV to trail its peers by a wide margin this year. However, for investors willing to go against the grain and be contrarian, AbbVie currently offers a rare chance to pick up a great biotech firm with a huge yield. The truth is, ABBV still has plenty of tricks up its sleeve to keep the dividends and growth going for many, many years.
Back in 2013, traditional pharmaceutical firm Abbott Labs (ABT ) spun off its faster moving biotech business as AbbVie. Along with that spin-off was wonder drug Humira. This drug is a big one for ABBV and was originally used to treat rheumatoid arthritis. However, in recent years, Humira has been approved to treat a host of ailments including plaque psoriasis, Crohn’s disease, and ulcerative colitis, among others.
This expanded reach for the drug has helped AbbVie bring in a whopping $14 billion in revenues last year. That amount made it the best-selling drug of 2015 and puts it on the all-time best seller list. Sales of Humira have now reached 62% of AbbVie’s total revenues.
That would be fine, except the composition-of-matter patent on the drug expires at the end of this year.
The composition-of-matter patent is kind of a big one for drug companies. It’s the one that prevents generics from being created. Needless to say, with such a huge amount of AbbVie’s bottom line tied up to just one drug, that patent expiration is a very big deal. ABBV expects that Humira will bring in north of $18 billion a year through 2020. All of that, or at least the bulk of that, could go “poof!” if generic competition eats away at its sales. And it should, given the price difference on generics.
For example, when AstraZeneca’s (AZN) blockbuster heart medicine Crestor went off patent this past May, AZN’s sales slipped 11% and its EPS fell 31% during the second quarter.
So the concern is real and as a result, ABBV struggled compared with rivals this year.
And yet, ABBV might be a big-time buy for investors. It’s quickly becoming more than a one-trick pony.
For starters, its drug pipeline is pretty robust. Its investigational drug Elagolix promises to be a blockbuster in the world of women’s care. As will its Zinbryta therapy for the treatment of multiple sclerosis and Venclexta for leukemia. Meanwhile, its overall portfolio and pipeline is full of late-stage drugs, and AbbVie predicts it will have 20 or so new drugs on the market by 2020 to cover any potential Humira losses.
Some of those have come from ABBV’s hefty M&A activities. The biotech stock spent roughly $21 billion to buy oncology/cancer drug specialist Pharmacyclics. More recently, it paid $5.8 billion for Stemcentrx and its portfolio of cancer drugs in development.
As for Humira itself, ABBV has 70 additional patents for the drug that could keep generics away until 2022. Management has recently expressed its disdain for any firm looking into making a biosimilar or generic drug of the blockbuster. Using that patent portfolio, ABBV has gone after anyone really thinking about making a generic Humira. For example, it recently sued biotech rival Amgen (AMGN ) over its biosimilar of Humira.
All in all, its growing portfolio of drugs and its continued patent protection of Humira bodes well for ABBV’s prospects over the next few years.
ABBV should continue to be very profitable for the foreseeable future. The firm estimates that new drugs and Humira patent protection should provide it with revenues of $37 billion through 2020. Humira’s share of that should fall to less than half. Over the longer term, ABBV’s rich portfolio of future blockbusters should ultimately help keep cash flows high and dividends growing.
With the potential to keep revenues and earnings humming along, AbbVie’s rich dividend history seems to be intact.
ABT has managed to pay increasing dividends for the past 44 years. Management passed on that trend to ABBV when it spun it out. Since 2013, AbbVie has paid an increasing dividend every year just like clockwork. And with the Humira patent issues relatively taken care of, there’s no reason to think that it won’t keep up the trend. AbbVie’s current 3.45% dividend yield could be just the start.
The market seems to be writing off AbbVie, thanks to its patent expiration problem. However, ABBV is more than just Humira. Its rich portfolio of future drugs should keep powering its dividends for years to come. And the chance to buy shares for that long-term future is now.