AbbVie Q4 Earnings Preview: Few Clouds On Horizon Thanks To Masterful Management (Rating Upgrade)

Summary:

• AbbVie Inc.’s revenues have fallen in 2023 due to the expiration of patents for its best-selling drug Humira, but the decline has not been as severe as expected.
• AbbVie’s share price has grown by 11% in the past six months and over 110% in the past five years.
• The company recently provided raised guidance for earnings per share in 2023 and 2024, but overall revenues in both years are expected to be substantially lower than in 2022.
• The company will announce its Q4 2023 earnings this Friday. I am not expecting any major surprises – although the market may be pleasantly surprised as key divisions can have strong years.
• With a generous dividend and strong management, I doubt AbbVie will disappoint shareholders in 2024 – a necessary “trough” year.

Investment Overview

2023 had been telegraphed as a potential “annus horribilis” for the Illinois-based Big Pharma concern AbbVie Inc. (NYSE:ABBV), as it was the year patents for its all-time best selling drug Humira expired in the U.S., allowing competing companies to launch generic versions of the autoimmune drug at substantial discounts of up to 85%.

As many as eight Humira biosimilars had been launched by the middle of 2023, and across the first three quarters of 2023, Humira revenues fell to $11.1bn, down ~30% year-on-year. Overall, across the same time period, AbbVie’s total revenues fell 7% year-on-year, to $40bn. The company’s net earnings fell 53%, to $2.26 per share, although on an adjusted basis, the figure was $8.32 – down ~18%.

The drop-off in Humira revenues to date has not been as bad as the market had expected, which has helped AbbVie’s share price to grow nicely since hitting a low of $139 per share in early November, to trade at $164 per share at the time of writing – up 11% across the past six months, and >110% across the past 5 years. AbbVie pays a generous dividend, also, recently increased to $1.55 per quarter, which translates to an annual yield of 3.8% at current traded share price of $164.

AbbVie provided raised guidance for 2023 for earnings per share (“EPS’) of $11.19 – $11.23 when sharing Q3 earnings, which doubtless pleased the market, and management also raised initial guidance for 2024, stating EPS would now be >$11 per share. As such, the Pharma appears to be coping well with its biggest challenge since being spun out of Abbott Laboratories (ABT) back in 2012, since when its shares have increased in value by nearly 350%.

Nevertheless, there is no doubt that AbbVie’s top line revenues this year will be substantially lower than the $58bn generated in 2022, and that, quite possibly, guidance for 2024 will represent another annual drop – I would put the figures in the region of ~$54bn in 2023, as guided by management, and ~$52.5bn in 2024.

This is in line with management’s plans, shared with investors, for 2024 to be a “trough” year, before several years of “high single digit” percentage top line growth. AbbVie has been candid about its “post Humira LOE” plans, claiming that its two more recently launched auto-immune drugs, Skyrizi and Rinvoq, are capable of driving peak revenues of ~$25bn per annum between them, completely off-setting the losses that Humira will experience from 2025 onwards.

The Humira LOE, revenues guidance for 2024 for the drug, and the performance – past and future – of Skyrizi and Rinvoq will doubtless dominate the agenda when Humira announces its Q4 and FY 2023 earnings later this week, on Friday morning, although there will likely be other issues under the microscope, too.

Recovery in the underperforming aesthetics division, prospects for neuroscience and eye-care drugs, the future of Imbruvica now it is subject to government price controls, and AbbVie’s recent M&A spree, which has seen the company acquire the antibody drug conjugate maker Immunogen, in a $10bn deal, and the central nervous system (“CNS”) drug developer Cerevel, in a an $8.7bn deal, will be all be under the microscope.

AbbVie Ahead Of Q4 2023 Earnings – Delivering On Most Fronts, But Challenges Intensify In 2024

As of the end of 2022, AbbVie earned ~50% of its total revenues of $58bn via its immunology division, ~11% from oncology, 9% from aesthetics, ~11% from neuroscience, 5% from eye care, and the rest from other sources.

Besides Humira, AbbVie markets and sells multiple “blockbuster” drugs, including both Skyrizi and Rinvoq, $5.2bn and $2.2bn revenues respectively in 2022, Imbruvica, $4.5bn, Botox in the cosmetic and migraine settings, $2.6bn and $2.7bn respectively, depression med Vraylar, $2bn, and legacy assets Mavyret and Creon, indicated for hepatitis C and pancreatic insufficiency respectively, which earned revenues of $1.5bn, and $1.3bn in 2022.

AbbVie’s treatment landscape is changing – as the company’s recent M&A spree suggests, it is trying to diversify away from Humira and immunology, although thanks to Skyrizi and Rinvoq, the likelihood is this that immunology will remain the company’s main revenue driver for the next decade at least.

Across the first nine months of 2023, Skyrizi drove revenues of $5.4bn, and Rinvoq $2.7bn, up respectively 50% and 55% year-on-year. During a fireside chat at the JP Morgan Healthcare conference earlier this month, AbbVie’s Chief Commercial Officer (“COO”) Jeff Stewart stuck a bullish note when discussing these two assets:

So if you think about Skyrizi and Rinvoq, we anticipate continued very, very strong share gains over the year. That’s driven by sort of fundamental sort of commercial execution, and I think also several catalysts that we’ll see over the year. Some of those are R&D catalysts that have already taken place.

We often describe for Skyrizi and Rinvoq really an unprecedented position with nine head-to-head trials across all of those big indications against really leading players. And so a full-year impact of having those big head-to-head trials is going to be very, very important going forward.

Nevertheless, to fulfil AbbVie’s expectations for shared Skyrizi and Rinvoq revenues of ~$21bn by 2027, as set by Chief Executive Officer Rick Gonzalez (speaking at last year’s JP Morgan Healthcare conference), Skyrizi and Rinvoq revenues will have to keep growing at a double digit per annum rate for another 6 years or more.

As such, analysts will be keen to hear what revenue targets management is setting for these drugs in 2024, when earnings are announced and guidance provided on Friday February 2nd during the Q4 earnings call with analysts, and what the drop-off in Humira revenues is likely to be.

Personally, I expect management to forecast for Humira revenues in the double-digit billions minimum, for Skyrizi revenues of ~$8bn, and Rinvoq revenues of ~$4bn. Skyrizi is approved to treat Crohn’s Disease (“CD”), Psoriatic Arthritis (“PsA”) and Plaque Psoriasis, with an approval in ulcerative colitis due likely this year, while Rinvoq is approved to treat Rheumatoid Arthritis (“RA”), Psoriatic Arthritis, Atopic Dermatitis (“AD”), Ulcerative Colitis (“UC”), Crohn’s Disease, and Ankylosing Spondylitis.

Both drugs have strong safety and efficacy profiles – even if physicians are still wary of janus kinase inhibitors like Rinvoq, owing to concerns about patients developing cancer – Rinvoq carries a boxed warning about cancer, blood clots, and cardiovascular issues – and look likely to take a large percentage of lost Humira market share over the coming years.

Over the long term, AbbVie’s carefully orchestrated succession plan for lost Humira revenues to be picked up by Skyrizi and Rinvoq, without price or volume being impacted, is ahead of schedule, and therefore, the likelihood is that revenues and profitability guidance for 2024 will be ahead of analysts’ expectations, potentially leading to a small spike in AbbVie’s stock price.

Aesthetics, Neuroscience & Eyecare – Promising Progress On Most Fronts Expected

Away from immunology, Aesthetics, Neuroscience and Eyecare product revenues accounted for >$11bn of revenues across the first three quarters of 2023, or >28% of all revenues.

Botox is the largest contributor to those revenues across its two indications, cosmetic and therapeutic, generating total revenues of $4.2bn, or ~11% of all AbbVie revenues, and on track to increase its annual revenues by ~$500m year-on-year, to not far off $6bn. Before the end of the decade, however, management expects to drive Botox revenues of >$9bn – as discussed by President and Chief Operating Officer (“COO”) Rob Michael at this year’s JP Morgan Healthcare conference:

Think about the masseter and platysma indications for Botox, those will each add a couple of hundred million dollars in revenue. And then we have the regenerative fillers that also will drive the growth in the filler space. So we look at the combination of the market growth potential, given the penetration rates and history, as well as the pipeline, we feel very confident in delivering on that greater than $9 billion by 2029.

Ably supported by Juvederm, another “blockbuster” selling asset in AbbVie’s portfolio, management’s forecast for aesthetics revenues in 2024 may exceed analysts’ expectations, and take some pressure off the immunology division. In terms of neuroscience, COO Michael again had a lot of positive opinion to share during his recent fireside chat:

neuroscience probably isn’t appreciated as much as we would like it to be, I mean it’s our second largest therapeutic area. It’s going to grow by over a $1 billion in 2023. We talk about Vraylar with the adjunctive MDD approval about a year ago. We’ve seen a tremendous ramp. We’re going to grow about 35% in ‘23. And then you look at the oral CGRP portfolio with Ubrelvy and QULIPTA, those on a combined basis, will approach 50% growth. So we’re seeing really nice momentum on a neuroscience portfolio, really driven by psychiatry with Vraylar and then migraine portfolio, inclusive of Botox Therapeutic about 40% of Botox Therapeutic is for chronic migraine.

AbbVie believes that Vraylar, which has been approved to treat schizophrenia and bi-polar disorder since 2015, and major depressive disorder (“MDD”) since December 2022, can surpass $4bn per annum in peak revenues, and that the migraine therapies Ubrelvy and Qulipta can both achieve “blockbuster” (>$1bn per annum) revenues – their combined contribution is likely to be ~$1bn in 2023, and a rise of another $500m in 2024 seems possible, based on current double-digit percentage growth rates.

Comparatively, growth has been somewhat slow within the eye care division, which returned revenues of $2.7bn in 2022, down ~25% year-on-year, and is likely to post a potentially lower figure again in 2023. The good news, however, is that a partnership between AbbVie and Regenxbio (RGNX) over a gene therapy, RGX-314, indicated for wet age-related macular degeneration (“AMD”), recently returned positive data from a Phase 2 study.

At the highest does level, RGX-314 achieved an 80% reduction in annualized injection rate, with 50% of more than 50 patients injection free, and with zero cases of intraocular inflammation observed in patients.

The current standard of care in Wet AMD is Regeneron’s (REGN) >$8bn per annum selling, Eylea, which requires an injection every 2-3 months, therefore, a “one and done” gene therapy may have a good chance of generating multi-billion revenues per annum in this indication in time, provided, of course, it can complete a Phase 3 pivotal study and secure a formal FDA approval.

Recent M&A Targets Oncology, Neuroscience – & AbbVie May Not Be Done Yet

With its immunology division laser focused on Skyrizi and Rinvoq, aesthetics responding to an improved prevailing market for lead product Botox, migraine and depressive meds delivering revenues in the multi-billions, and a potentially transformational gene therapy drug advancing towards approval in eye care, oncology is arguably the division that could most benefit from some inorganic growth, and fortunately, with its $10bn buyout of Immunogen, AbbVie has directed its M&A efforts accordingly.

As I wrote in a note covering the deal back in November last year:

Immunogen secured approval for its first commercial product – the antibody-drug conjugate Mirvetuximab Soravtansine – in November 2022, in the indication of FRα positive, platinum-resistant ovarian cancer (“PROC”). Under the brand name Elahere, the drug earned $105.2m of revenues in Q3 2023, and $212.1m across the first nine months of 2023.

ELAHERE is a “first-in-class ADC comprising a folate receptor alpha-binding antibody, cleavable linker, and the maytansinoid payload DM4, a potent tubulin inhibitor designed to kill the targeted cancer cells,” and it represents Immunogen’s first successful drug approval in its ~40-year history.

Antibody Drug Conjugates are probably the most sought after and studied drug class in oncology today. New York Pharma giant Pfizer (PFE) spent $43bn acquiring Seagen, and its 3 approved ADCs, which generated ~$2bn revenues last year, while Merck has recently agreed a $5.5bn long term partnership with Daiichi Sankyo to develop ADCs, making it the centerpiece of its strategy to generate >$20bn of revenues from new oncology drugs.

AbbVie’s plans for its own oncology division are likely not so ambitious, but the company has flirted with the ADC space for some time, having formerly invested in Seagen. It also acquired Stemcentrx in a $5.8bn deal in 2016 to gain access to an ADC targeting small cell lung cancer, which ultimately failed to make a mark in clinical studies. The company’s in-house ADC asset, Telisotuzumab-Vedotin, or Teliso-V for short, recently “demonstrated compelling clinical benefits across key endpoints” in a Phase 2 study in patients with previously treated non-small cell lung cancer (“NSCLC”).

In short, acquiring a commercially approved ADC, whilst one if its own assets is looking a good bet for eventual approval in the substantial lung cancer market, and acquiring several more clinical stage ADCs – Immunogen’s anti-CD123 ADC Pivekimab Sunirine has entered Phase 1 studies in patients with Blastic plasmacytoid dendritic cell neoplasm (“BPDCN”), and acute myeloid lymphoma (“AML”) – for the sum of ~$10bn looks like reasonably good business for AbbVie.

If ADC’s do prove to be the next “big thing” in Pharma, thanks to their ability to enhance treatment effect and safety by combining a monoclonal antibody with a cytotoxic small molecule drug, then AbbVie could be one of the chief beneficiaries, provided it has the ability to keep innovating internally, in an unfamiliar solid tumor cancer market.

Meanwhile, the recent approval of Epkinly, developed by AbbVie and partner Genmab, in diffuse large B-cell lymphoma (“DLBCL”), will help to offset falling revenues of one-time double-digit billion per annum selling Imbruvica, now subject to government control on its pricing, which has led to a gloomy forward revenues prognosis.

AbbVie has accepted a >$2bn impairment charge in relation to this, but analysts believe Epkinly could achieve peak revenues of >$3bn, and AbbVie’s other blood cancer drug, Venclexta, is expected to surpass $4bn in annual revenues, so this division can grow, also, in spite of the imbruvica setbacks.

Meanwhile, the Cerevel deal gives AbbVie access to numerous late stage, and therefore relatively de-risked CNS assets in a field of research where failure rates are high – as I wrote in a note on Cerevel back in December, almost immediately prior to the acquisition, the company’s focus is on, according to its quarterly report / 10-Q submission:

advancing our extensive and diverse pipeline with numerous clinical trials underway or planned, including three ongoing Phase 3 trials and an open-label extension trial for tavapadon in Parkinson’s, two ongoing Phase 2 trials and an open-label extension trial for emraclidine in schizophrenia, an ongoing Phase 2 proof-of-concept trial and an open-label extension trial for darigabat in focal epilepsy and an ongoing Phase 2 proof-of-concept trial for darigabat in panic disorder.

In a presentation outlining the benefits of the deal, AbbVie suggests that emraclidine represents a multi-billion dollar market opportunity and the “most substantial component of deal value”. The drug will fit seamlessly into AbbVie’s current CNS product pipeline, while tavapadon, which could be used as a monotherapy for early stage Parkinson’s, or an adjunctive therapy in later stage, is an asset widely believed to have blockbuster potential.

Will AbbVie be making further bolt-on acquisitions in 2024? It seems unlikely, as CFO Michael told the audience at JPM that:

We’re very satisfied with the position we’re in. We will continue to look for early stage opportunities will be smaller in size, because it’s the focus for BD throughout ’23 was looking for assets that can drive long-term growth.

Really I think in the next decade, we have a clear line-of-sight for this decade with our current portfolio. We didn’t need to go outside to supplement that. So even though these two deals will add some level of revenue this decade, it wasn’t really about that, it was more about the next decade. So our BD focus doesn’t change. We continue to look for assets that can drive growth in the next decade.

Concluding Thoughts – I am Expecting A Positive Earnings Release But No Major Share Price Gains In 2024

When previewing Merck’s (MRK) upcoming earnings in a note published yesterday, I compared the situation of Merck – which loses patent protection for its flagship cancer drug keytruda, which drives >$20bn revenues per annum, around 2028 – to AbbVie four or five years ago, when Humira’s upcoming patent expiry became the main metric on which to base any valuation of the company.

In 2024, one year from Humira’s loss of market exclusivity, the market has a much better picture of what it is like for a Big Pharma to wave goodbye to billions of dollars in annual revenues, and the damage to Humira revenues is set to become worse in each passing year.

This is why it is essential for major pharmaceuticals – who are essentially required to overhaul their entire product portfolio once every couple of decades, to benefit from patent protections and charging a higher price for better drugs – to have contingency plans in place when major drugs lose patent protections.

To date, AbbVie has managed the situation extremely well, launching two new drugs it believes can completely offset any losses from the Humira LOE, whilst continuing to grow its other divisions organically, or inorganically via bolt-on M&A. The company has not let its guard drop either on the pipeline development side, or the financial performance side, expecting to have paid down $34bn of debt in relation to its Allergan buyout by the end of this year, and promising organic revenues growth from the beginning of next year.

Meanwhile, Humira’s drop in revenues in 2023 has not been as bad as expected, and management believes the drug will take >$7bn in U.S. sales in 2024. As I also mentioned in reference to Merck and Keytruda, in many ways, a patent expired drug capable of positing annual revenues in or around the double-digit billion mark is not necessarily a bad problem to have.

The days of mega-money acquisitions similar to AbbVie’s >$65bn deal for Allergan are likely over, for the next decade at least, as management believes it has the pipeline and portfolio in place to drive long-term growth, even if 2024 revenues will likely to be lower than 2023 revenues.

It’s unlikely the market will hold a “trough” year against AbbVie in 2024, provided it sees the right growth projections for Skyrizi and Rinvoq, and sees the other divisions growing, bolstered by new drugs, either newly approved or gained via M&A deals.

In summary, it is hard to pick out aspects of AbbVie’s upcoming earnings announcement, and guidance for 2024, that is likely to give the market a headache. The company is expertly run and historically, rewards investors with share price growth and a generous dividend, even if management has been hauled over the coals in the past for its questionable drug pricing tactics.

If I had a concern about AbbVie in 2024 it would most likely be focused on the Skyrizi and Rinvoq numbers, and whether revenue growth will be fast enough to satisfy the market and management’s own expectations. Another slight concern would be AbbVie’s R&D efforts – the company is not renowned as a drug developer, although arguably, in Skyrizi and Rinvoq it has quietly launched two drugs whose long-term revenues could break $10bn per annum.

With no prospects of AbbVie, unravelling a drug candidate as exciting as, e.g., Novo Nordisk (NVO) or Eli Lilly’s (LLY) GLP-1 inhibitor class, with its >$100bn revenue potential, I doubt we will see AbbVie stock soaring on surprise news in 2024, but I do expect Q4 earnings will set the tone for a highly promising year.

With few surprises in store for AbbVie Inc. across the next 12 months, however, steady growth, perhaps towards a price target of ~$180 per share maximum, in my view (based on higher price to sales and price to earnings ratios), is probably the optimum outcome for shareholders this year. There is rarely a bad time to buy AbbVie stock, and these few days ahead of earnings appear to be no exception.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of ABBV, BMY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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