One undeniable fact about AbbVie (NYSE:ABBV) is its historic reliance on Humira, a blockbuster drug that has consistently accounted for over 60% of the company’s total sales. In fact, Humira has often been touted as one of the best-selling drugs of all time, an achievement that is undoubtedly impressive.

Humira’s Dominance and Challenges

For the first decade of its existence as a public company, AbbVie leaned heavily on the revenue generated by Humira. This drug, with its patent protection, enjoyed year-over-year sales growth by expanding its list of approved indications across various therapeutic areas, including rheumatology, dermatology, and gastroenterology. Even after losing exclusivity in Europe, Humira’s sales continued to grow until it finally faced loss of exclusivity in the United States in 2023. This marked a significant turning point as AbbVie anticipated a 35% drop in Humira sales for that year.

Recognizing the impending “patent cliff,” AbbVie proactively pursued mergers and acquisitions to diversify its revenue streams. The acquisition of Allergan was a strategic move that broadened the company’s portfolio to include aesthetics, neuroscience, and eye care segments. However, it was clear that more than just these acquisitions would be needed to offset the loss of Humira’s revenue.

The Path Forward: A Balanced Approach

As of 2023, AbbVie faces the challenge of declining revenue, with only a modest improvement expected in 2024. While the company has introduced new immunology drugs to replace Humira, these are likely to maintain sales at current levels rather than drive substantial growth. To reignite its growth trajectory, AbbVie is banking on the expansion of its Oncology, Neuroscience, and Aesthetics segments.

This shift toward a more balanced portfolio across therapeutic areas is crucial for AbbVie’s long-term success. Overreliance on Humira during its initial decade has made it imperative for the company to diversify its revenue sources and minimize dependence on a single drug.

Immunology: Skyrizi and Rinvoq Lead the Way

AbbVie’s immunology segment, much like Humira, is anchored by drugs like Skyrizi and Rinvoq. These drugs operate through different mechanisms than Humira but treat many of the same conditions. AbbVie continues to seek additional indications for these drugs, which holds promise for revenue stability. Skyrizi and Rinvoq are projected to take the reins from Humira, with expectations of reaching sales figures exceeding $21 billion by 2027.

However, it’s important to note that competition, like Pfizer’s Xeljanz, and potential side effects may pose risks in this segment. Additionally, other IL-23 inhibitor drugs from competitors like Novartis, Johnson & Johnson, and Eli Lilly are in the mix, making the landscape more competitive.

Oncology: Exploring New Frontiers

In the oncology segment, AbbVie is currently focused on blood cancers, particularly chronic lymphocytic leukemia, with Imbruvica as its top-selling drug. While Imbruvica’s sales have already peaked, the newer drug Venclexta continues to show double-digit growth, especially in international markets. Additional drugs, including Epkinly, navitoclax, and Taliso-V, are in the pipeline, and AbbVie expects significant revenue from these, potentially doubling the segment’s sales to $12 billion by the end of the decade.

However, it’s worth noting that drug development in oncology carries inherent risks, as demonstrated by AbbVie’s write-off of $4 billion related to its acquisition of Stemcentryx in 2019.

Neuroscience: A Surprising Growth Driver

Although AbbVie’s acquisition of Allergan primarily aimed to bolster its cash flow with products like Botox and eye care, the neuroscience segment has become a significant growth driver. Botox Therapeutic, used for therapeutic purposes such as migraine and overactive bladder, has been a top seller. Newer migraine treatments, Ubrelvy and Qulipta, are still growing and expected to reach $1 billion each in sales at their peak. Vraylar, a depression drug, is another standout, already exceeding $2 billion in sales and projected to hit $5 billion at its peak. With other promising drugs in the pipeline, this segment is poised for continued growth.

Aesthetics: International Expansion

AbbVie’s aesthetics segment, featuring products like Botox and Juvederm, reported $5.3 billion in sales in 2022. While growth has been modest due to economic factors affecting consumer choices, international markets have shown promise, with significant growth reported, especially in China. AbbVie aims to further tap into international demand and is targeting sales of over $9 billion in 2029.

Financial Outlook: Steady Growth

Looking at the big picture, AbbVie is guiding for $53.4 billion in sales in 2023, which is expected to mark the trough level. Beyond that, I anticipate the immunology segment’s sales to stabilize around $25 billion. Oncology is set to double its sales by 2030, and Neuroscience and Aesthetics are expected to contribute 60%-70% to this growth. However, other segments like eye care are likely to remain flat or experience a decline.

Improvements in net margin, driven by reduced interest expenses due to debt repayment from the Allergan deal, are expected to boost earnings per share (EPS) from $11.00 in 2023 to $14.97 in 2030, reflecting a compound annual growth rate (CAGR) of 4.5%. A modest annual dividend increase, maintaining a payout ratio in the mid-50% range, is projected.

Valuation and Conclusion

In terms of valuation, AbbVie falls in the middle of the pack among large-cap biotech and pharma companies, with a P/E ratio of 13.4 times 2023 earnings. When considering the PEG ratio to account for expected growth rates, AbbVie, along with Merck and Gilead, falls within the 2.5-3.0 PEG range, indicating fair value relative to each other.

In conclusion, AbbVie’s future success hinges on its ability to diversify its revenue sources, moving away from the heavy reliance on Humira that characterized its first decade. Promising drugs in immunology, oncology, neuroscience, and aesthetics offer potential for growth, but the overall EPS growth rate is expected to remain in the mid-single digits, similar to many of its large-cap peers. The robust dividend growth seen in AbbVie’s early years is likely to taper to a 3%-5% range. With an expected total return of around 8% per year in line with historical S&P 500 returns, AbbVie remains a Hold at its current price of $148. For those considering a new position, it might be prudent to wait for a potential entry point around $132.50, which has been the lower end of its trading range since the start of 2022.