Occasionally a company will spin off a division, only to have the offspring grow to rival its parent. Pharmaceutical company Abbott Laboratories (ABT), with a market capitalization of $209.7 billion, is now slightly smaller than its spinoff AbbVie Inc. (ABBV), which has a market cap $203.4 billion as of July 4, 2021.

Devised as the research arm of Abbott and based in Chicago, AbbVie became a pharmaceutical company in its own right in late 2012. Abbott retained the non-research interests—everything from baby formula to sports nutrition to heart stents. At the time of the spinoff, Abbott management claimed that the move gave investors a chance to objectively value two businesses that were heading in disparate directions. However, cynical investors suspected that Abbott’s board of directors constructed AbbVie as a repository in which to dump some of its imminently expiring patents.

Still, the new company seemed to be on a roll for the next few years, with its stock—originally issued at $33—soaring as high as $116 in early 2018. Unfortunately, it started to tumble shortly thereafter, and came under further press pressure on July 19, 2018, when prominent short-seller Andrew Left’s Citron Research called AbbiVie the “next great drug short.”

Nevertheless, the company is a solid performer. For 2020, it posted net revenues of $45.8 billion, a 38% increase over the previous year, for a net earnings of $4.6 billion. AbbVie reported Q1 2021 earnings with net revenues of $13 billion, up 51% operationally compared to the same quarter last year. Its board of directors declared an increase in the company’s quarterly cash dividend from $1.18 per share to $1.30 per share beginning with the dividend payable on Feb. 16, 2021.

AbbVie’s Product Line

AbbVie’s entire product line consists mainly of 16 drugs, among them Lupron (for prostate cancer), Androgel (a testosterone booster) and Creon (pancreas therapy). But the company’s undisputed heavyweight champion is Humira, an anti-inflammatory medication that just happens to be one of the world’s best-selling drugs.

AbbVie sold $19.8 billion worth of Humira worldwide in 2020, and if you’ve never used it, thank the deity of your choice. Physicians use Humira to treat such ailments as Crohn’s disease and rheumatoid arthritis, a far more damaging and painful counterpart to common, non-inflammatory osteoarthritis. A standard prescription costs about $6,200, which means AbbVie sells about 3.1 million prescriptions a year. Humira means almost as much to AbbVie as tires do to Michelin. The drug alone was responsible for around 43% of AbbVie’s revenue in 2020.

Humira is expensive, but so were the years of research and testing that went into developing it and preparing it for market. Your average Crohn’s patient will take that trade. Humira brings in more than three times more revenue than AbbVie’s next most lucrative drug, Imbruvica, which is used to treat certain types of leukemia and lymphoma. 

One of AbbVie’s most versatile drugs, Lupron, brought in $752 million in revenue in 2020. Developed to fight everything from prostate cancer to vaginal fibroid tumors to early puberty, Lupron is a drug for every age and both sexes.

AbbVie’s Expiring Patents

The drugs that generate money one year aren’t necessarily the drugs that generate it the next. That’s not necessarily because superior drugs have supplanted the older ones, but rather because patents have expired and the market share of the drug in question has thus shrunk. For instance, AbbVie sells multiple drugs for the treatment of dyslipidemia (unhealthy levels of lipids in the blood) like TriCor and Niaspan, but some of the patents expired in the last couple of years, significantly reducing the drugs’ contribution to AbbVie’s income.

Another cause for concern: barbarians at the gate of the Humira empire. The patents protecting the drug began to expire in 2016. Its first competitor arrived in India and sold for $200 a vial, one-fifth of the US price of the drug at the time. However, this price would not last, as competitors raised their prices. For a while, sales of the name-brand drug continued to grow as AbbVie filed additional patents to protect its main source of revenue, and also raised prices; worldwide Humira sales increased by 8.2% in 2018 and 3.5% in 2020. But cheaper copycat versions, arriving in Europe in late 2018, began to take a toll the following year (the stock price’s tumbles, and Lefton’s “short” comment, largely reflected the arrival of these European competitors). In 2019, international sales of Humira dropped for the first time ever—by 33.5% in Q3—generating close to a $2 billion cut in revenue for the year. In Q1 of 2021, international sales decreased by 8.3% compared to Q1 of 2020.

AbbVie’s Future Prospects

A Humira biosimilar competitor is not expected to hit the market in the United States until 2023, so U.S. sales of the drug remain robust (up 6.9% in Q1 2021). And AbbVie aggressively continues to develop other drugs and pharmaceutical avenues, with several forward steps occurring in 2019. The company has gained the U.S. Food and Drug Administration’s (FDA) approval of its Rinvoq for the treatment of moderate to severe rheumatoid arthritis. The FDA’s also given a green light to Skyrizi, a treatment for psoriasis.

In June 2019, AbbVie also announced the acquisition of Allergan, manufacturer of Botox; though the price tag is $63 billion, the deal could be a money-saver in the long run, as it lets the company acquire popular products without having to spend on research and development.

The Bottom Line

If there’s one thing we’ve learned from analyzing the financial reports of large pharmaceutical companies like Merck & Co. (MRK), Pfizer Inc. (PFE) and Novartis (NVS), it’s that in general, it’s far better to produce an expensive drug with a small user base than a low-margin one taken by tens of millions. Walmart Inc. (WMT) might dwarf Trader Joe’s, but pharmaceuticals are a different game with a different strategy. The more ambitious the drug and the more serious the ailments it counters, the better for the manufacturer. As long as AbbVie can bring its new drugs to market faster than its patents expire, the company should be in a great position in the long run.