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Why Drugmaker AbbVie Can Power Past Patent Expiration

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T hough facing patent expirations on its blockbuster rheumatoid arthritis drug in 2016, pharmaceutical powerhouse AbbVie says that it can defend Humira from generic challengers -- potentially for years.

In the meantime,AbbVie ( ABBV ) clinched a $21 billion acquisition in May that, it says, diversifies and bolsters its pipeline of future prescriptions. Drugs in the pipeline could stand in when there's an eventual decline in Humira sales.

The North Chicago, Ill.-based drugmaker is also riding a wave of strong earnings. Most recently, in April, it reported a double-digit advance in sales. It posted adjusted first-quarter earnings per share of 94 cents, up 32% from a year earlier, on sales of $5.04 billion, up more than 10%.

Sales of Humira climbed 18% and made up more than 60% of overall revenue.

AbbVie boasts a three-year EPS growth rate of 11%. It is among the top-ranked companies in IBD's Medical-Ethical Drugs group, with a Composite Rating of 96.Valeant Pharmaceuticals International ( VRX ) has the highest in the group, a best-possible 99.

Also in April, AbbVie raised its adjusted EPS estimate for the full year to a range of $4.10 to $4.30, up from its previous guidance of $4.05 to $4.25, thanks to strong momentum in Humira sales and gains in other drugs, including higher sales of cancer drug Lupron and thyroid-disorder drug Synthroid.

Humira At The Helm

Over the past 2 1/2 years, Humira has grown from a $9 billion product to one that generates up to $14 billion in a year, AbbVie says, thanks to gains in both prices and sales volume. About 40% of Humira sales are generated outside of the U.S. As populations age in developed countries, demand for drugs that treat common ailments such as arthritis is steadily mounting, analysts say.

AbbVie stock has risen by 27% over the past 12 months and is up 21% from an April dip, though it's ahead only about 4% for the year to date -- held in check by Humira patent-expiration worries, analysts say.

"That's the key pressure on the stock," Morningstar analyst Damien Conover told IBD.

AbbVie is slated to lose certain patent protections on Humira at the end of 2016, making it vulnerable to generic challengers that are eager to introduce so-called biosimilars, or lower-cost versions of the name-brand drug.

Morningstar estimates that AbbVie could lose up to 15% of its Humira sales annually, beginning in 2017, should producers of biosimilars be allowed to move in and take share. Conover said that several competitors are working on biosimilar versions of Humira, notably including rivalAmgen ( AMGN ), which has developed a version that, it has said, it could start selling in 2017.

AbbVie executives, however, say that in addition to patents on the finished drug itself, the company has hundreds of other patents globally that cover the formulation and manufacturing of Humira that it can use to legally challenge the introduction of biosimilars, likely delaying the onset of competitive pressure for several years. These patents do not begin to expire until 2022.

During a call with analysts to discuss first-quarter results, CEO Richard Gonzalez said, "We have a robust portfolio of intellectual property protecting Humira, which we intend to enforce if infringed by a biosimilar applicant." The company, he added, expects Humira "to drive strong growth and significant cash-flow generation for many years."

Gonzalez says that AbbVie is also braced for a worst-case scenario, in which a competitor can begin selling a biosimilar as early as 2017. He said that AbbVie would trim costs to keep expenses in line with revenue and protect the bottom line as sales of Humira decline.

Acquisitions And Expansion

Meanwhile, AbbVie has moved with haste to diversify its offerings and buttress its pipeline.

This year, for example, it began selling Viekira Pak, a treatment for hepatitis C that pulled in sales of more than $230 million during the first quarter. Gonzalez said during the earnings call that he expects Viekira to generate an annualized run rate of more than $3 billion in global sales by the end of 2015.

The company also jumped on the M&A path this year, closing the $21 billion acquisition of Pharmacyclics in May. The deal gives AbbVie rights to Imbruvica, a drug that treats blood cancer. AbbVie said in a news release announcing the deal's closing that the treatment of blood cancer is a $24 billion global market.

Analysts say that AbbVie also has several drugs in the making that span its areas of expertise: virology, immunology, neurology and oncology. In oncology alone, Gonzalez says, AbbVie has five drugs poised to launch over the next few years. They will complement Imbruvica, he says, and will help the company grow share in the blood-cancer treatment arena.

"They've got a great pipeline," Morningstar's Conover said. "That should mitigate the patent headwind."

More dealmaking, too, could follow and help add to AbbVie's product lineup.

"You can either build it or you can buy it, and in the case of a company with important patents expiring, it will look to buy that growth in order to get ahead of what could otherwise be a declining revenue stream," Jack Ablin, chief investment officer at BMO Private Bank and an observer of the prescription-drug industry, told IBD.

An AbbVie spokeswoman did not respond to IBD's interview request. While speaking at a conference in May, AbbVie CFO Bill Chase told investors that another deal in the $20 billion range was not likely in the near term. But he said that the company continues to look for "tuck-in" deals that would help further complement its existing pipeline.

AbbVie, Chase said, is not "turning off the M&A engine," but it is "much more likely" to pursue "the sorts of transactions that we have done since 2009 onward, which were largely single-asset additions to our pipeline."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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