AbbVie has a knack for beating earnings estimates, and it did it again with its Q4 2022 release. But the company has a black cloud hanging over it. Is this cloud darker than previously thought, or is there a rainbow with a pot of gold awaiting investors?
Here’s what we learned from the fourth quarter earnings call.
Earnings beat forecasts – again…
AbbVie (NYSE:ABBV) announced its fourth quarter 2022 earnings on February 9th, 2023. Posting EPS of $3.54, ABBV beat the consensus estimate for each quarter of 2022. In the corresponding quarter of 2021, ABBV reported earnings of $3.3 per share.
Over the year, ABBV posted net revenues of $58.054 billion – an increase of around $1.8 billion from 2021, when revenues were $56.197.
But costs are up year on year
Operating costs are rising, driven by the cost of sales, general, and administration. In this area of expense, the company spent almost $3 billion more over the year than it did in 2021. It has decreased spending on R&D and on the cost of products sold.
In total, ABBV’s costs increased by $1.67 billion to $39.94 billion.
Humira sales are about to erode…
ABBV’s star drug is Humira. It has been the major driver of revenues and earnings for the last 10 years. In the fourth quarter, Humira net revenues came in at $5.579 billion, an increase of 4.6% on the fourth quarter 2021. For the whole of 2022, Humira sales accounted for more than $21 billion of net revenues – that’s around 36% of total revenues.
But its sales are falling as biosimilars are entering the market.
With the drug’s patent expiring in 2023, we can expect revenues from this drug to fall further and faster. Looking at ABBV’s European experience ─ where Humira revenues have fallen by 26.5% in Q4 2022 compared to Q4 2021 ─ leads the company to forecast that Humira revenues will fall 37% in 2023. This is much better than had previously been forecast.
But the company has put a floor to earnings erosion…
Despite the expected erosion of Humira sales which could eliminate around $7 billion of revenues in 2023, the company’s management has put a floor of $10.70 on its earnings.
It is not certain if this will be the low point in 2023 or 2024, but the confidence with which it has stated this downside buoyed the market even more than the better-than-expected earnings. Consequently, the shares rose by almost 3% on the day of the earnings report.
With robust growth forecast from other sales
The company’s management expects a negative impact from the downturn in Humira sales, but also expects growth in sales of other drugs and treatments to return the company to ‘robust sale growth’ in 2025.
For example, it expects year-on-year growth in sales of Skyrizi and Rinvoq of 45% to $11.1 billion. It also expects double-digit growth in sales of neuroscience, including accelerating sales of Vraylar.
Investment in R&D is likely to rise – comparatively speaking
When considered as a percentage of sales, ABBV’s spending on R&D has been low compared to the rest of the industry. Currently at around 15%, some investors question if this level of spending can support organic growth.
But this is about to change. Partly because of the anticipated fall in Humira sales.
Chairman and CEO Rick Gonzalez explained that R&D spending is subject to several dynamics. These include that Humira sales have required relatively little R&D support. High Humira sales have naturally diluted the percentage of R&D spending.
In addition, the company is aggressively growing its aesthetics business, but this does not need high funding and is a relatively cheap sector to grow.
Gonzalez also pointed out the high returns on some of its R&D investment. “We obviously fund R&D at a level that we believe we can drive productivity,” he explained in reply to a question about R&D spending. “And I think if you look at our productivity over the last 10 years, the data I’ve seen suggests we are one of the most productive R&D engines in the industry. And certainly, when you look at products like Skyrizi and Rinvoq, the return on those assets is tremendous.”
Finally, Gonzalez noted that the company is approaching a stage (over the next three or four years) during which it will experience a significant increase in phase 3 trials. This will require a significant increase in investment.
In conclusion, ABBV’s R&D investment is driven by the desire for productivity and the confidence that R&D spending will be rewarded.
“We tend to drive R&D based on programs that we have a high level of confidence, it can be productive, and it can be successful,” said Gonzalez. “And we don’t constrain R&D in any way from that perspective.”
Great news, but has the market missed a costly contradiction?
Putting a floor on earnings certainly proved positive for market reaction. Additionally, forecasting the Humira sales decline at the low end of previous expectations was also a welcome surprise. However, while this is at the bottom end of the previous forecast range of 35% to 55%, it’s also important to understand how this forecast has been made: a combination of price erosion and volume erosion.
It’s also important to note that the company expects the fall in Humira revenues to accelerate in the second half of 2023, but that, on the earnings call, it would not be drawn on providing guidance for 2024. As Vice Chairman and President Rob Michael said:
“We’re not going to give you 2024 guidance. I think the way to think about ‘24 is we would expect to see additional price, but albeit not the same level as ‘23, and more volume coming through because you’re going to have 10 biosimilars in the market for the full year. So, we would expect to see more of a volume impact in ‘24 than we would expect to see in ‘23.”
The bottom line is that the company doesn’t know if a 37% decline in Humira sales is as bad as it will get. It could get worse in 2024.
Can the $7 billion + loss in Humira revenues be made back by increased sales of other products?
How much will an expected increase in R&D spending impact EPS in the short term?
What should investors do now?
In conclusion, while the company’s downside EPS forecast is positive and this forward-looking stance has buoyed the share price, as the company rightly says, it is difficult to forecast when the full extent of the slide in Humira sales will be felt.
This isn’t to say this is a bad company. It isn’t. We think ABBV’s management is doing a great job. But:
- Expectations have now been set at the low end of a range of falling sales for Humira
- The bar for its other drugs and treatments has been set high
- The potential for higher R&D costs has been mooted, but not quantified
That gives a lot more room for negative surprises.