AbbVie faces unique risks
In addition to analyzing AbbVie’s return potential, it’s also necessary for investors to analyze the key risks faced by a biotechnology company.
Business concentration risk
AbbVie (ABBV) depends on a single drug, Humira, for more than 63% of its total revenues. Humira has been facing tough competition from drugs such as Remicade manufactured by Johnson & Johnson (JNJ), Merck (MRK), and Mitsubishi Tanabe Pharma, as well as Enbrel by Pfizer (PFE).
AbbVie continues to expand Humira’s approved indications and geographies as well as its existing formulation to reduce pain associated with injection. However, if these innovations don’t translate into commercial success, or if Humira loses market to its competition, this concentration will directly affect AbbVie’s bottom line and subsequently its market value.
Patent expiration risk
Launched in the United States in 2002, Humira is expected to lose its US patent protection in December 2016. In December 2014, Cadila Healthcare introduced Humira’s biosimilar, Exemptia, in India.
Upon losing its patent, Humira is expected to face increased competition from new biosimilars launched in the United States. This could directly impact AbbVie’s profit margins.
In March 2015, AbbVie completed the acquisition of Pharmacyclics for a total consideration of $21 billion. The deal is expected to enable AbbVie to enter the $24 billion hematologic oncology space. The success of this acquisition rests mainly upon the success of the key drug Imbruvica. Imbruvica is a novel BTK inhibitor drug and is currently used to treat 15,000 patients.
Imbruvica is expected to complement AbbVie’s investigational oncology compounds. However, if the drug fails to achieve these outcomes, it will lead to substantial write-downs and subsequent loss in market value.
AbbVie was originally a company focused on autoimmune diseases. The acquisition of Pharmacyclics marks a change in AbbVie’s strategy. If employees from the two companies are unable to sort out their cultural and work-related differences, the post-merger integration risks could also culminate in losses for AbbVie.
You can limit your exposure to AbbVie’s company-specific risks by investing in the VanEck Vectors Pharmaceutical ETF (PPH). PPH holds 4.84% of its total holdings in AbbVie.