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3 Reasons Why AbbVie Stock Could Be Approaching a Make or Break Moment

After the market's tepid reception to AbbVie's (NYSE: ABBV) latest earnings report on July 29, the drugmaker appears to face a fork in the road ahead. Down one path is the potential decline of market share for its most profitable medicine and a further drop in the stock price. The other potential path is far sunnier with the company seeing success in shoring up its pipeline via new medicines, paving the way for slow but accelerating growth ahead.

So which way will AbbVie's fortunes go? The answer depends on three issues creating the fork in the road in the first place.

1. Its new aesthetics segment just stumbled

The first reason AbbVie is approaching a critical point is that one of its engines of growth is sputtering -- more or less right out of the gate. In mid-2020, the company acquired Allergan, picking up a handful of aesthetic therapies like the popular dermal fillers Botox and Juvederm.

AbbVie's entire aesthetics segment is fairly modest, worth only $1.3 billion compared with the company's total revenue of about $14.5 billion, and AbbVie needs all the growth it can get. Sales of Allergan's medicines have helped AbbVie continue to grow its top line even as revenue from its biggest moneymaker, the psoriatic arthritis drug Humira, has started to taper due to competition from generics in international markets. And tapering in the domestic market could start as soon as next year, compressing profit margins further.

Per AbbVie's Q2 earnings update, sales from aesthetics therapies dipped by 4.4% year-over-year on a reported basis as a result of Juvederm, which saw its revenue crash by 19.5% to $344 million. Management blames the sharp drop on pandemic-related disruptions in the Chinese market, and also the cessation of aesthetic sales to Russia.

While these reasons are beyond AbbVie's control, that's of no comfort to shareholders. China's fight against the coronavirus probably won't likely end anytime soon, nor will sanctions on Russia, so investors should expect the aesthetics segment to continue struggling. And that'll make top-line growth increasingly challenging over the next couple of years if Humira income recedes faster than anticipated.

2. Humira sales are holding up, but it could be temporary

If Humira's pace of decline levels off in international markets, that should give more time for sales of the drug's intended replacements, Rinvoq and Skyrizi, to scale up. The good news for AbbVie shareholders is that total revenue from Humira rose by 5.8% to reach more than $5.3 billion in Q2 even as biosimilar medicines gobble up market share outside the U.S.

Internationally, Humira sales fell by 13.8% year-over-year in the quarter, which is actually a slower pace of retreat compared to the contraction of 22.6% in Q1.But if the drug's losses accelerate, it might offset the expected growth from Skyrizi and Rinvoq, which as a pair are slated to make around $7.5 billion this year. And if that results in top-line shrinkage, it'll be quite damaging to the stock.

3. Revenue from Skyrizi and Rinvoq is ramping up rapidly

The final reason why AbbVie is approaching a make or break point is that its strategy of using the newer drugs Rinvoq and Skyrizi to replace Humira appears to be working quite well so far. By 2025, management expects the two drugs to make more than $15 billion annually, meaning that they'll outpace Humira at its peak.

AbbView believes Skyrizi and Rinvoq will be up to the task of replacing Humira's contribution to AbbVie's total revenue. In Q2, Skyrizi sales grew by 85.9% year-over-year and Rinvoq sales by 56.3%, and as a pair they brought in more than $1.8 billion. It won't take too many more quarters like that for the duo to catch up to where Humira is today.

That's an obvious point in favor of AbbVie stock in the medium term as well as long term. Of course, if biosimilars of Humira end up being effective enough to crimp international demand for the drug's replacements, the situation will be a lot less favorable -- but there's no evidence to suggest that'll happen as of yet.

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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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