Portfolio holding AbbVie (ABBV) reported a mixed second quarter on Friday morning. 

• On the top line, net revenue increased 6.1% on an operational basis to $14.58 billion, but that missed the consensus estimate on FactSet of $14.67 billion. 

• Adjusted earnings per share increased 11.2% to $3.37, beating estimates of $3.32. Included in earnings was a 14-cent per share unfavorable impact related to acquired in-process research and development (IPR&D) and milestone expense. This is an accounting expense for drug stocks that is now required by the Securities and Exchange Commission.

• Adjusted operating margin of 51%, which includes an unfavorable 180 basis point impact from acquired IPR&D and milestone expense, was higher than estimates of 50.28%.

Bottom line

It wasn’t a clean quarter from AbbVie but the broader results were relatively in line with expectations, making Friday’s roughly 5% selloff a bit confusing.

Some of this could be due to profit-taking, with the stock still up 5% year to date against an S&P 500, which has dropped about 13%.

Frustration around what AbbVie’s 2023 and 2024 earnings will come in (after Humira goes off-patent) played a big role too. Despite the concerns of how shallow (or deep) the earnings trough will look like, management laid out what we believe to be a strong investment case after that. AbbVie believes it will have high single-digit earnings growth in 2025 and beyond, which they called industry-leading, and also the lowest loss of exclusivity exposure in the industry in the second half of the decade. 

We like shares right here as a defensive play into an economic recession, with an attractive dividend profile of ~4% yield

Major Q2 segment results 

AbbVie’s Immunology sales of $7.21 billion, up 19.2% year over year, exceeded the $6.86 billion consensus. Sales within the segment:

• Humira: $5.36 billion, up 6.8% year over year, versus $5.22 billion expected.

• Skyrizi: $1.25 billion, up 88.3% year over year, versus $1.08 billion expected.

• Rinvoq: $592 million, an increase of 60.7% year over year, versus $586 million expected.

As a reminder, immunology is a key focus of investors because this is portfolio in transition due to the Humira loss of exclusivity in the United States in the second half of next year. While it is still up to debate how much fast Humira sales will decline in 2023 and 2024, what remains clear is that Skyrizi and Rinvoq have a promising future. First approved by the Food and Drug Administration in April 2019, they have since been gaining clearance for other indications, reflecting the huge year-over-year sales gains. Skyrizi and Rinvoq are performing extremely well and are on pace for approximately $7.5 billion in combined sales this year. Still, it appears that investors are growing frustrated by the lack of clarity around the Humira erosion, partially explaining why ABBV shares sold off Friday.

Hematologic oncology sales of $1.65 billion, down 7.9% year over year, missed the $1.81 billion consensus. Sales within the segment:

• Ibruvica: $1.15 billion versus $1.28 billion expected.

• Venclexta: $505 million vs. $527 million expected.

In aesthetics, sales of $1.37 billion, down 2.1% year over year, missed estimates of $1.512 billion. Sales within the segment:

• Botox Cosmetic: $695 million versus $664 million expected.

• Juvaderm: $344 million versus $450 million expected.

• Other: $332 million versus $391 million expected.

The result here was a disappointment for a business that has actually done pretty well since being acquired from Allergan. Weighing on the results this quarter, especially for the Juvederm filler business, were the Covid related lockdowns in China as well as the suspension of operations in Russia. There were some economic pressures in the quarter as well due to the high price point of Juvederm. It is worth noting that management said this has not impacted Botox cosmetics sales to date. Importantly, management continues to expect positive full-year growth for Juvederm driven by easing of Covid restrictions in China as well as two new filler launches in the United States.

In neuroscience, sales of $1.66 billion, up 15.2% year over year, was shy of the $1.68 billion consensus. Sales within the segment:

• Botox Therapeutic: $678 million versus $672 million expected.

• Vraylar: $492 million versus $537 million expected.

• Duodopa: $120 million versus $125 million expected.

• Ubrelvy: $185 million versus $190 million expected.

• Qulipta: $33 million versus $34 million.

• Other: $150 million versus $139 million expected.

In the eye care segment, sales of $717 million beat the $661million consensus. Sales within the segment:

• Lumigan: $130 million versus $145 million expected.

• Alphagan: $92 million versus $115 million expected.

• Restasis: $168 million versus $87 million expected.

• Other: $327 million versus $294 million expected.

Guidance

Turning to the full year outlook, AbbVie now expects total net revenues of approximately $58.9 billion, down from its previous view of $59.4 billion and below estimates of $59.53 billion.

There are some moving parts here and we should point out that AbbVie expects a 1.7% unfavorable impact from foreign exchange. From a product perspective, AbbVie raised its Skyrizi global sales outlook by $400 million to $4.8 billon, above estimates of $4.5 billion, due to strong market share performance. This was great news. However, management took down its full year Imbruvica expectations to $4.7. billion, below estimates of $5 billion, due to the lack of recovery in the chronic lymphocytic leukemia (CLL) market and increased competition.

On earnings, AbbVie’s outlook was unchanged at $13.78 to $13.98. Keep in mind that this includes a negative impact of 23 cents per share related to IPR&D expense so far this year. The midpoint of this outlook is $13.88, slightly below estimates of $13.89.

For the third quarter, AbbVie expects net revenue of approximately $14.8 billion and adjusted earnings per share of $3.55 and $3.59. Analysts had expected sales of $15.27 billion and earnings of $3.66.