By Jack Hough
A decade ago, AbbVie shareholders were hurtling toward a patent cliff -- what the drug industry calls the sudden loss of sales exclusivity on a blockbuster. Since then, the stock has returned 460%, beating the market by well over 100 points. Let's look at how that happened, and size up a pair of soon-to-be patent cliff divers, Merck and Bristol Myers Squibb.
The AbbVie drug is called Humira, and it was revolutionary when it was launched by Abbott Laboratories in 2002. It helped validate the use of monoclonal antibodies, which are engineered to target specific molecules. Humira blocks a key driver of inflammation triggered by the immune system. It can treat a wide range of autoimmune diseases, including rheumatoid arthritis, plaque psoriasis, Crohn's disease, and ulcerative colitis.
U.S. drug patents typically last 20 years, but that's from the time of filing, not commercial launch. Sales exclusivity is usually shorter -- eight to 14 years. When Abbott spun off AbbVie at the beginning of 2013, the business rationale was to let drug discovery stand on its own apart from medical devices and diagnostics, but a side benefit was containing the expected fallout from Humira's main patent expiring in December 2016. By then, the drug was 63% of revenue.
But Humira demonstrated that some patent cliffs play out more like cliffhangers. What expired in 2016 is called a composition of matter patent. AbbVie secured a web of related patents covering manufacturing methods, formulations, and more -- what is sometimes known as a patent thicket. And since Humira is made in living cells (from the ovaries of a rodent called the Chinese hamster), copying it is finicky work. So competition didn't actually arrive until two years ago. Humira sales peaked in 2022 at $21.2 billion, $5 billion more than in the supposed patent cliff year of 2016.
All that surplus cash flow helped fund the development of a pair of next-generation drugs for autoimmune diseases, called Skyrizi and Rinvoq. Those two are expected to combine for $31 billion in sales this year, rising to $50 billion by 2030. Humira sales finally collapsed, but investors barely noticed. The stock's forward price/earnings ratio has swelled from a fearful 11 a decade ago to a confident 21 recently.
The Humira example is an extreme one. Not all drug companies get years of extra growth from top sellers after their patents expire, and not all replace them with even bigger hits. But drug companies facing key patent expirations often trade cheaply and generate plenty of cash to put to work offsetting future revenue shortfalls. Merck and Bristol Myers come to mind.
Merck makes Keytruda, which is the world's best-selling medicine, sort of. Technically, if you combine Eli Lilly's Mounjaro for diabetes and Zepbound for obesity into a single medicine called tirzepatide, the active ingredient in both, then it probably became the biggest seller last year. Still, Keytruda is a huge moneymaker. It's another monoclonal antibody, like Humira, only it blocks a pathway that's used by tumors to hide from the body's immune system. That makes it useful for fighting a long list of cancers -- skin, lung, kidney, and colorectal, to name a handful. Last year, Keytruda brought in an estimated $31.7 billion, or 49% of Merck's total sales.
That's a potential problem for investors because Keytruda's main patent expires in December 2028. Separately, Merck's No. 2 earner, Gardasil, a vaccine for human papillomavirus, or HPV, has suffered steep sales declines in China. An economic downturn there has hurt demand for privately paid vaccines, and domestic drug companies have come up with cheaper alternatives. Over the past three years, Merck stock returned just 11%, or 70 points less than the S&P 500 index, and nearly all of it came from the stock's dividend yield, recently 3.1%.
At a glance, Merck stock doesn't look especially cheap at 20 times this year's projected earnings, but those earnings are expected to temporarily tank on costs related to a flurry of dealmaking and the ramping up of late-state clinical trials. Shares trade at a humbler 11 times the earnings forecast for next year, when margins are expected to bounce back to normal levels.
Merck now has about 80 treatments in Phase 3 clinical trials, the last step before seeking approval for new product launches. This year, the company will get Phase 3 readouts on drugs for HIV, diabetic macular edema, and ulcerative colitis, and next year, for influenza and various cancers. Management reckons that its revenue opportunity from new drugs works out to more than $70 billion by the mid-2030s, or about double Keytruda's projected 2028 sales. Merck has also prepared a dense patent thicket for Keytruda, and a new subcutaneous injection called Keytruda Qlex offers not only much faster delivery than the intravenous version, but also newer patents.
The bull case for Merck, then, involves an AbbVie-like outcome by the end of the decade, with minimal earnings declines, a de-risked outlook, and a less pessimistic stock valuation.
Bristol Myers faces an even steeper patent cliff and has further to go to offset it. Drugs representing more than three-quarters of last year's sales will lose exclusivity by 2031. Shares lost 16% over the past three years, or 27% not counting the dividend yield, now 4.6%. That makes Bristol Myers the cheapest name in Big Pharma, at less than nine times this year's projected earnings.
Management hasn't said when or where earnings might hit bottom, only that it plans to return to growth by the end of the decade. BofA Securities reckons $5 a share is a good ballpark number for trough earnings, down from an estimated $6.30 this year. Shares sell for 11 times the lower figure. The company has been busy with dealmaking, and has Phase 3 trials spanning cancer, heart disease, immunology, and mental health. It points to a half-dozen pipeline drugs with blockbuster potential, and more than 10 launches expected through 2030. BofA upgraded the stock to Buy from Neutral last month, citing the low price and this year's possibilities for good pipeline news.
Write to Jack Hough at jack.hough@barrons.com. Follow him on X and subscribe to his Barron's Streetwise podcast.
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(END) Dow Jones Newswires
January 23, 2026 21:30 ET (02:30 GMT)
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