ABBV: Trailing US Humira Growth Driven More or Less Equally by Net Sales and Volume Gains; Looking Forward, either Net Price or Volume Likely to be Negative

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Richard Evans / Scott Hinds / Ryan Baum

SEE END OF THIS REPORT FOR IMPORTANT DISCLOSURES

203.901.1631 /.1632 / .1627

revans@ / shinds@ / rbaum@ssrllc.com

@SSRHealth

November 1, 2016

ABBV: Trailing US Humira Growth Driven More or Less Equally by Net Sales and Volume Gains; Looking Forward, either Net Price or Volume Likely to be Negative

  • In its 3Q16 comments ABBV claims that volume gains account for a vast majority of growth. This conflicts with plain evidence, which shows that net pricing and product mix gains have offset outright volume declines for ABBV overall, and that net pricing and volume growth have been more or less equal drivers of Humira’s US net sales growth
  • The fact that US Humira net sales growth (which accounts for nearly all of ABBV global net sales growth) is driven by equal parts volume and price is crucial context for what comes next – a likely outright decline in one or the other of these equally critical factors
  • US payors are opening the anti-TNF categories (by diagnosis) to bid, granting the winner all or most newly diagnosed patients. Winning such bids means either explosive unit growth for UCB (Cimzia) or JNJ (Simponi), modest unit growth for AMGN (Enbrel), or defense of trailing rates of unit growth for ABBV (Humira). However, whomever wins almost certainly does so at net prices well below the current market. As such if ABBV is to maintain its unit volume trend, it almost certainly has to accept a net price decline. Net prices offered by UCB and JNJ are likely to be lower than those acceptable to ABBV and/or AMGN, since the former companies stand to gain more patients than they currently have, and the latter companies must apply any price concessions to their very large pools of existing patients
  • Conversely, ABBV might choose not to discount in order to capture newly diagnosed patients, in which case its volume base should erode at the annual rate of Humira patient failures – roughly 10% per year
  • Either outcome is a sharp change in net sales growth for US Humira, and by extension for ABBV. We believe total company consensus revenues for ABBV are roughly 15% too high for 2019, and in a worst-case could be as much as 26% too high[1]

Where we’re BULLISH: Biopharma companies with undervalued pipelines (e.g. AMGN, BAYER, BMY, GILD, ROCHE, SHPG, SNY, VRTX); Biopharma companies with pending major product approvals (e.g. ACAD, ADMA, ALIOF, BIIB, CHMA, CLVS, CPRX, CTIC, GILD, ICPT, JAZZ, LLY, LPCN, MRK, NVO, OCUL, PTCT, SRPT, TEVA, ZSPH); SNY on sales potential for Praluent (alirocumab); CNC, MOH and WCG on bullish prospects for Medicaid HMOs; and, DVA and FMS for the likely gross margin effects of generic forms of Epogen

Where we’re BEARISH: PBMs facing loss of generic dispensing margin as the AWP pricing benchmark is replaced (e.g. ESRX); Drug Retail as dispensing margins are pressured by narrowing retail networks and replacement of AWP (e.g. WBA, CVS); ABBV on Humira US pricing risks; ENDP on risks to branded Rx price premia; Research Tools & Services companies as growth expectations and valuations are too high in an environment of falling biopharma R&D spend (e.g. CRL, Q, ICLR); and, suppliers of capital equipment to hospitals on the likelihood hospitals over-invested in capital equipment before the roll-out of the Affordable Care Act (e.g. ISRG, EKTAY, HAE)

ABBV’s Humira and AMGN’s Enbrel are the dominant brands in the US DMARD category (Exhibit 1). The companies have raised net prices at rates well above general US Rx brand net price inflation rates (Exhibit 2) to a point at which the DMARD category accounted for 32% of total US Rx market net price inflation as of 2Q16 (Exhibit 3)[2]

As we’ve argued previously, we believe payors gave preference to Humira and Enbrel in anticipation of these brands being among the first to see US biosimilar competition[3]. Payors’ interest in having as many patients as possible on these brands ahead of their US biosimilar entries plainly gave Humira and Enbrel pricing power in the run-up to the anticipated biosimilar approvals. However entry timing for biosimilars to these brands is now far less clear; despite this ABBV and AMGN have continued relatively aggressive pricing actions. With payors’ main motive (anticipated biosimilars) for giving Humira and Enbrel preference over newly diagnosed patients muted, and with these brands driving nearly half of total market net price inflation, payors were all but forced to look for means to temper DMARD pricing growth

In September, ESRX announced a DMARD formulary policy[4] that matched the contours of the formulary changes we anticipated, and last week AMGN guided that as a result of formulary pressures Enbrel would see no significant US net pricing gains in 2017

ABBV made clear in its 3Q16 call that it sees the US DMARD market differently than AMGN – in short ABBV appears not to anticipate the same degree of pricing pressure as AMGN. And, ABBV further claimed that the vast majority of its growth comes from volume, rather than price

Our views on risks to US DMARD pricing are well characterized elsewhere[5]; our aim in this note is to show empirically that ABBV’s comments on the relative importance of price and volume don’t match the available evidence

The net price, volume, and mix characteristics of ABBV’s US net sales growth, by quarter from 1Q08, are shown in Exhibit 4. Net sales growth (blue area) has been driven primarily by a combination of net price (green line) and product mix (purple) gains, which have been partially offset by consistent and relatively sizable outright volume declines (red line). Exhibit 5 shows CAGRs of net sales growth (blue column), net price (green), mix (purple), and volume (red) over the 1, 3, 5, and 10-year look-back periods. In all periods, net pricing has been a major positive driver of total net sales growth, and volumes have declined

Much of ABBV’s global and US price / volume trends are dominated by US Humira, simply because the brand has become such an overwhelming proportion of both WW and US sales (Exhibit 6a, 6b). US net sales of Humira accounts for 120% of WW net sales growth over 10 years, 103% over 5 years, 87% over 3 years, and 94% over the last year (Exhibit 7a). Exhibit 7b further divides the contribution of US Humira to WW sales growth into US Humira net pricing gains (green), US Humira volume gains (red), and other factors[6]

Exhibit 8 shows US Humira net sales growth (blue area), and the growth rates of net and list pricing (green) and volume (red) by quarter since 1Q08. Exhibit 9 shows the share of US Humira net sales growth driven by price (green) or volume (red) over 10, 5, 3, and 1 year look-backs. Net pricing gains were at least (10 year) as large, or larger (5 year) than volume gains across the longer-term look-back. Even across the shorter look-back periods net pricing gains were a major component, to a degree that over no look-back period could volume gains be reasonably characterized as having driven the vast majority of US Humira growth

To summarize the relevant conclusions re: price / volume: 1) the ABBV WW net sales growth story is one of volume declines being offset by a combination of product mix and net pricing gains; 2) ABBV WW net sales growth is dominated by US Humira net sales growth; and 3) US Humira net sales growth has been a fairly balanced combination of net pricing and volume gains

Looking forward, the question for US Humira isn’t one of whether net price or volume grew faster historically, it’s instead one of just how much net price and/or volume are likely to fall as a result of formulary pressure. As payors are now effectively auctioning the newly diagnosed patients to the lowest-priced anti-TNFs (other than Remicade) labelled for that patient’s indication, Humira cannot possibly maintain both net price and volume growth. It must either sacrifice net price (not just net price growth, but actual net price) to maintain its claim on newly diagnosed patients, or it must forego newly diagnosed patients if it chooses to defend its current net price. Whether ABBV chooses to defend volume growth or net price, the outcome is likely to be lower US Humira sales. About 10% of Humira patients fail annually; as such we can expect Humira volumes to fall by +/- 10% annually in cases where it loses access to newly diagnosed patients. Conversely if ABBV chooses to maintain its share of newly diagnosed patients by competing on price, it presumably must come close to the bids offered by UCB’s Cimzia and JNJ’s Simponi. Because the numbers of patients UCB and JNJ might gain by winning bids overwhelms these brands’ current patient numbers, UCB and JNJ are less constrained in their bids for newly diagnosed patients – i.e. they don’t have to worry about cutting price on the ‘installed base’. We doubt ABBV would have to match the UCB and JNJ prices outright, but they would have to get reasonably close. Because we believe the UCB and JNJ bids will be somewhat dramatically below the current market, this implies a very large net price decline would be required of US Humira if it expects to keep its dominant share of newly diagnosed patients. The bottom line is that we expect a brand with very large trailing net price and volume gains to face either a significant price decline, or a significant volume decline, in the near term

Summarizing, our thesis is that US Humira cannot maintain both price and volume growth at anything approaching the trailing rates. Unless Humira meets the competing bids offered by UCB’s Cimzia and/or JNJ’s Simponi, Humira loses access to newly diagnosed patients, and its volume trend (in indications where competing bids are awarded) falls to a level reflecting the rate at which Humira patients fail – about 10% annually (Exhibit 10). Humira’s options are to lower the price and keep the volumes, or maintain price and lose volume

 

  1. “ABBV, AMGN, and US DMARD Pricing: The Dog and its Reflection”, SSR Health LLC, June 27, 2016
  2. The upper most rows of Exhibit 3 list in rank order the therapeutic areas that contributed the most to net price inflation in any given period. The second set of rows shows the percentage of total US Rx market net price inflation attributable to a given therapeutic area, and the third set of rows shows the rate of net price growth (v. year prior quarter) for that therapeutic area. For example, in 2Q16 DMARDs accounted for 31.9% of total US Rx market net price inflation, and DMARD net prices grew 13.2% on a sales-weighted basis. The fourth, fifth, and sixth sets of rows identify the therapeutic areas that made the largest negative contributions to the total US Rx market net price trend, the percent of net price change explained by a given therapeutic area, and the rate of net price change for a given therapeutic area.
  3. We realize Remicade has been – and was always expected to be – the first anti-TNF DMARD to have a US biosimilar. However because Remicade (infused) is less tolerable than the other major anti-TNFs (injected sub-q); and because failure rates on Remicade are substantially higher than failure rates on the other major anti-TNFs, we believe that for some time Remicade has not been a viable first line option for a majority of DMARD patients
  4. See “ESRX DMARD Formulary Points to Slower Sales for ABBV / AMGN …”, SSR Health LLC, September 11, 2016
  5. Ibid 1
  6. ‘US brand Rx ex-Humira’ is comprised of products besides Humira with US net sales itemized by ABBV, prior to loss of exclusivity (LOE); ‘US brand Rx residual’ is comprised of products with itemized net sales that are post-LOE, plus US brand Rx sales growth explained by products without itemized net sales (chiefly products post-LOE once no longer itemized, plus smaller products)

©2016, SSR, LLC, 225 High Ridge Rd, 2nd Floor, Stamford, CT 06905. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein. The views and other information provided are subject to change without notice. This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. In the past 12 months, through a wholly-owned subsidiary SSR Health LLC has provided paid advisory services to Pfizer Inc (PFE) and to Merck (MKGAY) on both securities-related and non-securities-related topic

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