ABBV, AMGN, and US DMARD Pricing: The Dog and Its Reflection

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Richard Evans / Scott Hinds / Ryan Baum / Hardy Evans

203.901.1631 /.1632 / .1627

revans@ / shinds@ / rbaum / hevans@ssrllc.com

@SSRHealth

June 27, 2016

ABBV, AMGN, and US DMARD Pricing: The Dog and Its Reflection

  • US list price inflation has accelerated to 28% for Humira and Enbrel, up from 16% in 2014, and 22% (Humira) and 20% (Enbrel) in 2015. Gross-to-net discounts are roughly constant, meaning net gains are roughly on par with list gains. The DMARD category, which Humira and Enbrel dominate, accounted for more than one-third of total US brand Rx net price inflation as of 4Q15, and likely explains more than half for 1Q16. Formulary managers have little choice but to react
  • US payors originally expected Humira follow-ons in or around 2017; this, plus difficulties associated with switching patients from one DMARD to another motivated payors in recent years to put most new patients on Humira. ABBV’s disclosure of additional adalimumab patents has pushed the entry of follow-ons to an uncertain future date, making Humira less obviously desirable for new patients. And, accelerating inflation forces payors toward formulary changes that require switching patients either now (from Humira to a non-Humira low bidder) or later (from whatever low-bidder might be awarded new patients, to generic adalimumab once it’s available)
  • Switching patients among biologic DMARDs is undesirable, but not impractical. Extended wash-out periods between the current drug and the ‘switched-to’ drug are no longer considered necessary; and, practical experience with switching has been gained in ex-US markets having tighter formulary controls. The long-acting insulin example is informative; US payors shifted to Levemir-only or Lantus-only formularies to end cooperative inflation between these two brands, even though ideal clinical policy calls for both brands to be freely available. Long-acting net price gains were once in excess of 30%, and are now falling at a rate of more than 20%
  • We assign 25% odds to a scenario in which Humira and Enbrel net price gains moderate, allowing Humira and Enbrel unit demand trends to play out largely uninterrupted. We assign 50% odds to a scenario in which formulary managers award newly diagnosed (and other-brand failure) patients to the lowest bidder(s), forcing sales declines of roughly 10% for each brand. Finally, we assign 25% odds to a scenario in which DMARD prices reset 20% lower, but Humira and Enbrel unit demand trends play out more or less uninterrupted
  • The weighted average of these scenarios reduces ABBV total company global sales by 10% in 2017, and by 15% in 2018 and 2019 as compared to consensus. The worst-case ABBV scenario (10% annual erosion) reduces total company global sales by 13%, 22%, and 26% in years 2017 thru 2019, respectively
  • The weighted average of these scenarios reduces AMGN total company global sales by 2% (2017, 2018) and 3% (2019) as compared to consensus. The worst-case AMGN scenario (10% annual erosion) reduces AMGN total company global sales by 3%, 5%, and 8% in 2017 thru 2019, respectively

Where we’re BULLISH: Biopharma companies with undervalued pipelines (e.g. ABBV, BMY, GILD, SHPG, SNY, VRTX); Biopharma companies with pending major product approvals (e.g. ABBV, 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)

Humira (ABBV) and Enbrel (AMGN) are the two dominant first-line biological DMARDs[1] in the US (Exhibit 1). Remicade (JNJ) also has considerable share; however, this brand’s market influence is waning, at least in part because patients fail Remicade at much higher rates than either Humira or Enbrel[2]

Humira and Enbrel have raised list prices ahead of the market pace since early 2012, and have very recently accelerated list pricing gains to an annual rate of more than 25 percent (Exhibit 2a). US list pricing actions for the two brands have moved in near lockstep (Exhibit 2b). Since 2012 the 10 pricing actions taken on one brand have occurred, on average, within 14 days of actions taken by the other. On eight of these ten occasions the pricing actions were identical[3]; on the remaining two occasions the pricing actions were within 1% and 2% of one another

Gross-to-net concessions as a percentage of list price have remained relatively stable at or near 15 percent (Exhibit 3); as a result, net prices (on a per treatment course basis) have grown largely in line with list price gains. We estimate that Humira’s average net cost per treatment course grew from $16,763 in 2012 to $26,682 most recently[4], and that Enbrel’s net cost grew from $18,379 to $35,634 over the same period (Exhibit 4)

In many ways we’ve been here before. From late 2011 until mid-2014, the two dominant long-acting insulins (Lantus/SNY, Levemir/NOVO) took accelerating, above-market list pricing actions (Exhibit 5a), in lockstep (Exhibit 5b). These two brands offered relatively large average discounts; however, because these remained stable (until early 2014, Exhibit 6) net costs for Lantus and Levemir followed the list pricing gains

The underlying conceit in the long-acting insulin case was that formularies would be unwilling to carry only one of the two insulins. Lantus reliably manages blood glucose with once-daily dosing for most, but not all, patients. In patients that cannot reach goals on Lantus once-daily, Levemir (which has a shorter half-life than Lantus) can be used twice daily to give more ‘area under the curve’, and thus greater control. Levemir can also be used once daily for some, but not all, patients. Thus a Lantus-only formulary means under-treating patients who need the longer half-life that two doses of Levemir can provide; conversely a Levemir-only formulary means many patients who could’ve been treated with just one daily injection of Lantus will need two injections of Levemir

The long-acting insulin market became a game of chicken between the manufacturers and formulary managers, and the manufacturers lost. Essentially the manufacturers bet that the formulary managers would bear accelerating net pricing gains, rather than making the tough clinical trade-offs required to restrict the formulary to only one of the two long-acting brands. By late 2014, most major formularies were carrying only one of the brands. As of 4Q15, net pricing in the long-acting insulin category was falling at an annual rate of more than 20 percent (Exhibit 7)

The underlying clinical conceit driving DMARD inflation roughly mirrors that of the long-acting insulin example. Biological DMARDs have long half-lives (14 days for Humira; 4 days for Enbrel; see Appendix for summary of biological DMARD characteristics). As such when switching from one of these agents to another, there’s a very real chance that the old agent is still ‘on board’ when the first dose of the new agent is given. Early in these products’ lives the fear was that such overlap could result in greater rates of infection and cancer as a result of excessive immunosuppression. The way to avoid overlap is to allow a generous ‘wash-out’ period; however, this raises the risk of disease ‘flares’ in the period when neither biologic is being dosed. Clinical dogma very much favors tight control of disease (particularly in the case of rheumatoid arthritis), thus disease flares from too-long wash-out periods are a serious consideration. Concern over disease flares is heightened by clinical evidence that patients are less responsive to biological DMARDs after a flare. As serious as these concerns are, they have mitigated over time as infection and malignancy rates have remained low, and as practitioners outside the US have become at least somewhat accustomed to switching responsive patients’ biological DMARDs in these more restrictive formulary environments

A related consideration is the anticipated approval of biosimilars to Humira (first) and eventually Enbrel. Until ABBV disclosed additional US patents in 2015, the general expectation was that Humira biosimilars would be available in the US by 2017. In a category where patients tend to remain on drug for long periods (about half of Humira and Enbrel patients will remain on drug five years after initiation), and where switching is relatively complex, for obvious reasons formulary managers wanted as many patients as possible on Humira since that brand would have the first biosimilar. Now that it’s no longer clear which brand’s biosimilar will come first, payors’ interest in putting most newly diagnosed patients on Humira surely has lessened. And, in light of further pricing acceleration, formulary managers almost certainly will consider taking share away from Humira and/or Enbrel

It’s worthwhile considering DMARD inflation from the perspective of the formulary manager (e.g. ESRX, CVS, UNH’s Optum). As of 4Q15 sales-weighted DMARD net prices were rising at an average annual real rate of nearly 10 percent, and DMARD inflation explained more than a third of total US brand drug net price inflation (Exhibit 8). Given the recent acceleration of DMARD pricing in late 4Q15 and early 1Q16, in all likelihood DMARDs now account for more than half of total US brand drug net price inflation. Formulary managers are practically compelled to offer plan sponsors options for fighting back – if only out of fear that competing formulary managers will develop a viable solution. As such we’re entirely convinced that the major formulary managers will offer plan sponsors options for limiting, or even reversing, DMARD price growth. The questions are what form these options take, and whether plan sponsors will say yes

Formulary managers and their plan sponsors have two broad options: 1) switch current TNF-inhibitor patients to whichever TNF-inhibitor (Humira, Enbrel, Cimzia or Simponi) offers the lowest bid; and/or 2) put all newly diagnosed (and previously diagnosed and treated failures whose next treatment is a TNF-inhibitor) on whichever TNF-inhibitor offers the lowest bid

Option 1 – Switch current patients to the lowest bidder. This obviously means tackling head-on the clinical challenges associated with TNF-inhibitor switching; however recent experience shows that switching is feasible, and recent market evidence (the Lantus v. Levemir example) shows that formulary managers are willing to take on similar clinical challenges. Plainly this option would produce the greatest level of price competition – in theory there is no lower limit to possible market share losses, so Humira and Enbrel would be expected to bid aggressively to maintain share, just as Cimzia and Simponi would be expected to bid aggressively to capture share

Option 2 – Direct all or most newly diagnosed patients, plus existing patients who fail other therapies and are slated to receive a TNF-inhibitor, onto the lowest bidding TNF-inhibitor. This option is less impactful than option 1, but nevertheless still quite powerful. Consistent with CDC figures we assume 1.5M current US RA patients, and an incidence rate of 43/100,000. And, using average (Humira) persistency rates from longer-term studies, we assume roughly 10% of the treated[5] prevalent patient pool fails its current treatment option in each year. The incident rate implies roughly 13,000 new patient starts annually, and the prevalent failure rate implies roughly 110,000 patients switching treatment (or at least failing current treatment) annually. If we assume a given product captures all newly diagnosed patients, but no prevalent failure patients; and, we assume that patients taking product X will fail at the same rate as Humira, then a decision to put all newly diagnosed patients on product X gives product X only 2.7% patient share over five years. If we then add the assumption that product X captures one-fifth of currently-treated failures, its share over the same 5 years rises to 7%, or if we assume the product captures one-third of currently-treated failure its share rises to 10% over five years (Exhibit 9). These are share gains worth bidding for, particularly if you’re Cimzia or Simponi, with starting net sales shares of 3.3% and 3.7%, respectively

However looking at Option 2 from the perspective of the market leaders, it’s clear Humira and Enbrel will be less willing to bid aggressively under this option, as compared to Option 1. Faced with an auction of newly diagnosed patients, Humira and Enbrel would logically choose not to bid a price that would lower their net sales more than the alternative of holding price steady, but losing volume. About 10 percent of Humira and Enbrel patients will stop therapy annually (Exhibits 10a, 10b), so a choice to give up new patients while holding price steady would presumably result in a 10% annual rate of net sales erosion for either brand. The cumulative effect of this erosion is substantial, dropping net 2020 net sales by more than a third relative to 2016 net sales

Thus where Option 1 can be expected to generate aggressive bids from all four[6] of Humira, Enbrel, Cimzia, and Simponi, Option 2 would be expected to generate aggressive bids from Cimzia and Simponi, but somewhat less aggressive bids from Humira and Enbrel. And, under Option 2 formulary managers must counter the likelihood that Humira and Enbrel will accelerate pricing further to offset their loss of newly diagnosed patients. We believe this can be done by shifting TNF patients’ specialty-tier out-of-pocket obligations from fixed-dollar co-pays to percentage co-insurance, and by raising maximum out-of-pocket dollar limits for TNF patients that have co-insurance. Co-insurance links patients’ out-of-pocket costs to products’ list prices – and thus changes in out-of-pocket costs to changes in list prices. For example a patient with a 50% co-payment would see their out-of-pocket costs rise by 50% of the absolute dollar value of a product’s change in list price. In all likelihood the manufacturer would have to offer commercial patients correspondingly larger co-pay card subsidies to offset the rising out-of-pocket obligation, making the net effect one in which the manufacturer is able to capture only half of the absolute dollar gains associated with any given list price increase. In the case of Medicare and/or Medicaid patients, manufacturers would not be able to directly offset rising out-of-pocket costs under co-insurance benefit structures, meaning list price changes would be expected to produce volume losses in these market segments – which together account for more than a quarter of total biological DMARD volumes

As of 4Q16 US Humira sales account for 37% of ABBV global sales, and 51% of ABBV’s global sales growth; US Enbrel sales account for 24% of AMGN’s global sales, and 54% of AMGN’s global sales growth (Exhibit 11). Global consensus expectations have risen steadily for both brands (Exhibits 12a, 12b), but reflect decelerating growth (3.2% 5-year CAGR for Humira, 4.2% for Enbrel); presumably this is explained by a combination of ex-US biosimilar launches, and a conservative outlook regarding continued US pricing growth and/or the timing of US biosimilar launches

We don’t have line of sight into US v. ROW detail for consensus; however, this hardly matters for AMGN (US is 95% of AMGN’s WW Enbrel total). In ABBV’s case, we estimate US v. ROW shares of consensus by trending ROW sales downward to reflect a continuation of the current ROW sales decline, amplified by pending ROW biosimilar[7] launches (Exhibit 13). To evaluate whether consensus expectations are realistic, we compared consensus to weighted averages of several scenarios that we believe reflect the set of likely price / volume outcomes for either brand

For Humira, we modeled 15% US growth (slowed net pricing growth and continued dominance of newly diagnosed patients), 10% annual erosion (loss of newly diagnosed and other-brand treatment failures; no price growth), and a 20% price reset offset by continued dominance of newly diagnosed patients (10% volume growth). These scenarios are weighted as having 25%, 50%, and 25% odds of occurrence, respectively. For Enbrel, we modeled 10% growth (slower net pricing gains), 10% annual erosion (loss of newly diagnosed and other-brand treatment failures; no price growth), and a 20% price reset offset by continued dominance of newly diagnosed patients (10% volume growth)

The weighted average of the Humira scenarios reduces consensus sales expectations by $2.7B to $4.8B, equal to 10% (2017) and 15% reductions (2018, 2019) in total company global sales expectations. The worst-case Humira scenario lowers consensus sales expectations by $3.3B to$8.6B, equal to 13%, 22%, and 26% (2017-2019) reductions in total company global sales expectations (Exhibit 14a)

The weighted average of the Enbrel scenarios reduces consensus sales expectations by $390M to $850M, equal to 2% (2017, 2018) and 3% reductions (2019) in total company global sales expectations. The worst-case Enbrel scenario lowers consensus sales expectations by $630M to$2.2B, equal to 3%, 5%, and 8% (2017-2019) reductions in total company global sales expectations (Exhibit 14b)

 

  1. Disease Modifying Anti-Rheumatic Drugs
  2. See for example: Lund Hetland et al., “Direct Comparison of Treatment Responses, Remission Rates, and Drug Adherence in Patients with Rheumatoid Arthritis Treated with Adalimumab, Etanercept, or Infliximab”, Arthritis & Rheumatism, Vol. 62, No. 1, January 2010, pp 23-32; Martin du Pan et al., “Comparison of Drug Retention Rates and Causes of Drug Discontinuation Between Anti-Tumor Necrosis Factor Agents in Rheumatoid Arthritis”, Arthritis & Rheumatism, Vol. 61, No. 5, May 15, 2009, pp 560-568; Fabbroni et al., “Drug Retention Rates and Treatment Discontinuation among Anti-TNF-α Agents in Psoriatic Arthritis and Ankylosing Spondylitis in Clinical Practice”, Mediators of Inflammation, Volume 2014, Article ID 862969; and, Kristensen et al., “Results of a Five-Year Observational Study of Treatment with Infliximab and Etanercept Among Rheumatoid Arthritis Patients in Southern Sweden”, Arthritis & Rheumatism, Vol. 54, No. 2, February 2006, pp 600-606
  3. To the first decimal point percentage change in list price
  4. 4 quarter trailing average ending 1Q16
  5. We assume 70% of the prevalent pool is treated with a biological DMARD
  6. We exclude Remicade from consideration as a first-line ‘workhorse’ agent, given: 1) the need for Remicade to be infused; and 2) the fact that patients fail Remicade more quickly than Humira and Enbrel… and presumably also faster than Cimzia and Simponi
  7. Two follow-on versions of Humira are currently filed for approval with the European Medicines Agency (EMA), at least one of which should be on-market by 2017

 

©2016, SSR, LLC, 1055 Washington Blvd, Stamford, CT 06901. 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 topics

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