- AbbVie's Humira represents a sizeable portion of revenue, and will see biosimilar competition soon in the EU and in the US.

- In the EU, a more biosimilar-friendly environment (net of regional differences) and the launch of at least three biosimilars could lead to more significant declines than expected.

- In the US, competition is not expected until 2023, and biosimilars have not gained much traction to date. However, the environment is changing.

- The pipeline looks promising with numerous label expansions planned that could offset Humira sales declines. Some investors are skeptical over whether it will be enough.

- Ultimately, the lack of visibility on Humira's growth trajectory prevents most of the street from turning more positive. 4Q18 Humira performance will be closely watched.

Upcoming Biosimilar Competition for Humira is the Key Topic for AbbVie

As has been widely discussed, AbbVie faces biosimilar competition in EU starting in 4Q18, and a patent dispute in the US, with settlements allowing for competition to begin in the 2022-2023 time frame. This is important given the sizable revenue that Humira is responsible for (65% in 2017). There's a nuanced debate here between the bulls and bears on the rate of Humira's sales erosion, which will be determined by a confluence of legal, political/regulatory, and medical factors. Let's jump into it.

Europe To See Biosimilar Competition in 4Q18

In Europe, Humira's $6 billion in sales (as of FY2017) will face biosimilar competition starting in 4Q18. Management's guidance is for an 18-20% decline through the end of 2019, and more modest declines thereafter. In terms of the street's estimates, consensus sits in the middle of the guidance range at a 19% decline, but there are numerous brokers with estimates in the 14-15% decline range, and others with 21-30% declines. 

Bulls see a possibility for a less severe decline. AbbVie recently launched a lower volume Humira dose without citrate buffers, which should improve customer comfort levels. The company has switched many of its existing patients onto the new formulation in the hopes that it increases the barriers to switching onto a biosimilar. Additionally, management has noted that they will compete heavily on price to maintain market share. While this will still prove to be a revenue headwind, the decline could be more moderate than expected.  Furthermore, the timeline of the launches will vary by country, and therefore the severity of the decline will not be immediate. And in many countries, there is still a biosimilar stigma (both from a regulatory and medical perspective), especially in Italy and France.

What are the arguments for a more severe decline north of 20%? While the region is fragmented and not consistent, the environment is more supportive of biosimilars than in the US, which has led to higher overall uptake. For example, the Nordic countries lead the way with some biosimilars capturing as much as 80% in some markets (i.e. infliximab). These countries have had supportive regulatory frameworks which have helped lessen the medical stigma associated with biosimilars. Additionally, prior biosimilar performance suggests that erosion happens more rapidly with 2 or more biosimilars. AbbVie will see at least three biosimilars to compete against in the EU.

Additionally, interchangeability represents another significant threat that could further pressure Humira's EU sales (and the US, which I'll discuss later). Interchangeability is a designation signifying that the product is expected to produce the same clinical result as the branded product in any given patient, and that switching between the branded product and the biosimilar would not reduce the safety or efficacy of the product.  Drugs with the interchangeable designation can be automatically substituted in most states in the US (with the remaining states still in various stages of legislation). While there is no interchangeability designation in the EU, each country can decide the degree of substitution for the reference product. And many do expect interchangeability to eventually come to the EU over the next several years, which could further accelerate the uptake of biosimilars.

While management has stated that they expect an 18-20% decline through 2019, they also stated that they may adjust their guidance based on initial results in 4Q18. As a result, investors are closely watching biosimilar performance here to determine  what the go-forward rate will be, and whether management's guidance is conservative enough.

Biosimilars in the US Have Struggled To Gain Traction, But This Could Change

In the US, there are several components to the Humira debate: 1) will biosimilars enter the market prior to 2023, and 2) what will be the rate of erosion once biosimilars do enter the market?

On the timing of biosimilar competition, the short story is that consensus does not expect competition until 2023. The company has an impressive barricade of patents (>100) that cover formulation, manufacturing, and use, and competitors have been unable to meaningfully challenge them in inter partes review (with the majority of challenges holding up in court). As a result, AbbVie has/is expected to settle with numerous competitors to launch their biosimilars in early or mid 2023 (Amgen, Samsung Bioepis, and Mylan have already entered into settlements). Several senators have sent in letters to the FTC asking for an investigation into "pay to delay" settlements, but analysts do not see this investigation meaningfully changing the timeline; an invalidation of the settlements would only restart the patent litigation process, and that process would not likely conclude before 2023 anyway.

The more significant debate is on what impact biosimilar competition will have on Humira sales in the US in 2023. Consensus currently points to annual declines in the high teens/low twenties starting in 2023 and continuing onward.

Bulls argue that this rate is perhaps too aggressive given the current environment on biosimilars. Biosimilar adoption has been held back by widespread skepticism in the US. For example, as of 1Q18, JNJ's Remicade had retained over 95% of the market for infliximab despite competition from two biosimilars. Additionally, Neupogen still maintains roughly 60% of the filgrastim market despite over two years of competition from multiple biosimilars.

The reasons for the slow uptake are varied. On the medical front, there is a stigma among prescribers that biosimilars are not as safe or effective as the branded product, and therefore are not often recommended. Note that this stigma has not been supported by studies. In fact, a literature review by Sandoz examined 90 switching studies and found that the large majority of the studies were in favor of biosimilars – there was no drop off in efficacy, safety, or immunogenicity when switching between a branded product and biosimilars. However, the stigma exists nonetheless and is quite pervasive in the US.

Additionally, branded product manufacturers often engage in aggressive and complicated contracting practices that make it difficult for biosimilars to gain entry into the market. Manufacturers will include contracting provisions that give rebates to drugs that qualify for preferred status. With higher rebates given only to the drugs that maintain a certain level of volume, it becomes extremely difficult for the biosimilars to compete and incentivize the PBMs and insurers to move away from the branded product. Johnson and Johnson employed this strategy heavily to protect Remicade from biosimilar competition to great effect.

As a result, uptake remains limited among the biosimilars, which also further reinforces the medical stigma. This cycle is referred to as the "rebate trap" and it is often the defense among bulls for why Humira will not be as severely impacted by the biosimilars as consensus might suggest.

Bears on the other hand see an evolving landscape that will eventually become more biosimilar-friendly. Note that this increasingly appears to be the consensus among the analysts covering AbbVie, and it is partially a reason why the stock has traded sideways as investors fret about FDA changes that could put US Humira sales further at risk in 2023 (beyond the 20% consensus declines).

The underlying tenet to the changing regulatory environment is that the FDA, the Trump Administration, Congress, and the rest of the industry seem to understand the importance in ensuring that biosimilars are widely adopted. It's important to note that generics faced an uphill battle as well when introduced in the 1980s. However, with enough regulatory and industry support, they eventually became widely adopted by consumers. Many bears see a similar (and hopefully expedited) path for biosimilars given a similar need for price competition in biologics. Biosimilar success in many EU regions further show that widespread adoption is possible.

While biosimilars are currently putting pricing pressure on the branded manufacturers (and are therefore creating clear benefits to the consumer), it doesn't appear to be a sustainable benefit as none of the revenue gains are going to biosimilars. If biosimilars continue to face an uphill battle in adoption, biosimilar manufacturers will be less incentivized to pursue further biosimilar development, which will ultimately harm the original intent and spirit of the Biologics Price Competition and Innovation Act. As a result, the FDA, the Trump Administration, Congress and other players (I.e. insurers, PBMs) are intent on ensuring that biosimilars are more widely adopted.

One way that the FDA will attempt to ease the environment for biosimilars is by issuing guidance on more aspects of biosimilar development. The FDA issued draft interchangeability guidance in January 2017 and a revised guidance is expected by mid 2019 (with some analysts expecting updates in the coming months), which should expedite biosimilar adoption. Additionally, the FDA is looking to issue revised or final guidance on six other aspects of biosimilar development, which could further speed up biosimilar time to market. Development for biosimilars is significantly higher than generics, with some estimates placing biosimilar development cost at $100M-250M vs. the $10M average cost for generic drugs. Guidance on development could lower the cost and allow biosimilars to be priced at a higher discount to the branded product.

Additionally, government institutions are looking more closely at the rebate practices by the manufacturers. On September 4th, the FDA will hold a public hearing on ways to facilitate price competition and innovation. On July 19th, the Department of Health and Human Services submitted a rule change to the Office of Management and Budget titled "Removal of Safe Harbor Protection for Rebates to Plans or PBMs Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection." The Trump Administration is expected to take further actions against rebating prior to the midterm elections. Furthermore, PFE has sued JNJ due to their anticompetitive rebate practices, and the Biosimilar Council has already sided with Pfizer. It seems inevitable that many of the contracting practices that enable the "rebate trap" will not hold longer-term as the government more closely scrutinizes commercial tactics employed by branded biologics.

In sum, the bear thesis is that by 2023, we may see interchangeable biosimilars and policies that invalidate the rebate trap, thereby facilitating greater uptake of biosimilars in the US. In the meantime, the stock may see elevated headline risk as regulatory updates leak out, especially as we approach midterm elections.

Ultimately, it appears that the erosion debate will be determined by regulatory agencies and the political will to change drug pricing. If the government is able to pass meaningful legislation that is supportive of biosimilars in an expedited fashion, then Humira will likely see significant competition from biosimilars and a rapid erosion in 2023 and beyond. But if the government moves slowly, as they are known to do, then Humira may see upside relative to consensus estimates.

Other Tidbits

This article focused primarily on the Humira erosion debate, but AbbVie's pipeline could also offset Humira losses as well. Here are a few short tidbits on what the street is saying about various drugs/label expansions in the pipeline:

• AbbVie recently released positive Orilissa top-line results from its phase 3 extension study in Uterine Fibroids. While largely expected by the street, the street sees Orilissa as a promising asset with the potential to reach at least $2 billion in sales by 2025. Rollout will be gradual, but I've seen some disagreement on the street in terms of uptake.
• Upadacitinib should see more immediate uptake driven by the rheumatology market. Street looks for a regulatory filing in 4Q18 and potential approval in 2019. The drug appears to have the highest potency among the JAK inhibitors. The street had some concerns around safety for Upadacitinib (as well as the class as a whole), but recently updated safety results should provide some relief.
• Mavyret has been a big positive for the company in HCV, but management does not see the drug as a long-term revenue driver given the state of the HCV market.
• Venclexta received approval for a second indication in 2Q18 (treatment of patients with relapsed/refractory chronic lymphoblastic leukemia), and we could see as much as five additional label expansions over the next three years.
• Imbruvica label expansion is another opportunity for upside, with several more indications in various stages of clinical trials, including frontline pancreatic cancer, frontline mantle cell lymphoma, and second-line follicular lymphoma.

Street Largely Needs More Visibility on Humira Growth Trajectory Before Turning More Positive

Overall, the street consensus appears to be that the pipeline label expansions look promising, but a lack of visibility on Humira's growth trajectory outweighs these positives for now. Going forward, the street will be closely watching 1) Humira performance in 4Q with biosimilar competition beginning, and 2) regulatory updates on biosimilars.