- For International Humira, the debate centers on whether there is further downside to AbbVie’s 2019 guidance of a 30% ex FX decline. This follows several downward revisions by management over the last year.

- For US Humira, the drug will face competition from several novel mechanisms of action, including JAK, IL-17, and IL-23 inhibitors in rheumatoid arthritis and psoriasis. These drugs could also present downside risk to Humira estimates.

- Skyrizi and upadacitinib are the most often-cited drugs within the pipeline. While they could offset some of the gap, AbbVie is looking at a $10B+ revenue gap from Humira, and Skyrizi/upadacitinib do not look exciting enough to cover the shortfall.

AbbVie at Risk of Falling Behind on the Treadmill

As I have described in the past, pharma stocks can be thought of as a runner on a treadmill. Mature, blockbuster drugs are always losing exclusivities through patent expirations, and pharma companies must innovate to stay ahead of the speeding treadmill. While some companies, like Pfizer, appear to be running ahead of the treadmill, others like AbbVie are at risk of falling behind.

Almost a year ago, I wrote an article detailing the upcoming biosimilar competition for Humira ex-US in 4Q18, and the longer-term US Humira biosimilar cliff in 2023. In my treadmill analogy, the threat of Humira losses represent the treadmill speeding up.  

Today, it appears that the treadmill is going faster than the runner. International biosimilar competition for Humira is now here, and the share loss to biosimilars have been more severe than management and some on the street expected since I last wrote on the company.  Investor sentiment remains very bearish on the stock. 

In the near-to-medium term, AbbVie has a few drugs that will help them keep up with the treadmill. Upadacitinib and Skyrizi (risankizumab) are two key drugs that are expected to offset the losses between 2020-2023, and I'll detail the specific topics for each drug that investors are debating.

However, the concern is still centered on Humira. While the new drugs should contribute to revenue, the consensus opinion is that these drugs will not offset continued weakness in ex-US and potential upcoming weakness in the US. For this reason, AbbVie continues to trade at a discount. Bulls argue that additional M&A, new drugs, and inexpensive valuation (with a strong dividend yield) make up for this gap. I personally believe that the downside risk is becoming more balanced with the upside risk, but would still stay on the sidelines for now until it becomes more clear when Humira declines will stabilize. 

New drugs in the US and biosimilar competition in EU threatens Humira sales

Humira remains the key sore spot for AbbVie and a large reason for the stock's underperformance over the last year. In 2018, Humira made up about $20 billion of revenue, with $14 billion in the US and $6 billion in International, making it a significant revenue contributor for Humira as a whole.

As I wrote in my note last year, International was going to be the first segment to see biosimilar competition in 4Q18. Consensus expectations and management guidance was for around a high-teens decline for 2019, and management noted that they had based their guidance on Remicade and Enbrel's performance following biosimilar competition. However, investors were nervous that declines could be more severe, and there were a group of sellside analysts forecasting declines of 21-30%.  

Looking back, guidance was wrong, and the nervous investors were right. In ex-US, Humira faced competition from four biosimilars, which made the erosion much more rapid than what Remicade and Enbrel saw. Management ended up lowering guidance multiple times afterward, and today the guidance sits at a 30% ex FX decline for 2019. Management's guidance reflects greater-than-anticipated pricing pressure (management noted pricing is about 10% lower than expected) and in more regions than anticipated (with 75% of International now under biosimilar pressure vs. 66% initially expected).  

Going forward, management did note that they are now seeing trends play out according to their new expectations. However, with management guidance pointing to accelerated declines in 2Q (with guidance pointing to 33-34% ex-FX declines), there is a sense among some investors that there remains some downside risk for the company. Piper Jaffray's surveys among dermatologists and rheumatologists suggest that declines could be as high as 40%, as EU rheumatologists have noted that their biosimilar use is expected to increase.

Consensus currently calls for a 32% decline for the full year (inclusive of FX). In order for the stock to recover, the company will need to show that ex-US Humira declines have stabilized and will not be worse than what management has factored into guidance. 

Within the US, Humira will not face biosimilar competition until 2023, but may still come under pressure from drugs with alternate mechanisms of action (MOA). AbbVie's own IL-23 inhibitor, Skyrizi, will be one such competitor in plaque psoriasis (among other IL-17 and IL-23 inhibitors), and is widely regarded as the best treatment option available. Additionally, janus kinase (JAK) inhibitors are likely to see increased usage for rheumatoid arthritis (RA) as well, with the upcoming upadacitinib (also owned by AbbVie) and Gilead’s filgotinib on the horizon. While owning two of the key drugs within these alternate MOAs does help offset some of the losses, it won’t likely be one for one. As a result, investors have moved down US estimates over time, with consensus growth expectations moving down by about 2 points over the last six months. Growth is still expected until 2023, but declines are expected to be sharp thereafter, and there is still the risk of downward revisions once the new drugs launch.

In total, Humira is expected to decline from here on, with much of the pressure being driven by ex-US until 2023, and greater US pressure thereafter. And investors see room for further downside in both segments from current expectations. With Humira representing a significant portion of sales, AbbVie must show significant progress in its new drugs in order to minimize revenue declines once US biosimilar competition arrives.

Pipeline: Is Upadacitinib and Skyrizi enough to offset Humira losses?

Upadacitinib. Upadacitinib is a janus kinase (JAK) selective inhibitor in RA. The JAK class has shown promising results in efficacy, but has also shown a history of safety concerns, which I have detailed in the past. The key debate for upadacitinib is not in whether it will receive approval - the street widely expects it - but in whether it will receive label warnings like its JAK predecessors.

Pfizer's tofacitinib and Eli Lilly's baricitinib are the other two JAK drugs that received approval several years ago, and both have been plagued with safety issues that have limited patient uptake. Specifically, venuous thromboembolic events (VTEs) and other severe cardiovascular events led to a black box warning for baricitinib and warnings for tofacitinib. Note that for baricitinib, the approved 2mg dose did not show any VTEs but still received a black box warning. Baricitinib had 5 observations of VTEs with its 4mg dose.  

Upadacitinib's success in RA is dependent on avoiding the warnings that baricitinib and tofacitinib received. Note that AbbVie has submitted labeling only for the 15mg dose, but will include data for the 30mg dose as well. The data from clinical trials is mixed, as upadacitinib did see VTEs (6 in all phase 3 trials, 8 in all phase 2 and 3 trials), but they also appeared to be less frequent than existing JAK drugs when controlling for a variety of factors.  

Management has guided to $3 billion in 2025 RA-related revenue for upadacitinib, and for $6.5 billion for all indications. Consensus expectations for the drug in all indications are for $3 billion revenue by 2025. Safety labeling will play a key role in whether the drug is able to outperform consensus expectations and be successful in other indications. If upadacitinib is able to avoid major warnings, the drug could see higher uptake than its JAK predecessors have, and could fare better once Gilead's filgotinib (which is widely seen as having comparable efficacy to upadacitinib and improved safety levels) comes to market in 2020. The company expects an FDA decision by 3Q19.

Skyrizi. AbbVie recently received approval for Skyrizi (risankizumab), a drug used for the treatment of plaque psoriasis. Management strongly believes that the drug should see a rapid ramp due to best-in-class efficacy, favorable benefit/risk, and quarterly dosing. Management noted that they expect to receive >50% commercial access by July, an achievement that has not been seen by any other launch in the psoriasis category, and ultimately $150 million in revenue for 2019. Investor reaction was favorable, as the guidance was much more aggressive than where expectations where (consensus called for roughly $100 million for the year).  Ultimately, management has guided to $5 billion in revenue by 2025. Consensus currently calls for $3 billion by then, but surveys among dermatologists and investor sentiment suggest that expectations are likely higher, and that significant Skyrizi success is priced in to the stock.  

Humira Revenue Loss to be Significant

My read on consensus is that both Skyrizi and upadacitinib look promising, but are not considered exciting enough among investors to overcome the Humira drag. Both drugs are currently expected to generate combined revenue of about $6 billion by 2025, while global Humira is expected to lose $10 billion revenue by then (with further losses as a potential scenario). Personally, I find this line of reasoning more compelling and, despite the attractive 5%+ dividend yield, would wait on the sidelines until there is more evidence that downside revisions are behind the company.

For those who see Humira as a buy, they either must believe that upadacitinib or Skyrizi are much bigger than what the market currently predicts, or that another pipeline drug (perhaps Imbruvica or Venclexta) will emerge as a much more significant contributor to revenue than is currently expected. Additionally/alternatively, Humira sales declines must be close to the bottom in terms of expectations, and must fare better than expected against upcoming new MOAs.