ABBV: Humira Pricing … Let’s Play a Game

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Richard Evans / Scott Hinds / Ryan Baum

203.901.1631 /.1632 / .1627

revans@ / shinds@ / rbaum@ssrllc.com

@SSRHealth

December 19, 2016

ABBV: Humira Pricing … Let’s Play a Game

  • ESRX is auctioning newly diagnosed anti-TNF patients to the lowest bidder; other major payors are likely to follow suit
  • Presumably the price bid for newly diagnosed patients must also be applied to the ‘installed base’ of legacy patients. In the case of Cimzia and Simponi the installed bases are quite small relative to potential new patients, which warrants more aggressive discounting as compared to Humira, for whom the installed base is much larger relative to potential new patients
  • Humira’s current net price per treatment year is approximately $27,500. Humira arguably must discount further to continue capturing new patients at the current rate; alternatively Humira can hold its current price and lose access to new patients. The ‘indifference price’ at which these two scenarios have equal 5-year NPV’s is $16,750, i.e. Humira should bid no lower than this price to continue capturing newly diagnosed patients at the present rate
  • For Cimzia and Simponi, indifference prices at which greater shares of newly diagnosed patients produce NPVs equal to holding price and share of new patients constant are $10,660 and $11,006, respectively. Current net treatment costs per year for Cimzia and Simponi are $27,008 and $29,546, respectively. Because these brands’ indifference prices are well below Humira’s, the likely outcome is for these brands to bid just below Humira’s indifference price, or circa $16,500. At this net price, volume gains from newly diagnosed patients increase each brand’s 5 year NPV by more than 40%
  • Cimzia and Simponi list prices are on par with Humira’s. As such the rebates (circa $21,000 to $23,000) required to reach the $16,500 net annual treatment cost are far greater than current (circa $10,084) Humira rebates. Because of this, average rebates in the anti-TNF space actually grow if payors auction newly diagnosed patients to Cimzia and Simponi, even under the assumption that Humira rebates decline in proportion with Humira’s falling patient share
  • US Humira growth accounts for all of ABBV’s global revenue growth. US Humira growth consists of roughly equal parts price and volume. In an auction for newly diagnosed patients, as is occurring, Humira must sacrifice either price or volume, and so cannot reasonably be expected to grow at anything approaching trailing rates

ABBV’s global revenue growth is entirely explained by US Humira growth, which in turn consists of roughly equal parts price and volume[1]. ESRX is auctioning new patient starts by indication in the DMARD category, and we believe other major formulary managers will follow[2]

If we assume payors are willing and able to place newly diagnosed patients on the lowest bidder, and if we further assume bids will be offered that are below current market, then we must also assume that trailing rates of both price and volume growth cannot continue for US Humira

Elsewhere we’ve argued extensively that payors are willing and able to grant newly diagnosed patients to the lowest bidder[3]; our aim here is to tackle the question of whether bids are likely to be below current market, and if so by roughly how much

For each of the brands[4] bidding for newly diagnosed patients, bids offered logically should reflect each brand manager’s best estimate of the price at which the NPV of future brand profits is maximized. Brand managers should rationally assume that prices bid apply to all patients – both the ‘installed base’ of legacy patients, and to the newly diagnosed. In this respect Cimzia and Simponi are advantaged relative to Humira and Enbrel, since their smaller installed bases mean the value of new patients gained can more easily exceed the negative value of repricing the installed base. Knowing this, the Cimzia and Simponi managers should expect that the lowest bid Humira or Enbrel are likely to offer is higher than the lowest price at which Cimzia and/or Simponi would be better off winning the newly diagnosed patients. As such the game should start with Cimzia and Simponi calculating the incumbents’ ‘indifference’ price, i.e. the price at which the NPV of winning all new patients at a lower price equals the NPV of maintaining price but losing all new patients. It turns out the indifference price for Humira and Enbrel is a similar discount (approximately 39%) from current net pricing; for simplicity, and because Humira is far more impactful to ABBV than Enbrel is to AMGN, we’ll focus on Humira

We know Humira’s average net price per year of therapy ($27,500), and Humira’s annual sales level, which allows us to estimate Humira’s current number of US patients (or more precisely, patient years – about 367,065). We also know that the attrition rate on Humira patients is roughly 10 percent (Exhibit 1), which allows us to solve for the number of newly diagnosed patients that must be coming to Humira annually (about 81,000) for the brand to register its trailing (circa 12%) rate of unit growth. Using the trailing rate of growth in newly diagnosed patients at the total market level (about 4%), we assume that if Humira kept its current share of newly diagnosed patients, that the number of patients coming to the brand annually would grow at 4 percent. If Humira rationally assumes that it must discount from its current price to capture this future patient flow, the question becomes whether, and at what price, it is more profitable to bid a lower price for the new patient flow than to simply hold the current price steady and give up the new patients. Assuming constant pricing at the current annual net cost of therapy ($27,500) and no new patient flow, we would expect unit demand to fall at a rate of 10 percent annually, reflecting the attrition rate of ‘legacy’ Humira patients. The NPV[5] of this five year sales stream is roughly $33.5B (Exhibit 2). As such the lowest price Humira should be willing to bid to capture all newly diagnosed patients is the price at which the resulting unit volume gains offset the requisite discount, producing an NPV equivalent to the baseline scenario. This price (in annual cost of therapy terms) is $16,743 annually, a 39% discount from current net pricing (Exhibit 2, again)

We repeat this exercise for both Cimzia and Simponi; however in each case we assume a baseline in which offering no bid and maintaining 10 percent price inflation results in new patient flows on par with trailing new patient flows (conservative assumptions that make bidding for new patients relatively less attractive), and that if a bid is offered that the best case scenario involves capturing only half of the new patient flows that would otherwise have gone to Humira (since at the point of making the bid either brand should expect the other to behave similarly, making it unreasonable to bid on the expectation of getting all newly diagnosed patients)

In Cimzia’s case 10 percent annual price inflation and a continued share of newly diagnosed patients yields a net revenue NPV of $4.7B (Exhibit 3, scenario ‘a’). This same NPV could be achieved by capturing half of newly diagnosed patients at an annual treatment cost of $10,660, which is 60.5% below Cimzia’s current net pricing (Exhibit 3, scenario ‘b’). However because Humira almost certainly would not bid at this level, Cimzia might rationally instead bid just below the level at which Humira can bid, e.g. $16,500. At this net pricing level the 5 year NPV of Cimzia net sales is $6.8B, 45% greater than the base case of doing nothing (Exhibit 3, scenario ‘c’)

In Simponi’s case 10 percent annual price inflation and a continued capture rate of newly diagnosed patients yields a 5 year net sales NPV of $4.8B (Exhibit 4, scenario ‘a’). This same NPV can be achieved by capturing half of newly diagnosed patients at a net annual treatment cost of $11,006, 62.7% below current net pricing (Exhibit 4, scenario ‘b’). Knowing Humira is unlikely to bid below $16,750, Simponi might rationally bid just below this level (e.g. $16,500), an annual net treatment cost at which capturing half of newly diagnosed patients yields a 5 year net sales NPV of $6.7B, 41% greater than the base case of 10 percent price growth and constant capture rate of newly diagnosed patients (Exhibit 4, scenario ‘c’)

The likely outcome of this competition is that Cimzia and Simponi bid just below Humira’s indifference price, splitting the market’s newly diagnosed patient flow between them, registering NPV gains of 40% or more. Both brands have sold in the past at net annual treatment costs below the $16,500 estimated bid, therefore we can assume both brands have positive gross margins at this price. The outcome for Humira is a 10 percent annual rate of decline in units, at constant pricing, and thus a ten percent annual rate of decline in net sales

By far the most common objection to our ABBV/Humira bear case is that formulary managers cannot afford to let Humira’s market share decline, as this would lead to lower rebates from Humira, on which the formulary managers depend. This ignores that Cimzia and Simponi carry list prices on par with Humira, that the rebates required to achieve the targeted bid price are far larger than current Humira rebates, and that the likely market blend of much higher Cimzia / Simponi rebates and lower Humira rebates still produces a gain in average rebates per treatment year. Exhibit 5 examines the viewpoint of the formulary manager, and starts with a (‘do-nothing’) baseline scenario in which Humira, Cimzia, and Simponi maintain trailing rates of newly diagnosed patient gains, and constant rebates[6], producing a volume-weighted average rebate per treatment year of just over $10,000, which holds roughly constant across the 5 years modeled. Exhibit 5 also contains a scenario in which Cimzia and Simponi rebate from their current list prices to a net price level of $16,500, and in so doing capture half of newly diagnosed patients at Humira’s expense. The scenario further assumes that Humira rebates fall in proportion to Humira’s falling share of patients. The result is that sharply higher Cimzia / Simponi rebates, beginning in year 2, more than offset the decline in Humira rebates, producing nearly 10 percent compound annual growth in average rebates, which reach $14,668 by year 5

The scenario comparison makes clear that awarding newly diagnosed patients to the low bidder is likely to produce higher average rebates than the baseline, status quo scenario – even if Humira decrease rebates in proportion with its share losses. As a practical matter we doubt Humira rebates can fall significantly, meaning the idea of auctioning new patients to the low bidder is even more favorable than shown. Formulary managers awarding newly diagnosed patients to Cimzia or Simponi are likely to calibrate ‘legacy’ Humira patients’ out-of-pocket payments to Humira’s net price, meaning Humira patients’ out-of-pocket costs are likely to rise if Humira rebates fall. Because these same patients will have access to Cimzia or Simponi at the same lower out-of-pocket as newly diagnosed patients, falling Humira rebates (and rising Humira out-of-pocket costs) only serve to shift legacy Humira patients to Cimzia or Simponi. Formulary managers obviously are highly incentivized to accommodate switching from Humira to Cimzia or Simponi, particularly if Humira rebates fall, because of the very large incremental rebate gains ($10,000 to $12,000 at current Humira rebates, and this gap only grows if Humira rebates fall) associated with the switch

 

  1. For detail please see: “ABBV: Trailing US Humira Growth Driven More or Less Equally by Net Sales and Volume Gains …”, SSR Health LLC, November 1, 2016
  2. For detail please see: “ESRX’ new DMARD formulary …”, SSR Health LLC, September 11, 2016
  3. For detail please see: “ABBV, AMGN, and US DMARD Pricing: The Dog and Its Reflection”, SSR Health LLC, June 27, 2016
  4. We assume, and evidence indicates, that bidding is limited to the anti-TNFs other than Remicade, i.e. Humira, Enbrel, Cimzia, and Simponi
  5. We calculate the NPV on sales rather than gross profits, as we have no reasonable means of assuming relative COGS rates across the brands in question; and, if we assume identical COGS percentages across all brands, the analysis is essentially the same as running the NPV on net sales
  6. In all likelihood rebates would grow as the result of list price inflation. However because list price inflation impacts rebates in both scenarios equally, it’s simpler to assume no list price inflation, allowing a cleaner comparison of changes in rebate attributable to bidding

 

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