ESRX’ new DMARD formulary points to slowing US sales for Humira(ABBV) and Enbrel(AMGN), with outright sales declines possible. Cimzia(UCB) and Simponi(JNJ) are beneficiaries

Richard Evans / Scott Hinds / Ryan Baum / Hardy Evans

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September 11, 2016

ESRX’ new DMARD formulary points to slowing US sales for Humira(ABBV) and Enbrel(AMGN), with outright sales declines possible. Cimzia(UCB) and Simponi(JNJ) are beneficiaries

• US net price gains on Humira and Enbrel have accelerated, with the companies’ pricing actions moving nearly in lock-step. These two brands alone account for as much as half of total US Rx market net price inflation through 1Q16. As we argued in June, these realities compel formulary managers to offer their plan sponsors options for pushing back
• Last Thursday, ESRX announced its ‘Inflammatory Conditions Care Value Program’ which is intended to shift newly diagnosed patients to the least expensive DMARD^[1]s on offer. Importantly, the program is awarding business to DMARD brands one disease type at a time, rather than awarding the entire DMARD category. This gives legitimate alternatives like Cimzia and Simponi – who are approved for the major DMARD indications but not for the entire breadth of indications (like Humira) – a fair shot at winning formulary positions for the diseases in their labels
• Obviously it is to the dominant players’ (ABBV, AMGN) benefit that the program is limited to newly diagnosed patients, and makes no attempt to pressure existing patients to switch. However, because annual quit rates on Humira and Enbrel are circa 10%, losing newly diagnosed patients in any of the larger DMARD indications likely would result in outright volume declines
• ABBV is most at risk; in worst-case scenario where ABBV loses all newly diagnosed patients and has no change in net price, 2020 total-company revenue consensus is roughly 28% too high. Under the same assumptions, AMGN’s 2020 total-company revenue consensus would be roughly 8% too high
• Being focused to newly diagnosed patients, the ESRX program primarily affects first-line therapy, i.e. the anti-TNF’s (Humira, Enbrel, Remicade, Cimzia, Simponi). Remicade is unlikely to benefit because of its IV route of administration (the other 4 anti-TNFs are administered subcutaneously), and also because of its higher attrition rate relative to Humira and Enbrel. This leaves Cimzia and Simponi as the key beneficiaries

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)

In our June 27 note “ABBV, AMGN, and US DMARD Pricing: The Dog and Its Reflection”, we argued that because Humira (ABBV) and Enbrel (AMGN) price increases recently accounted for roughly half of total (brand) US market net price inflation, formulary managers were practically compelled to offer plan sponsors a means of controlling these products’ prices

Last Thursday, ESRX announced its “Inflammatory Conditions Care Value Program”, whose features mirror those anticipated in our June note. In particular, the program divides the DMARD^[2] formulary category into multiple sub-categories that correspond to the many distinct inflammatory conditions treated by the DMARD class. Formulary competition among DMARD brands will now be organized separately for each condition, rather than holding a single competition at the DMARD level for all underlying conditions. This obviates a key Humira advantage, and in so doing gives legitimate drugs with narrower labels (e.g. Cimzia, Simponi) a fair shot at winning the conditions for which these drugs are, or soon will be, approved (Exhibit 1)

The relevant text from ESRX’ announcement is worth highlighting, and reads as follows:

“Inflammatory diseases comprise several very different types of conditions, from rheumatoid arthritis to dermatological conditions like psoriasis, to inflammatory bowel conditions like Crohn’s disease. Because the industry has historically constructed formularies to cover the entire range of inflammatory conditions, many of the medications that are narrowly indicated for one or two specific conditions have not been able to compete effectively with the two major nonspecific anti-inflammatory medications, which together currently represent 73% of the U.S. market share for this therapy class.

As part of the Inflammatory Conditions Care Value Program, Express Scripts will now manage a formulary category around each individual inflammatory condition. Niche, single-indication products will be able to compete head-to-head with the nonspecific products, and this more precise approach to formulary management will enable Express Scripts to leverage the additional competition to make this therapy class more affordable for participating plans.”

Our understanding is that the resulting formulary restrictions will apply only to patients who are newly initiating therapy, meaning patients with a given condition on a given brand will not be required to switch to the preferred brand if it differs from their current medication. We note however that while existing patients may not be required to switch to the preferred brand for their condition, there remains every possibility that these patients will be offered financial incentives (lower out-of-pockets) to switch

Even if no incumbent patients switch to a new preferred agent, the impact of losing all newly diagnosed patients to a competing brand is profound — longitudinal analyses show that about 10% of Humira and Enbrel patients quit annually (Exhibits 2a, 2b)

As the ESRX program generally reflects the contours of the DMARD policy we’ve anticipated, we believe it will have considerable impact. And, believing the program will be successful, this is likely to compound pressure on other formulary managers (e.g. CVS\Caremark, Optum), from whom we also anticipate more aggressive DMARD programs

ABBV (Humira) and AMGN (Enbrel) obviously have the most to lose, as they currently dominate the DMARD category, and are almost certain to lose either price or volume, and perhaps both. Of the two ABBV is most at risk simply because it is far more dependent on Humira pricing gains than AMGN is on Enbrel pricing gains. For both companies, the worst case scenario is that they hold price constant, and in so doing lose all newly diagnosed patients. Given the 10% annual quit rate for both brands, this potentially cuts both brands’ sales by 35% over five years. For ABBV this would reduce 2020e Humira sales by $8.9B v. consensus, and total company sales by 28% v. consensus (Exhibit 3a). For AMGN this would reduce Enbrel sales by $1.9B v. consensus, and total company sales by 8% v. consensus (Exhibit 3b). Obviously we expect both companies to do better than this worst case scenario; however, we emphasize that each company’s best case scenario is a sharp deceleration in US DMARD sales

Because both Humira and Enbrel are anti-TNF’s^[3], and because anti-TNF’s remain the preferred first-line treatment option for most DMARD-treated conditions, the other subcutaneously administered anti-TNF’s (Cimzia/UCB and Simponi/JNJ) have the most to gain. Because of its IV route of administration and higher relative failure rate, Remicade is unlikely to benefit from the policy change. And, because the policy arguably primarily affects the first-line anti-TNF’s, we don’t anticipate a major impact on the DMARD brands with non-TNF mechanisms of action

1. Disease Modifying Anti-Rheumatic Drugs ↑
2. Disease Modifying Anti-Rheumatic Drug ↑
3. TNF = tumor necrosis factor ↑

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