Humira Biosimilar Threat: Who Gets the Customer First?

The concern with AbbVie’s blockbuster biologic Humira is the lost of patent exclusivity in the U.S. and Europe over the next two years.

The worry is revenue from Humira will drop off a cliff as generic drugs enter the market.

This would be a logical worry if Humira was a small molecule drug. A generic small molecule drug simply has to prove it is the same chemical formula as the branded drug. No new safety and efficacy trials needed.

Humira is a biologic, a large molecule, that is synthesized from living cells. The process to synthesize and isolate the biologic is the drug. A small change in the process can yield vastly different results.

A biosimilar is a company’s effort to reverse engineer the original process to create their own biologic. The new biologic should be similar to the original.

Because it is a new and different process, the biosimilar has to undergo safety and efficacy trials. This drives the cost up to produce the biosimilar.

Recent biosimilars are coming to market at 15-25% discounts to the original because of the extra costs. Unlike generic small molecule drugs that are 50, 60, 70% cheaper than the branded drug.

Switching Costs

Biologics have some switching costs built into them.

If you are taking a biologic and your illness is under control with little or manageable side effects would you switch to a biosimilar? Knowing that it may work less effectively or not at all? And your side effects could increase to save 15-20%?

If you’re a doctor and your patient is responding well to the branded biologic will you suggest switching to the biosimilar? Knowing that it isn’t the exact same drug and it may not treat your patient as effectively or may increase the adverse side effects?

The Real Threat

The real threat is a new patient trying the cheaper biosimilar first and responding favorably to it. Then there is no reason to switch over to the more expensive original biologic.

Who gets to acquire the customer first?

Why Amgen’s News is Good for AbbVie

This is also why the news this morning that Amgen’s Humira biosimilar will be delayed in the U.S. until 2023 is beneficial to AbbVie.

It doesn’t simply mean less competition over the next 5-6 years.

It means AbbVie gets to acquire new patients over the next 5-6 years. And these new patients are unlikely to switch when Amgen’s biosimilar launches.

The lifetime value of an AbbVie’s U.S. Humira customers just increased.

Further Reading:

AMM Dividend Letter Issue 5: Growing Wealth like Grace Groner with AbbVie (ABBV)



Splitting AbbVie to Unlock Value

AbbVie (ABBV) is a rare stock.

AbbVie’s yields almost 4%. Its current dividend yield is 3.87%. And unlike the other 4% yielders, it is not a slow growing utility, telecom, or cyclical car manufacturing business.

High dividend yield
Chart from Goldman Sachs. Click image to enlarge.

AbbVie is a growing biotech company with a promising drug pipeline with even more potential growth.

Why is a growth company trading with the yield of a utility company?

Because of Humira.

Humira starts losing patent exclusivity in a couple years.

Biologic vs Small Molecule Losing Its Patent

We’ve argued before that the loss of the Humira and other large biologics will be different than a small molecule drug losing its patent.

With a small molecule drug, like Claritin or Viagra, a generic version only has to prove that it is the same chemical formula and structure as the name brand drug. The generic drug does not have to undergo efficacy and safety tests. The name brand drug already underwent these trials and the two drugs are exactly the same.

Biologics are different.The entire process to produce the biologic is the drug. Small changes in the process can have large effects on the outcome. It is because of this that a generic biologic, a biosimilar, has to undergo efficacy and safety tests. This drives the cost of the biosimilar up. The cost savings of switching from a name brand biologic to a biosimilar is much less.

The entire process to produce the biologic is the drug. Small changes in the process can have large effects on the outcome. It is because of this that a generic biologic, a biosimilar, has to undergo efficacy and safety tests. This drives the cost of the biosimilar up. The cost savings of switching from a name brand biologic to a biosimilar are much less.

The real issue is potential Humira users using a biosimilar to start their treatment and finding it works. The likelihood of these patients switching to the higher costing Humira when their lower cost biosimilar works are minuscule.

Growth will slow but Humira will remain a cash cow from AbbVie.

And yet AbbVie is trading as if Humira will follow the same pattern as a small molecule going off patent and very little value is being given to AbbVie’s pipeline.

Goldman Sachs has a potential solution.

Splitting AbbVie into Two

Splitting the company into two. A Humira company and a pipeline company.

While investors wait for Growth-co to mature, we believe the company could unlock trapped value by separating business segments for reporting purposes (“Humira-co” and “Growth-Co”) and returning cash to shareholders. While Humira-co is a cash cow that is funding the pipeline, we believe its value (i.e., sustainable cash flows) is underappreciated, with heightened fear of Humira’s inevitable decline, the rate and magnitude of which are unclear. ABBV could unlock value by monetizing the asset and reward shareholders for owning the shares in the face of this uncertainty. We believe ABBV could return cash to shareholders through either a perpetual Humira dividend or share buyback, although we believe the former would be more attractive. We expect ABBV to have a strong balance sheet generating ~$60bn in cumulative cash flow (64% of current market cap) over the next 5 years that can more than support an additional dividend payout. With most of its cash overseas, tax repatriation makes this scenario even more possible. We think fears around Humira have overshadowed the new product story. For this reason, we think separating Growth co. for reporting purposes would reveal the segment’s potential for biotech top-line growth and margins. Driven by oncology, immunology, women’s health and other, Growth-co should see top line growth of 16% over the next 5 years from $9.8 bn (including legacy) to $20.5 bn.

AbbVie would remain whole. The company would create two new reporting structures.

I like the idea of a special dividend.

Chart courtesy of Goldman Sachs. Click image to enlarge.

The goal of the split is to act as aa catalyst to unlock and/or reveal AbbVie’s true worth. I’m all for that but when I’m ready to sell. I like AbbVie’s current low prices. I get to buy more at a cheap price.

Humira’s Patent Loss Not as Ominous as it Looks

Ever since AbbVie (ABBV) was spun off from Abbot Labs (ABT) the major concern was the upcoming loss of patent protection for Humira. Humira is one of the most successful drugs ever and it provides over 60% of AbbVie’s revenue. Losing Humira would be a huge blow to AbbVie’s business.

The common misconception with Humira is that it is a small molecule drug like Lipitor. With small molecule drugs, as soon as patent protection is gone sales plummet as cheaper generic drugs hit the market.

Humira is not a small molecule drug, it is a large molecule biologic. Biologics use microorganisms to produce a protein, the drug, that is then isolated and processed for human use. The entire process is the drug. One change in the production can have large consequences. It is because of this that biosimilars have to undergo safety and efficacy tests just like the name-brand biologic.

A small molecule generic just has to prove that it is the exact same chemical composition and structure as its name-brand counterpart.

This makes biosimilars very costly to make. The companies that make the biosimilar can’t offer too big of a discount to the name-brand biologic as The Wall Street Journal reports.

Biotech drugs are more difficult and expensive to make than traditional chemical-based pills. That is true of their knockoff versions, as well, making biosimilar makers unwilling to sharply undercut prices of the original versions.

“I really don’t expect big relief from biosimilars,” says Steven Marciniak, vice president of pharmacy programs at Priority Health, an insurer based in Grand Rapids, Mich.

The first biosimilar on the U.S. market, a knockoff of Amgen Inc.’s cancer-care drug Neupogen, was priced just 15% below the branded drug late last year. During the three years before, Amgen had raised the list price of a vial of Neupogen by 15.7%, according to data firm Truven Health Analytics.

If I’m a Doctor or a patient knowing that a biosimilar may work as well or it may not as the name-brand biologic will I choose the biosimilar for a 15% discount? Some will, but will it be at the same rate as people switching to generic small molecules? No.

The loss of Humira’s patent is not as ominous as it looks.


Knockoffs of Biotech Drugs Bring Paltry Savings (The Wall Street Journal)

The Dividend Stocks of the Ultimate Stock Pickers

Morningstar is out with their lists of the highest-yielding and widely-held dividend paying stocks of their Ultimate Stock Pickers.

The top ten highest yielding owned by Morningstar’s Ultimate Stock Pickers.

Table courtesy of Morningstar. Click image to enlarge.
Table courtesy of Morningstar. Click image to enlarge.

And the most widely held dividend paying stocks by Morningstar’s Ultimate Stock Pickers.

Table courtesy of Morningstar. Click image to enlarge.
Table courtesy of Morningstar. Click image to enlarge.


4 Dividend-Payers From the Ultimate Stock-Pickers (Morningstar)

The Common Misconception of AbbVie, Humira, & Biologics

There is a common misconception with AbbVie (ABBV) in regards to its blockbuster drug Humira. Sure Dividend outlines this misconception below.

That’s where the risk with AbbVClie comes in.

The company’s composition-of-matter patent for Humira expires at the end of 2016 in the United States. It expires in 2018 in Europe.

When these patents expire, Humira will lose its competitive advantage. Amgen (AMGN) has already submitted a biosimilar version AbbVie to the FDA (they did so in November of 2015). It is likely that other pharmaceutical companies will follow.

It’s difficult to know exactly how far revenue and profit will slide for Humira once it experiences competition.

The image below shows the effects of generic drug competition on Claritin to give an idea of what happens when a drug loses market exclusivity:

Image courtesy of Sure Dividend.
Image courtesy of Sure Dividend.

Looks scary.

Humira is going off patent and will experience a dramatic drop-off in sales once generic drugs get the green light just like Claritin did. For AbbVie it could be even worse because so much of its current revenue and profits come from Humira.

And it would be very scary if not for the fact that Claritin and Humira are two drastically different drug compounds.

Small Molecule Drugs

Claritin is a small chemically synthesized drug whose structure is well defined. When a small molecule drug loses its patent a generic drug maker only has to prove that their generic drug is the same drug structurally. The generic drug maker does not have to run new efficacy and safety trials. For good reason, the generic and the branded drug are exactly the same.

Making generic small molecule drugs is relatively cheap. This is why generic drug makers can charge such low prices in relation to the branded drug and take market share away.

Large Molecule Biologics

Humira is a biologic. It is a very large molecule that is made through the use of microorganisms. The entire process of making a biologic, from creating the genetically engineered cells to the isolation of the finished product, is the drug. A change in any step can produce a different molecule.

Because different biologic making processes can produce different drugs, any company that wants to make a generic biologic, a biosimilar, has to undergo new efficacy and safety trials for its drug. Bringing a biosimilar to market is about the same as bringing a new branded drug to market. It is costly. A biosimilar’s discount to the branded drug is not as great as a generic small molecule’s discount is to its branded drug. Novartis’ Neupogen biosimilar sells at a 15% discount.

Higher Legal Hurdles

The legal hurdle for bringing biosimilar’s to market will be high too. As Amgen just found out with U.S. patent officials refusing to review two of their Humira patent challenges. The patent challenge mentioned by Sure Dividend above. Amgen was thought to be the first company able to bring a Humira biosimilar to market. That timetable has been pushed back.

Biologics are a little more protected than chemical small molecule drugs to generic competition. It doesn’t mean biosimilars can’t come to market and compete with Humira. However, if biosimilars only offer a 15% discount it will be tough to take significant market share away from the branded drug. If Humira is working well for a patient with little side effects then it will be hard for the prescribing doctor to switch from a medication that works to an unproven biosimilar.


Dividend Aristocrats Part 47: AbbVie (Sure Dividend)