Abbott Labs (NYSE:ABT) may have breathed a sigh of relief last week as two potential competitors of Humira, the highest-selling drug of Abbott, have hit roadblocks in their quests for a Rheumatoid Arthritis (RA) drug. Eli Lilly unexpectedly decided to terminate one of the three phase III studies of its RA experimental drug, Tabalumab, due to lack of efficacy.  AstraZeneca’s investigational oral drug Fostamatinib failed to match Humira in a mid-stage study even as it will move ahead with late stage trials. 
While it is too early to judge the impact of these events on Humira’s sales, it could result in upside to our $67 price estimate for Abbott Labs should the new entrants fail to take off. Below we discuss why.
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- What Can We Expect From Abbott’s Q1’16 Earnings?
- What’s Abbott’s Fundamental Value Based On Expected 2016 Results?
Facts And Our Expectations Going Forward
Humira is the world’s best selling drug in the autoimmune market and is mainly used to treat RA. Humira has been a phenomenal growth driver for Abbott. Revenues from Humira were $3.3 billion in 2007, which increased to $8.5 billion in 2011 on significant uptake and new indications. While the drug has shown consistent double digit growth rates in the last couple of quarters, we expect revenues to increase slightly over the next two years to top $10 billion by 2013 on expanded use of the drug.
Humira, very recently, secured the European Medicines Agency’s (EMA) approval for treatment of severe active Crohn’s Disease in pediatric patients who failed to respond to conventional treatments along with FDA approval for the treatment of Ulcerative Colitis (UC) and EMA approval for moderately active Crohn’s Disease. 
Thereafter, we expect revenues to gradually decline until 2017 as competition, mainly from oral pills, penetrates the market (Humira, a TNF inhibitor, is an injectable drug). In the current rush of launching oral pills for the lucrative autoimmune disease market, Pfizer has emerged as the front-runner and is already in the process of launching oral drug Tofacitinib (Xeljanz) after receiving FDA approval last month (Read Pfizer Receives Big Boost As FDA Approves Rheumatoid Arthritis Drug). The pill will compete directly with Humira as FDA label mandates its use after failures from methotrexate, a primary treatment and doesn’t mention TNF drugs including Humira.  It means Tofacitinib could be taken before TNF inhibitors. Further, Pfizer will begin phase III studies to verify Tofacitinib’s efficacy and safety in UC patients.
Emerging competition also includes a separate oral pill, Baricitinib, from Eli Lilly and Incyte that has produced encouraging data in clinical trials. While Baricitinib still has a long way to go, it could prove to be more safe and effective over Xeljanz as witnessed in a mid-stage trial.  Current treatments could also pose a challenge for Humira’s growth trajectory as Roche reported better efficacy results for monotherapy RA patients over Humira even as Abbott has contended the same.  Belgium-based company Ablynx also claimed to show benefits over Humira.  Humira is set to lose patent protection in December 2016 in the U.S. and by mid-2017 in the other parts of world, and we expect a steep fall thereafter.
But, What Could Lead To Upside?
However, despite the convenience of being an oral pill, serious side-effects (serious infections and malignancies) could keep Pfizer away from making a significant dent in Humira’s sales.  Physicians would prefer waiting longer before moving from proven biologics to new oral pills. In addition, if expected competition continues to meet similar failures as mentioned earlier, Humira may actually be able to see further growth in sales than we expect until the patent expires.
Further, by virtue of being a biologic, Humira could see a much slower generic erosion than conventional small-molecule drugs. Getting approval for biosimilars (generics of biologics) is complicated as clinical trials are required for regulatory approvals. Further, it is expensive to make biosimilars, which means prices may not be significantly lower than the original biologics. 
Since Humira is the single largest revenue contributor to current Abbott Labs (Abbott is splitting its business, Read Abbott Labs: Board Approves Split As Jan 1 Nears) and constitutes more than 13% of our price estimate, even a small underperformance with respect to our expectations will have a big impact on Abbott’s valuation. If, due to aforementioned factors, revenues from Humira decline only to $6.5 billion (as against our expectations of $5 billion) by the end of our forecast period, this could translate in 5% upside to our current price estimate of $70.Notes:
- Lilly Discontinues One of Three Phase 3 Rheumatoid Arthritis Registration Studies for Tabalumab, Eli Lilly Press Release, Dec 14 2012 [↩]
- AstraZeneca announces top-line results of OSKIRA-4 Phase IIb study of fostamatinib as a monotherapy for rheumatoid arthritis, AstraZeneca Press Release, Dec 14 2012 [↩]
- Abbott’s HUMIRA® (Adalimumab) Approved in Europe for Severe Active Pediatric Crohn’s Disease, Abbott News Release, Nov 27 2012 [↩]
- U.S. Food and Drug Administration Approval of XELJANZ® (tofacitinib citrate) and Invitation to Media Briefing from Pfizer, Pfizer Press Release, Nov 6 2012 [↩]
- Pfizer’s Xeljanz Gets Approval, While Lilly’s Baricitinib Looks Strong, Seeking Alpha, Nov 21 2012 [↩]
- Roche says arthritis drug beats top rival in trial, Reuters, June 6 2012 [↩]
- Ablynx says top drug shows benefit over rival, Chicago Tribune, June 25 2012 [↩]
- Pfizer Arthritis Pill Raises Safety Concerns, FDA Staff Says, Bloomberg, May 8 2012 [↩]
- Biosimilars and Data Exclusivity, Office of Health Economics, June 8 2010 [↩]