How Lead Product Dependency Shapes Corporate Strategy In Pharma

A number of recent high-profile events in the pharmaceutical industry have showcased the significance of lead product dependency – that is, the proportion of revenues a company derives from its largest selling drug – on corporate strategy. Indeed, lead product dependency has played an integral role in two recently proposed acquisitions with a combined value of around $60 billion.

Announced last week, AbbVie’s first-quarter financial results once again showcased how highly leveraged its total revenues are to sales of the TNF inhibitor Humira. Generating global sales of $3.1 billion in Q1, Humira accounted for 62% of AbbVie’s top-line revenues, versus an average lead product dependency ratio of around 22% across the largest 15 industry players (when assessed against prescription pharma and vaccine sales).

The fact that AbbVie’s lead product dependency has expanded from 45% in 2011 provides both positive and negative connotations. Look at any analysis of novel FDA approvals during the past decade and AbbVie is conspicuous by its absence (at least prior to approval of Viekira Pak for hepatitis C last year). On the flip-side,

launched over a decade ago, first-quarter sales of Humira increased by a staggering 18% year-on-year, prompting Bloomberg Intelligence analyst Sam Fazeli to describe the franchise as “unstoppable.”

The emergence of biosimilar competition, expected before the end of the decade, is likely to change this dynamic. While loss of market exclusivity is unlikely to trigger the rapid erosion in sales typically associated with small-molecule generic drug launches, at best it will rob AbbVie of its key revenue growth driver.

Hence why the company has invested heavily in both the hepatitis C market – where it was willing to break “industry protocol” and compete aggressively with Gilead Sciences on price – and agreed to pay $21 billion to acquire the biotechnology company Pharmacyclics.

Observers largely balked at the price AbbVie is willing to pay for Pharmacyclics, despite the commercial promise of its lead asset Imbruvica, which is used and is being developed for the treatment of various hematological malignancies. Such sentiment was largely shaped by the fact that 50% of Imbruvica is already owned by long-term development partner Johnson & Johnson.

But given its high level of dependency on a single product franchise, AbbVie is not by definition a typical pharmaceutical company. A bold move was necessary and the key metric to watch over the next five to 10 years will be how the proportion of AbbVie’s total revenues derived from Humira evolves. The ratio could be positively maintained if market share can be defended in the face of biosimilar competition (and pricing elasticity remains in place in the interim), but investors will expect to see it fall as sales from Viekira Pak and Imbruvica grow.

This performance could have profound implications on AbbVie’s future strategic direction, with CEO Richard Gonzalez promising dramatic cost cuts in the face of a “disaster scenario,” where exposure to declining Humira sales threatens profitability. Current consensus models that AbbVie’s lead product dependency will decline to around 50% by 2019; sales of Humira will stand at $15 billion, with Viekira Pak and Imbruvica forecast to deliver $2.3 billion and $4.1 billion, respectively.

Teva’s proposed acquisition of Mylan, with an opening (but rejected) bid of $40.1 billion, is also shaped in part by the company’s efforts to pivot away from its dependency on the multiple sclerosis treatment Copaxone which will shortly be exposed to generic competition. While the therapy accounts for around 22% of pharma revenues, on a par with the top 15 average, its leverage on Teva’s profitability is notably higher. Based on 2014 revenues, a deal with Mylan would swell Teva’s pharma sales to around $27 billion, thereby reducing sales dependency on Copaxone to around 15%. Teva would simultaneously become the largest global generics player by some margin and the mix of products generating branded sales would be diluted, with Copaxone’s contribution falling from 76% to 62%.

It would seem, however, that the dependency of Copaxone on Teva’s value has not been lost on Mylan’s management board, who rejected the bid on Monday (April 27), and will continue to dictate Teva’s pursuit. The suggestion that Teva’s deal would expose Mylan shareholders to “low-quality, high-risk” stock is a clear reflection of the short-term generic threat to Copaxone 20mg (the first generic was approved by the FDA earlier this month) and the longer-term generic threat to Copaxone 40mg (which around two thirds of existing patients have now been switched to).

Other examples across the Big Pharma peer set are very much in evidence.

Driven by the incredible launch performance of Sovaldi (and subsequently Harvoni), Gilead’s lead hepatitis C franchise accounted for just under half of its revenues in 2014. With few doubting the company’s long-term leadership of this market, focus is steadily turning to what transformational acquisition Gilead will make next, funded by Sovaldi and Harvoni revenues; the latest suggestion – touted by Bernstein analyst Geoffrey Porges – is a proposed $45 billion acquisition of Vertex Pharmaceuticals.

Positive top-line data from Merck & Co.’s TECOS study, announced earlier this week, appears to remove some overhang on the company. In not demonstrating an increase in hospitalisations for heart failure, unlike some other DPP-4 inhibitors, Merck’s Januvia/Janumet franchise is expected to gain additional share in the oral diabetes market. Exposure to the TECOS result was enhanced by the fact that Januvia/Janumet account for some 17% of Merck’s revenue. Also with relevance to the diabetes market, former Sanofi CEO Christopher Viehbacher made a dramatic and unexpected exit last year, with this decision seemingly driven largely by the performance of the Lantus franchise, which accounts for around 20% of pharma sales.

This lead product dependency ratio is not quite as low as Pfizer’s, which generates 11.3% of its pharmaceutical revenues from the neuropathic pain treatment Lyrica. At this end of the spectrum, multi-source acquisitions and patent expiry for Lipitor in 2011 has diminished Pfizer’s exposure to a single product franchise, a dynamic that also showcases the difficulty the firm now faces in growing its already large revenue base; one which prompts continued speculation of a company break-up.

Source: Forbes Health