"ABT shares already price in threat of oral competitors to Humira - Given the pullback in Abbott’s shares over the first positive Phase III read-out of Pfizer’s JAK-inhibitor tasocitinib in rheumatoid arthritis, we conducted a physician survey to determine the potential competitive threat to Abbott’s most important driver, Humira. Survey results of 25 rheumatologists suggested that doctors perceived tasocitinib as differentiated and a meaningful competitor to the anti-TNF class by the first year on the market if the initial positive data bear out in the rest of Pfizer’s Phase III filing package (expected to be complete by mid-2011). However, our scenario analysis based on our proprietary immunology market model suggests that Abbott’s shares already reflect Pfizer’s tasocitinib takes a 20% share of the market over the next several years. This may be a real possibility, given our survey results, but we maintain that a lot needs to fall in place before that happens. Given the tasocitinib data available thus far (3 month Phase III data), we see the market being early to price in the competitive threat in Abbott’s shares (down 13% since mid-October), for which Pfizer’s shares have not benefited. However, we also see Abbott shares as likely range-bound in the near-term as investors will assume Pfizer’s tasocitinib works until it does not, particularly given four tasocitinib Phase III data read-outs in 2011, including a head-to-head with Humira.
"In our view, Abbott shares appear undervalued, given near-term strong earnings power, but the JAK inhibitor overhang is unlikely to go away unless the program fails or Abbott engages in significant M&A activity that dilutes Humira’s importance to the bottom line. The stock could be poised for a rebound through the end of the year given its poor ytd performance, but we maintain our Neutral rating on the stock. Certainly, if Pfizer’s tasocitinib were to emerge as a meaningful competitor, it would pressure not only Abbott’s Humira, but also other drugs in the class such as Pfizer/Amgen’s Enbrel and J&J/Merck’s Remicade. However, we have seen disproportionate attention and weakness in Abbott’s shares as Humira makes up 50%+ of Abbott’s earnings vs. <20% for Pfizer, J&J, and Merck. On the flip side, Pfizer’s shares have largely shrugged off the tasocitinib data, given that it is still early to determine whether the drug is in fact a viable and sizeable competitor to the anti-TNFs. However, if Pfizer’s tasocitinib does in fact reach a 20% share of the market, we see it potentially reaching $2.5-$4.0 billion in global sales, (assuming a 20% discount to Humira), representing a net $1.50/share in NPV value to Pfizer (net of Enbrel loss)."
"Survey results: Rheumatologists express excitement around JAKs - We surveyed 25 Rheumatologists, all of whom currently prescribe biologic disease modifying anti-rhemautic drugs (DMARDs; including TNF-alpha blockers) for their moderate to severe rheumatoid arthritis (RA) patients. All surveyed physicians were currently practicing, with experience ranging from less than 10 years (12%) to over 15 years (56%).
"Key takeaways from rheumatologists treating RA: Currently, physicians place Humira well in the current treatment paradigm. However, survey results present several potential implications for the anti-TNF class if P3 tasocitinib trials continue to read out encouraging efficacy and safety results. Physicians highlighted tasocitinib’s unique and promising attributes, including its attractive oral dose formulation, its potential superior efficacy and comparable safety profile, and potentially lower pricing, all of which serve to drive adoption.
"Within one year of launch, physicians expect to start prescribing tasocitinib in place of anti-TNF therapies. 76% of physicians expect to prescribe tasocitinib within the first year, with 44% expecting to utilize tasocitinib in place of anti-TNF therapies.
"Ongoing tasocitinib P3 trials address the clinical data physicians expect. However, physicians were mixed as to whether superior efficacy would be necessary to a drive switch to tasocitinib from anti-TNF therapies.
"Physicians are not currently concerned about safety and are relatively comfortable with the extent of the P3 safety database. Physicians do not see elevations in LDL levels as a significant concern that would negatively impact prescribing decisions towards tasocitinib."
"Threat of oral competition pressure Abbott shares - With 2009 worldwide sales of $18.5 billion and 2010 sales estimated to be $22 billion, TNFalpha blockers represent the largest class of biological drugs on the market. Abbott’s shares have pulled back 13% since just before 3Q earnings season and the threat of oral competition to Humira resurfaced as a threat, vs. sector average of -8% and 0% for S&P 500). If Pfizer’s tasocitinib were to emerge as a meaningful competitor, it would pressure not only Abbott’s Humira, but also other drugs in the class such as Pfizer/Amgen’s Enbrel and J&J/Merck’s Remicade. However, we have seen significantly more weakness in Abbott’s shares, given Humira makes up 20%-plus of Abbott’s revenues and 50%-plus of Abbott’s EPS vs. less than 10% of revenues and less than 20% of EPS for Pfizer, J&J, and Merck.
"Market’s sell-off in Abbott appears early; Jak-3 already priced in - While the physician feedback from our survey suggests that Pfizer’s tasocitinib could be a meaningful competitor to the anti-TNF class, the initial indication will be restricted to RA,which we estimate accounts for 60% of the class’ total sales. Recent Phase II data in psoriasis suggested only modest efficacy, and other indications require clinical trials and regulatory filings to drive use. We conducted an analysis through 2025 to calculate the revenue loss to Humira (and other anti-TNF drugs) if tasocitinib were to capture 20%-22% of the market (in line with survey results). Relative to our current RA market model, we project that this implies an annual revenue loss to Humira of $1.0-1.5 billion from 2013- 2025. However, when we calculate the NPV of this $1.0-1.5 billion loss in revenue stream, we arrive at an implied loss of $3.61 per share – roughly in line with Abbott’s loss in share price above and beyond its peers."