Why layoffs by other employers threaten AbbVie

AbbVie is bracing for revenue declines as tens of millions of Americans lose their jobs—and the health insurance that comes with them—due to the COVID-19 pandemic.

When people lose employer-provided commercial health insurance, they also lose their primary means of paying for prescription drugs. Some may eventually shift over to Medicaid, but the government-funded program for the poor and disabled pays much less for drugs than commercial health insurers pay.

Widespread loss of commercial insurance is expected to put financial pressure on drugmakers, and it comes at a particularly challenging time for AbbVie. The North Chicago-based company has less than three years to pad sales before its top-selling Humira loses U.S. market exclusivity. In addition to facing lower reimbursements for expensive treatments, AbbVie has had fewer new patients start its drugs during the pandemic. And it's integrating newly acquired Botox-maker Allergan at a time when many cosmetic procedures have been sidelined by the coronavirus.

PLUNGE PREDICTED

COVID-19 could derail AbbVie's efforts to offset a plunge in sales when Humira knockoffs hit the U.S. in 2023. Piper Sandler analyst Christopher Raymond predicts that Humira sales will drop by about $10 billion by 2025.

The pandemic "is going to make it a lot harder to milk the last extra few billion dollars out of the drug," says Erik Gordon, a professor at the University of Michigan's Ross School of Business. "Think about how big Humira is. A disappointing final couple of years of sales could be a disappointment that's counted in billions."

AbbVie cited a potential decrease in commercially insured patients and an increase to its patient assistance programs when it cut projected 2020 earnings per share by 6 cents to a range of $7.60 to $7.70.

"By the time we get to the third quarter, we should have a pretty good feel for whether or not that's going to play out the way we thought, or if it's going to be better than what we thought," CEO Richard Gonzalez said at a health care conference this month.

But even as states reopen and some people return to work, the economic impact of the pandemic is still unfolding. About 27 million people could lose their employer-sponsored health insurance due to job loss between March 1 and May 2, according to a recent Kaiser Family Foundation analysis. This includes people who lose their own coverage, as well as those who are covered as dependents.

Among those who become uninsured after a job loss, KFF estimates that 13 million people would be eligible for Medicaid and 8 million would be eligible for reduced premiums under Obamacare. And if recently unemployed people don't get new jobs before unemployment insurance ends for many in January 2021, an additional 4 million could qualify for Medicaid.

Several drugmakers, including Eli Lilly and Novartis, addressed the concern during first-quarter earnings calls, acknowledging that a drop in commercially insured patients could squeeze sales. Eli Lilly Chief Financial Officer Joshua Smiley said, "In general, a move from a well-insured commercial patient to Medicaid is a net negative."

Some drugs are more vulnerable to economic conditions than others. During a recession, "the more critical care-oriented your drug is, the less exposed you are to some extent," says Morningstar analyst Damien Conover. While AbbVie has a "strong mix" of critical care drugs, including cancer treatments, Allergan's aesthetics products "are a little more economically sensitive," he says.

Gonzalez didn't break down AbbVie's so-called payer mix, or the percentage of revenue that comes from various types of insurers, during the recent conference. But private insurance accounts for the largest share of U.S. drug sales at 42 percent, according to a 2017 analysis by the Kaiser Family Foundation.

FEWER NEW PATIENTS

Another coronavirus side effect: The number of new patients starting Humira and AbbVie's new plaque psoriasis drug Skyrizi was down 30 to 40 percent, as doctors restricted patient visits and many dermatology offices were closed, Gonzalez told analysts in May.

Meanwhile, competition is coming for Humira in the U.S. The drugmaker has long been propped up by the $19.2 billion drug, which accounted for 58 percent of sales last year.

AbbVie is counting on Allergan to cushion the blow. But it's integrating the acquisition at a challenging time for the industry and medical aesthetics in particular.

"They're probably not going to get quite as much cash flows from Allergan as they could have had we not gone through this COVID-19 pandemic and related recession," Conover says.

Allergan's aesthetics business took a hit from COVID-19, starting at the end of the first quarter, Gonzalez said at this month's conference, noting that the segment is rebounding "significantly faster than we originally planned" in areas that have reopened.

"When the 2008-2009 financial crisis hit, almost everyone thought this was a business that would suffer disproportionately, and it ended up being more resilient than anybody thought," says Raymond. "Everyone has to get their Botox, no matter what."

On the AbbVie side of the business, the company has high hopes for Skyrizi and new rheumatoid arthritis drug Rinvoq. It also recently announced a cancer research and development partnership to expand its oncology pipeline, and it's backing an effort to develop an antibody therapy that aims to prevent and treat COVID-19.