FREE

Event update: Pharmaceuticals; US biosimilar market - Inferences from J&J results/call

Event

• J&J recently reported Q1CY18 results. The company’s commentary on erosion of Remicade sales gives us a perspective on the evolution of the nascent biosimilar market in the US.

Context

• EU has been leading the US in biosimilar launches/adoption. As the EU saw a strong acceptance of biosimilars in a short time, market expected a similar trend for the US biosimilar adoption (which was late versus the EU).
• However, initial signs indicate challenges in the pace of biosimilar adoption in the US (unlike seen in the EU), as innovators aggressively sought to protect their franchises.
• We believe these challenges need to be factored in growth assumptions linked to biosimilar adoption in the US market

How will the evolving Remicade situation in the US impact the US biosimilar market?

• J&J's Remicade (Infliximab) is the first complex monoclonal antibody in the US market which has seen the entry of biosimilars with the launch of biosimilars by Pfizer in Q4CY16 and MSD in Q3CY17.
• However, ~18 months post Pfizer launch, biosimilars haven’t gained any meaningful market share in the US market.
• J&J reported 22% yoy decline in US Remicade sales during the quarter (Q1CY18); adjusted for one-off rebate, the fall was ~16%.
• Management cited bulk of the decline was led by price erosion, while Remicade continues to enjoy ~95% volume share
• Further, management expects Remicade’s sales erosion to stay at 15-16% yoy through the year – clearly doesn’t indicate any meaningful ramp-up in biosimilars, even going forward.
• Notably, in the EU, Remicade sales fell 30% in the first year with an overall decline of 63% within three years of biosimilar launch. Biosimilars hold ~50% market share in the EU.
• Given that formidable biosimilar entities like Pfizer and MSD have struggled to gain market shares in Infliximab, shows challenges in securing rapid market share uptick for biosimilars in the US market. In this context, the innovator, J&J, has leveraged rebates/contracts with the Pharmacy Benefit Managers (PBMs)/formularies to keep the share of biosimilars at bay.
• We need to watch if other innovators in other complex biosimilar launches are able to replicate the scenario. In our view, if the trend persists, some sort of regulatory intervention would be required to unclog this market.
• Excerpts from the J&J Q1CY18 call transcript on Bloomberg:

“REMICADE in the U.S. was down 22%, negatively impacted by a prior period pricing adjustment related to a major payer's delayed submission of rebate claims. We don't anticipate significant adjustments will be required in future quarters. Excluding this adjustment, REMICADE's decline would have been closer to 16%, largely driven by price erosion, as REMICADE has retained better than 95% of its volume share”

“On REMICADE, I think that the 15% – 16% that you quoted is a good way to think about the erosion moving forward this year”

Valuations & view

J&J’s success in retaining significant market share in Remicade despite biosimilar launches by formidable players like Pfizer and MSD is indicative of the likely scale-up challenges to be faced by future biosimilar players in the US market. Among Indian players, Biocon is way ahead of the pack, with its approval for biosimilar Trastuzumab in the US, and potential approval for biosimilar Pegfilgrastim in Jun 2018. For biosimilar Herceptin, we have currently assumed 35% market share with 40% price erosion by the 2^nd year of launch (FY21) for Mylan (Biocon’s marketing partner). If the biosimilar uptick continues to be soft as in the case of Remicade, we see a downside risk to our estimates. We reiterate our Underperformer rating on Biocon.