The Business Of
Healthcare | AbbVie | How Do They Make Money?
Morning All!
So yesterday, we started our new series on The Business Of Healthcare. And we kept things fairly high-level, looking at the industry as a whole. Today, we’re going deeper and tucking into AbbVie specifically!
We mentioned yesterday that AbbVie manufactures and sells drugs across 5 different fields. Immunology (immune system), Oncology (cancers), Neuroscience (nervous system), Aesthetics (looks), and Eye care (vision). And across these 5 fields, AbbVie sells 30 different products (drugs). However, as the chart below shows us, just 6 of these drugs make up 71% of the company’s revenues.
And the #1 product, Humira, isn’t just AbbVie’s highest selling drug. It’s the best selling drug of all time! With revenues of ~$200bn since it launched in 2003 - Humira is the G.O.A.T of drugs!
So, what does Humira do? Well, it helps deal with a variety of conditions. Mainly conditions linked to inflammation in the body. So, rheumatoid arthritis, Crohn’s disease, and psoriasis. Humira can be used to treat them all!
But now, let’s actually dive into who AbbVie’s customers are. And you might think that’s obvious. People go to get their prescriptions from pharmacies so surely it’s the pharmacies right? Well, it’s not quite that simple!
Bigger Than JPMorgan and Facebook Combined?!
Alright, so last week, we saw how PepsiCo make the syrups for their Pepsi drinks. And then sell the syrups to companies like Britvic. Who are responsible for distributing the Pepsi to supermarkets, restaurants, stadiums, etc. And we see a similar thing here.
Yes, AbbVie make their drugs. And these drugs are needed in pharmacies. But AbbVie don’t distribute to pharmacies. That’s a lot of low-margin work! Instead, AbbVie sell their drugs to 3rd party wholesalers. And it’s these wholesalers who are responsible for distributing to pharmacies and hospitals. And the chart below shows us that over 90% of AbbVie’s revenues come from selling to just 3 customers!
Want to hear something wild? McKesson is the biggest drugs wholesaler in the US - and is the 15th biggest company in the world by revenue! Which is pretty crazy when you think about it. A company that just buys drugs from AbbVie, Pfizer and other manufacturers. And then sells them to pharmacies and hospitals. Makes more revenue ($277bn) than JPMorgan Chase ($136bn) and Facebook ($117bn) combined! And I hadn’t even heard of McKesson till a month ago!
That’ll Be $77k… To Survive
Okay, so we know the product behind AbbVie’s revenues - drugs. And we know the customers that bring in the revenue - wholesalers. Now, let’s look at how revenues have developed for AbbVie over the years. And the chart below shows us it’s been pretty smooth sailing for this US drug giant. Revenues have grown from $16bn in 2010 to $58bn last year! That’s a really healthy CAGR of 12%. Of course, it’s not the >20% CAGR we saw with Netflix and the semiconductor companies. But for a drugs company, 12% is pretty impressive!
But as always, we need to ask the question - what’s behind this revenue growth? Are more people buying AbbVie’s drugs? Are AbbVie raising the price for their drugs? Well, the answer is yes to both! Since its launch, Humira has been found to be an effective treatment for more and more conditions. And so doctors have been prescribing the drug more often.
But the main growth driver has been pricing. For people suffering with rheumatoid arthritis, Crohn’s disease, etc. they usually need one injection of Humira every 2 weeks. So that means 26 injections a year. The table below shows that in 2003, these 26 injections of Humira cost $13,589. And that’s a lot. However, by 2021, these 26 injections cost a scarcely believably $77,586! AbbVie’s Humira price have increased ~6x! Which works out to ~10% per year for 2 decades.
Now, fortunately, this is where health insurance steps in. Those extraordinary costs don’t fall on individuals, but health insurers pick up the tab! At least most of it! And we’ll cover this in much more detail in 2 weeks when we look at UnitedHealth - the largest health insurer in the US.
But some of you may be wondering - where does this all stop? Can AbbVie raise prices forever?! Well, the answer (thankfully for patients and insurers) is no! And to explain why, let’s take a look at the chart below. Which shows us how AbbVie’s revenues from Humira have grown in the US and outside the US. What we can see is that the money AbbVie’s been making from Humira has been increasing year after year in America. But outside the US, Humira revenues started to fall from 2018!
Now, what’s going on here? Have people stopped getting rheumatoid arthritis miraculously outside of the US?! Of course not! What happened was that in 2018, AbbVie lost their European patent protection on Humira!
What does this really mean? Well, this topic of patent protection is super controversial and so unique to the pharmaceutical industry. That we honestly need a whole day to look at this subject. So that’s what we’re going to do! On Friday, we’re going to dedicate a whole newsletter to patent protection. Because patents are one of the biggest drivers of revenues for a drug manufacturer!
But just so you’re not left completely in the dark. The reason patent protection is so important is because patents provide pricing power. They allow drug manufacturers to effectively (and legally) run a monopoly for a condition. And prevent competitors from selling drugs that would help people who have the condition. This means that the company with the patent can put drug prices really high as there’s no alternative. However, as soon as the patent expires, competitors come into the market. And prices are slashed. Which is what’s happened in Europe for Humira…
Much, much more to discuss on this topic on Friday in our patent special!
27th Jun 2023
And that’s a wrap! Tomorrow, we’ll crack on with looking at AbbVie’s margins. To see whether the drug giant has been able to convert their revenues into profits!
Have a fabulous day!
The Business Of Team