On Nov. 14, the European Medicine agency granted approval for AstraZeneca (NYSE:AZN) and Bristol-Myers's (NYSE:BMY) novel drug Forxiga (dapagliflozin) for the treatment of type 2 diabetes. Forxiga acts through a novel mechanism to control blood sugar levels in type 2 diabetes patients. Unlike other oral type 2 diabetes medications (Januvia or sulfonylurea) that act by pushing the body to release insulin, Forxiga manages blood glucose levels by promoting glucose excretion from the body through inhibition of sodium glucose co-transporter 2 (SGLT2).
This way of controlling glucose levels in type 2 diabetes has synergies with existing treatment options. The approval of Forxiga very much fills in the void created in the treatment of type 2 diabetes patients by the loss of Avandia and the restricted use of Actos due to safety issues.
At one point in time, Actos (pioglitazone) and Avandia (rosiglitazone) used to be important treatments in type 2 diabetes. Actos and Avandia belong to a class of drugs called glitazones, which act by sensitizing the body to insulin. Other oral drugs on the market act by pushing the body to release insulin in response to glucose levels. Thus, the mechanism of glitazones complemented the existing drugs very well. However, in the recent past, glitazones have been tainted because of safety concerns. Avandia was withdrawn due to cardiovascular safety issues, while the use of Actos has declined because of bladder cancer concerns with long-term usage. As a result, the overall share of this class of drugs -- which used to be around 12% -- has now come down to 5%.
Forxiga would initially be used as a third-line treatment option and as an add-on to insulin.
The best part of Forxiga is that it works by a mechanism that builds on the action of existing ones and hence makes an excellent add-on treatment option. The key advantage of having a complementary mechanism is that it will offer better synergies when added to a existing oral medications, thus leading to superior glucose control. Apart from better efficacy, Forxiga also offers other benefits for type 2 diabetes patients:
1. Weight loss: In a 104-week study, dapagliflozin in combination with metformin reduced weight by approximately 3.7 kg. The weight-loss proposition is similar to the GLP-1 class of drugs, but also comes with an advantage of oral dosing and better tolerability.
2. Low rates of hypoglycemia: In a head-to-head 52-week double-blind multicenter active controlled non-inferiority trial comparing Forxiga (dapagliflozin) to sulfonylureas as an add-on to metformin in ~800 patients, adjusted mean HbA1c reduction with dapagliflozin (-0.52%) compared with sulfonylurea (-0.52%), was statistically non-inferior at 52 weeks. On the secondary endpoints: Dapagliflozin produced significant adjusted mean weight loss (-3.2 kg) vs. weight gain (1.2 kg; P < 0.0001) with sulfonylurea. A larger proportion of patients on dapagliflozin achieved ≥5% body weight reduction (33.3%) vs. sulfonylurea (2.5%). Only 3.5 % of patients on Dapagliflozin experienced hypoglycemia (3.5%) as compared to sulfonylurea (40.8%; P < 0.0001).
3. Forxiga has a strong proposition as an add-on to insulin: Because of its ability to act independently of insulin, low hypoglycemia rates and the weight-loss benefit it makes an excellent combination with insulin.
USFDA approval for Dapagliflozin should come in by 2014.
Dapagliflozin/Forxiga suffered a setback earlier, as the USFDA rejected approval based on a negative recommendation by the USFDA advisory committee. The advisory committee had voted against the approval of Dapagliflozin for adults with type 2 diabetes (voting nine to six). The rejection was mainly due to the imbalance of breast and bladder cancer observed in clinical studies in the dapagliflozin arm compared to the control arm.
In the pre-clinical studies, there was an increased incidence and severity of atypical hyperplasia of the renal tubules that was observed at all doses of dapagliflozin in rats, but there was no increase in renal tubule adenoma or carcinoma. AstraZeneca is conducting studies to address the USFDA's concern and is expected to refile NDA for dapagliflozin by mid-year 2013. Hence, we can safely assume an approval in 2014 in the U.S.
Overall, the SGLT2 class of drugs, by virtue of the unique benefits that they confer on diabetes patients (weight loss, no hypoglycemia, and synergistic action), should garner a 5%-7% market share in the diabetes market. This would translate into a market potential of $4.3 billion to $6 billion. Forxiga, by virtue of its first-mover advantage (in ex-U.S. markets) among SGLT2 drugs, should be able to quickly ramp up and garner the majority of market share (30%-40%). This translates into peak sales of approximately $1.5 billion to $2 billion for Forxiga.
AstraZeneca is extremely undervalued when compared to other large-cap pharma companies. It trades at a meager 7.7 times P/E as against an industry average of 12 times now. I would not recommend a position in Bristol Myers, as I believe the current valuations are stretched and there is no scope for further appreciation. Bristol Myers trades at a P/E multiple of 17 times, which makes it the second costliest buy after Novo Nordisk in the large-cap pharma space.
We see AstraZeneca as well-positioned to drive Forxiga sales, by virtue of its full product offering in diabetes, and that should put the company back on a growth trajectory. I think its time to be optimistic about AstraZeneca.