- AZN has been acting well, and discussed impressive trial results at ASCO on its best-selling drug.
- Specifically, Tagrisso for various mutant forms of NSCLC had unexpectedly massive benefit over placebo when used after surgery.
- This will increase sales materially; exactly how much is uncertain. Various considerations are discussed in the article.
- Other positive news that could be material for AZN was also presented at ASCO.
- I have moved from looking at AZN as an asset to trade within a rising channel to a long-term hold now.
AstraZeneca (NASDAQ:AZN) has been a strong stock market performer the past few years despite the following unimpressive results, as presented on page 2 of its 2019 Annual Report and comparing 2017 with 2019:
- revenues up 8.5%
- net cash flow from operating activities down 17%
- reported operating profit down 20%
- "core" operating profit down 6%
- reported EPS down 57% to $0.515 per ADR
- "core" EPS down 18%.
Yet the stock is up 50% since May 29, 2018, closing at $54.60 in US trading as of Friday, May 29.
Formed in 1999 via a merger of the Swedish Astra AB and the British Zeneca Group, AstraZeneca trades in London and Stockholm. Each regular share converts to two ADRs, which is the usual way Americans such as yours truly buy the shares.
AZN reports using IFRS rather than US GAAP.
AZN trades at 106X TTM EPS.
Clearly the mythical Mr. Market has been looking past the earnings valley, focusing on the sales growth and expecting earnings to catch up.
A strong first quarter sets the stage
AZN provides a thorough quarterly earnings report. If you are interested in the company and not very familiar with it, please consider reviewing it at your leisure. I will discuss just a few points and then move on to its press releases from ASCO (American Society of Clinical Oncology), which is ongoing as I write this on Sunday.
AZN showed sales growth of 16%, of which several percent was due to stocking related to COVID-19 lockdowns.
Reported EPS rose 27% to about $0.295 per ADR; "core" EPS rose 17% to about $0.525 per ADR.
Sales grew in all AZN's territories. Importantly, AZN generates 33% of its sales from the US, a notably lower percentage than most Big Pharma/Big Biotech companies. This makes it somewhat of a play on China and other emerging markets, which together comprise its largest geographic segment, at 36% of revenues. Note, AZN has little below-the-line collaboration revenue at this time, so revenues and sales are almost identical.
AZN has a diversified group of drugs in almost all major therapeutic areas. Only CNS and anti-infectives among the broad therapeutic categories are absent from its major drug list. AZN's hottest business segment is oncology, but all divisions are growing and mostly have young, growing drugs and a robust pipeline. This last point is the main reason investors have been looking past the prolonged patent expiration valley.
One unusual point about AZN is seen on p.5 of the Q2 presentation. This shows that despite a sales base around $25 B, there were 7 drugs which were annualizing above $1 B in annual sales, with one more (Fasenra) growing fast and getting close to that level. This many blockbusters for this size drug company is unusual.
My perspective on that last point is that the diversity of product categories and the many blockbusters that were not yet mega-blockbusters (until very recently) has presented a certain impediment to AZN gaining a clearer image amongst more investors.
That may be about to change. The next section describes the background of ASCO's exciting news on AZN's best-selling drug, followed by comments on other positive reports AZN made at ASCO.
Tagrisso may be mega
Tagrisso is the one AZN drug that was looking like a mega-blockbuster, with sales of $982 MM in Q1, up a powerful 56% yoy.
This is a drug for specific types of non-small cell lung cancer, defined by genetic analysis. Competition in this EGFR inhibitor drug class includes AZN's own Iressa, Tarceva from Roche (OTCQX:RHHBY), the recently-approved dual drug regimen of Cyramza from Lilly (LLY) plus Tarceva, and others.
Tagrisso began to break out from the pack with the FLAURA study results in 2017, data which strengthened as more time passed, and which AZN highlights on its web page for Tagrisso. PMLive reported on this as follows:
AstraZeneca has the improvement in overall survival it needed for lung cancer therapy Tagrisso (osimertinib), as it tries to double down on its use in the first-line setting.
Updated results from the FLAURA trial show that Tagrisso extends survival in previously-untreated patients with EGFR-positive non-small cell lung cancer (NSCLC), building on 2017 results showing that the drug could extend progression-free survival.
The improvement in OS came over other drugs in the EGFR inhibitor class, namely AZ’s own Iressa (gefitinib) and Roche’s Tarceva (erlotinib), and according to AZ’s head of oncology José Baselga it is the only medicine to achieve this outcome.
Per the P.I., high effectiveness in front-line as well as second-line treatment alongside reasonably good tolerability has led Tagrisso to dominance in the field, with broad acceptance in different markets worldwide.
But, surgery for lung cancer is often deemed curative, meaning no chemo or immunotherapy is needed, and AZN thus went after the large "adjuvant" or post-surgical indication. In April, AZN revealed that the news on adjuvant therapy was very good with a press release with this headline:
TAGRISSO Phase III ADAURA trial will be unblinded early after overwhelming efficacy in the adjuvant treatment of patients with EGFR-mutated lung cancer.
However, the rules of the clinical trial game are that the press release provides general information. The details come out at a medical meeting, in this case ASCO.
They were even better than expected.
ADAURA impresses everyone
The title of the ASCO-related press release and the sub-headline provide data at a level I do not recall seeing in the field of cancer treatments:
TAGRISSO Demonstrated Unprecedented Patient Benefit in the Adjuvant Treatment of EGFR-Mutated Lung Cancer
Phase III ADAURA trial showed treatment with TAGRISSO after surgery with curative intent reduced the risk of disease recurrence or death by c. 80%.
The primary endpoint was disease-free survival after surgery. One group of patients received surgery with curative intent and then placebo; another group received the same surgery and then Tagrisso. The key paragraph from the press release shows very statistically and medically significant benefit from Tagrisso:
At two years, 89% of all patients in the trial treated with TAGRISSO remained alive and disease free versus 53% on placebo. Consistent DFS results were seen across all subgroups, including patients treated with surgery followed by chemotherapy and those who received surgery only, as well as in Asian and non-Asian patients.
The hazard ratio for the primary endpoint was an incredibly low (i.e. benefit from Tagrisso) of 0.17, with tight confidence intervals.
A key secondary endpoint had similarly impressive results.
The company was comfortable with side effects, saying the following:
The safety and tolerability of TAGRISSO in this trial was consistent with previous trials in the metastatic setting. Adverse events at Grade 3 or higher from all causes occurred in 10% of patients in the TAGRISSO arm versus 3% in the placebo arm as assessed by the investigator.
With only 53% of patients alive and disease-free at two years versus 89% with Tagrisso, the side effects appear quite acceptable given the benefit.
See the press release for a fuller data set, including the sustained benefit at three years.
Note, some patients in both the placebo and Tagrisso groups also received chemotherapy. The benefits of Tagrisso were seen in both the chemo and non-chemo settings.
ADAURA will continue to allow enough deaths (a secondary endpoint) to occur to allow appropriate analysis.
The press release has a section titled "About lung cancer" which presents information about the potential frequency of cases for which ADAURA shows Tagrisso could be helpful.
How big a market could ADAURA open up?
AZN commented on the gross number of patients, as reported by Bloomberg:
Around 60,000 additional patients may be eligible for treatment if the drug is approved in early-stage, post-surgical lung cancer, according to Dave Fredrickson, vice president for global oncology. Patients would take the drug for two to three years.
Bloomberg (and I) believe that survival data is not necessary for widespread use of Tagrisso in the adjuvant setting. Quoting Bloomberg again:
The study results’ strength suggest that most doctors will adopt the therapy now as the standard of care for this new set of patients, rather than waiting for additional data on overall survival, Sam Fazeli, a Bloomberg Intelligence analyst, said in a note.
BioWorld reports that "overall survival... are trending better in the Tagrisso arm, with only nine deaths compared to 20 in the control arm."
With all the above, Bioworld reports that SVB Leerink analyst Andrew Berens "upped his worldwide adjuvant NSCLC revenues to $5.6 billion from $1.5 billion and raised his price target for Astrazeneca to $65 from $60." BioPharma Dive reports the information that Mr. Berens has increased his peak sales estimate for Tagrisso to $16 B/year, possibly thinking of greater use in existing indications.
No one really knows: Cowen analyst Steve Scala is for now pegging peak sales at $8 B.
Part of the issue is that the relevant mutations allowing Tagrisso to be used are most common in Asia; Bioworld quotes an AZN representative as saying that 3000 US patients would be eligible for this form of Tagrisso treatment annually. That's very different from the 60,000 global number that Mr. Fredrickson told Bloomberg. That discrepancy suggests to me that China and Japan are the major target countries for adjuvant treatment.
The BioPharma Dive article notes that part of AZN's strategy now will include trying to get oncologists to do more genetic analysis of lung cancer.
My take on Tagrisso and AZN shares
I am not knowledgeable about net pricing or profit structure for Tagrisso in Asia. Thus, it is too early to weigh in with my own updated modeling of future profits from Tagrisso. I can report that AZN has listed two patents on Tagrisso in the FDA's Orange Book that expire in 2032, and another one that expires in 2035. Assuming long patent-protected life elsewhere, the $2.70 per ADR price increase in AZN ADRs between April 9 and April 13 (with the summary press release on ADAURA release April 10) does not comport with a potential $40 B total sales increase from the neoadjuvant indication. On that basis, my guess is that there is more upside to AZN as the market digests this 'wow' clinical trial readout.
There are usually 'buts' in investing, and one is that AZN closed at $47.36 on April 13, well below the current price. There has been lots of other hard news, some of which I discuss next, plus hope that AZN can get a COVID-19 vaccine to market quickly, but it is possible that a good part of the recent ramp in AZN could be tied to the ADAURA study.
Overall, though, I tend to think that at least $60 is a reasonable price target by year-end.
One reason for that is that by now having what could easily move in several years to a $10 B run rate, AZN becomes stronger in other ways. Mega blockbusters help companies create ecosystems of products; they make the company more desirable as a partner or acquirer. Their economics are great: there is much more profit in one $10 B drug than 10 drugs each doing $1 B.
So, I tend to think AZN has more to this move based largely on ADAURA.
Next I want to summarize two more positive news items from ASCO.
Below the diaphragm, good news on liver and gastric cancer
AZN has had a distinct lack of success adding the Yervoy-like immuno-oncology drug tremelimumab, or "tre," to its successful PD-L1 inhibitor Imfinzi, but finally there is some hope. A Phase 2 study of tre plus Imfinzi in advanced liver cancer suggested benefit from a one-dose loading dose of tre, as AZN discusses in the press release titled IMFINZI plus tremelimumab Demonstrated Promising Clinical Activity and Tolerability in Patients With Advanced Liver Cancer.
A large Phase 3 study with what I gather has a similar design is likely to read out before year-end. If successful, this could address a market of enough potential to be material to AZN, and could give "tre" its first approval.
Also good news was clinically meaningful and statistically significant improvement in objective response rate and overall survival for the antibody-drug conjugate Enhertu versus chemo in salvage cases of gastric cancer. Please see the entire press release for details. AZN's press release provides some context with this quote:
In DESTINY-Gastric01, the response rate was more than three times higher with ENHERTU versus chemotherapy. Additionally, more than half of patients treated with ENHERTU were alive at one year compared to less than a third with chemotherapy. In addition to the impressive results we saw in HER2-positive metastatic breast cancer in DESTINY-Breast01, these results in gastric cancer may help further define the role of ENHERTU in transforming patient outcomes across multiple HER2-targetable cancers.
There were no unexpected safety concerns, though as with all ADCs, the side effect profile is of concern.
AZN entered into a collaboration with Daiichi Sankyo (OTCPK:DSNKY) last year for Enhertu.
There is much more going on in oncology, and outside of oncology, at AZN, but in the interests of time, I will move toward a summing up.
AZN may be fundamentally moving to a lower-risk situation from an operational standpoint. However, the stock has moved up as well, so there are valuation issues of significance. Other than valuation, I cannot point to any one risk that strikes me as worth highlighting. Rather, I would say there are many ways to lose money by buying AZN here. Please see the company's regulatory filings and other materials to learn about specific risks attendant to being an AZN shareholder.
Summary - the bulls have read this one pretty well
I have mentioned occasionally in articles or a comments thread that I liked AZN's turnaround, but looked at it as a trading vehicle due to valuation issues. At this juncture, I have to say that in our era of high P/Es, AZN has a clear path to a "normal" P/E by virtue of its many growth drivers. I have highlighted some of them here, but as mentioned above, most of its blockbusters are relatively young. In addition, there are some very new molecules just entering their post-approval life cycle, and the pipeline appears credible to me given the success with new product development under the leadership of former Roche executive, AZN's CEO Pascal Soriot. I believe that he and his team, and the board, deserve a lot of credit for being able to maintain a dividend that AZN has periodically not even been earning and get to today's level where rapid multi-year growth may await.
Risks are by no means trivial, but I like AZN as a longer-term holding now. I was long some AZN going into ASCO, and added more shares Friday on the news.
If you are interested in AZN but are new to the company, you must understand that most of the company's product line and pipeline were not addressed in this article.
Thanks for reading and sharing any comments you may wish to contribute.
Submitted Sunday night, AZN ADR's at $54.60 at Friday's close.
S&P futures 3034.50, down 0.35%.
This article was written by
Analyst’s Disclosure: I am/we are long AZN, RHHBY, LLY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Not investment advice. I am not an investment adviser.
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