Summary

• AstraZeneca enjoys a strong oncology-focused pipeline but also trades at a high multiple

• For the stock to work, AstraZeneca will need to execute on an ambitious pipeline of drugs

• I detail four of the key drugs here: Calquence, Lynparza, Tagrisso, and DS-8201

A High Growth Stock with High Expectations

AstraZeneca has outperformed peers since 2017 as the company has transformed into an oncology-focused pharmaceutical company with one of the strongest pipelines in the industry. Unfortunately, AstraZeneca's success isn't a secret, and as a result, the stock is one of the most expensive stocks in the space, trading at roughly 19x 2021 core earnings of $2.61.  With a higher stock price comes higher expectations. As a result, AstraZeneca will need to execute on its plan to grow oncology for the stock to continue to work.

In this note, I'll detail four key drugs that investors are focused on as major drivers of growth going forward: Calquence, Lynparza, Tagrisso, and trastuzumab deruxtecan. Imfinzi also deserves an honorable mention, but I will save a discussion of this drug for a later report.

Calquence. Calquence is a BTK inhibitor for the treatment of b-cell malignancies. There have been a number of positive recent developments for the drug. First, AstraZeneca recently received FDA approval for a label expansion for frontline and relapsed/refractory (r/r) chronic lymphocytic leukemia (CLL) in late November. Second, at the American Society of Hematology (ASH) conference in early December, AstraZeneca provided more detailed results from the ELEVATE-TN trial which examined Calquence as monotherapy and Calquence + Gazyva in CLL. Third, the National Comprehensive Cancer Network (NCCN) practice guidelines recently listed Calquence as a Category 1 recommendation in r/r CLL. All of these developments should help improve Calquence sales going forward.

Within the r/r CLL setting, Imbruvica (another BTK inhibitor) is currently the standard of care with about $5 billion in revenue driven by its best-in-class efficacy. However, about 30-40% of patients on Imbruvica develop tolerability issues over time, and eventually must discontinue. This is the opportunity for Calquence, a more selective BTK inhibitor, which has shown better tolerance and arguably competitive efficacy. Detailed data from the ELEVATE-TN trial supported this conclusion.

A counterargument raised here is that there is a healthy amount of debate in front line (1L) CLL setting over which drug is definitively the best. Imbruvica monotherapy, Calquence and Gazyva, Venclexta and Gazyva, or Rituxan and chemo are all options that are considered by doctors. As a result, it's conceivable that while the detailed data could add to Calquence sales, it's not likely to lead to much higher-than-expected sales. For that to happen, investors will need to see positive data from head to head trials of Calquence vs. Imbruvica, which won't come until 2021.

Overall, the street models $300 million in consensus sales for 2020, growing to $1.9 billion in risk-adjusted sales by 2025. Head to head data could provide upside to these estimates should the data prove positive.

Lynparza. Lynparza is a best-in-class PARP inhibitor. The drug owns the highest share in 2L maintenance ovarian cancer after receiving an unexpectedly broad label in 2017 (regardless of BRCA designation) and demonstrating a strong safety profile. The drug now owns ~70% of PARP inhibitor revenue, and ~60% of ovarian cancer revenue.

There are two major opportunities (by indication) for Lynparza in the near-term. The first is in 1L ovarian cancer. Overall, the opportunity here is significant, but the magnitude of the opportunity has been debated after updated data was provided at the European Society for Medical Oncology, which I detailed in a separate article on GSK. More specifically, the debate of which PARP inhibitor will take the most share comes down to an analysis of the patient subgroups within ovarian cancer.

In short, the results for both Zejula (GSK's PARP inhibitor) and Lynparza in 1L ovarian cancer were mixed. Recall that there are two subtypes to be aware of - BRCA+/-, and HRD+/-. Within the BRCA+ subgroup, Lynparza looks to have the best efficacy and is likely to take a significant share, as Lynparza median progression free survival (PFS) was not reached, whereas Zejula's median PFS was 21.9 months. However, within the HRD- subgroup, Lynparza did not show a statistically significant effect, whereas competitor Zejula did. Both could potentially split the BRCA-/HRD+ group. Safety was also mixed between the two, as Zejula had lower discontinuation rates, but Lynparza had lower grade 3+ events.

Overall, even with some share gains from Zejula, the opportunity for Lynparza looks significant in 1L ovarian cancer. It should also be noted that the HRD testing is not widely conducted due to the high cost and lack of clinical relevance.

The second opportunity for Lynparza is in prostate cancer, where PARP inhibitors could gain meaningful traction. Lynparza will be competing against Clovis's Rubraca, which is also aiming to be the first PARP inhibitor to market within this indication.

As I’ve detailed in my note on Clovis Oncology, data for Lynparza looks compelling. AstraZeneca's ph. 3 PROfound trial showed Lynparza superiority to physician choice of Xtandi or Zytiga after failing one prior novel hormonal agent. The street and institutional investors consider Lynparza to have an advantage over Rubraca as PROfound is a better designed study; PROfound is a randomized ph. 3 trial vs. standard of care that included both BRCA+ and ATM+ mutations, whereas Rubraca is a single arm ph. 2 study. As a result, it's widely thought among the street that Lynparza is better positioned to potentially receive a broader label and higher uptake, especially in Europe where payers have shown a preference for randomized data.

Both management teams had stated that they would be submitting a supplemental new drug application by end of 2019. Clovis potentially could be six months ahead of Lynparza, as it received a breakthrough therapy designation. Looking ahead, AstraZeneca has several trials in 1L prostate cancer, where the opportunity will be more significant. Data from these studies (PROpel and KEYLINK) are expected in 2021.

Considering all indications (including one recently approved in pancreatic cancer), consensus estimates currently call for $3.5 billion in 2025 revenue.

Tagrisso. Tagrisso is another one of the primary oncology revenue driversfor AstraZeneca. Tagrisso is a once-daily prescription for patients with metastatic non-small cell (NSCLC) lung cancer with the EGFR mutation. This mutation occurs in about 10-20% of patients with lung cancer. Patients will typically receive a tyrosine kinase inhibitor (TKIs) as their first line therapy. While these therapies are typically effective initially, many patients will develop resistance within about a year. The most common resistance is T790M, which occurs in about 50% of EGFR NSCLC patients. Tagrisso is the only approved drug that can overcome this resistance. This differentiation has allowed Tagrisso to become the preferred regimen in the 2L setting for T790M mutation.

Tagrisso received approval for frontline usage in metastatic patients in April of 2018 on the strength of data from its ph. 3 FLAURA trial, where overall duration of response was much stronger than other standard EGFR-TKIs (17.2 months vs. 8.5 months for the standard EGFR-TKIs). Final updated data was presented at ESMO in 2019 that further supported this (showing an overall survival benefit over standard EGFR-TKIs) and established the drug as the standard of care in the 1L setting.

Going forward, expectations are high for the drug as it gains further traction globally and in the first line setting. Consensus currently has sales growing to $4.1 billion next year and $6.5 billion by 2025. Of note, Tagrisso could potentially move to earlier non-metastatic settings. Tagrisso is being studied in a number of additional settings, including in the adjuvant setting with ADAURA (interim readout potentially in 1H20 according to JP Morgan's estimates), and in stage 3 unresectable EGFR NSCLC in the ph. 3 LAURA trial (with a potential interim readout sometime in 2021 according to Leerink). If successful in the latter trial, this would open up the much larger pre-metastatic setting for Tagrisso.

Trastuzumab Deruxtecan (TD). Trastuzumab Deruxtecan (or DS-8201) is a HER2-targeted antibody drug conjugate (ADC) aimed at breast, gastric, colorectal, and lung cancers. The drug has shown promise in preclinical studies where a strong "bystander effect" that kills nearby cells regardless of HER2 expression was observed.

For context, current standard of care in metastatic breast cancer (mBC) is Herceptin + Perjeta and Docetaxel (chemo). The median demonstrated PFS was 18.5 months, and the OS was 56.5 months in the ph. 3 CLEOPATRA trial. After progression, treatment with Kadcyla is often recommended. Kadcyla demonstrated a 43.6% response rate, a PFS of 9.6 months, and a durability of response of 12.6 months in the ph. 3 EMILIA trial.

Data from TD in its ph. 1 trial demonstrated a 60% ORR and a 20.7 month durable response in heavily pretreated HER2+ mBC patients - better than the 2L data for Kadcyla and competitive with the Herceptin + Perjeta and Docetaxel results in 1L.

This promising data was further supported early last month, when AstraZeneca presented additional detailed data from TD's pivotal ph. 2 trial DESTINY-Breast01 at San Antonio Breast Cancer Symposium. The data showed a 60.9% response rate and a 6% complete response. The duration of response was 14.8 months and the median PFS was 16.4 months. The results further support the data from the ph. 1 trial and continues to suggest that there could be a paradigm shift in late line, metastatic breast cancer treatment.

In terms of safety, data was consistent with prior results. Interstitial lung disease (ILD) remains a concern, as ILD occurred in 13.6% of patients, with 1 grade 3+ ILD, and 4 deaths to ILD. This will likely require close monitoring in clinical practice.

DS-8201 recently received FDA approval, representing the first step towards building a larger HER2 franchise in cancers such as breast cancer, gastric cancer, colorectal cancer, NSCLC, and others. As a result, consensus currently calls for the franchise to generate $820 million in risk-adjusted revenue by 2025, but many investors see potential upside to this number based on future readouts.

Conclusion

The street is widely positive on AstraZeneca’s growth outlook, with a strong pipeline driven by a number of promising candidates in oncology. The street currently models double digit growth in the early 2020s, and high single digit growth thereafter, largely driven in part by key drug launches and expansions into additional indications with Calquence, Lynparza, Tagrisso, and DS-8201. With a more concentrated oncology portfolio, AstraZeneca can focus its sales efforts and drive additional margin expansion. In turn, this drives mid-teen EPS growth, justifying the premium multiple that AstraZeneca currently demands.

The key to this roadmap is strong execution on high expectations. With a number of catalysts and readouts in 2020 (many in Imfinzi), AstraZeneca will need to continue to see positive results from trials and successful global launches for the stock to continue to work.