Astrazeneca muddies the water as Mystic fails

The honourable intentions of chief executive Pascal Soriot seemed destined to dominate Astrazeneca’s second-quarter earnings today. An effective PR onslaught relegated the rumours of his defection to the sidelines, but when the dust settles investors might still find themselves with reason to question his position.

The failure of the Mystic study at the first cut of the data naturally overshadowed the other announcements, and it is surprising that Astra chose to bury positive news of a big phase III win for Tagrisso on the same day. Meanwhile, a billion-dollar collaboration with Merck & Co over Lynparza has many scratching their heads – with the company’s stock down a huge 16% today the move looks suspiciously like a poison pill.

The Parp inhibitor is considered Astra’s third-most valuable oncology asset, behind Imfinzi and Tagrisso – EvaluatePharma’s sellside consensus sees sales of $1.2bn in 2022, giving Lynparza an NPV of $5.1bn.

Half of this value will now transfer to Merck – the partners will jointly share gross profits that flow from future sales. Development costs are also shared with various exclusions – the deal has essentially been engineered to allow Merck to develop the drug in combination with Keytruda, although other settings will be explored. For all this, Merck will pay $1.6bn up front, up to $750m for certain licence options and up to $6.2bn in future milestones.

The deal also included Astra’s Mek inhibitor selumetinib, but it is safe to assume that the vast majority of these valuations flow from Lynparza.

On a call with reporters this morning Mr Soriot defended the deal, arguing that more value could be created through the collaboration than by Astra on its own.

“We are being realistic – [Imfinzi] will not get 100% market share and [Keytruda] is an important PD-1 agent, and doing very well,” he said.

Here Mr Soriot certainly has a point, particularly as the initial Mystic readout does not help to paint Imfinzi as the go-to anti-PD-(L)1 agent. But it is also true that while the deal helps boost Astra’s near-term “externalisation revenues”, in the longer term Lynparza’s value will be flowing through another group’s profit and loss account.

This fact will not escape any potential acquirers who might take a look if an outright failure of Mystic next year weakens the drugmaker further. Astra’s share price plummeted to £43.20 this morning, considerably below the £55 per share that Pfizer offered three years ago.

Sending out signals

Mr Soriot mounted a vigorous defence of his commitment to his job and track record today, but really it was all about Mystic. The company maintains that it can still succeed – EP Vantage has considered this in greater depth here: Mystic falls at the first hurdle, July 27, 2017.

News of the successful Flaura trial at least allowed the company to highlight a bright spot, and the achievements of Tagrisso should not be underplayed. The kinase inhibitor, which hits EGFR-positive tumours, now looks likely to expand into front-line use in lung cancer and puts Astra’s projection of peak sales of $4bn into reach.

But the company's financial results lay bare the ravages of patent expiries, and how little progress Mr Soriot has made delivering the $45bn in revenues that he promised by 2023, when defending the Pfizer bid. Second-quarter revenues fell 10% to $5bn, and analysts currently do not envision the top line growing to anywhere close to his forecast in the coming years.

Mystic has of course blown a huge hole in the numbers; the share price reaction this morning shows that the market does not expect success at the final readout. But the Merck deal only adds to concerns. At best, it looks like a pragmatic approach to maximising the value of an asset; at worst, an admission of Imfinzi’s inferiority and Astrazeneca’s minor role in the immuno-oncology world.

Of course no one believes that pledges made in the midst of a bid defence are devoid of hyperbole. And anyway, investors are increasingly focusing on another area of Astra’s accounts, with concerns mounting that the company will struggle to generate the cash flow to maintain its dividend. Selling the family jewels – like the looting of Lynparza – is not a sustainable long term strategy and a cost cutting programme is surely in the works.

Dividends might not be sexy but they are a huge issue for powerful institutional shareholders. Any stumble here would have Mr Soriot wishing he had answered the call from Teva.

To contact the writer of this story email Amy Brown in London at [email protected] or follow @ByAmyBrown on Twitter

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