●     Valuations unreliable given large timeframe to market

●     Likely EU/US pricing pressures to impact revenue forecasting

●     Combined Pfizer-AZ pipeline unlikely to create industry leader

 

 

AstraZeneca’s (LON:AZN) own pipeline valuations up to 2023 are overinflated given the uncertainties in R&D execution and the future commercial landscape, industry experts said. Pfizer’s (NYSE:PFE) poor track record in the clinic raises doubts on converting any potential synergies to a successful combined pipeline in the long term, they added.

 

On Tuesday (13 May), AZ issued a statement that its board believes Pfizer’s attempt to acquire AZ does not reflect the value of its pipeline. On 6 May, AstraZeneca issued an update to shareholders on its strategy to deliver annual revenues of greater than USD 45bn by 2023.

 

AstraZeneca’s pipeline valuations on individual candidates are based on loose analyst forecasts and optimistic assumptions on success, noted an industry consultant. These numbers hold little weight in accurately predicting market reality, particularly the further they are away from the market, he said.

 

The projections are “very bullish”, particularly as AZ had a poor drug development record under its previous management, said an industry advisor and former global healthcare banker. 

 

The valuations are a standard defense, but these numbers would have been slightly more credible from players like Novartis (VTX:NOVN), Roche (VTX:ROG) or Bristol-Myers Squibb (NYSE:BMY) who have had more R&D success, he added. 

 

The rapidly changing landscape for launching new drugs is becoming increasingly difficult to secure premium pricing for ROI (particularly in oncology) which puts a spin on accurately predicting AZ’s commercial potential nine years from now, with little data generated on its early-stage pipeline, said a drug reimbursement consultant.

 

AZ has now decided to focus on its three core areas: oncology, respiratory and cardiovascular, according to AZ’s CEO Pascal Soriot in a 24 April conference call.

 

AZ has valued key pipeline assets and non-risk-adjusted peak year sales estimates were given for MEDI4736 (USD 6.5bn) and AZD9291 (USD 3bn) for lung cancer and olaparib for ovarian cancer (USD 2bn). The Immuno-oncology assets are generating the most interest in AZ’s pipeline, but AZ is lagging behind in the race to market with big pharma oncology firms including BMS, Merck (NYSE:MRK) and Roche, said a second industry consultant. Ultimate commercial success will depend on comparative effectiveness data, but also power in pricing negotiations in a competitive space which will be a challenge, the two industry consultants and advisor said.

 

The oncology space is increasingly coming under scrutiny from a price point in Europe, requiring more robust and difficult-to-generate cost-effectiveness data to justify high listed prices, the reimbursement consultant noted. The US has been the preferred launch region, but it is expected that there will soon be downward pricing pressure in the US as charging upwards of USD 100,000 per patient per year for some oncology treatments is becoming less feasible, a second industry consultant added. This could heavily impact AZ’s products that are five or six years away from the market, added the first industry consultant.

 

Lead developments in respiratory -- PT003 and PT001 for chronic obstructive pulmonary disease (COPD) -- have been given USD 4bn peak sale estimation by AZ, however, the COPD area is a complex and competitive space, said the advisor. Pulmonologists have previously told BioPharm Insight that the LABA/LAMA combinations will be the new mainstay of COPD treatment, though AZ’s program (PT003) is well behind in the race as GlaxoSmithKline (LON:GSK) is already leading the market with its imminent EU/US launch of Anoro elipta this year. US R&D hurdles have been encountered by closest competitors Novartis and Forest (NYSE:FRX), though their EU launches are at least three years ahead of AZ, who expects a best case global launch in 2017, he added.

 

In the cardiovascular (CV) and diabetes arena, AZ’s Brilinta (ticagrelor) for acute coronary syndrome (ACS) has the highest sales projection of USD 3.5bn by 2023, driven by its current approval in ACS and expansion into the broader patient population. 2013 sales in ACS were USD 283m and cardiologists have previously told BioPharm Insight that Brilinta would see minimal uptake in a broader secondary care setting. Brilinta has so far not had a successful launch and it will be difficult to meet AZ’s projections, said the second industry consultant and advisor. Diabetes does seem to be an area with more growth promise for AZ with its existing product base including Onglyza (saxagliptin), Bydureon (exenatide) and Farxiga (dapagliflozin), with good 1Q14 earnings of USD 347m, noted the second consultant, yet added that a revenue target of USD 8bn for the total franchise by 2023 is also a stretch.

 

AZ has made a string of pipeline announcements over the last two weeks including a drug approval, trial initiation, trial results and research collaborations, which could be a mixture of defense strategy and coincidence, yet no announcement has made any drastic changes to overall valuations, noted the advisor.

 

AZ has “taken exaggeration to the limit” on projected revenues, and it’s questionable whether AZ itself believes its own numbers, said a former senior Pfizer executive. Pfizer’s tax-incentivized GBP 63bn (USD 106bn) offer convincingly exceeds AZ’s overinflated pipeline projections, noted the advisor and second industry consultant.

 

Pfizer’s swoop will struggle to combine value

 

Despite the overly optimistic projections, all experts agreed a merger of Pfizer and AstraZeneca would not likely add great value in a combined pipeline. From an R&D standpoint, AZ and Pfizer are historically two big pharma players infamous for sinking enormous amounts of money into R&D with a low success rate, said the advisor. Pfizer’s major strength areas are CV, immunology, neuroscience, oncology and vaccines, and the biggest value synergies between AZ and Pfizer have been described in oncology, noted the advisor. Yet neither Pfizer nor AstraZeneca are the leaders in oncology, and combining two low-tier players will not leverage a leader in the field like Pfizer is suggesting, he added.

 

A combined Pfizer-AstraZeneca will never be able to compete with the likes of oncology leaders Roche, Novartis and Celgene (NASDAQ:CELG), the second industry consultant added.

 

In any merger, pipelines suffer with drug development slashes, and no mergers to date have seen the pure addition of pipelines, said the first industry consultant. There is no rationale on potential synergies and how they will improve innovation and cost-effective healthcare, he said. Pfizer also has a bad track record of acquisitions including Warner-Lambert, Pharmacia and Wyeth, where poor strategic decisions were made on which assets to progress and shelve, noted the second industry consultant. Pfizer could handle the merger, but its statements on commitments to innovation are not substantial enough to convince this can be executed correctly for the long term, added the former Pfizer executive and advisor.

 

AZ’s management has publicly reinforced the fact this merger would cause disruption and distraction to R&D efforts and this is not an exaggeration as mergers of this size can easily cause up to 10 years of R&D disruption, the advisor said. The merger of GlaxoWellcome and SmithKline in 2000 saw a similar disruption that only started to see R&D upside at the latter part of 10 years, the advisor noted. 

 

Pfizer has run out of options from a clinical perspective and is making a short-term financial move, all experts agreed.

 

There is a short-term financial rationale from a shareholder perspective to go ahead with the deal with a few offer bumps as AZ prepares to lose a disproportionate part of its sales between now and 2018 as blockbusters go off patent, the advisor said, adding, whilst a credible leader, Soriot’s execution in driving pipeline assets to the market over the next 10 years becomes a big investment risk.

 

AstraZeneca has a market cap of GBP 59.6bn. Pfizer has a market cap of USD 185bn. now and 2018 as blockbusters go off patent, the advisor said, adding, whilst a credible leader, Soriot’s execution in driving pipeline assets to the market over the next 10 years becomes a big investment risk.

 

AstraZeneca has a market cap of GBP 59.6bn. Pfizer has a market cap of USD 185bn.