AstraZeneca PLC (AZN) Earnings Call Transcript & Summary

Hello, and welcome to Deutsche Bank's Depositary Receipts Virtual Investor Conference, DBVIC. My name is [indiscernible] from the Deutsche Bank team. I am pleased to announce that our next presentation will be from AstraZeneca PLC from the U.K. Before I introduce our speaker, a few points to note. Please submit your questions in the questions box below the slides. Once the Q&A session has ended, don't log out. You will automatically be transferred into the AstraZeneca booth where you could continue to ask questions via chat. On a final note, all of today's presentations will be recorded and can be accessed via the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Chris Sheldon, Head of Investor Relations; Josie Afolabi, Director, Investor Relations, Oncology; and Christer Gruvris, Director, Investor Relations, Biopharmaceuticals, Finance and Fixed Income of AstraZeneca, which trades on NASDAQ under the symbol AZN and on the London Stock Exchange as AZN. Welcome, Chris, Josie and Christer. Off to you guys.

Thank you, Vincent, and Hi, and welcome, everyone. My name is Christer, and I will take you through this presentation together with my colleagues, Chris and Josie. We announced Q3 results on Friday last week, and we'll take you through this presentation, and then we will end up with a Q&A opportunity for you guys. Go to the first slide. With the inclusion of Alexion from the 21st of July, we saw total revenue increasing by 28% to $25.4 billion. If we exclude the COVID-19 vaccine, revenues increased by 17% year-to-date. Revenue in the third quarter came in at almost $10 billion, but obviously helped by our COVID-19 vaccine sales. Core EPS increased by 23% year-to-date to $3.59. The increase in operating expenses in the quarter reflected associated costs with the consolidation of Alexion, but also continued investments behind our new launches. We also announced that we will now slowly transition our COVID-19 vaccine business to a more commercial basis, but we still will ensure that the vaccine is still affordable for low and middle-income countries. We anticipate only modest profit. We updated our full year guidance also to reflect the contribution of our COVID-19 medicines in the fourth quarter. On an EPS level, we anticipate that the profit from the vaccine will be offset by costs for our long-acting antibody. Hence, our core EPS guidance for the full year remains unchanged. As you can see in the middle of this slide, all our key franchises are doing well. We demonstrated broad-based double-digit growth with oncology growing at 16%, CVRM at 10% and respiratory at 12%. For rare diseases, that is Alexion, total revenue was $1.3 billion, and that includes revenues from the 21st of July only. Other medicines, which mainly includes our older legacy medicines, declined, but that is mainly due to divestments. We remain very committed to following the science, and the news flow was exceptionally good in the last few months, with 8 positive Phase III data readouts across 7 medicines. And we believe that many of these have the potential to change the standard of care. This slide shows the diversification of our business, not only across the different disease areas, but also across the geographies. If you look specifically at the emerging markets region, growth was 10% year-to-date, excluding the contribution from the COVID-19 vaccine. China grew by 2% in the quarter due to some recent volume-based procurement initiatives, and we also had some inventory movements relating to Tagrisso impacting Q3 numbers. However, the slower China growth was compensated by emerging markets ex-China, increasing by 30% in the quarter. So overall, emerging markets grew by 12% in the quarter, highlighting our diversification in ex-China emerging markets. The next slide is a very busy slide, and I will not take you through all of it. I will just highlight some of the regulatory approvals we received in the quarter, including Farxiga, for treatment of chronic kidney disease, both in the European Union and Japan. We also got approval for Saphnelo that is for treatment of lupus in both the U.S. and Japan. We also had regulatory submissions for our long-acting COVID-19 antibody in the U.S., and in oncology for Enhertu. This is the submission based on the impressive DBO3 data presented at ESMO earlier this year. If we now turn to the P&L, and we start with the reported P&L. There you go. Total revenue increased by 28% year-to-date and by 48% in the third quarter. This includes our COVID-19 vaccine. Excluding the vaccine, total revenue grew by 17% year-to-date and by 32% in the quarter with strong performance across our key disease areas. Our reported EPS was negative at $1.10, and this was impacted by an impairment charge of $1.2 billion. This relates to our strategic decision to discontinue the development of Verinurad. This is an asset we got through the acquisition of Ardea back in 2012. Other reported numbers are also impacted by a number of adjustments following the consolidation of Alexion. One of the main adjustments is in inventory, where pre-Alexion held inventory at cost, whereas now following the consolidation, we reported at fair value. As a result, cost of sales for the group was inflated by $1 billion in the third quarter. On a reported basis, we expect that the cost of sales to continue to be high for the next 18 months or so until this inventory is completely sold. We also incurred some higher amortization charges in the quarter as we start amortizing the Alexion medicines over the useful economic line. These changes, however, do not impact our core results. Turning to the core P&L. The core gross margin was 74.1% year-to-date, obviously driven by the vaccine sales. If you exclude the vaccine, we did see a small decline in gross margin, and this is in line with our previous comments on increased pricing pressure in China and also increased profit sharing arrangement on several successful medicines, including Lynparza. Core operating expenses increased by 20%. However, obviously, this is not an apples-for-apples comparison since we consolidated Alexion from 21st of July. If you exclude the impact from the COVID-19 vaccine, core operating expenses increased by a mid-teens percentage. Higher R&D costs also reflects our recent pipeline successes as well investments in R&D for our long-acting COVID-19 antibody beyond the level of government funding we have received. The increase in SG&A cost reflects again the addition of Alexion, but also increased investment in new launches, including Saphnelo in lupus and Farxiga in CKD as well as significant prelaunch investments following successful Phase III data for assets [indiscernible] Enhertu, Lynparza, tezepelumab and PT027. Core earnings per share of $3.59 includes a negative impact of $0.03 from the vaccine with a $0.01 benefit in the third quarter. On this slide, you can see in the graph to the left, that we saw a further improvement in our core operating mix in the third quarter with limited lower other income, but obviously still a significant increase in profit, obviously helped by the Alexion consolidation. And as I mentioned previously, we updated our 2021 guidance to provide further details around the contribution of the COVID-19 medicines. If you exclude the vaccine, we continue to expect low 20s percentage increase in total revenue, in line with our prior guidance. If you include vaccine sales in the fourth quarter, we expect total revenues to increase by a mid- to high 20s percentage. And we anticipate vaccine sales in the fourth quarter to be a blend of our original not-for-profit agreements and new commercial contracts. However, the vast majority is still going to come from not-for-profit pandemic agreements. In line with prior years, we expect a step-up in total revenue in the fourth quarter and also in core EPS as implied by our full year guidance. Any net profit from the commercial vaccine in the fourth quarter, we expect to be fully offset by continued investment in the long-acting antibody. Hence, we keep our core EPS guidance unchanged, and we expect a range between $5.05 and $5.40, and this is at constant exchange rates. Our net debt increased to $24.7 billion following the completion of the Alexion transaction. That leads our current debt-to-EBITDA ratio at around 3.1x. Our EBITDA is, however, reduced by $1 billion unwind of the Alexion's fair value adjustment we mentioned previously. If you exclude this, our non-sort of cash impact, our net debt-to-EBITDA ratio would reduce to around 2.7x. And as previously communicated, we are committed to rapidly reducing our net debt. Our capital allocation priorities remain unchanged. In no specific order, we aim to maintain a strong investment-grade credit rating while continuing to reinvest in the business. We will also continue to explore strategic value-enhancing business opportunities, and we remain committed to our progressive dividend policy defined as stable or increasing dividend. With that, I will hand over to Josie to take us through the commercial and R&D update.

Thanks, Christer. I'm pleased to take you through the updates across our commercial, research and development areas throughout the company. Our oncology business, total revenue grew 16%, reflecting the momentum of new launches and resilience in the face of continued headwinds from COVID-19. In the U.S., we saw continued underlying volume demand with Tagrisso as a result of first-line duration increase. We're pleased with the good progress we've seen in making -- in moving physician practices in adjuvant. In emerging markets, growth in the year was 1% -- in the year-to-date, sorry, it was 1%. In China, the strong volume growth we're seeing in the first line and second line is still catching up with the price discount from NRDL inclusion in March. This inclusion saw an inventory build and a bolus due to first-gen TKI switches in the front line. In the third quarter, we're down sequentially as those factors were not at play. We fully expect continued volume growth to offset the price cut soon and for Tagrisso to resume top line growth in China at that point. Imfinzi grew by -- 17%, sorry, in the year-to-date, growing use in the Pacific indication and successful launches of Caspian. We're now on 16, where Lynparza increased product sales by 31% to $1.7 billion and remains the class leading PARP inhibitor across 4 tumor types. U.S. sales were up 26%, driven by greater use in ovarian, prostate and adjuvant breast cancer, while China benefited from strong volume growth due to the expanded ovarian cancer indication from the NRDL in March. Now to turn to Slide 17. While Calquence continues to make strong progress towards blockbuster status, driven by a robust share performance in the U.S. in chronic lymphocytic leukemia, where it has reached 52% in new patient share. Moving on to Enhertu, the year-to-date saw good momentum in third-line breast and second-line gastric cancer. Enhertu is now the established leader in third-line HER2-positive breast cancer. Now moving on to Slide 18. The DESTINY-Breast03 trial saw a highly clinically meaningful and statistically significant improvement in PFS compared to T-DM1 as well as a trend in overall survival at this very immature analysis. No new safety concerns were identified and importantly, no Grade for 4 or 5 treatment-related interstitial lung disease events were observed, which is great for the potential use in earlier lines of therapy. During the period, Lynparza became the first PARP inhibitor to generate positive data in the first-line metastatic castration-resistant prostate cancer indication in combination of abiraterone, a new hormonal agent in an all-comers population. Turning now to IO. We recently reported back-to-back positive readouts for our franchise with HIMALAYA in hepatocellular carcinoma and TOPAZ-1 in advanced biliary tract cancer. HIMALAYA saw a single dose of tremelimumab added to Imfinzi, resulting in a clinically meaningful improvement in overall survival when compared to the current standard of care. In Topas 1, Imfinzi in combination in standard of care chemo showed an improvement in overall survival in patients versus chemo alone. It's the first major global treatment breakthrough in first-line biliary tract cancer in over 10 years. We await results from the EMERALD-1 trial in the second half of next year, evaluating the use of Infinity in patients with locoregional hepatocellular carcinoma were not amenable to curative therapy. And now what's next? New trial starts for us include [indiscernible] a trial in first-line ovarian cancer for Lynparza and the VOLGA trial in muscle invasive bladder cancer for Imfinzi. We'll also start a new trial for Enhertu called DESTINY-Lung04, along with TROPION-Breast01 for our TROP2 ADC. We have 2 new bispecifis that have entered Phase I trials in solid tumors, AZD2936, a PD-1/TIGIT bispecific as well as AZD7789, a PD-1/TIM-3 bispecific, which are both potential next-gen immuno-oncology therapies. Now for Slide 21. So I'll now take you through biopharmaceuticals business. In CVRM, total revenue was up 10% to $6 billion. Farxiga grew by 51% and continues as the fastest growing SGLT2 inhibitor globally, boosted by successful launches in heart failure and chronic kidney disease. Lokelma, our branded potassium binder for the treatment of hyperkalemia, saw revenues more than doubled to $122 million, increasing market share in both the U.S. and Japan. Turning now to Respiratory & Immunology, Fasenra delivered profit sales of $901 million, up 32% in the year-to-date and is the leading respiratory biologic prescribed for eosinophilic asthma globally. Breztri with product sales of $130 million continues its global launch trajectory in COPD, rapidly gaining market share in the fast-growing triple fixed-dose combination costs. Lastly, Symbicort sales were $2 billion, a slight decrease of 3% against a tough comparison from COVID-19-related stocking last year. Symbicort still is the #1 ICS/LABA globally and has to date received 42 approvals for its use as a rescue therapy for asthma. Excluding revenue from the COVID-19 vaccine, emerging markets total revenue grew 10% in the year-to-date to $7.5 billion. Growth in China for the period was 8% and growth in the emerging markets outside of China was 14%. Tagrisso grew 1% in the emerging markets, reflecting the impact of inventory phasing in China. Farxiga grew 74% from increased patient access in China following NRDL inclusion last year. And Pulmicort China experienced some recovery from the impact of COVID-19 ahead of the anticipated VBP impact from [indiscernible]. Outside of China, we saw broad-based growth across all regions. Excluding the impact of the COVID-19 vaccine, total revenue growth increased by 9% in Asia Pac, 12% in the Middle East and Africa, 28% in Latin America and 15% in Russia. Now our respiratory and immunology portfolio continues to deliver from an R&D perspective. In August, Saphnelo was approved to treat moderate to severe systemic lupus erythematosus in the U.S. and Japan and is still under review in Europe. We announced positive high-level results from the MANDALA and DENALI trials to PT027 which is a fixed-dose combination of albuterol and budesonide. We anticipate regulatory submission to be completed in the first half of next year. We also gained a priority review for tezepelumab in the U.S. as well as orphan drug designation for the treatment of eosinophilic esophagitis. A vaccine Vaxzevria has now dispatched over 1.5 billion doses at the end of Q3 and 2 billion doses as of the end of this week. Turning to AZD7442. We announced positive results from the PROVENT and TACKLE Phase III trials. AZD7442 is the only long-acting antibody combination that has demonstrated the ability to both present -- prevent and treat COVID-19. At IDWeek this year, we recently presented data from the MELODY and MEDLEY trials, nirsevimab, which showed it is highly effective at reducing medically attended lower respiratory tract infections, and regulatory submissions are expected to complete in the first half of next year. Now for what's next? This quarter, we saw results for cotadutide, our GLP-1/glucagon coagonist for the treatment of NASH and DKD well as Phase II data for AZD8233, our PCSK9 inhibitor with dyslipidemia, and we hope to show results from these trials with you very soon. Now to cover Alexion, our new rare disease area. Alexion has approved medicines for the treatment of 7 rare and devastating diseases. And Alexion has a strong commercial and financial track record, achieving best-in-class conversion to Ultomiris in less than 18 months from launch and delivering over $6 billion in total revenues in 2020, representing a 21% growth from the prior year. Alexion is developing novel C5 inhibitors, including a subcutaneous formulation of Ultomiris and Alexion1720, a subcutaneous antibody as well as 2 Oral Factor D medicines and Alexion1820, which is a subcutaneous anti-properdin with potential application in multiple diseases. Rare disease year-to-date total revenue was $1.3 billion or a 6% quarter-on-quarter pro forma growth, driven by strong Soliris volume growth and successful conversion to Ultomiris. In R&D, we saw positive Phase III data for Ultomiris in gMG as well as positive Phase III results for 1840 Wilson disease. Unfortunately, we announced a discontinuation of the Phase III trial for Ultomiris in ALS for futility analysis. Finally, Alexion exercised the option to fully acquire Caelum Biosciences and accelerate the Phase III development of CAEL-101 in AL amyloidosis, a rare plasma cell dyscrasia characterized by autonomous proliferation of plasma cells with overproduction of monoclonal immunoglobulin G. Total revenue for Soliris declined by 2%, impacted by prior year order timing in emerging markets. Ultomiris grew by 31% in the period, driven by strong conversion from Soliris and 14 new country launches year-to-date. Strensiq grew by 8% in the period due to underlying volume growth in the U.S. Finally, what's next on Slide 33? In July, we dosed the first patient in our Phase III Ultomiris trial in complement-mediated thrombotic microangiopathy, one of the multiple label expansion opportunities. We also made [indiscernible] for Alexion1850, our next-generation asfotase alfa now in Phase I for the treatment of hypophosphatasia, a rare genetic brain disorder often diagnosed in infancy or early childhood. And now I'll finally take you to round up our future catalysts. This is quite a busy slide, so I'll just quickly pick up some news flow that we're expecting by the end of the year. So we're expecting to have regulatory submission acceptance for Lynparza in adjuvants. We're also hoping to have submission acceptance for the subcutaneous formulation of Ultomiris in PNH and also Ultomiris in gMG. Looking ahead to '22, some of the key readouts include Farxiga use in heart failure with a preserved ejection fraction as well as Enhertu use in HER2-low breast cancer patients in the D-BO4 trial. So thank you very much for listening. We'll now hand over to questions.

Thank you, Josie. Thank you, Christer. Chris Sheldon here. I'll go through the questions as I see them in the chat. So the first question is, can we provide insights on the regulatory time lines of olaparib based upon the OlympiA trial for adjuvant breast cancer? So thank you for the question. So this was obviously presented at ASCO earlier this year with a publication in the New England Journal of Medicine. As a company, we tend to not announce regulatory submissions. We always -- when we have good data in hand as that was being presented at a plenary at ASCO. We will aim to submit it as soon as possible. We guide to potential approvals once the acceptance has been confirmed by a competent authority. So I'm sorry not to be able to say more detail there, but obviously, want to watch as we are able to announce if the file has been accepted for review. Another question has come in on AstraZeneca's projected H2 2022 approval of the T-Dxd, which is our HER2-directed antibody-drug conjugate in HER2 in second-line gastric cancer in the EU. And why we're guiding to the second half? So again, the CHMP have provided positive opinion on the file, which means it's accepted for review. So therefore, that time line reflects the anticipated review time lines from the November review date and therefore guiding to second half 2022, which, of course, means anywhere between July and December. Another question I can see coming in is on our 2021 guidance, where we have indicated mid- to high percentage total revenue increases, which includes the COVID-19 vaccine sales. And we've also created a new vaccine business. And what was our intent in this? And the question precisely says, was it easier to continue producing the COVID-19 shots over the longer term? So the reality is if you look at our pipeline of infectious medicines is really our clustering and a critical mass of several assets. So we have the COVID-19 vaccine, we have the long-acting antibody, AZD7442, which is an antibody cocktail, where we have data. We've disclosed externally for both the treatment and the prophylaxis of COVID-19. And then we have a couple of respiratory medicines as well, RSV's medicines. So Synergis currently approved for [indiscernible] to the RSV and also a development stage medicine nirsevimab. So the intent of this business is really just to combine the themed assets together, whether it's the appropriate dedicated resources to optimize and develop them accordingly, but specifically around the COVID antibody we disclosed yesterday morning. We've now released 2 billion doses globally, which is a significant achievement. 2/3 of those to middle to low-income countries. So we're very happy with the production, and this is just more a convenience to put the critical mass capabilities in one place. Hopefully, that answered that one. Can we discuss our key growth drivers for 2022 and our dividend policy? I might ask Christer actually to comment on the dividend policy and capital allocation means that I think he covered it on the slide already but just worth summarizing again, Christer, for the question?

Yes. Sure, Chris. First on sort of key growth drivers for 2022. Obviously, we will provide guidance as normal in February next year, but we have seen some very good progress on some key medicines such as Farxiga, now also in CKD and also heart failure. Calquence doing very well. We've also seen very good momentum behind Lynparza. And obviously, we have seen impressive data for Enhertu as well. Obviously, that is a shared medicine. We only get 60% of the top line, but still there's a number of medicines that sort of continued driving growth going forward. Obviously, we haven't given any guidance, but obviously, we do anticipate margin expansion going forward. And now also with Alexion as well. With regards to dividend policy, nothing has changed there as well. We're still talking about the progressive dividend policy, which is defined as either stable or increasing. At the time of the Alexion acquisition, we did say that Alexion brings capacity to increase the dividend. But we haven't been specific as to when. And obviously, finally, that is a Board decision. But nothing has changed with regards to sort of capital allocation priorities [indiscernible] .

Thank you, Christer. And yes, just growth drivers for 2022. Obviously, Enhertu, we have the DESTINY-Breast04 study. Current approval, of course, is in the HER2 positive segment, and that's a study in a different patient population, looking at different levels of HER2 expression. And also looking ahead for immuno-oncology, I think Josie mentioned this, but the EMERALD-2 in locoregional HCC, just to highlight 2 examples in oncology. Christer, if you want to stay off mute, this next one is probably a good one for you. Can we provide some color on the rollout of Farxiga in the U.S. market potential?

I did. I was on mute.

Sorry, Chris. Thank you.

Obviously, Farxiga is doing very well. It is in the U.S. specifically, it's very competitive markets where PBM sort of play up to different companies versus each other. But obviously, we have the heart failure, and we also have the CKD level -- label now, which hopefully can sort of drive further momentum. I mean everyone asked about U.S. when we are talking about diabetes, but I think it's important also to look at ex U.S. markets, look at Farxiga in both Europe and the emerging markets, is doing tremendously well. We just got CKD approval in Europe, and we're waiting for approval also in other geographies. And yes, we continue being very optimistic on Farxiga as of today. Obviously, the patent expires in sort of 2025, 2026 in the U.S. As you probably know, we also have a few fixed-dose combination in the pipeline as well that hopefully if successful, that could potentially extend that time period.

Thank you. Christer, I think that brings us precisely to the end. I don't see any further questions. Thank you, Josie, thank you, Christer, and I think I'll hand you back to the hosts.