AstraZeneca PLC (AZN) Earnings Call Transcript & Summary

Okay. Thanks, everyone. Let's get started. My name is Mark Purcell, on the stage here with [ John Mather ] as well. We're European pharmaceuticals analyst here at Morgan Stanley. Before I introduce the company, AstraZeneca, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative. So today, we have the CFO of AstraZeneca, Aradhana Sarin; and then the CMO and Oncology Chief Development Officer, Cristian Massacesi, if that's correct. Look, I guess two big picture questions for you first, and then we'll sort of dive into some more detail.

Aradhana, I was just going to ask a little bit about IRA. I guess Farxiga was named in the drugs for the list. It was a bit of a surprise to us being so close to your LOE. But if you could help us understand a little bit more about how you see this legislation, the unknowns, the knowns? And which other assets you feel could be part of the IRA which moves towards the end of this decade.

Well, first of all, thanks for having us here. The IRA is obviously, I think, one of these parts of the legislation that -- and you've seen we've filed a legal sort of objection to that, as have many other pharma companies. We were surprised as well that Farxiga was included as part of the first 10 drugs given, as you mentioned, the LOE is actually 2026. So by the time this gets implemented, we'd sort of be at the LOE. So from a financial standpoint, that really doesn't make a whole lot of difference for this decade because we were anyway planning for that. I think the other one that's been part of the debate is Tagrisso, and we still very much believe that Tagrisso will not be part of the IRA given the orphan status and orphan exclusions and so forth. I think more importantly, the question is, what does this do for innovation long term? And while some of the other elements of Part D reform we very much agree with, and I think that will, on balance, while we will, on oncology drugs or more expensive drugs, we will need to have more of the cost or pick up more of the cost, we think on the biopharma side or other there will be more compliance and so it's good for patients. So I think that has probably net-net limited effect. I think the bigger effect is on the 9-year and 13-year and how that actually changes our decision-making in terms of where do we invest and what type of molecules and what type of technologies that we're investing in. And I think in some ways, the entire field was anyway moving more and more towards biologics, and this probably will accelerate it even further. And then the second thing it will influence is when we launch and what type of indications we launch. Generally in oncology, as you know, drugs get launched with second line and then move further up, so we'll need to make a decision as we launch new drugs. Do we do that? Do we sort of stagger it, where we launch first and so forth? So that's been some of the debate and decision-making that will get influenced over time as a result of this.

Great. Thank you. And Cristian, a big one for you. The oncology business is so complicated. I mean the clinical trial and the regulator themselves are somewhat confusing sometimes. But could you help us understand the sort of big picture aspiration here in oncology. You've got a slide together where you hope that by 2030, over half of the patients with lung cancer will be on your medicines. You have like clearly significant aspirations in breast cancer and then you're getting into areas like endometrial, [indiscernible] or GI/GU tumors in the future. So could you sort of simplify the story from your perspective in terms of your aspirations in oncology? And probably as part of that on the smart chemotherapy, as we call it, do you believe smart chemotherapy can replace the sort of carpet bombing approach to traditional chemotherapy.

Thanks, Mark. It's a big question. More than 25 minutes we have at [indiscernible]. So briefly, I think to progress in oncology, everything is a matter of oncology and in solid tumors. Let's clarify this, key hematology for the moment aside. Combinations is the way forward. You need a different mechanism of actions. You can't tackle such a complex nature of the tumor that is driven by multiple different ways to make resistance to treatment with just one mechanism. You need multiple mechanisms. This is our first strategy, developing class of agents with different mechanisms of action, ADCs, targeted therapies, immuno-oncology drugs, bringing this to next level of development and then combining between them. This is the way to progress and improve on the standard of care. If you see where the most recent progress is in the most hard-to-treat tumors, what happen was that in non-small cell lung cancer where you combine immunotherapeutics with standard chemotherapy was in GU [indiscernible] combined PKIs and immunotherapeutics and so on. Of course, you cannot ignore that cell therapy and what brings into to the next level of infusing activated T cells that technically can help to defeat the tumor is something that required so in solid tumor [ planning ]. So we are becoming a company that are developing multiple mechanism of actions, including the standard drug development and also some therapy. Then you said we have a very rich portfolio in oncology, mature portfolio, but also our portfolio in Phase III. In lung cancer, we have the 6 drugs, in breast cancer with 7 drugs, and I'm talking about all the drugs that are currently in Phase III. And combining them, we can fundamentally cover and develop a strategy that goes in covering every setting indication. Take lung cancer as an example. You have the non-tumor driver setting, but immuno-oncology is playing a role. And here, you can improve the outcome through better immuno-oncology drugs. But as you say, you need also a better chemotherapy. I really believe in smart chemotherapy. I believe ADCs represent a weapon for oncology that are incredibly important. And because of fundamentally, you have a targeted chemotherapy. Cytotoxic are working well, simply were not selective enough. Here, you can, as a target you have a technologically advanced way to deliver the cytotoxic payload, and you can improve upon chemotherapy in combination with the next-generation IO, in our case, our bispecific portfolio, I think you can improve on that huge segment of breast cancer -- your lung cancer. There are also then the targeted therapies, so where for instance eGFR inhibitors to the next generation of combination in eGFR space can bring benefit, we will continue, of course, to keep Tagrisso as our backbone. Now we are developing multiple combination including ADC combination. This is the way we see our development. And in lung cancer, you not only have to think at the metastatic setting, I need to think that more and more, fortunately, patient has claimed earlier. Now that after post-COVID, we are back to some early detection, This can allow us to bring these new modalities earlier to cure more. This is ultimately our goal, cure more patients. Using the treatment new adjuvant in the adjuvant space is the way to cure more patients. And we want to bring the best that you have in that setting. So this is our strategy. Lung cancer as an example, my is exactly the same in breast cancer. We are doing the same in GI. We are today a real GI company beyond liver cancer and [indiscernible] cancer. We are starting to develop seriously portfolio [ glycemic ] gastric cancer. Recently, we acquired a new ADC, Claudin 18.2, from Keymed in China, a very promising asset. We have also, of course, an important ambition in prostrate cancer. Beyond Lynparza and beyond some of the development drugs that we have is an area of great interest for us.

[ Chad ], I think you've got a couple of more detailed questions. Here they come quick.

Yes. So digging into one of these smart tumor assets, I guess the Dato-DXd and the TROPION-Lung01 data. So I guess how are you feeling about the data profile reflecting on the data you've seen so far this year and also the updates from World Lung this weekend? And I guess, are you more or less confident on your sort of peak set of aspirations for the product than you were at the start of the year?

The answer is yes. the confidence is still completely there. Dato-DXd is coming from the, say, technology in the Daiichi Sankyo development that we are partnering like Enhertu is the same payload as deruxtecan, very active and potent payload. The data is different between Enhertu and Dato-DXd. Enhertu is an 8, Dato is a 4 because TROP2 is a very expressed target. TROP2 is a very important target beyond lung cancer, is a targeted over expressed in multiple tumor types, breast cancer, prostate, gastric. So Dato-DXd can be an important product across tumor types. In lung cancer, in our view is a core indication for us, and TRO1 actually is confirming that Dato will be a drug in lung cancer, because we have a positive outcome in the second line plus trial, and we had multiple data showing the activity of that as monotherapy, but even more as a combination. That is a drug that can be combined easily. We show the data in TRO2 at ASCO with rontalizumab. On rontalizumab carboplatin, we showed the data TRO4 at [indiscernible] combination with [indiscernible] carboplatin. [ Takeway anyway ] is good. In frontline, the toxicity profile is better tolerated because patients are earlier, and the level of activity give us confidence that you get something more than what you will get with chemotherapy and checkpoint inhibitors. We have response rates in the range of 70% or plus in the triplet with carbo and we have the doublet 50-plus percent response rate. So good activity so far in frontline in Phase II setting. And we believe we are having a position of leadership in non-small cell lung cancer because we have 3 Phase III ongoing so with Dato-DXd, in PD-L1 TRO8 combination with pembro, and then in other combination with pembro/carbo, we have TRO7 and advanced combination with carbo. So I believe that we position Dato-DXd as a well set drug in a way to bring benefit to patients in combination with checkpoint inhibitor, standard chemotherapy in frontline. The second-line data, we're going to be presenting them. We share the preliminary results. Of course we're waiting for the [indiscernible] analysis, the final [indiscernible] analysis, will happen sometime next year.So -- and the confidence is all there. It is a drug that is core to our development strategy, but an [ outstanding marker ]. Our development strategy in some indication is very simple. We want to build on top of what is the standard treatment chemotherapy with our ADCs, that is one of them. And we want to be on top of IO without bispecifics. The combinability of this is happening. The one last thing I want to say on Dato. We are running these ADCs and Dato-DXd specifically, where there is data already, are very active in the eGFR mutated space in non-small cell lung cancer. So we're going to have to think calling Dato as a potential backbone in strategy to replace chemotherapy in IO space non-small cell lung cancer, Dato-DXd can play an important role for eGFR space. We run in combination with Tagrisso in the ORCHARD study. The combination is emerging a great interest, and it's safe, so it's very important. Dato-DXd monotherapy is very active. So if you think FLAURA2 results very positive, we presented at the [indiscernible], you can imagine that our next step in that space can be replacing standard chemo with Dato-DXd on top of Tagrisso.

Just briefly going on to the safety. I guess could you talk about the steps you're taking to limit ILD events in future [ count ] trials through patient stratification?

So ILD has been a very important area of work effort for both our companies, Daiichi Sankyo and also AstraZeneca. Since the first findings from Enhertu, okay? I think we have a very clear management guidelines that are implemented, and we learned a lot. ILD that we observed with Dato-DXd is not different in nature, but is different in frequency compare Enhertu, is lower. In Enhertu, we had reported some cases. We have saw in some cases in TRO1, but like what we learned in Enhertu, more later you are in the treatment of the patient, and of course, higher is the risk of ILD. So Dato-DXd has a larger program, and we didn't see so far any, for instance, Grade 5 in front line, in combination with checkpoint inhibitors and carboplatin that are agents by result that can increase the risk. We didn't see cases -- severe cases in breast cancer. So the profile of that -- of course, ILD is an adverse event that we were aware since the beginning of development, but is very much dose dependent. So at 6 milligram, we are confident that this dose that we can control it safely. And of course, it's very dependent on the patient you're treating. So we believe that the profile of the product and the safety profile of the product and the ILD we are observing is good enough to consider this drug in an earlier setting, like we showed with Enhertu, you see. After this was tackled and the investigator understood how to manage it, Enhertu now was used very broadly. And the rates, yes, you have ILDs. You have ILDs, now the most important thing is not to have severe cases. This is what we can avoid through the management guidance that we are providing.

Aradhana, back to you. I mean Cristiancan't do this on his own, and you hold the purse things.

I would like that.

So could you help us understand, I mean I think you just started a very important study, the eVOLVE-Lung02 trial. So there's another 20 studies still to be started, pivotal studies before the end of the year. I guess you update us in a few weeks' time. So where are we in terms of this sort of OpEx trajectory? We often get the question, where are you with your aspirations on operating margins? But I guess the number of options to spend on are very significant. So how are you thinking about OpEx and investment for long-term growth?

Look, I think it's always a balance between driving margins and investing for growth. And that will always be the case, right? We will not -- and we've had a very strong philosophy, as you know, on sort of how we decide what trials to fund. And so it's a very rigorous process [ putting the 5 Rs ] and so forth. You're absolutely correct, this year is a big year for Phase III study starts. But a lot of the Phase III study, the bulk of the cost will sort of be in the next few years. I think for us, the challenge is making sure we're staying disciplined on the projects that we actually fund and not compromise on that because we need to hit a number or anything like that. And I think we've also said that we maintain R&D sort of on a percentage of revenue basis sort of in below 20, 21, 22, somewhere in that range. So by definition, that provides a certain amount of discipline because there's a limited amount of budgets. It also helps us become more efficient, and not just in R&D. In the sales and marketing, on the SG&A line, we're trying to drive a lot more efficiency. But one also has to realize, we are a little bit different compared to maybe a lot of these other pharma. We're less concentrated. Unlike a Novo or Lilly or BMS, we have a very global footprint, right? So by definition, that means many different countries [ ship to board ], infrastructure in all those countries. Obviously, pricing in those countries is a lot lower than pricing in the U.S. So we're diversified that way, and that doesn't come with a specific cost infrastructure. We are also very diversified from a therapeutic area standpoint. So on one hand is sort of the Alexion and rare disease business, which is a different margin profile. And then on the other hand is primary care business, which is a different margin profile. And then oncology is somewhere in the middle. So I think we're driving efficiency on sort of every line item, but there are some major differences between us and other pharma.

Got it. And before handing back to another question from [ Charlie ] for you. You mentioned sort of emerging markets and geographical diversification. I guess there's kind of two questions we often get asked, is number one, doing business in China. It used to be sort of a business in China for China; now it's business in China for the rest of the world. But there are some sort of geopolitical considerations as well. So it'd be great to get your sort of perspective on how important China is to your strategy. Then secondly, whilst your costs slightly slide to the upside in the first half, your revenue growth, particularly in the emerging markets, accelerated a lot more than people had anticipated, particularly non-China emerging markets, but even China, you upgraded your guidance. So what are we missing with emerging markets and your business there?

So I think in emerging markets, so first of all, I'll address the China question. China is a very important market for us. We have about a $6 billion business in China. And I'd say it's always been an important commercial business, and we've invested over the years in building that commercial business. Obviously, with the NRDL and the pricing impact, that had some impact over the years. But I think even the way the policies are changing now, that is much more predictable and noble. So that's a positive thing. I think the other thing on China, which we're finding is it's not just important from a commercial standpoint, but also becoming more and more important from an R&D standpoint. And again, you've seen that not just with us. Cristian mentioned, the Claudin 18.2 which we licensed from Keymed, we have a collaboration with [ TMBG ]. So we're trying to tap also into the local innovation there. And we are very much a preferred partner given our legacy in China. So I think it's both of that. The geopolitics, I know there's a lot of coverage in the media and so forth. But from an on-the-ground standpoint, we just don't feel it. And I think we're also in a very important industry and to serve cancer patients or to serve heart disease patients regardless of where they are, I think it's viewed very differently versus maybe certain other industries. The rest of emerging markets, the non-China emerging markets growth was really driven sort of in the first half by Farxiga, by Pulmicort, Symbicort. So a lot of our sort of primary care, the biopharma business really drives a lot of that growth. In fact, in many of the countries, we haven't even launched many of the oncology products. So there is a long tail of those launches still to come, but that just takes time in our smaller markets. And brand recognition matters a lot in emerging markets, almost a quasi consumer-ish type business. So we're bullish on emerging markets but knowing that it has a different sort of profitability profile.

Great, Cristian, you mentioned the FLAURA2 data from last night. So I guess I guess how would you say the results compare versus your expectations? And I guess which patients do you think the regimen is best suited for having seen the data?

Good. I think the data are quite good. And I mean [ another ratio of 062 ] is a very relevant operation in the context of a very active comparator arm like Tagrisso. I mean you have more than 8 months by an investigator, 9.9 months by [ BICA ], for PFS there is [ had to be a trend AOS ] that is important. Consider that the vast majority of patients are still ongoing. More patients are ongoing in active treatment in the combo arm of -- monotherapy arm, and we still have 75% of patient alive at [ rears ]. So there are still also great potential of this data to improve and to continue to mature. The PFS 50-plus percent and 51% maturity is already very solid, robust analysis. In our view, this is -- this represents another important option for these patient in frontline. Then would every patient receive the combo with Tagrisso and chemo? No. We already knew that Tagrisso, a great part of patient will remain on Tagrisso only independently what you can add on Tagrisso, because it's such an active regimen and well tolerated and well managed. That's a group of patients will remain. But there are patients that are younger, sicker with more symptoms or higher tumor growth. CNS, CNS metastases are very important. In this trial, FLAURA2, the CNS metastasis was in 40% of the patients; in FLAURA it was 20%. This is a population by enrollment sicker than FLAURA. So also there was slightly underperformance of monotherapy Tagrisso, this is explained by that. It's obvious because if you have a patient that requires chemotherapy, you put in the trial So we believe that this is a great option. Actually, this is -- if you look at the strategy, this is, for us, is a confirmation that we did the right strategy in bringing on top of Tagrisso a regimen that is well managed, well known and fundamentally well tolerated because if you look, there is an excess of Grade 3 events and adverse event in the chemotherapy [indiscernible] toxicity. 11% of patients discontinued Tagrisso in the combo arm versus 7% in the mono arm. Chemotherapy is not a problem in keeping the patient on Tagrisso. And with 20, 29 patients, you can imagine this patient in Tagrisso almost 2 years, at least. So we believe it's a great option to add and to continue to build on Tagrisso's success. And then the next step for us would be, like I was saying before, try to improve even further going with a better chemo, smarter chemo [ in this rare ] disease and using different approaches [indiscernible] inhibitor upon progression to Tagrisso in second line. This is another space where ADC can play a role, small molecule like [indiscernible] can play a role, and this is the strategy we want to bring ahead.

So how important do you see the maturation of the OS? And I note there's a bit much we get the breast separation in PFS towards the end of the trial. So is that something we can maybe see in OS too?

So PFS cannot be formally tested anymore because it's positive interim and so -- and I want to say versus competition, we hit a positive interim that is a usually higher bar. So this is -- definitely PFS will be simply reported as descriptive analysis, we will not spend additional analysis on that. OS can mature because the maturity is still low. And I was telling you a lot of patients are still ongoing, a lot of patients are still alive, fortunately. So these OS can mature. We have examples in the space of TKIs and AGA in non-small cell lung cancer that maturing the data, sometimes OS quotes can separate, we have example in [ ike ] inhibition for example. So this is something that can happen.

Just in the last few minutes, I mean one of some topics that have come out over this weekend is around succession and your CEO. We'd seen him a couple of weeks ago and he was looking forward to driving Astra to being the #1 oncology company in the world. Can you sort of help us understand any of the sort of promises around the succession plan? And any comments you can otherwise provide?

Yes, I think there was some rumor or some article in the Daily Mail that I think started in some of these rumors. We don't comment on rumors, obviously. But at the same time, given some of the stock price movement, we are a U.K. listed company, so we wouldn't be forced to make a comment if there was any truth to those rumors, which we didn't. So I think that tells you everything. That being said, we had a Chairman change earlier this year. And I think we made comments at the time that -- Pascal made comment that he looks forward to working with Michel, our new Chairman, for many, many years to come. So -- and everything that we experience every single day, there is no slowing down. So he's very much involved in all the stuff. And it's just such an exciting time to be at the company, right? I mean we all feel, all of us in the management and the employees obviously, like the best for AstraZeneca is yet to come. So there's a lot in internal excitement, and it would be hard to walk away from that.

That's very fair. And then just in the last minute and a half, Cristian, you have a lot more data we have. So if you were to help us sharpen our pencils in terms of areas where we should focus? We've got the sort of next-generation IO, where you're looking to replace KEYTRUDA. We've got the sort of next generation of DNA damage repair, PARP inhibitors, both of these franchises moving into Phase III. And then we'll get proof of concept data on your own smart chemo platform next year. So of those three, which should I spend a little bit more time on over the coming months?

All three of them, all three of them because -- and don't think -- put them together. The PARP1 selective is a great drug, really is still an asset that is emerging, but the target coverage and the safety profile is emerging very, very promising. And imagine the -- imagine that if you can have in your hands a PARP inhibitor that can be better combined. This is the problem with a PARP1/2 selective with [indiscernible], very difficult to combine with chemo, almost impossible to combine with ADCs, a top line disease, but easier to combine with [indiscernible], with monotherapies. But if you have a PARP inhibitor that can be more combinable, can open up multiple opportunities, especially with the ADCs. The bispecifics in our view is probably really under evaluated. We have a portfolio of bispecifics with finally the same PD-L1 backbone and CTLA-4, TIGIT or C3. And you can play with this asset according to the setting where you are. You have the [indiscernible] tumors or settings. You have the TIGIT sensitive tumors or settings, PD-L1, for instance. And you have the C3 that seems to be a mechanism that can overcome a TIGIT resistance. So it can open up the portfolio. And then you can combine this with our ADC portfolio. Beyond the Daiichi Sankyo partnership, we have our own ADC portfolio, B7H4, eGFR [indiscernible] and a folate receptor alpha with the technology that is -- they are a top 1 payload, good link that break when needs to break and good technology in [indiscernible]. So it's very exciting. And for us, what Aradhana was telling is we try to maintain the discipline, pick the right combination, the right study because the difficulty is to decide what not to do more than what to do. And we want, of course, continue to build in the indication where we are strong, in lung cancer, in breast cancer, in some of these malignancies in GI is a great focus for us. And of course, we are a hematology company.

It's certainly fun.

He's not going to make your work easier.

I know. No, I don't think he would. Cristian, Aradhana, thanks so much for the time. Thank you for listening.