Bayer Aktiengesellschaft (BAYN) Earnings Call Transcript & Summary

Good morning, good afternoon, everybody. My name is Michael Leuchten. I'm one of the pharma analysts at UBS based in London. It's my pleasure today to introduce the Bayer team for today's -- for today's fireside chat, we have Jörgen Möller who's -- so Jörg Möller who's the Head of R&D at Bayer pharma, and we also have Jürgen Beunink with us from the IR team. For participants on today's presentation, there is a way of submitting questions to me. I will see them on my screen. If you want to do that, please do so. We will have a start off with a list of questions that I will go through with Jörg, and then we'll see how far we can go and we can maybe fill some questions after. So with that, thank you very much for joining us today.

Maybe to start off with, obviously, the COVID pandemic has been a hot topic throughout the industry, both positively and negatively, obviously, broader as well. From your perspective, Jörg, what permanent changes do you think we can reasonably expect from the pandemic to drive the way pharma and Bayer and its peers will operate? And maybe splitting that into short-term implications and longer-term implications from an R&D perspective.

Yes. Thanks, Michael, and good morning, good afternoon also from us here in Leverkusen. I'm Jörg Möller. And thanks for hosting us. So to your question, Michael, at this stage, in my view, really longer-term or permanent implications on the pandemic are really difficult to assess. I think a lot will depend on the duration of the pandemic but also our ability to find an effective vaccine. Here at Bayer, our clear focus has been from day 1 to secure health and safety of our employees. And following that, the next focus has beyond safeguarding, supply, production, logistics and the ongoing business operations. As you probably have seen in our Q1 results, we did see some positive impact on Xarelto and the hematology business. On the other hand, the Mirena intrauterine device family was affected negatively. So we feel that probably going forward, shifting demand patterns could reduce demand for some of our pharma products, especially if patients are deterred from visiting the doctor for refills or required procedures, for example, with Eylea or the IUDs. In R&D, our focus really has been to support our ongoing activity. So both in research as well as in clinical development, we right away focused on supporting what was ongoing. At this stage, I'm happy to share with you that in our early research activities, we did not have to stop a single experiment prematurely. And also, in late-stage clinical development, for example, we just clinically completed the first Phase III outcome study with mineralocorticoid receptor antagonist finerenone, the so-called FIDELIO Phase III study in diabetic kidney disease. And we were able to keep 99.7% of patients in the trial, and that was a global study. And as one would expect, of course, there were also geographies that were quite severely impacted by the pandemic, so I think that is quite reassuring. Also in our oncology programs, the Phase III study with our androgen receptor antagonist darolutamide, the ARASENS Phase III study also has been fully enrolled. Across the portfolio, we have, for some projects, pushed out initiation of new studies. Well, we were also able to accelerate some other programs, especially those that have mechanisms where we feel they can be useful also to treat COVID-19 or [sacrale] of COVID-19 infection. So from an R&D perspective and also looking at our ongoing R&D operations, we do not see a material impact on our clinical programs overall so far.

Okay. Fantastic. And maybe going into the same question from a sort of your R&D perspective, thinking a little bit longer term, maybe crisis comes with some opportunity, I guess, in cases where maybe things can be done more efficiently, is there anything that you think might actually be helpful as we think about the way R&D is done? I mean call it digitalization, call it the way the regulators may be willing to accept data dossiers. Is there a disruption that could actually help the industry with R&D productivity when we really take a long-term view?

Absolutely. I do think so. What I do see is a much greater share of collaborative efforts. I myself participate a number of times per week in pre-competitive discussions with my peers where we, across companies, academic institutions but also with regulators, try to work together. And our efforts have been to open our compound libraries. And so we are sharing compound libraries. We are seeing mutual support for trying to assess benefit risk profiles of drugs that are existing and can be repurposed. We are also seeing, I think, in discussions with the regulatory agencies, a much greater deal of fluidity in regulatory pathways. And I'm hoping that some of these aspects can also be maintained. More closer to home, you're absolutely right, we were forced by the pandemic to also much faster than we originally had planned roll out certain programs when it comes, for example, to remote monitoring of clinical studies, risk-based monitoring of clinical studies, decentralized conducts -- conduct of ongoing clinical programs and shipping study medication directly to patients. And those pilots, we had to roll out much faster than we had planned. And I believe that has also much helped us in our learning curve, and we are now much more confident already that we can more broadly apply some of these technologies. And I think that will also help us actually in the long run.

Okay. Great. And last question on this topic. So over the last few years, the digital side of it, the remote monitoring or digital endpoints, anything like that seemed to be a parallel thing that could, in a best-case scenario, happen with the regulatory agencies if they wanted it to. Is there now sort of a faster integration of that into their thinking processes? So do you think this is going to morph into a more open mind where the regulatory agencies are willing to accept endpoints that maybe in the past they wouldn't have had accepted?

That is my hope. Like I said, I think there is, in my perception observation, a much greater fluidity on the side of regulators. But we, of course, need to see whether that also translates into actions. And that will be, I think, the big asset test. Can we come up with synthetic control arms? For example, can we apply real-world evidence also for post-approval commitments? And I guess that is something we still need to see. At least in conversations, my impression is there is more openness.

Okay. Great. So bringing it back to Bayer. Since the successful introduction of Xarelto, which was successfully developed in-house, Bayer has relied upon inorganic additions to the portfolio. So when we think about the mix, organic versus inorganic, how do you compare the -- or how do you comp the balance? How do you look at that portfolio and say, okay, that's a good balance if meant to far one way or the other?

Well, we have worked last year on implementing a new innovation strategy for R&D. And when we looked at where do we stand as compared to the industry, we observed that at Bayer, about 70% of our R&D projects are sourced internally. That is a higher share of internal resource project as compared to the industry. In the future, we strive for more than 50% of our R&D projects to be externally sourced. Traditionally, and you hinted to that, actually, external sourcing of innovation has been and is an important element of our R&D strategy. Assets like Nexavar, Stivarga, Nubeqa, Eylea, Vitrakvi, Xofigo were developed with partners or sourced from partners. And also, with Xarelto, although that was discovered at Bayer laboratories, we co-developed Xarelto together with J&J. So we intend to intensify external sourcing of innovation. And we also want to expand into new modalities like cell- and gene-based therapies because we believe of the increasing importance of new modalities with disruptive potential. We feel that going forward, addressing high medical need with really meaningful innovation will ever increase in its importance. And therefore, also the role of external innovation will increase in its importance. At Bayer, we spend about around about EUR 3 billion annually on pharmaceutical R&D, and that is less than 1% of what is annually being spent in the life sciences globally. And I think that comparison alone already shows that it is unrealistic for anybody to say, well, every mechanism, every technology, we have the means and capabilities to have everything in-house. And so the ability to effectively work in collaborations from traditional licensing agreements, strategic alliances also with academic partners to public-private partnerships, I think, will be a key strategic capability for any R&D organization but also for the R&D organization, of course, at Bayer.

Okay. And when we think about partnering or external innovation, obviously, there is always competition. There's competition for assets that might be available. There's competition to who is the best partner. So how does Bayer compete as a partner? What's the selling point that Bayer can bring to the table when, presumably, whenever there's an oncology project up for partnering, there will be a number of the usual suspects looking at that asset or project?

I think to demonstrate the successful ability to take care -- take good care of a partnered project really goes a long way because, obviously, especially smaller players like biotech companies, look very carefully on what is the track record. And here at Bayer, I think, with examples like Nexavar, Stivarga, Nubeqa but also Eylea and Xarelto, I think these speak volumes and go a long way on our ability and capabilities to create value also for a partner. And the most recent example is Vitrakvi. Of course, without spilling any beans, it is no secret that we were not alone being attracted and interested by the potential of Vitrakvi, but we were able to conclude the deal with Loxo. When you look at our track record, 5 out of 7 partnered products that came to the market in the last 10 to 15 years have achieved blockbuster status or have blockbuster potential when they were launched more recently. And I think this track record, indeed, goes a long way and does make Bayer a preferred partner when it comes to attractive opportunities.

And is that the case geographically? And the reason I'm asking, a few years ago, Bayer had a slight underpresence in the U.S. in oncology. For example, I think some of your recruitment was a little bit more difficult in the U.S. and ex U.S. Is that balance fine now? Is your R&D scale, for lack of better word, is that good geographically? Or do you still have a stronger position in some geographies versus others?

You are right. We are underrepresented in the U.S. with our commercial activities. Between 20% to 25% of our pharma, sales are generated in the U.S. And that is largely linked to the fact that we do not have a primary care sales force and marketing organization in the U.S. In R&D, we are running a truly global organization with activities in Europe, in the U.S., in Asia. In the U.S., we do have our biologicals R&D and West Coast Innovation Center in the Bay Area in California. But importantly, we are expanding our presence in Cambridge, Boston to make use and benefit from the innovation hotspots that Boston, Cambridge represents, not only for the U.S. but actually on a global scale. So part of our new R&D innovation strategy is, indeed, to increase also our R&D presence in the U.S. And to that extent, a little bit more than a year ago, we entered into a deal with the MIT that will present us with R&D location right at Kendall Square where we intend to bring our oncogenic signaling R&D team there but also want to make use of the opportunities in the Boston ecosystem by bringing the relevant partnering capabilities, technology, scouting and so on into that location as well.

Okay. And a follow-up question to that. You referred to your R&D budget. So as you go through those measures, can you maybe talk a little bit about the replumbing that has to happen for the organization to allow for that? You do spend healthy on R&D as a percentage of revenues. It hasn't been growing exponentially relative to the repositioning on the R&D. So behind the scenes, the replumbing, how extensive has that been to do that?

Well, we are working to flexibilize, especially our research spend. For development, we always have kind of like a 50-50 split between internal and external costs, but we are trying to drive down our fixed internal spend in research activities. And as a case in point, you may have seen that we were able to identify with Nuvisan for our Berlin side an attractive partner that is in the process of acquiring a fully integrated research site with 400 FTEs in Berlin. And these are models that we are implementing in order to flexibilize our setup, especially in the earlier stages of the research process.

Okay. Great. And then, before we dig into some of these products or some of your products in development a little bit deeper, we just had the vericiguat Phase III results in the VICTORIA trial. We are waiting for the finerenone Phase III data. You just said that the trial just completed, so read out soon. We've seen larotrectinib approval. We've also seen darolutamide. So is this a new R&D wave for Bayer? And if so, what do you think is driving that renewed momentum after a spell of less new products coming to market from your organization?

I guess it's very simple from my perspective. We are delivering on our promises. If you look back between 2011, 2013, we have launched Xarelto, Eylea, Stivarga, Xofigo at the time. And we said in 2013, we now need to replenish our late-stage pipeline. And we had, at that time, identified finerenone, copanlisib, vericiguat. In 2014, we in-licensed darolutamide and said we want to bring those assets to Phase III readiness by the end of 2015. And we have delivered on that, moved those assets into Phase III. So you basically now see that our strategy that we presented a couple of years back has been, I think, quite successfully executed. And that is why our pipeline news flow became more dynamic and more positive over the last 18, 20 months where we had positive Phase III readouts for the COMPASS study and VOYAGER PAD as life-cycle management studies for Xarelto. And we executed on our treat-and-extend dosing scheme for Eylea. We have seen the approval of JV and hemophilia A. We have launched Vitrakvi and Nubeqa. And now we are seeing and have just presented positive Phase III data for vericiguat in heart failure with reduced ejection fraction. So we are quite pleased with this development. But as I tried to point out, these are, in a way, consequences of the right decisions we took already some time ago. And it is, in my view, also a reflection of our stringent focus on key therapeutic areas for us, especially cardiovascular and oncology, where we spend about 40% each of our R&D resources.

Okay. And a follow-up question to that. So the one thing that you haven't done is you haven't broadened your -- I mean I do want to ask you about gene therapy in a bit, but you haven't -- you've been very disciplined in the therapeutic areas that you're sticking to. Is that a -- was that a conscientious decision not to go broader? Or is it just because your skill set was that focused, and that's really what was the natural conclusion from what you had at present or what you had on your hands when you decided where to go?

I think for a company of our size, it is very important that we focus because our ambition is to be able to compete with the best in those areas where we are present. And for us, that means especially a clear focus on cardiovascular and oncology. We have been very disciplined also supporting our hemophilia franchise and of course, our women's health franchise. But it would be unrealistic for us to say, well, we broadly expand our therapeutic areas because that would be just diluting our efforts and probably eat into our competitiveness. So we want to be leading in the areas where we play. Having said that, a clear strategic focus as we implement our R&D innovation strategy is to broaden our modality spreads. Bayer traditionally has been very strong in small molecules. And for us, we want to keep that strength but also become stronger in protein-based approaches, in approaches such as cell and gene therapy but also approaches where we can effectively leverage our small molecule expertise like the deals we did in the early portfolio with DuPont or Arvinas. In the case of DuPont, focusing on biomolecular condensate. So potentially, thereby, increasing and broadening the druggable space where we can then apply our small molecule capabilities. So that has been the strategy and also, that is the strategy that we are now implementing in R&D.

Okay. Great. Now maybe as a next step, if we start moving into some of the products. First on my list, vericiguat. We had the VICTORIA study. So how do you think about the product now that we have the results? Where does it fit within heart failure?

Vericiguat is a first-in-class direct soluble guanylate cyclase stimulator that we developed in patients with symptomatic heart failure with reduced ejection fraction. And this is the result of the pioneering work that we started actually 25 years ago with Johannes-Peter Stasch and coworkers at the time where Bayer came across the potential and importance of soluble guanylate cyclase as an important pathway in cardiovascular disease. And that work has given us a number of deliver candidates that failed in early stages of clinical development, mostly for pharmacokinetic reasons. But we took those learnings and went back from bedside back to bench and have applied those learnings and that improved our approaches. And that gave us first riociguat meanwhile approved for different forms of pulmonary hypertension under the trade name of Adempas. And this work and this ability to learn also gave us vericiguat. And we just presented the results of the Victoria study with vericiguat where we could show that the compound significantly reduced the risk of the composite primary endpoint of cardiovascular death or hospitalizations due to heart failure when given on top of existing heart failure therapies, including Entresto. And so I think the first important remark here is that vericiguat is not intended to replace existing heart failure therapies, but we developed it on top of the standard of care that is nowadays being used in heart failure. And when you read the publication but also the reaction to our data presentation, I think it is clear that cardiologists and physicians treating heart failure patients acknowledge that we tested a unique study patient population with a very high unmet medical need, and we're able to show that vericiguat can, indeed, provide a benefit to these patients. The absolute risk reduction that we saw in VICTORIA was 4.2%. In the primary endpoint, it's actually on a par with other contemporary trials in heart failure. And there is an even higher benefit in those patients that were in the lower quartiles of baseline NT-proBNP levels. And I want to point out that I think what vericiguat demonstrated is also the ability to really benefit the very sick heart failure patients and still derive a benefit while keeping a very, I think, promising safety profile that was positive also in combination with other therapies that are used in heart failure patients, including the sacubitril/valsartan Entresto. And we are now in the process of discussing these data sets with regulatory authorities and hope to be able to soon be able to add vericiguat as an addition to the armamentarium of cardiologists treating heart failure patients.

Okay. Great. I'm going to skip over larotrectinib for now. Maybe we can come back to that if we have time. But I would also be interested to hear your views on darolutamide in terms of differentiation. The product has been on the market for a little while now. So your view from a clinical perspective, where does it fit? Where do you think the propositions are strongest in prostate cancer?

I think when we entered into our deal with Orion pharmaceuticals in 2014, we were attracted by the promising data of darolutamide, its promising safety profile at the time. And we started development in 2 indications: number one, non-metastatic castration-resistant, prostate cancer patients in the ARAMIS study; and then also metastatic, hormone-sensitive prostate cancer patients in the ARASENS study. Meanwhile, darolutamide Nubeqa is approved in non-metastatic, castration-resistant prostate cancer, and the launch is ongoing. If you compare with the caveat and limitations of cross-trial comparisons, darolutamide to the competitors, I think we are seeing good efficacy. Maybe even when I get to that, slightly better efficacy when it comes to overall survival because darolutamide could demonstrate a metastasis-free survival of 40 months on top of androgen-deprivation therapy compared to 18 months that were demonstrated with placebo. This compares well with the data that also have been presented by the competition. But darolutamide was the first of the antigen-receptor antagonist that could show a significant improvement also in overall survival with a hazard ratio of 0.69, so a 31% reduction in the risk of death. We are going to present the data set at the upcoming ASCO meeting. And from what I hear through the grapevine, our risk reduction in death and improvement overall survival compares favorably to other data that became subsequently available also in terms of overall survival with the competition. And therefore, in ARAMIS, in the first Phase III study, Nubeqa plus the standard of care demonstrated a favorable safety profile. We were able to demonstrate also that the compound allowed patient to maintain a high quality of life. It did not increase rate of critical adverse events, including but not limited to seizures for structures, cognitive disorders or hypertension compared to placebo, some of which have been reported with the competition. And this, I think, is especially important given that this patient population typically is very interested in maintaining a high quality of life because the disease impact at this stage isn't that progressed. And so in my view, I think darolutamide and Nubeqa is quite favorably differentiated from the data that are known and available for enzalutamide or apalutamide.

Okay. Great. And then another product that's launched relatively recently is copanlisib. Just any updates on where that product sits? And any life-cycle management or follow-up studies that would help the product be differentiated from competition?

Yes. I think copanlisib actually already is quite differentiated because it is the only IV available intravenously administered PI3K inhibitor. We clearly also have seen, compared to the oral members of the PI3K class, a lower propensity for especially serious GI adverse events. That helped patient to stay on the drug and ease also the work that physicians have to do with managing adverse events. Copanlisib in contrast to other members of the class inhibits both the alpha and delta isoform of the pathway. And it is intermittently weekly dosed as compared to the continuous once- or twice-daily dosing that we see with the oral competitors. And I think that maybe also the reason why we see not only very good efficacy but also better tolerability, which also translated that into the fact that copanlisib does not have a black box warning. So right now, we are working to get into an earlier treatment lines with copanlisib in combination with the standard of care and also translating our early approval into a permanent approval by following up on the post-approval commitment. So that work is ongoing, and we are fully on track there.

Okay. Great. And then in the last 5 minutes, just wondering if you could give us an update on your hemophilia projects and in particular, an update on your gene therapy efforts where you're involved. And then I'd like to ask you closing questions on how we can bring all this together. Thank you.

So in hemophilia, we recently launched our long-acting factor VIII compound Jivi. And we saw good uptake also as demonstrated in our Q1 data. You're right, in our pipeline, we are working on a gene therapy project also for hemophilia A patients that we started in our collaboration with Ultragenyx. And here, we are utilizing a specific adeno-associated vector that is designed to improve gene transfer to hepatocytes. And this factor system contains B-domain deleted factor VIII gene. Our project is currently in a combined Phase I/Phase II study. We presented data from the first 2 cohorts at the American Society of Hematology meeting end of 2019 and at the IARC meeting in early 2020. And so we know that, indeed, the principle works. We do see factor VIII expression. We are now in dose escalation because we believe we can improve as we dose increase the expression levels and potentially also duration. So far in the data that we presented, we have seen factor VIII expression between 5% and 20% in the cohort 1 and between 10% and 40% in the second cohort with a higher dose without safety concerns. The study is ongoing, and we're going to report data of the subsequent cohorts at an upcoming meeting.

Okay. And then to the last few minutes, bringing this all together. We didn't talk about the thorium platform. We didn't talk about some of your earlier assets and any leads program. But when we -- where we stand today, obviously, one big question that the market has when it comes to biopharma is there is a patent expiry for Xarelto. There could be Eylea biosimilars. So when you look at your portfolio now, your R&D pipeline, do you believe you have enough replacement power to offset those headwinds as a summary of the discussion so far?

I think from my perspective, number one, I am not aware that there's any pharma company that can realistically say, well, if you have a product like Xarelto going off patent, nobody will take notice. I think that is just an unrealistic assumption. But I think in our case, we have a number of advantages: number one, the loss of exclusivity for Xarelto is not a singular event. It will be a multiyear event starting in China the end of this year. In Europe, the patent will expire in September 2023. We have the potential for a 6-month pediatric extension of this exclusivity on top. And so based on historic examples, we would expect a more staggered impact from generic competition in Europe. In the U.S., we have a compound patent that expires in August 2024. Again, here, we also have the potential for a 6-month pediatric exclusivity on top. In addition, we do have a patent for the once-daily use of Xarelto in the U.S. that will expire in 2034. The once-daily dosage form is commercially the most important for Xarelto. This patent was challenged by Mylan and others. And we came to an agreement with Mylan that they may launch a generic version of once-daily rivaroxaban in the U.S. in 2027. So we really have, over the different geographies, a staggered approach, staggered over a number of years. We also talked earlier in our conversation about our recent successes in our late-stage pipeline. We talked about the launch of JV. We talked about the launch of Nubeqa and Vitrakvi. We presented vericiguat. We are expecting to see the first outcome data with finerenone in the not-too-distant future. And we certainly expect that the growth of these recently launched and late-stage pipeline asset will help us mitigate part of the consequences of the loss of exclusivity of Xarelto. But in addition, we continue to actively look for in-licensing opportunities. So I think in sum, we are well-prepared. We are not expecting a cliff but rather seeing a dip following the loss of exclusivity. And we expect to be able to return to growth soon thereafter with the help of both our internal pipeline, augmented by additional external opportunities.

Fantastic. We've gone slightly over. Thank you very much, Jörg Möller, Head of R&D at Bayer pharma. Very interesting. I hope participants found it helpful. And I hope everybody has a good day.

Thanks so much, Michael.