Memorandum

Pfizer 1Q14 – Extensive commentary on AZ acquisition efforts – May 12, 2014

Executive Highlights

  • Management expressed disappointment that AZ’s Board of Directors rejected Pfizer’s most recent acquisition proposal, and discussed the benefits of a potential merger.
  • The SGLT-2 inhibitor ertugliflozin (partnered with Merck) remains in phase 3; two candidates for diabetic nephropathy remain in phase 2. An acetyl-CoA carboxylase inhibitor was advanced to phase 2 for type 2 diabetes.

Pfizer provided its 1Q14 financial update last week in a call led by Chairman and CEO Mr. Ian Read. Although the disappointing whole-company financial performance in 1Q14 made broader headlines, our ears were attentively listening for commentary and updates on Pfizer’s efforts to acquire AstraZeneca (AZ), a move that could have major implications for both companies’ diabetes pipelines. Most recently, AZ rejected Pfizer’s ~$106 billion proposal for GBP 50.00 ($84.47) per share in a ~30/70 cash-to-share ratio (read our report). The company remains interested in acquiring AZ, and we imagine that another proposal is being drawn up, or at least being considered.

On the pipeline front, we learned that the company is advancing an acetyl-CoA carboxylase inhibitor into phase 2 for type 2 diabetes, although ClinicalTrials.gov shows that the two registered phase 2 trials were suspended two weeks ago. The SGLT-2 inhibitor ertugliflozin remains in phase 3, an undisclosed phase 1 biologic for type 2 diabetes was dropped from the company’s pipeline, and the rest of Pfizer’s diabetes pipeline remained unchanged.

See below for our top five highlights from the call, which include: (i) management commentary on AZ acquisition efforts; (ii) an update on Pfizer’s phase 2 acetyl-CoA carboxylase inhibitor; (iii) a phase 3 update on ertugliflozin; (iv) a pipeline update on Pfizer’s two candidates for diabetic nephropathy and other diabetes pipeline candidates; and (v) company thoughts on the timeline of Pfizer’s PCSK9 inhibitor bococizumab (for LDL-C lowering). Following our top highlights, we include a selection of relevant Q&A.    

 

Top Five Highlights

1. Management provided extensive commentary on Pfizer’s quest to acquire UK-based AstraZeneca (AZ). During prepared remarks, management expressed disappointment with the decision of AZ’s Board of Directors to reject Pfizer’s most recent proposal of GBP 50.00 ($84.47) per share in a roughly 30/70 cash-to-share ratio (read our report on AZ’s decision). Although CEO Mr. Ian Read characterized Pfizer’s position as one of strength, and emphasized that a potential acquisition would be a way to augment the company’s existing business strategy (rather than to address weaknesses in its existing business), he shared that Pfizer sees AZ as an excellent strategic fit for Pfizer on a number of levels and that Pfizer is still looking to engage with AZ leadership to pursue an acquisition. We had been somewhat surprised that Pfizer’s latest offer represented only a modest improvement over its previous offer in January in terms of its size and cash content (read our report for background), but would expect that Pfizer will continue its courtship.

  • Pfizer has a number of financial reasons for pursuing this acquisition. The corporate tax rate in the US (where Pfizer is based) is currently at 35%, while the corporate tax rate in the UK is set to drop to 20% next year. If the two companies merged, the combined company would domicile in the UK for tax purposes, although Pfizer has previously expressed that it would want its headquarters to remain in New York City. Additionally, it would be in Pfizer’s financial interest to make an overseas acquisition given that, as of December 31, 2013, the company had around $69 billion in untaxed cash overseas, which would be heavily taxed if repatriated to the US. In terms of the structure of the combined company, management shared today that it would not rule out splitting the combined company into separate business divisions, along the lines that Pfizer has reorganized its business into separate divisions.
  • We were glad to hear Pfizer share some reasons for the that would have a more substantial positive impact on the company’s pipeline and for patients. Speaking in broad terms, CEO Mr. Ian Read noted that industry consolidation is one of the ways through which pharmaceutical companies could respond to government and payer pressure on pricing by improving efficiency and product value – he did also suggested that “getting our tax rate down” would be another way to trim costs. Pfizer management sees the two companies’ pipelines as very compatible, and at least within diabetes, we would agree – Pfizer has a number of diabetes candidates in phase 1 and phase 2 (see below) but no products on the market, while AZ has a number of diabetes products that were recently approved or could be approved soon (Onglyza, Bydureon & Byetta, Forxiga, and related fixed dose combinations).
  • One complicating factor for a merger is Pfizer’s collaboration with Merck on the phase 3 SGLT-2 inhibitor ertugliflozin and a possible fixed-dose combination with Merck’s market-leading DPP-4 inhibitor Januvia. Ertugliflozin would stand in direct competition with AZ’s Forxiga (dapagliflozin) should the companies merge. We would expect that Pfizer might give up ertugliflozin rights to its partner Merck (for some price) should it acquire Forxiga, or that (perhaps more likely) Merck would take a breakup fee and then pursue another partners (perhaps Lexicon or J&J). Another option for Pfizer would be to terminate its phase 3 compound ertugliflozin and use the partnership with Merck to create a Januvia/Forxiga FDC, while terminating AZ’s Onglyza/Forxiga FDC development program. The latter seems much less likely but we’re throwing out there some theoretical possibilities – we assume Merck would not allow this. From our view, we hope AZ can remain undistracted no matter what happens as it finally is a diabetes powerhouse in its own right and the sole ownership of assets has been seen as a major win by many - that is, before all these discussions arose that had nothing to do with how diabetes would improve for patients or HCPs.

2. We learned that Pfizer recently advanced an acetyl-CoA carboxylase (ACC) inhibitor (PF-05175157) into phase 2 for type 2 diabetes – this is the first we have heard of this mechanism at this stage of development. However, it appears from ClinicalTrials.gov that the two registered six-week phase 2 studies for PF-05175157 (one investigating monotherapy, and the other as an add-on to metformin, with primary completion dates scheduled for November-December 2014) have suspended recruitment just a few weeks ago. Given that the company recently moved the candidate forward in its pipeline (updated earlier this month), we would not necessarily see the suspensions as an immediately worrying sign, unless the company did not have time to update its pipeline before the company’s presentation.

  • Acetyl-CoA carboxylase (ACC) is involved in the biosynthesis of fatty acids, and an ACC inhibitor would improve fatty acid oxidation. The mechanism has shown positive effects on glucose homeostasis in preclinical testing.
  • The competitive landscape for this class remains fairly uncluttered. Cambridge, MA-based biotech Nimbus Discovery has an ACC inhibitor in preclinical testing (ND-630). We found a publication on ACC inhibition from 2010 associated with Sanofi, and at GTC Bio 2011 we heard J&J Research Fellow Dr. James Lenhard discuss an investigation of an ACC inhibitor candidate. Given the novelty of this class, we’ll be looking closely for data on Pfizer’s candidate.

3. Ertugliflozin’s phase 3 program (partnered with Merck) continues to progress – see table 1 below for a summary of the companies’ six phase 3 studies. Since the company’s 4Q13 update, a study investigating ertugliflozin as an add-on to metformin and sitagliptin had its primary completion date pushed back very slightly from September 2015 to October 2015, and a study comparing ertugliflozin to the sulfonylurea glimepiride as an add-on to metformin (previously scheduled to be the final non-CVOT study to complete) had its estimated primary completion date moved up significantly from January 2017 to December 2015. The drug’s CVOT continues to recruit, and has an estimated primary completion date of mid-2020. During Q&A, management characterized ertugliflozin as one of the company’s more exciting pipeline candidates.

 Table 1: Phase 3 studies for ertugliflozin, arranged by estimated primary completion date

Study Name (Identifier)

Estimated Enrollment

Study Treatment

Primary Endpoint

Est. Primary Completion (as of May 9)

MK-8835-003 (NCT01958671)

450 patients with type 2 diabetes

Ertugliflozin monotherapy vs. placebo or metformin

A1c change from baseline to week 26

August 2015

 

MK-8835-006 (NCT02036515)

405 patients with type 2 diabetes

Ertugliflozin vs. placebo as add-on to metformin and sitagliptin

A1c change from baseline to week 26

October 2015 (previously September 2015)

MK-8835-007 (NCT02033889)

600 patients with type 2 diabetes

Ertugliflozin vs. placebo as add-on to metformin

A1c change from baseline to week 26

December 2015

MK-8835-002 (NCT01999218)

1230 patients with type 2 diabetes

Ertugliflozin vs. glimepiride as add- on to metformin

A1c change from baseline to week 52

December 2015 (previously January 2017)

MK-8835-001 (NCT01986855)

468 patients with type 2 diabetes and stage 3 chronic kidney disease

Ertugliflozin vs. placebo (with possible background therapy)

A1c change from baseline to week 26

January 2016

MK-8835-004 (NCT01986881) [CVOT]

3900 patients with type 2 diabetes and established CV disease

Ertugliflozin vs. placebo (with possible background therapy)

Time to first MACE event

June 2020

4. The rest of the company’s pipeline of candidates for type 2 and type 1 diabetes remains largely unchanged (see table 2 below). The one notable change is that an undisclosed phase 1 biologic for type 2 diabetes (PF-05231023) appears to have been dropped from development.

  • Our eyes remain on Pfizer’s two candidates for diabetic nephropathy, given the unmet need in that patient population. The company’s PDE5 inhibitor for diabetic nephropathy (PF-00489791) and its CCR2/5 antagonist for diabetic nephropathy and diabetic macular edema (PF-04634817) remain in phase 2. During the company’s 4Q13 update, management shared the PDE5 inhibitor had demonstrated “encouraging clinical performance,” warranting further exploration in phase 2b. Management had also then commented that it sees important medical and commercial opportunity in renal diseases.

Table 2: Pfizer’s diabetes drug pipeline

Drug Name

Class

Indication

Status/
Timeline

Ertugliflozin (PF-04971729)

SGLT-2 inhibitor

Type 2 diabetes

Phase 3

PF-00489791

PDE5 inhibitor

Diabetic nephropathy

Phase 2

PF-04634817

CCR2/5 antagonist

Diabetic nephropathy, diabetic macular edema

Phase 2

PF-04937319

Hepatic glucokinase activator

Type 2 diabetes

Phase 2

PF-05175157

Acetyl-CoA carboxylase inhibitor

Type 2 diabetes

Phase 2

PF-06291874

-

Type 2 diabetes

Phase 1

PF-06342674

Undisclosed biologic

Type 1 diabetes

Phase 1

5. Pfizer is a participant in the race to develop PCSK9 inhibitors, a new drug class with exciting potential for LDL cholesterol lowering. See our American College of Cardiology 2014 Full Report for phase 3 data on Amgen’s evolocumab and Sanofi’s alirocumab, which are currently seen as leading the pack. Pfizer’s candidate, bococizumab, is currently in phase 3 as well. Notably, during Q&A, management suggested that bococizumab should reach market at roughly the same time as its competitors, with outcomes data. Based on this phrasing, we were unsure if management was suggesting that the candidate would reach any markets at the same time as evolocumab and alirocumab, of if it believes its outcomes data should be available at roughly the same time. Excitement about the PCSK9 inhibitor class is running very high at the moment, and we imagine that there is a lot of time pressure to progress the candidate through phase 3 expeditiously. 

Questions and Answers

Q: What things do you think that a merged Pfizer and AZ can do better than AZ alone? In other words, what do you see as potential weaknesses of AZ’s standalone business, either in terms of product mix or R&D ability, through geographic positioning or anything else?

A: From our view, I think if you look at AZ, they've had a strategy of licensing in and bringing in the lots of products from other companies. In fact, most of their pipeline is licensed-in products, with very few developed nationally. So we look at that and we look at the fit with our portfolio, especially in the immune oncology area, where they have assets that, standalone, are probably coming late to the market, but if they were combined with our portfolio, I think it strengthens their portfolio substantially. And then when you look at their products, they fit into our categories. So we believe that with our marketing presence and our ability in those categories, we can make more out of those products than they can standalone.

But the power of this deal for us is these three components. It's the fit on the portfolio, it's the nice fit with the early pipeline, but it's not a pipeline story, per se. It's also a removing of overlaps, and making the organization more efficient. And I do believe you'll continue to see a trend in the industry: as governments pressurize on access and pricing, they're really telling the industry you need to get more efficient. You need to bring to market higher-value products at a lower cost.

There are different ways of doing that. There are internal improvements in your efficiencies, which Pfizer has done, and been very effective at. There's asset swaps, which you saw going on between GSK and Novartis, which also gets to getting companies to remove overlaps. Or there is industry consolidation, which this would be an example of that. And then the third component of value here, which is really important for Pfizer, is this ability to free the balance sheet up, and get our tax rate down, which would enable a lot of different strategies.

And so all three of these elements are important. I've been asked, would you do it if you didn't have this part, you didn't have that part. I think the answer is I'm doing it because I have all three parts, and it strengthens our strategy right now, and creates, I believe, compelling shareholder value.

Q: Assuming Pfizer acquires AZ, is it most likely that you would take the post-merger entity and eventually split it up completely into separate publicly-traded companies? Is there something about inversion and re-domiciling in the UK that would make a full split-up like that more difficult?

A: We are interested in preserving optionality that we've set up. We would see the integration of AstraZeneca with Pfizer along the way that we are organized – we would preserve that optionality. We would focus on managing those businesses as efficiently as possible. And no decision has been taken about the future, as there's been no decision taken about our businesses at this moment in time, but we would conserve that optionality.

Q: The big concern about the AZ deal is that you think there's something wrong with Pfizer. I was just wondering, Ian or Frank, if I could just get a general reaction to that?

A: I think we've gone out of our way to say that this -- I see this AZ deal as a way to accelerating an already good strategy. I think we've gone to pains in this release to point out the exciting developments in our pipeline, and the way we return value to shareholders, and so I definitely feel that we did this out of a position of strength. In fact, we, having approached AZ in December, and having received a negative from them in confidential conversations, decided to wait until we had results of palbociclib and adult vaccine, so that if we came back into the market it would be seen as we're coming back from a position of strength. So we will continue to operate our business, continue to drive shareholder value, and feel very confident about our standalone strategies.

Q: AstraZeneca, in its statements, has pushed back against the last proposal around valuation, the mix of cash and equity, and also execution risk. Would you characterize conversations you've had with shareholders voicing similar concerns, or perhaps is it slightly different reception as you go around asking about that?

A: We listen to the shareholders and we made what we thought was a compelling offer, which fully valued AZ, and we're awaiting further commentary back from AZ.

Q: On the pipeline, and approaching AstraZeneca from a position of strength … what are the other key assets that you think may not be adequately appreciated by the Street?

A: You've got PCSK9, which will arrive at the market, we expect roughly the same time as the other major competitors, with outcomes data. We have palbo, we have all the trials around palbo, Prevnar 13 in adult, we've got a meningitis B, we've got the ertugliflozin with Merck. […]

Frankly, opportunities abound inside our company, both from the in-line portfolio, the emerging markets opportunities, the pipeline, recent launches, and to be launched, and then if you look at the -- across vaccines, oncology, and get a very nice portfolio of unique opportunities. So as I say, this is -- we're doing this because we see an opportunity to create additional value from this acquisition or combination, not because we feel any negativity towards our present strategy, which we feel is very strong.

Q: Ian, at what point would you consider going directly to AstraZeneca shareholders? You mentioned a premium that you're offering, plus your disappointment by the Company's lack of engagement.

A: We've made public our offer to the Board. We remain considering all our options on how we progress these discussions.

--by Manu Venkat and Kelly Close