AZ 3Q17 – Diabetes portfolio falls 3% YOY; SGLT-2 Farxiga sales rise 30% YOY to $285M; GLP-1 Bydureon sales decline 12% YOY to $128M, hope in newly-approved autoinjector; SGLT-2 market grows 35% YOY to $935M; Pooled GLP-1 grows 25% YOY to $1.6B – November 10, 2017

AZ provided its 3Q17 financial update on Thursday in a call led by CEO Mr. Pascal Soriot. See here for the company’s press release, here for the presentation deck, and here for a special clinical trials appendix. While it was a challenging quarter for AZ’s diabetes portfolio (down 3% YOY as reported), SGLT-2 inhibitor Farxiga continues to shine, posting double-digit YOY and sequential growth in 3Q17. Moreover, 3Q17 was a strong quarter for the GLP-1 agonist class (+25% YOY) and the SGLT-2 inhibitor class (+35% YOY) overall, and our first three highlights share pooled market analyses on SGLT-2, GLP-1, and DPP-4.

Table 1: 3Q17 Financial Results for AZ’s Major Diabetes Products

Pooled Market Highlights

1. The GLP-1 agonist market grew 25% YOY (flat sequentially) to $1.6 billion in 3Q17 (from a high base of $1.3 billion in 3Q16). This strong performance puts the class ahead of pace to reach $6 billion for the full year 2017 – pooled revenue totaled $4.9 billion in 2016, and year-to-date (YTD) totals $4.6 billion. Novo Nordisk’s Victoza still leads with 54% market share by value, but continues to face competition from Lilly’s Trulicity, which captured 34% of pooled sales in 3Q17. A decision on Novo Nordisk’s once-weekly semaglutide is expected by the end of 2017. With the FDA approval of a CV indication for Victoza, demonstrated CV benefit is becoming increasingly important for agents in this class, although many thought leaders have defended cardioprotection as a GLP-1 class effect (attributing neutral results to study design rather than molecule).

2. The SGLT-2 inhibitor market grew 35% YOY and 9% sequentially to $935 million, from a base of $692 million in 3Q16 and $857 million in 2Q17. Growth drivers in 3Q17 included Lilly/BI’s Jardiance (more than doubling YOY to $385 million) and AZ’s Farxiga (rising 30% YOY to $285 million), which more than compensated for the 19% YOY decline in J&J’s Invokana sales (to $265 million). Notably, SGLT-2 inhibitors experienced greater YOY growth overall in 3Q17 than GLP-1 agonists (+25% YOY), which hasn’t been the case in recent quarters: In 1H17, GLP-1 revenue was climbing faster from a higher base vs. SGLT-2 revenue, which we took as a sign of positive but muted performance for the oral agents. The higher jump for SGLT-2 inhibitors in 3Q17 is notable. For comparison, the class grew 18% YOY in 1Q17 and 20% YOY in 2Q17, and sequential growth was -14% and +20%, respectively. And indeed, we might expect more dramatic growth considering the impressive CVOT data on Jardiance and Invokana, plus the Jardiance CV indication. The “composite” benefits associated with this class can’t be understated:

• CV and kidney risk reduction;
• The glycemic-dependent nature (no hypo);
• The weight loss;
• The ease of use of this class – easy to prescribe a pill, no titration, manageable side-effects, easy to take a pill …

3. Pooled sales for the DPP-4 inhibitor class grew a modest 2% YOY and 1% sequentially to $2.5 billion in 3Q17 though they did increase, which is still notable given the high $10 billion annualized base. This performance keeps in step with the recent trend of fluctuating sales for the DPP-4 inhibitor class. Merck’s Januvia remains the indisputable frontrunner, capturing 61% of the market by value in 3Q17 (as it has since 1Q17). Lilly/BI’s Tradjenta was next with 17% market share by value, followed by Novartis’ Galvus with 12%, and AZ’s Onglyza and Takeda’s Nesina, both with 5%.

Financial Highlights

4. AZ’s diabetes portfolio fell 3% YOY to $589 million in 3Q17, which represents a 2% sequential decline. Management also referred to a “softer” year-to-date performance for diabetes, down 3% YOY globally (to $1.8 billion) and down 10% YOY in the US (to $994 million). US pricing pressure remains a substantial challenge and profitability is undoubtedly down as well. That said, AZ has got all the fastest-growing classes.

5. The SGLT-2 Farxiga franchise grew 35% YOY to $285 million, against a tough comparison of 64% YOY growth in 3Q16 ($220 million). Year-to-date (YTD), revenue from Farxiga increased 24% YOY to $742 million, and the product is on track to hit $1 billion in 2017 (sales totaled $835 million in 2016). Management seemed pleased that this business returned to growth in the US, rising 4% YTD and 13% YOY in 3Q17 ($133 million), attributing this to “optimized affordability programs,” though the company’s presentation slides read “reduced affordability programs”. We are not sure whether this means discounts and co-pay cards are being scaled back for US patients on Farxiga, in the face of ongoing pricing pressure and intense negotiations with PBMs, though this is speculation since there was no further commentary.

6. Revenue from GLP-1 agonist Bydureon (exenatide once-weekly) fell 12% YOY to $128 million (from $145 million in 3Q16), also falling 12% sequentially (from $146 million in 2Q17). Management highlighted the recent FDA approval of the Bydureon BCise autoinjector, a huge improvement in patient friendliness, as well as the FDA and EMA approval of the inclusion of DURATION-8 data on the Bydureon and Farxiga labels. Byetta (exenatide twice-daily) sales fell 36% YOY to $39 million in 3Q17.

7. Sales of DPP-4 inhibitor Onglyza fell 25% YOY to $127 million, marking the fifth consecutive quarter of double-digit YOY decline for the franchise. Sequentially, sales dove 15% from $150 million in 2Q17. Overall, we don’t find Onglyza’s 3Q17 performance to be all that surprising, given AZ’s deliberate shift of focus away from DPP-4 in favor of SGLT-2 – to this end, Onglyza received no mention in prepared remarks or Q&A.

Pipeline Highlights

8. No information was provided on Qtern’s US launch. The fixed-dose SGLT-2/DPP-4 combination product (dapagliflozin/saxagliptin) was FDA-approved in March 2017. There was no mention of AZ’s earlier-stage diabetes pipeline either, but you’ll find the latest details on each candidate in our pipeline summary table below.

Pooled Market Highlights

1. GLP-1 Agonists: 25% YOY Growth to $1.6 Billion; Market Well Ahead of Pace to Surpass $6 Billion in 2017; Victoza Faces Ever-Increasing Competition from Trulicity; New Innovation on the Horizon in Oral/Injectable Semaglutide

The GLP-1 agonist market grew 25% YOY to $1.6 billion in 3Q17 (from a high base of $1.3 billion in 3Q16). This strong performance puts the class ahead of pace to reach $6 billion for the full year 2017 – pooled revenue totaled $4.9 billion in 2016, and YTD totals $4.6 billion in the first three quarters of 2017. Growth so far this year has been impressive, with 35%, 29% and 25% YOY growth in 1Q17, 2Q17, and 3Q17, respectively.  GLP-1 sales took a small 1% dip sequentially in 3Q17, but this occurred from all-time-high revenue in 2Q17 (~$1.6 billion). Very notably, GLP-1 agonists have matched the rapid-acting insulin market in quarterly sales, a sign of innovation and increasing competition from this advanced therapy class, which addresses postprandial excursions without hypoglycemia risk, not to mention the profound glucose-lowering and weight loss efficacy, plus the possible cardioprotection. We’re pleased to see continued commercial success of this class, which has grown to comprise 11% of the global diabetes market by value and 13% in North America, as of August 2017 (according to Novo Nordisk’s 3Q17 roadshow presentation). That said, we maintain that far more patients could benefit from GLP-1 agonist therapy than those currently taking it. Novo Nordisk’s Victoza continues to lead the market by value, capturing 54% of sales by our calculations, followed by Lilly’s Trulicity with 34%, AZ’s Bydureon with 8%, AZ’s Byetta and GSK’s Tanzeum with 2% each, and Sanofi’s Lyxumia with <1%. Value share for Trulicity (product sales more than doubled YOY in both 2Q17 and 3Q17) is up from 30% in 2Q17 and 26% in 1Q17, while Victoza’s is down from 56% and 57%, respectively. Looking at market share by volume reveals a similar trend of narrowing gap between Victoza and Trulicity: As of August, 2o17, Victoza accounted for 44% of total GLP-1 agonist prescriptions in the US (TRx) vs. Trulicity’s 37%. This is a smaller difference compared to Victoza’s 46% US TRx and Trulicity’s 34% US TRx in May 2017. Both Novo Nordisk and Lilly have cited underlying class growth as a driver of continued financial success, but Novo Nordisk management has also acknowledged competition from Trulicity.

• Innovation abounds in the GLP-1 agonist class, leading us to believe that we will continue to see strong growth into the mid-term future. The market entry of Novo Nordisk’s semaglutide appears all the more imminent following a 16-0 vote in favor of approval at a recent FDA Advisory Committee meeting – it seems highly unlikely that retinopathy risk will stand in the way, given opinions from ophthalmologists that this can be well-managed in the real world by following already-established practice guidelines for eye care. A decision is expected by the end of 2017. Semaglutide appears to be more potent than existing GLP-1 agonists, the most recent indication being topline results from SUSTAIN 7: Semaglutide showed statistically significant superiority on A1c and body weight reduction vs. Trulicity (dulaglutide). Indeed, management referred to semaglutide as “probably the biggest opportunity we’ve ever had in Novo Nordisk,” and we certainly believe in the potential for this new once-weekly product to spur further growth in the GLP-1 agonist market. Novo Nordisk is also developing an oral formulation of semaglutide, which could be an even bigger disruptor as the first oral GLP-1 agent. In a recent interview with Novo Nordisk SVP of Device R&D Mr. Kenneth Strømdahl, he suggested that oral administration is the next major frontier for GLP-1 therapy: “Oral semaglutide – that would be a huge success.” AZ received FDA approval in October for Bydureon BCise, a patient-friendly autoinjector that eliminates the need for reconstitution prior to injecting exenatide. While Bydureon sales fell a disappointing 12% YOY in 3Q17, we look forward to the new pen launch in 1Q18, which could boost AZ’s GLP-1 franchise and could contribute to overall class growth as well. Intarcia’s ITCA 650 (an implantable mini pump offering continuous, subcutaneous release of exenatide for three-six months, ensuring adherence) received a Complete Response Letter in 3Q17. While we hope for a speedy resubmission, its market entry is at least delayed for now.
• REWIND, the CVOT for Trulicity, is set to wrap-up in July 2018, and could have profound implications as thought leaders continue to debate whether or not cardioprotection is a GLP-1 class effect. If REWIND does not show CV superiority vs. placebo, Victoza and semaglutide will remain the only GLP-1 agonists to have done so, which could give Novo Nordisk’s GLP-1 agonist business a competitive edge (the FDA approved a CV indication for Victoza in late August). In our view, demonstrating CV efficacy will become increasingly important as treatment paradigms in diabetes shift, slowly but surely, toward outcomes-based care, and as the bar for diabetes drugs continues to rise. On the other hand, positive REWIND results would weigh heavily in favor of a CV class effect for GLP-1 agonists. During Novo Nordisk’s 3Q17 update, CSO Dr. Mads Thomsen implied that REWIND is less likely to show CV benefit vs. LEADER or SUSTAIN 6 due to the study population’s lower baseline A1c (~7.3%) and shorter disease duration (~10 years), as well as only 31% having existing CV disease (meaning 69% of participants comprise a primary prevention cohort). This picks up on elements of trial design discussed in the context of EXSCEL, AZ’s CVOT for Bydureon presented recently at EASD. Novo Nordisk has drawn a distinction between human GLP-1-based molecules (liraglutide, semaglutide, dulaglutide) and exendin-4-based molecules (exenatide, lixisenatide), arguing that this divide is the basis for a mix of positive and neutral CVOTs. However, Bydureon only narrowly missed the statistical threshold for superiority in EXSCEL (HR=0.91, 95% CI: 0.83-1.00, p<0.001 for non-inferiority, p=0.06 for superiority). Thought leaders including Drs. Bernard Zinman and Naveed Sattar have attributed the narrow miss to pragmatic (“real-world”) study design, since there was no run-in period in EXSCEL to exclude participants with low medication adherence, and since there was a larger primary prevention cohort compared to LEADER and SUSTAIN 6. There is clearly a lot left to unpack here. We’re not ready to give up on the notion of cardioprotection for all GLP-1 agonists, especially given the proposed mechanism of anti-atherosclerotic effects. Although there are certainly limits to what AZ can say about Bydureon’s CV effects (even on today’s call, management mentioned that the CVOT met its safety endpoint but not its efficacy endpoint), and EXSCEL is very unlikely to support a new indication for once-weekly exenatide, with the results, we certainly think that most would believe it is cardioprotective. From this perspective, there are definitely advantages to conducting a CVOT in a higher-risk target population. We’ll be watching these dynamics extremely closely in the coming months. It goes without saying we’d love to see one CVOT to really determine the stakes for the class.

Figure 1: Pooled GLP-1 Agonist Sales (1Q06-3Q17)

2. SGLT-2 Inhibitors: 35% YOY Growth to $935 Million, Driven by Lilly/BI’s Jardiance and AZ’s Farxiga; Strong Whole Class Sales, Though the “Head Room to Grow is Enormous”

The SGLT-2 inhibitor market grew 35% YOY and 9% sequentially to $935 million (from a base of $692 million in 3Q16). Growth drivers in 3Q17 included Lilly/BI’s Jardiance (more than doubling YOY to $385 million) and AZ’s Farxiga (rising 30% YOY to $285 million), which more than compensated for the 19% YOY decline in J&J’s Invokana sales (to $265 million). In fact, Farxiga sales in 3Q17 surpassed Invokana sales for the first time since J&J’s SGLT-2 product launched (2014); this follows 2Q17, when Jardiance revenue surpassed Invokana revenue for the first time. Jardiance captured 41% of the market by value in 3Q17 (up from 36% in 2Q17), followed by Farxiga with 30% (essentially flat from 29% in 2Q17) and Invokana with 28% (down from 34% in 2Q17). Importantly, this analysis uses our estimate for total global Jardiance sales, since only Lilly’s share (and not BI’s) is reported publically. We’ve based our calculations on the assumption that Lilly’s portion represents ~33%, given that BI listed global net sales for the franchise at €165 million, or ~$183 million, in a 2015 diabetes update, the same year in which Lilly collected $60 million in full year franchise revenue. We noticed a continuing trend in 3Q17, following Q1 and Q2, of Jardiance “stealing share” from Invokana while Farxiga maintains its position within the class. There’s a chance this may change in 2018, with Jardiance excluded in favor of Invokana on the CVS Health formulary (Farxiga will remain as a preferred drug), but on the flip side, J&J may have negotiated a lower price/higher rebate with the PBM and thus may see lower net revenue despite increased volume (i.e. lower realized price per prescription). Notably, SGLT-2 inhibitors experienced greater YOY growth overall in 3Q17 than GLP-1 agonists (+25% YOY), which hasn’t been the case in recent quarters: In 1H17, GLP-1 revenue was climbing faster from a higher base vs. SGLT-2 revenue, which we took as a sign of positive but muted performance for the oral agents. We’re pleased to see a higher jump for SGLT-2 inhibitors in 3Q17, to an all-time-high in pooled quarterly sales – for comparison, the class grew 18% YOY in 1Q17 (totaling $715 million) and 20% YOY in 2Q17 (totaling $857 million) – although we might expect more dramatic growth considering the impressive CVOT data on Jardiance (empagliflozin) and Invokana (canagliflozin) and the Jardiance label update (the FDA approved a CV indication based on EMPA-REG OUTCOME results in December 2016). As AZ management established on today’s call, “the penetration of the class is still relatively low, so the head room to grow is enormous.”

• In line with this, we believe many more people within the type 2 diabetes patient population could benefit from the potent glucose-lowering, weight loss, blood pressure-lowering, and possible cardioprotection of SGLT-2 inhibitors. Greater uptake will likely depend on:
  
  • Strong access, including reimbursement from payers as well as manufacturer-led patient savings programs (though commentary from management today suggests that AZ may be pulling back on affordability initiatives – more on this in highlight #6 below);
  • A CV indication for Invokana (J&J recently filed an sNDA requesting this, and an FDA decision on the label change is expected in late 2018); and
  • Upcoming data from the DECLARE CVOT for Farxiga (dapagliflozin), which could further support the notion of a cardioprotective class effect, and which might show CV benefit in a primary prevention population (though we’ll have to wait-and-see).
  • Merck/Pfizer are expecting an FDA decision on ertugliflozin by end of year, and this fourth-to-market SGLT-2 product could stimulate underlying class growth.
  • Beyond type 2, this class holds exciting potential to expand into other indications, which would also grow the market. To this end, Lilly/BI have launched the EMPEROR HF clinical program for empagliflozin in chronic heart failure (expected to complete June 2020), and the partners plan to initiate a dedicated study of Jardiance in chronic kidney disease (CKD) as well, though no timing has been announced. AZ has the Dapa-HF and Dapa-CKD trials ongoing (expected to complete in December 2019 and November 2020, respectively), while J&J expects data from the CREDENCE trial (canagliflozin in diabetic kidney disease) in 2H19. AZ’s DEPICT 1 trial was the first phase 3 readout on an SGLT-2 inhibitor (dapagliflozin) in type 1 diabetes, and the data was quite positive and well-received when presented at EASD. Lilly/BI also have phase 3 clinical trials ongoing for empagliflozin in people with type 1 diabetes.
• Across all indications, we imagine the SGLT-2 class will confront safety concerns surrounding lower limb amputations, sparked by CANVAS data which found a nearly two-fold risk for this complication with Invokana treatment vs. placebo. That said, compared to the CV benefits, we do not think overall this is going to hurt the class in a major way. The FDA has issued a boxed warning on all canagliflozin-containing medicines, while the EMA has extended the same warning to all products in the class – it’s interesting to see two different approaches that over time may move closer to each other – again, we’d love to see a class CVOT here as we would in GLP-1 (we could also have just one big CVOT with all therapies in both classes). Thus far, it doesn’t seem like this worry has dampened global sales of Jardiance or Farxiga – for that matter, many thought leaders (including Drs. Dan Drucker, Anne Peters, and Andrew Boulton) have emphasized the low base rate of amputations in the real world (especially compared to CV disease prevalence among type 2 patients), arguing that these can be avoided in individuals taking Invokana with proper screening and monitoring of the feet. That said, there’s no doubt that safety warnings on product labels influence prescription habits, and we hold out hope that this amputation concern will eventually be put to bed (through further data and/or proliferation of “best practice” foot care within the context of diabetes), as it’s almost certainly limiting some patients who could truly benefit from starting SGLT-2 therapy.
• According to AZ’s 3Q17 presentation, Farxiga maintained 40% global TRx (share of total prescriptions). There was no mention of TRx for Jardiance or Invokana, but in 2Q17, AZ listed these values as 30% and 22%, respectively. AZ management once again attributed sluggish US pharmaceutical performance to intense pricing pressure surrounding diabetes drugs – to this end, we’re curious to see how US TRx compares to SGLT-2 inhibitor volume in other markets. As Lilly/BI (and hopefully soon, J&J) promote SGLT-2 inhibitors to cardiologists, we’ll be keen to see the breakdown of prescriptions written by different types of healthcare providers, from PCPs to diabetes care specialists to cardiology specialists. At ESC 2017, the cardiology community expressed distinct enthusiasm for Jardiance as a CV drug, suggesting that empagliflozin’s glucose-lowering effects may actually be “secondary” to its profound protective effects on heart failure and CV death.

Figure 2: Pooled SGLT-2 Inhibitor Sales (1Q13-3Q17)

3. DPP-4 Inhibitors: 2% YOY Growth to $2.5 Billion; Merck’s Januvia Leads with 61% Value Share; FDA Adds Heart Failure Warnings to All Labels

Pooled sales for the DPP-4 inhibitor class grew a modest 2% YOY and 1% sequentially to $2.5 billion in 3Q17. This performance keeps in step with the recent trend of fluctuating sales for the DPP-4 inhibitor class: Revenue fell 4% YOY in 2Q17, fell 3% YOY in 1Q17, and rose 2% YOY in both 4Q16 and 3Q16. Merck’s Januvia (sitagliptin) franchise remains the indisputable frontrunner, capturing 61% of the market by value in 3Q17 (as it has since 1Q17). Lilly/BI’s Tradjenta (linagliptin) was next with 17% market share by value in 3Q17, followed by Novartis’ Galvus (vildagliptin) with 12%, and AZ’s Onglyza (saxagliptin) and Takeda’s Nesina (alogliptin) both with 5%. Notably, these value share estimates are based on our calculations for total Tradjenta revenue, since only Lilly’s share is reported publically. We approximate Lilly’s share of franchise revenue at ~36%, since the company reported Tradjenta revenue of $357 million in 2015, the same year that BI reported global net sales for Tradjenta at €909 million, or ~$1 billion, in a diabetes update. While no company has provided TRx information for these various DPP-4 inhibitor products, Merck did share in its 3Q17 update that global prescription volume for Januvia increased YOY despite the 2% YOY decrease in franchise sales (to ~$1.5 billion). And, AZ management cited competitive pricing in the US diabetes market as a reason for overall pharmaceutical revenue declines. This implies that while more patients may be accessing DPP-4 inhibitor treatment (this is speculation in itself, since we only heard confirmation of this from Merck, not from Lilly/BI, Novartis, AZ, or Takeda), these manufacturers are seeing lower realized price per prescription. Merck management expressed in both 2Q17 and 3Q17 that the company doesn’t anticipate that US pricing pressure will subside in the near future, so it’ll be interesting to see what (if any) tactics these companies deploy to sustain sales growth in their DPP-4 businesses.

• Conversations continue around DPP-4 inhibitors and heart failure risk. Though many thought leaders agree that this signal was unique to Onglyza in the SAVOR-TIMI study, the FDA recently issued warnings for heart failure on the Januvia, Nesina, and Tradjenta labels as well (Galvus is only marketed OUS). At ESC 2017, UT Southwestern’s Dr. Darren McGuire delivered a compelling argument against this broad-sweeping warning. He pointed to the resoundingly neutral hazard ratio for heart failure hospitalization in the TECOS trial for Januvia (HR=1.00), and reminded everyone that CVOTs for Tradjenta are still ongoing (CARMELINA, comparing linagliptin vs. placebo, is expected to complete in December 2017, while CAROLINA, comparing linagliptin vs. glimepiride, is expected to complete in March 2019). Hospitalization for heart failure trended in the wrong direction in Takeda’s EXAMINE trial for Nesina, but this finding did not reach statistical significance. We agree with Dr. McGuire that FDA’s action here was overly conservative – while we certainly appreciate the agency’s vital role in ensuring safety of pharmaceuticals, we also know that labels do influence busy HCPs in the real world, and it’s a shame to think that some patients who’d benefit from the glucose-lowering and great tolerability of a DPP-4 inhibitor might not get it because of a largely unfounded safety concern. Of course, other thought leaders including Drs. Jay Skyler and Steven Nissen have suggested de-prioritizing DPP-4 inhibitors in clinical practice in favor of a more advanced SGLT-2 inhibitor or GLP-1 agonist. As Dr. Skyler put it, these newer drugs offer superior A1c-lowering and weight loss efficacy (DPP-4 inhibitors are weight neutral, for the most part), and why deal with even the slightest hint of concern over heart failure when you have agents like empagliflozin, canagliflozin, and liraglutide that have demonstrated statistically significant cardioprotection? In general, we believe DPP-4 inhibitors will be a mainstay of diabetes management into the foreseeable future: They boast familiarity among patients/HCPs, and they come with strong safety/tolerability that makes them ideal therapeutic options for key segments of the patient population, including the elderly.

Figure 3: Pooled DPP-4 Inhibitor Sales (1Q07-3Q17)

Financial Highlights

4. Diabetes Portfolio Falls 3% YOY to $589 Million; Management References “Softer” Diabetes Performance YTD; Strategic Focus Remains on SGLT-2 Farxiga and GLP-1 Bydureon

AZ’s diabetes portfolio fell 3% YOY to $589 million in 3Q17, which represents a 2% sequential decline. Management also referred to a “softer” year-to-date performance for diabetes, down 3% YOY globally (to $1.8 billion) and down 10% YOY in the US (to $994 million). Along these same lines, AZ’s results announcement cites the competitive US diabetes environment as a reason for underwhelming sales from the company’s whole pharmaceutical portfolio (encompassing non-diabetes products as well). The call focused primarily on AZ’s oncology business, leaving little time for discussion of diabetes. SGLT-2 inhibitor Farxiga and GLP-1 agonist Bydureon were the only diabetes products mentioned by name, which we think is no coincidence, given the widespread clinical enthusiasm for both these therapy classes, as well as the expanding markets (see our pooled market analyses above). Moreover, Farxiga had an exciting readout in 3Q17 with the DEPICT 1 results presented at EASD (showing safety/efficacy in type 1 diabetes), and Bydureon saw important regulatory movement with the FDA approval of a new autoinjector (brand name Bydureon BCise). During Q&A, management expressed a positive outlook on future growth in diabetes with both Farxiga and Bydureon, noting that there is “head room” to grow since the penetration of these classes is still relatively low. Farxiga was a key bright spot in 3Q17, with sales growing 30% YOY to $285 million. The rest of AZ’s diabetes products experienced YOY declines, including even Bydureon. Revenue for the product fell 12% YOY in 3Q17 to $128 million.

Figure 4: Total Sales for AZ’s Diabetes Portfolio (4Q12-3Q17)

5. Bright Spot in Farxiga: Sales Rise 30% YOY to $285 Million, Potential to be a Blockbuster Drug in 2017; US Sales Rise 4% YTD from “Reduced Affordability Programs”

AZ’s SGLT-2 Farxiga franchise grew 30% YOY to $285 million, against a tough comparison of 64% YOY growth in 3Q16 to $220 million. Sequentially, Farxiga sales rose 14% from $250 million in 2Q17, when sales grew 21% sequentially, making this another tough comparison. Year-to-date (YTD), revenue from the SGLT-2 inhibitor increased 24% YOY to $742 million, and we think the product is on track to hit $1 billion blockbuster status in 2017 (Farxiga sales totaled $835 million in 2016). Notably, AZ’s SGLT-2 inhibitor was its only diabetes product with positive YOY growth in 3Q17. Our sense is that the company is very committed to making its SGLT-2 business a clinical and commercial success, with strategic marketing as well as ongoing mechanistic and outcomes studies to explore all potential benefits to the dapagliflozin molecule. To this end, management highlighted DEPICT 1 results (n=833) presented at EASD 2017: In patients with type 1 diabetes, dapagliflozin achieved superior A1c reductions vs. placebo (p<0.0001), promoted weight loss, increased time-in-range (a mean 10.6 hours in the placebo arm vs. 12.5 hours in the 5 mg dapagliflozin arm and 13.2 hours in the 10 mg dapagliflozin arm), and lowered total daily insulin dose by ~11% vs. placebo, all without increasing risk for DKA (rates of 1%, 2%, and 1% in the 5 mg, 10 mg, and placebo groups). We hope management’s positive outlook on Farxiga for type 1 means that AZ will indeed forge ahead with regulatory filings for this new indication, but first, we await DEPICT 2 results (study expected to complete April 2018). Management also called attention to label updates for Farxiga and for GLP-1 agonist Bydureon based on DURATION-8 – these two advanced diabetes drugs are now approved for co-administration, and each product label will clearly display the superior benefits to combination therapy vs. either monotherapy. In a separate call with our team last month, VP of US Medical Affairs Dr. Jim McDermott underscored that AZ is the first company to have positive published data on an SGLT-2/GLP-1 combination regimen added to its product labels. We agree this is a big deal, and a step that could boost sales for Farxiga and Bydureon alike. Moreover, management today alluded to multiple positive readouts from CVD-REAL, the AZ-sponsored real-world study comparing outcomes between SGLT-2 inhibitors and other glucose-lowering drugs. During Q&A, management elaborated, “CVD-REAL shows that SGLT-2 agents have a very material impact on heart failure, CV mortality, and likely renal disease,” suggesting that both Farxiga sales and overall SGLT-2 inhibitor sales have plenty of room to grow (absolutely, yes). CVD-REAL is a great lead-up to the DECLARE CVOT (data anticipated 2H18), which will determine Farxiga’s MACE effects in a randomized controlled setting. It’s early to speculate, especially because DECLARE includes a lower-risk population at baseline (a higher proportion of primary prevention patients compared to EMPA-REG OUTCOME and CANVAS), among other differences in trial design and execution. That said, we have our fingers crossed that Farxiga demonstrates cardioprotection in line with a CV class effect, and CVD-REAL bodes well. While not mentioned during the 3Q17 update, we recently learned of ongoing mechanistic studies of dapagliflozin as well, categorized under the DapaMech program in the ESC 2017 exhibit hall. A collection of key ongoing trials for Farxiga is summarized in the table below, and overall, we’re glad to see this tremendous commitment from AZ to its highest-selling diabetes product.

• By geography, US Farxiga revenue grew 13% YOY to $133 million in 3Q17, while ex-US revenue rose 49% YOY to $152 million. Sales in Europe totaled $66 million (up 40% YOY), and sales in emerging markets totaled $60 million (up 54% YOY). During prepared remarks, management highlighted 60% YOY sales growth for the product in Japan, specifically. As for the US, management seemed pleased that the Farxiga business returned to growth – rising 4% YOY YTD – and attributed this to “optimized affordability programs,” though the company’s presentation deck reads “reduced affordability programs” (slide 13). There was no deep dive on this, but we are concerned that it could mean discounts and co-pay cards are being scaled back for US patients, though this is speculation since no color was provided. We appreciate the severe extent to which US pricing pressure is challenging diabetes companies, which are paying high rebates to payers/PBMs and netting less per prescription. We don’t discredit AZ (or any diabetes manufacture, for that matter) for all the work the company has done to boost patient access in the face of competitive pricing. Still, it’s a massive disappointment for patients to lose out in this complicated payer environment, when what we really need is more transparency surrounding PBM negotiations and price-setting. Renowned diabetes thought leaders, including Drs. Jay Skyler and Irl Hirsch, have argued that PBMs are the “middle men” causing the most damage in terms of complex pricing schemes and yet adding little value to the system. Without a doubt, we need to find solutions (and soon) to assuage US pricing pressure while maintaining broad patient access – in no world should this solution involve restricting patient access, because (i) diabetes companies are in the business of improving lives for people with a difficult chronic disease, and (ii) eliminating affordability initiatives would still likely hurt volume and sales for these manufacturers.

Figure 5: Farxiga Franchise Sales (1Q13-3Q17)

Table 2: Ongoing Farxiga Clinical Trials

6. Bydureon Sales Fall 12% YOY to $146 Million in Wake of Full EXSCEL Results at EASD; Bydureon BCise Autoinjector Approved by FDA, US Launch in 1Q18; DURATION-8 Added to Drug Labels

Revenue from GLP-1 agonist Bydureon (exenatide once-weekly) fell 12% YOY as reported and operationally to $128 million (from $145 million in 3Q16), also falling 12% sequentially (from $146 million in 2Q17). Product sales have fluctuated between $120-$160 million over the past three years, compared to $528 million for Trulicity and $844 million for Victoza in 3Q17. By geography, US sales of Bydureon fell 13% YOY and 14% sequentially to $100 million, while ex-US sales fell 7% YOY and sequentially to $28 million. Despite what we’d characterize as a disappointing financial performance, AZ management maintained a positive outlook on the Bydureon business, emphasizing the recent FDA approval of Bydureon BCise. This new autoinjector is similar to the IDEO-designed Trulicity pen, which is likely responsible, in part, for the striking success of Lilly’s GLP-1 agonist (patient feedback has been quite positive, to our knowledge). Previously, Bydureon could only be administered via either a complicated single-dose reconstitution kit or a multi-dose dual chamber pen, which still involved a lengthy mixing and tapping process to accurately dose exenatide. Bydureon BCise has a hidden needle but visible plunger that patients can watch (as reassurance that they’ve taken their full dose), and will significantly lower injection burden and make Bydureon more accessible for those who struggle with traditional pens and syringes. Launch of Bydureon BCise is scheduled for 1Q18, and AZ plans to kick-off the new year with a comprehensive marketing and education approach through online channels and HCP offices, in addition to patient support. Notably, AZ also intends to price BCise at parity with the dual chamber pen – a huge win for patient access. BCise has also been accepted for review by the EMA, and a decision is expected in 2H18. Additionally, Bydureon’s 3Q17 performance coincides with the September presentation and publication of full EXSCEL CVOT results at EASD 2017 in Lisbon. This data showed that Bydureon just missed superiority on the primary endpoint of three-point MACE, with a hazard ratio of 0.91 (95% CI: 0.83-1.00). We’ve heard EXSCEL explained as a “pragmatic” CVOT, enrolling a large primary prevention cohort with no run-in period to maximize adherence and allowing wide concomitant medication use in both arms. While it’s likely too early to see any impact EXSCEL results might have on Bydureon sales, we don’t imagine it’ll be a big tailwind for the business, particularly as market leader Victoza now carries CV indications in both the US and EU (the REWIND CVOT of Lilly’s Trulicity will complete July 2018).

• In 3Q17, both the Bydureon and Farxiga labels were updated by the FDA to include results from DURATION-8, making AZ the first company to have positive data on SGLT-2/GLP-1 co-administration on its drug labels. The EMA also approved incorporation of this data into both the indication statement and clinical trials sections. One-year data from DURATION-8 was shared on a poster at ADA 2017, following the initial full results presentation (28 weeks) at EASD 2016 in Munich. A1c-lowering, weight loss, and reductions in systolic blood pressure were all significantly greater with Farxiga + Bydureon together vs. either agent alone. None of the effects were entirely additive, as is to be expected. That said, the sub-additive effects and the differential effects of each class on glucagon have raised some questions, particularly from Dr. John Buse. Individually, though, these two therapy classes represent some of the most advanced diabetes medicines on the market, and we’d be thrilled to see more data on their combination going forward. Despite past comments that Farxiga is AZ’s main priority in diabetes, the company’s seems firmly committed to both its GLP-1 agonist and its SGLT-2 inhibitor businesses. We continue to emphasize that so many more patients could be benefitting from both of these therapy classes. 
• Sales of GLP-1 agonist Byetta (exenatide twice-daily) fell 36% YOY as reported and operationally to $39 million in 3Q17, which represents a 9% sequential decline. This marks the seventh consecutive quarter of YOY decline for Byetta – obviously, this is not a medicine that AZ is investing in and we plan moving forward to quote more of our analysis on the combination of Bydureon and Byetta as that is what is really relevant. US sales fell 40% YOY in both 2Q17 (to $28 million) and 3Q17 (to $23 million). OUS sales were down 30% YOY to $16 million in 3Q17. While this trend has been in place since Bydureon entered the market – rightly so, as Bydureon carries one-fourteenth the injection burden, and AZ has focused on it completely at the expense of Byetta – it’s all the more disappointing to see in the face of sluggish Bydureon sales as well. Cumulative revenue for AZ’s exenatide franchise (Bydureon + Byetta) totaled $167 million in 3Q17, down 12% sequentially from $189 million in 2Q17 and down 19% YOY from $206 million in 3Q16. Bydureon is holding steady from 1Q17 and 2Q17, making up 77% of franchise sales.

Figure 6: Bydureon Sales (3Q12-3Q17)

Figure 7: Byetta Sales (3Q12-3Q17)

7. DPP-4 Inhibitor Onglyza Sales Dive 25% YOY to $127 Million, Reflecting AZ’s Strategic Shift to SGLT-2 Inhibitor Franchise

Sales of DPP-4 inhibitor Onglyza (saxagliptin) fell 25% YOY to $127 million, marking the fifth consecutive quarter of double-digit YOY decline for the franchise (-22% in 2Q17, -27% in 1Q17, -22% in 4Q16, and -17% in 3Q16). Sequentially, sales dove 15% from $150 million in 2Q17. The product experienced double-digit revenue decline across most global markets: Sales fell 37% YOY in the US to $58 million, fell 10% YOY in Europe to $26 million, fell 3% YOY to $30 million in emerging markets, and fell 28% YOY to $13 million in the rest of the world. The comparatively strong performance in emerging markets was attributed to the addition of Onglyza to China’s National Reimbursement Drug List (NRDL) in 3Q17. In China, Onglyza sales grew 41% YOY to $24 million, a distinct change of pace from the drug’s otherwise sluggish performance. As for the US, AZ’s results announcement cited continued competitive pressures and a lower share of the DPP-4 inhibitor market, though these factors were partially offset by lower utilization of patient access programs (notably, the company also mentioned reduced affordability programs with regard to SGLT-2 inhibitor Farxiga). Overall, we don’t find Onglyza’s 3Q17 performance to be all that surprising, given AZ’s deliberate shift of focus away from DPP-4 in favor of SGLT-2 – to this end, Onglyza received no mention in prepared remarks or Q&A. We do see the logic behind AZ’s strategy: Unlike other DPP-4 inhibitors, Onglyza showed a worrisome signal for heart failure hospitalization in its CVOT, and while some have suggested that DPP-4 agents are most effective in recently-diagnosed patients, the majority opinion among diabetes thought leaders is that this class can’t compete with the potency of SGLT-2 inhibitors or GLP-1 agonists later in the course of disease (on A1c, weight, or positive CV effects).

Figure 8: Onglyza Sales (4Q12-3Q17)

Pipeline Highlights

8. Still No Details on US Launch Timing for Fixed-Dose Qtern, FDA-Approved After Much Anticipation in March; Sluggish Uptake for SGLT-2/DPP-4 Combos To-Date – Could Merck/Pfizer’s Candidate Change This?

No information was provided on Qtern’s US launch. The fixed-dose SGLT-2/DPP-4 combination product (dapagliflozin/saxagliptin) was FDA-approved in March 2017. Given that this was the second US submission of Qtern, following an earlier Complete Response Letter (CRL) from the FDA, we had hoped for a swift product launch after much anticipation and build-up. On previous earnings calls, management has expressed a lot of optimism that Qtern will be a commercial success and a boost to AZ’s SGLT-2 business. We imagine three consecutive quarters of decline in the company’s diabetes portfolio (-1% YOY in 1Q17, -7% YOY in 2Q17, -3% YOY in 3Q17) may be straining commercial resources. AZ is pushing forth with a robust clinical program for standalone dapagliflozin (Farxiga), running a large CVOT, outcomes trials in chronic heart failure and kidney disease, and several mechanistic studies (see above), so perhaps resources have been prioritized here for the time being, instead of allocated to the launch and rollout of Qtern. Moreover, real-world uptake for this class of fixed-dose combinations has been sluggish at best, starting with Lilly/BI’s Glyxambi (empagliflozin/linagliptin), first to hit the US market in 2015, though it’s never quite taken off. Qtern was first-to-market in Europe, EMA-approved in 2Q16. We’re not sure why patients and providers have been reluctant to try fixed-dose SGLT-2/DPP-4 tablets, as these combination agents offer superior A1c-lowering efficacy vs. either monotherapy, they promote weight loss (whereas standalone DPP-4 inhibitors are weight neutral), they come with a milder side-effect profile, and they reduce pill burden as well as total number of required co-pays. Access issues come to mind as one likely possibility, particularly if companies haven’t prioritized payer negotiations for their SGLT-2/DPP-4 combos (we would find this hard to believe). We also understand that HCPs in the US shy away from fixed-dose or fixed-ratio combinations because they might pose a challenge in terms of attributing side-effects to one agent or another – there is some fault in this reasoning, namely that lower doses of each agent in a combination pill or injection affords greater tolerability and fewer/less intense side-effects overall. To be sure, it’ll take concerted effort from manufacturers to cultivate familiarity with this fixed-dose SGLT-2/DPP-4 drug class. Merck could play a substantial role here, as the company is expecting an FDA decision on Pfizer-partnered SGLT-2 inhibitor ertugliflozin as well as an ertugliflozin/sitagliptin combination by year-end. Merck’s Januvia (sitagliptin) is very familiar to real-world patients/providers in the diabetes community, and it consistently leads the DPP-4 market in sales – leveraging this, Merck/Pfizer have perhaps the greatest chance at gaining traction with their SGLT-2/DPP-4 combo, and in our view, this would be good news for the entire class.

Table 3: AZ Diabetes Pipeline Summary and Major Ongoing Clinical Trials

The table below reflects the latest updates, as far as we are aware, on AZ’s diabetes pipeline candidates. Rows highlighted in yellow indicate notable changes to the pipeline in 3Q17.

Select Questions and Answers

Q: Can you please provide your outlook on diabetes? It’s obviously getting more and more competitive, so how should we think about your growth platform?

A: Can I give a bottle of champagne for the first person who asked a question about cardiovascular and diabetes? We still have great expectations for diabetes. We’re excited about Farxiga in the SGLT-2 class and about Bydureon in the GLP-1 class. The thing to keep in mind is that there’s so much more potential there for the SGLT-2 class. CVD-REAL shows that SGLT-2 agents have a very material impact on heart failure, CV mortality, and likely renal disease. The penetration of the class is still relatively low, so the head room to grow is enormous. We are the leader globally. We think Farxiga’s got a great profile, and we’re excited about the possibilities with DECLARE, the only trial looking at primary prevention as well as secondary. We’re very confident in Farxiga’s position. We’re also excited about Bydureon BCise, a new device that is very competitive with other once-weekly GLP-1 devices. A lot of people are still in need of further glucose and weight control, so we’re looking forward to launching that and we’re ready to go.

-- by Ann Carracher, Abigail Dove, Payal Marathe, and Kelly Close