AstraZeneca PLC (NASDAQ:AZN) Q3 2022 Earnings Call Transcript

AstraZeneca PLC (NASDAQ:AZN) Q3 2022 Earnings Call Transcript November 10, 2022

AstraZeneca PLC beats earnings expectations. Reported EPS is $0.84, expectations were $0.72.

Operator: Good morning to those joining from the U.K. and the U.S., good afternoon to those in Central Europe, and good evening to those listening in Asia. Welcome, ladies and gentlemen, to AstraZeneca’s Year-to-date and Q3 Results 2022 Conference Call for Investors and Analysts. Before I hand over to AstraZeneca, I’d like to read the Safe Harbor statement. The company intends to utilize the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Participants on this call may make forward-looking statements with respect to the operations and financial performance of AstraZeneca. Although we believe our expectations are based on reasonable assumptions, by their very nature, forward-looking statements involve risks and uncertainties and may be influenced by factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements.

Any forward-looking statements made on this call reflect the knowledge and information available at the time of this call. The company undertakes no obligation to update forward-looking statements. Please also carefully review the forward-looking statements disclaimer in the slide deck that accompanies this conference call and webcast. There will be an opportunity to ask questions after today’s presentations. And with that, I will now hand you over to the company.

Andy Barnett: Thank you, operator, and good afternoon, everybody. I’m Andy Barnett , Head of Investor Relations at AstraZeneca, and I’m pleased to welcome you to AstraZeneca’s third quarter and year-to-date 2022 Conference Call. All materials presented today are available on our Web site. Slide 2 has our usual Safe Harbor statement. We will be making comments on our performance using constant exchange rates, or CER, core financial numbers and other non-GAAP measures. A non-GAAP to GAAP reconciliation is contained within the results announcement. Numbers are in million U.S. dollars for the first 9 months of the year, unless otherwise stated. Please advance to Slide 3. This slide shows our agenda for today’s call. Following our prepared remarks, we will open the line for questions.

We will try and address as many questions as we can during the allotted time. So please participants limit yourself to one question or more to allow a fair chance for others to participate in the call. As a reminder, for those on the phone, use the raise a hand function in Zoom to ask a question. And with that, please advance to Slide 4, and I will hand over to Pascal.

Pascal Soriot: Hello, everyone and welcome to this call. If you move to Slide 5, we’re pleased to report solid results with year-to-date total revenue of $33.1 billion, an increase of 37%. This includes total revenue in the quarter of close to $11 billion. On a pro forma basis, the growth rate in the year-to-date including Alexion was 19% and excluding our COVID medicines, the growth was 16%, illustrating the strength of our underlying business. Core EPS of $5.28 in the year-to-date is up 52 — to 52% versus the same period last year, with $1.67 added in the quarter. Of course, it helped by the addition of Alexion election from July 2021. This performance reflects the strength of our business against the challenging macroeconomic backdrop.

Our delivery in the year-to-date and near-term outlook has enabled us to upgrade our full year guidance. I would however, point out that EPS landing in the low 30s of the guidance range will depend on certain factors, including the timing of collaboration milestones, and Evusheld deliveries before the end of the year. Aradhana will take you through this change of to our guidance in more detail. Once again, we saw encouraging demand for medicines with growth from all disease areas versus last year. This included double-digit growth for oncology, CVRM, V&I, and rare disease and the growth of new medicines more than offset the expected decline of Pulmicort within R&I. Please move to Slide 6. R&D investment continues to pay off. We received a record 19 regulatory approvals in major markets since we reported our first half results, making a total of 25 approvals in the year-to-date with only a selection listed on this slide.

I would, in particular, like to call out the first global approvals for our CTLA-4 inhibitor Imjudo for the treatment of advanced liver cancer, and the of Beyfortus for the prevention of RSV in newborns and infants. We also announced positive Phase III data for two NMEs danicopan and PNH patients with clinically significant extravascular haemolysis and capivasertib in breast cancer, both with the potential to strengthen our leading positions in their respective diseases. Additionally, we saw encouraging data for Dato-DXd and camizestrant, enabling us to engage further clinical development of this potential important new medicines. Please move to Slide 7. A broad portfolio of both marketed and innovative pipeline medicines gives us confidence in our ability to deliver revenue growth at double-digit CAGR through 2025 and include an industry-leading growth thereafter.

Fundamentally, our business is highly resilient with low concentration risk and a diverse geographical footprint and a broad pipeline. Even excluding our COVID-19 medicines, we have 11 blockbuster medicines, and we have demonstrated success in developing and commercializing medicines in a range of diseases with high unmet medical need. We have 15 NMEs in Phase III clinical development, and we expect to maintain or even accelerate this pace of innovation in coming years. While our portfolio is diverse, we are well placed to lead in fast growing disease areas such as oncology, rare disease, and several areas of specialty medicine. A broad geographical footprint allows us to offset long to short-term challenges in any one region, which we continue to view as an advantage versus a number of our peers.

Delivering on our long-term growth ambitions will require us to continue to make the right strategic investment. I will now hand the call to Aradhana, to go through our financials as well as provide some detail around our investments to drive future growth. So please move to Slide 8.

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Aradhana Sarin: Thank you, Pascal and good afternoon, everyone. As usual, I will start with our reported P&L. Please turn to Slide 9. As Pascal has already highlighted, total revenue grew by 37% in the first 9 months. As a reminder, Alexion sales were only consolidated from July 21 last year. So this impacts the revenue growth numbers favorably. Collaboration revenue increased $944 million, of which close to $400 million relates to milestones received from partners, including Merck for the Lynparza collaboration. We’ve booked an additional around $330 million in collaboration revenue for Enhertu. Our reported gross margin continues to be impacted by the Alexion fair value inventory uplift, which we anticipate will continue for a couple of more quarters until the inventory is sold.

Please turn to Slide 10. This is our core P&L. The core gross margin during the period was 81% and increased by 6 percentage points at constant exchange rates. The favorable increase in gross margin is mainly driven by lower Vaxzevria sales versus last year. And the fact that Alexion sales were only consolidated from end of July. R&D costs increased by 29%, reflecting again, the timing of consolidation of Alexion last year, and also continued investment in the pipeline. We’ve had several positive readouts this year that have ungated additional clinical trials. Over the long-term, we continue to expect that we will keep R&D investments in the low 20s percentage of total revenue. SG&A cost increased by 24% year-to-date, reflecting the addition of Alexion and continued investment behind launched brands, including demand generation Evusheld.

We continue to manage SG&A costs by driving productivity and the operating margin will continue to improve as our product mix evolves between primary and specialty care. However, these will need to be balanced by our long-term growth ambition and investment for that growth, as well as external factors including inflation and currency. Core EPS of $5.28 represents growth of 52%. Please turn to Slide 11. Our cash flow continues to improve and we saw cash flow generated from operating activities increased by $2.9 billion to $7.4 billion in the first 9 months. In the third quarter, we paid three regulatory milestones totaling $400 million to Daiichi Sankyo following regulatory approvals for Enhertu in both breast and lung cancer. We also paid the last of the three initial upfront payments of $325 million relating to Dato-DXd as well as $100 million for the TeneoTwo acquisition which closed during the third quarter.

This brings the total amount paid year-to-date for the Daiichi Sankyo and other transactions to just over $2 billion. Our current net debt to EBITDA ratio is 2.9x. If adjusting for the Alexion fair value inventory uplift would does not affect our cash flow, the ratio is 1.9x, a reflection of the improvement in our underlying cash flow. Our cash conversion ratio continues to improve and we continue to focus on working capital improvement, inventory management and cash conversion. We remain committed to a strong investment grade rating and our capital allocation policy priorities remain unchanged. Please turn to Slide 12. As a reminder, we upgraded our total revenue guidance at half year results. Today, we are updating our core EPS guidance for the full year.

We continue to expect total revenue to grow by low 20s percentage. Despite being in early November, there continued to be several variables that we are monitoring in the fourth quarter, including Evusheld delivery, NRDL update and VBP implementation with potential stock compensation and the timing of some approvals with associated milestones. For the full year. We now anticipate core EPS to grow by high 20s to low 30s percentage at constant exchange rate, up from previously mid to high 20s. Although the phasing of expenses in the second half resulted in strong profitability in the third quarter, we expect higher operating costs particularly SG&A in the fourth quarter, similar to the sequential quarterly increase in prior years. As we report in U.S dollars, we face some currency headwinds with all of our key currencies having depreciated versus the U.S dollar.

Based on spot rates as per the end of October 2022, we continue to anticipate mid single-digit adverse FX impact on total revenue for the full year. For core EPS, we now anticipate a mid to high single-digit adverse impact for the full year, that is somewhat higher than what we anticipated back in July and reflects further depreciation of our key currencies. This is something to bear in mind when you update your models. Please turn to Slide 13. I’ve previously mentioned that we anticipate keeping R&D investments in the low 20s percentage of total revenue also over the mid to long-term. Today, just over 50% of our total R&D spend is invested in late-stage pipeline, including extensive LCM programs for already launched medicines. About 40% of our R&D budget is invested in early stage pipeline and discovery focusing on novel therapies generating proof-of-concept and building our in-house portfolio of next generation medicines including ADCs, bi-specifics and complement therapies.

This will help fuel our pipeline beyond 2025. The majority of the remaining part of the R&D budget is invested in Global Medical Affairs, which is focused on real world data generation and medical education, including driving guideline and practice change. This area of spend has become very important with our portfolio shifting into more specialty areas. We have a very disciplined investment approach where we set high bars from both a scientific and commercial perspective for the assets that reprogress into late-stage development. A good example is our PCSK9, which we terminated in the quarter despite having positive data. But it did not meet our high predefined criteria required for progressing into Phase III development. Our commercial investments include launching new products, new indications in existing markets, and existing products in new markets.

Good examples are Enhertu low breast cancer and Lynparza in prostate cancer were considerable market shaping is required. Please turn to Slide 14. With our culture of continuous improvement, we have been working hard to drive productivity and cost savings. Just to share some examples today, we have worked to optimize our manufacturing network between in-house and external CMOs, as well as build new capabilities such as continuous manufacturing to make us more efficient and flexible. We’re also looking at our global footprint enhancing how we work, leveraging low cost location and growing our global shared service centers. We’re making great progress on the integration of Alexion, recently moving to a direct easy distribution model in more than 22 markets.

I’m pleased to share that we now have a rare disease unit in China. We’ve been on a journey shifting late-stage clinical trials from an outsourced model to more mixed an in-house model that provides greater data control, and better trial execution in a more cost effective manner. Over time, the investments we are doing today will help accelerate clinical trials and shorten the time needed for regulatory submission, which will allow us to launch new medicines quicker in the future. With that, please advance to the next slide, and I will hand over to Dave, who will take us through the performance of our oncology business.

David Fredrickson: Thank you, Aradhana. Slide 16, please. We’re pleased to report that our oncology total revenue grew 24% year-over-year during the first 9 months of 2022, underpinned by 20% growth in product sales. We saw double-digit product sales growth for Tagrisso, Imfinzi and Lynparza in the period, as well as very strong continuing momentum for both Calquence and Enhertu./ Across regions, performance was again nicely balanced with the U.S., Europe, emerging markets and established rest of world each also driving double-digit year-on-year growth. As COVID-19 moves into an endemic phase, we’ve seen improved rates of cancer diagnosis, testing and treatment during the year. There is still some variability across tumor type and region, notably China were city lockdowns persist, but we remain optimistic on the underlying global trend.

Turning now to individual medicine performance. Tagrisso global revenues grew by 16% year-to-date. In the U.S., growth was 14% with Q3 growing at 18%, reflecting continued momentum for FLORA and ADORA. In emerging markets, revenues grew 22% with a strong contribution from China and Latin America. EM growth of Q3 of 35% benefited from strong FLORA volume growth and second-line resilience in China, but also reflects a fairly easy comparison to last year’s Q3. Tagrisso and Lynparza both face China NRDL renewal for 2023 to 2024 in Q4. We anticipate both medicines will incur some price reduction as a result of algorithm based adjustments. And established rest of world, Tagrisso growth was 10% year-to-date. In Japan, we can now confirm that we anticipate a mandatory price reduction that will be applied in 2023.

For Lynparza, we continue to solidify the brand as the leader in the global PARP inhibitor class, product sales grew 19% in the quarter and year-to-date led by growth and adjuvant breast cancer following this year’s approvals in the U.S., Europe and Japan with continued global growth in HRD positive ovarian cancer and second-line castration resistant prostate cancer. Slide 17, please. Turning now to Imfinzi, Calquence and Enhertu, all three benefited from good launch performances in Q3. Imfinzi global revenues grew 19% year-to-date and 26% in the third quarter with strength in the specific indication owing to recovery in lung cancer diagnosis and chemoradiation rates in many regions and the successful launch of TOPAZ-1 in biliary tract cancer in the U.S. Historically, the prognosis for patients with advanced BTC has been very poor, with less than 15% surviving for 5 years.

TOPAZ-1 brings the first IO treatment to the setting, one that meaningfully extends survival. We’ve been pleased with the early performance, with rapid uptake following NCCN inclusion and a strong commercial launch. Turning to hematology. Calquence continues to show excellent momentum with worldwide revenues up 77% year-to-date. In the U.S., Calquence maintain greater than 55% share of new BTKi starts in first-line CLL, underscoring its position as the clear standard of care. Calquence U.S revenues grew 15% sequentially in Q3, about half of that came from inventory build for the launch of the maleate tablet formation. This approval is important as it removes restrictions on concomitant use with proton pump inhibitors. Together with Calquence’s strong data including an attractive CV safety profile, nearly 4 years of long-term follow-up and the positive experience of physicians, we are well-positioned for continued momentum as the established standard of care.

In Europe, expansion continues resulting in 25% sequential growth from Q2. New patient share continues to rise as we rapidly established leadership in several major markets. Year-to-date, sales tripled over the same period in 2021. Finally for Enhertu, total revenue was up 165% to $387 million with a clear acceleration in Q3. In the U.S., Enhertu continued its gains and second-line HER2 high metastatic breast cancer achieving 45% new patient share in just 5 months post launch of DBO3. The August launch of DESTINY-Breast04 Enhertu low patients has gone very well too. Enhertu is now being utilized in more than a third of the prevalent advanced HR positive post chemo population. New start spanned multiple later lines of therapy suggesting some bolus effect.

Europe and emerging markets have contributed nicely to growth too. With the European launch in second-line HER2 high following a similar path to the U.S within HER2 at more than 35% new patients share in Germany and France in its launch quarter. Across the globe, we continue to be in an exciting period of launch activity. Most recently the U.S. approvals of Imjudo plus Imfinzi based upon HIMALAYA and liver cancer, and we look forward to upcoming approvals of Lynparza propel in prostate cancer. I’ll now hand over to Susan who will cover the progress in our pipeline.

Q&A Session

Susan Galbraith: Thank you, Dave. Please turn to the next slide. We had another strong presence at ESMO this year, showcasing our commitment to long-term follow-up, demonstrating the long duration of benefit — the benefit that patients receive from class leading medicines like Tagrisso and Lynparza. Additionally, we presented encouraging early data from the first of our bi-specific molecules in lung cancer. Tagrisso demonstrated 5.5 year median disease free survival in the adjuvant setting, with nearly three in four patients alive and disease free at 4 years. Exploratory analysis also showed reduced risk of disease recurrence in the brain or spinal cord by 76%. This is truly amazing to see as just 2 years ago patients with early stage EGFR mutated lung cancer had no targeted treatment options after surgery.

Similarly, follow-up for patients in the PAOLA-1 Phase III trial in ovarian cancer. So 65% of HRD positive patients treated with Lynparza plus bevacizumab alive at 5 years versus 48% of those on the control arm. The overall survival benefit was observed in the HRD positive group a pre-specified descriptive analysis for the PAOLA-1 trial. Lastly, our new PD-1 CTLA4 bi-specific volrustomig formerly MEDI5752 presented first clinical data in non small cell lung cancer. Volrustomig was engineered to block CTLA4 in the presence of PD-1 on activated T cells, improving the therapeutic index and resulting in a favorable toxicity profile when compared to concurrent use of the separate components. We look forward to developing volrustomig across various tumors.

Please turn to slide 19. 2 weeks ago we were delighted to share news of significant progress in our breast cancer pipeline with positive readouts for camizestrant and c. Camizestrant, our next generation all SERD met the primary endpoint in the SERENA-2 Phase II trial by delivering superior progression free survival versus Faslodex in patients with previously treated advanced ER-positive breast cancer. We believe these data strongly point to camizestrant’s best-in-class potential. The camizestrant clinical research program will evaluate multiple hypotheses in ER driven disease, including in SERENA-6, a pivotal trial in patients whose cancer has developed ESR-1 mutations. It was fantastic to see camizestrant, our potential first-in-class AKT inhibitor deliver a positive Phase III trial in advanced estrogen receptor positive breast cancer.

CAPItello-291 met both primary endpoints, improving progression free survival in the overall patient population and in a pre-specified biomarker subgroup with qualifying genetic alterations. These results indicate a new potential standard of care allowing patients to continue with endocrine therapy by combining with a medicine which targets the key pathway for endocrine therapy resistance. Please advance to Slide 20. Finally, a look at into our plans to continue to deliver innovation to lung cancer patients. TROPION-Lung07 is a Phase III trial exploring Dato-DXd in combination with pembrolizumab, replacing platinum chemotherapy in the non squamous PD-L1 less than 50% population to demonstrate superiority over the standard of care. From our DNA damage response portfolio, we have initiated the latter five Phase III trial of celarasertib plus Imfinzi, post IO non small cell lung cancer.

Celarasertib selective ATR inhibition can cause an accumulation of double strand DNA breaks synergistic with checkpoint inhibition. But additionally, we have data showing celarasertib’s effect on increasing type 1 interferons and its ability to modulate the tumor microenvironment including effects on myeloid cells, thereby potentially overcoming IO resistance. Finally, we’re very excited to debut the second antibody drug conjugate to come from our internal team AZD9592. AZD9592 is our first bi-specific ADC that has preferential binding in the presence of both EGFR and cMET expression aimed to direct binding distinctly to cancers thereby sparing normal tissue. It is this that results in a maximization of efficacy whilst maintaining a favorable safety profile.

This molecule utilizes our proprietary topoisomerase-1 inhibitor warhead, and we’re looking to develop it in EGFR mutant non small cell lung cancer patients, particularly in combination with Tagrisso, but also in EGFR wild-type patients. Please advance to the next slide and I’ll hand over to Ruud to cover biopharmaceuticals.