Astra Isn’t Immune to Competition; Company’s Revival Rests on Flimsy Foundations

Astra Isn’t Immune to Competition
Company’s Revival Rests on Flimsy Foundations
HELEN THOMAS
March 21, 2014 1:21 p.m. ET
AstraZeneca, AZN.LN -0.33% laggard of the pharmaceutical sector, has put on a burst of speed.
The U.K. drug maker, trading at nearly 16 times forecast 2015 earnings, is now among the highest-valued of the large European pharma companies, closing in on Swiss rival Roche.RHHBY +0.92% That is quite a turnaround: Six months ago, Astra traded at a 20% discount to U.S. and European peers; a year ago, it trailed by 30%.That has happened amid mounting investor excitement around immunotherapy. This is a term encompassing a variety of approaches that aim to enable the body’s immune system to recognize and attack cancer cells. The category’s potential is undeniable. But Astra’s revival rests on flimsy foundations.
On the basis of limited clinical data in melanoma, lung and renal cancer, forecasts for the immunotherapy market’s potential range from sales in the single-digit billions of dollars to Citigroup’s forecast of more than $35 billion. Four companies— Bristol-Myers Squibb,BMY -3.20% Merck, MRK -1.67% Roche and Astra—are most prominent in competing to bring treatments to market.
One category of drugs, known as PD-1s or PD-L1s, targets a pathway used by tumor cells to switch off the body’s immune system. Bristol Myers—now trading north of 30 times forward earnings—has caused the biggest frenzy, in particular around results in melanoma combining its treatment with another drug, Yervoy, which helps supercharge the body’s immune response. Astra could present its first, early-stage data at a key U.S. oncology conference in June on a similar combination in lung cancer. The opportunity in that market, which is also being targeted by Bristol Myers, is three to five times that for skin cancer.
Astra, which is still suffering as patents expire on key drugs, needed some pipeline excitement. Its revenues and earnings are expected to continue falling over the next three years, as peers return to growth. Only 8% of Astra’s forecast revenues in 2017 will come from its current pipeline, estimates Bernstein, compared with 14% at Roche. And Astra could be fourth in bringing a PD-1/PD-L1 product to market, notes J.P. Morgan, with no launch until 2017.
Astra’s size makes it a potent bet on the success of its nascent immunotherapy portfolio: A $5 billion drug would represent almost a fifth of Astra’s forecast 2020 sales, against closer to 5% of Roche’s. So any signs that these drugs are working—either alone or in combination—will likely fuel the immunotherapy flames.
For investors trying to read the tea leaves of early research, it is just too soon to judge what drugs will work best for which cancers in which people. But Roche, with its prized oncology franchise, may have an advantage in pursuing combination therapies with its existing drugs—and in finding biomarkers that help to identify which patients will respond best to a given treatment. And the Swiss group’s stronger pipeline should help sustain investors’ interest through any disappointments.
Astra may offer fireworks. But as the promise and pitfalls of immunotherapy become clearer, it is Roche that should provide the smoother ride.

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