Update on Astrazeneca

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Neil Woodford 27 July 2017 Est. reading: 4 min read

Today has been a busy day for AstraZeneca – the company has announced interim results for the six months to the end of June, which overall are ahead of expectations, driven by sales which are better than anticipated and good cost control which again has surpassed analysts’ forecasts.

From my point of view, these results continue to demonstrate good progress towards the strategic goals which the management team has communicated clearly to shareholders and the market. Guidance for the full year is unchanged. So far so good.

The disappointing news today is the result from the phase III Mystic trial in lung cancer where, in both the monotherapy and the combination therapy arms of the study, the trial failed to meet the progression free survival end point. The overall survival data, which arguably is more important for the drugs’ (Imfinzi and Tremelimumab) ultimate success in this lung cancer setting, is yet to report. We expect to see this data in the next six months or so. This is the failure of one part of a trial which, albeit important, is not a drug failure. We already know that Imfinzi is an effective cancer treatment and is approved in advanced bladder cancer. Recent data in the Pacific study showed an approvable trial outcome in non-operable stage three lung cancer. Perhaps, at a time like this when the stock market is in such a febrile state and prone to overreact to news, especially when it is bad, it is important to remind investors that all four of the large immuno-oncology players (Roche, Merck, Bristol-Myers Squibb and AstraZeneca) have all had cancer trial set backs in recent months.

In my view, today’s trial reading does not justify a 16% 1 fall in the value of the company and it is not evidence of the failure of the drug, nor of the strategy, nor indeed of the rationale for my investment in AstraZeneca.

In addition to the results and the progression free survival failure in Mystic, it is worth drawing our investors’ attention to the rationale on which I have based my investment decision in AstraZeneca.

Although the market paid little attention to two further announcements today, they are very significant. First, the company has announced positive results from another lung cancer trial. Data from the phase III Flaura trial shows a significant and clinically meaningful progression free survival benefit with the drug Tagrisso in a different lung cancer setting. This is very good news.

In addition, and possibly of even greater importance, was the announcement of a collaboration with Merck to independently develop and commercialise AstraZeneca’s approved cancer drug Lynparza (a PARP inhibitor) and Selumetinib (a MEK inhibitor) in combination with Merck’s Keytruda drug and the company’s Imfinzi.

The companies will share development and marketing costs equally as well as profits on Lynparza and Selumetinib in all indications. In return, Merck will pay AstraZeneca up to $8.5bn including an upfront payment of $1.6bn and a further $750m for various licence options. This is clearly a very significant financial deal. It is also a very significant endorsement of the potential of these two small molecule drugs (Lynparza and Selumetinib) in broader cancer settings, in combination with the two companies’ immuno-oncology agents. In my view, this is yet more evidence of the commercial potential across AstraZeneca’s pipeline, which the market has seen today pivoting only on the Mystic trial.

So where does all this news leave my views on AstraZeneca?

As I have said repeatedly, the investment case for AstraZeneca is about so much more than this one trial. Across a broad spread of disease areas, the company is developing new ground-breaking therapies which have significant commercial potential. Much of that is more visible today than at any stage since its CEO, Pascal Soriot, set out his strategic goal to double sales by 2023. The market remains deeply sceptical that anything like that is remotely possible. Consequently, almost nothing of this potential is priced into the shares.

I believe there is more than enough evidence to show that its chief executive’s strategy is working. Not everything will work first time and there will, like today, be other setbacks. I expect this and so does the company. The question I have to ask is, what is discounted in the share price? Not just today, but since I have had the holding and of course looking forward over the next three to five years. My view remains that very little of what I believe the company will achieve is reflected in today’s share price and even more so after today’s fall. The shares are simply too cheap and in a market liberally populated with expensive equities the investment case for AstraZeneca remains, in my view, very attractive.

Woodford Investment Management Ltd is authorised and regulated by the Financial Conduct Authority (firm reference number 745433). Incorporated in England and Wales, company number 10118169. Registered address: 27 Old Gloucester Street, London, WC1N 3AX.

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