Why AstraZeneca’s Olaparib Setback Could Be A Bigger Deal Than It Is

Investors don’t have enormous expectations for olaparib in the small subset of ovarian cancer patients AstraZeneca was targeting for accelerated approval, but the negative FDA advisory committee review comes at a pivotal time for the company.

With Pfizer Inc. said to be biding its time waiting for its next opportunity to rekindle buyout negotiations with AstraZeneca PLC, a regulatory delay for AstraZeneca’s ovarian cancer drug olaparib could have negative implications beyond the future of the drug itself.

AstraZeneca was able to thwart an initial takeover attempt by Pfizer earlier this year mainly by selling investors on its R&D story. The message AstraZeneca’s new management sold was that it turned around the company’s pipeline in a way that it would soon deliver high-value drugs and drive enormous long-term growth for shareholders – but only if the assets are left in the hands of AstraZeneca to develop.

Investors backed management, and the company was ultimately able to reject Pfizer’s buyout offer – roughly $117 billion in cash and stock – in May, though under UK takeover laws Pfizer can return with an offer in six months and the negotiating window can open even sooner if AstraZeneca chooses to approach Pfizer (Also see "AstraZeneca Gets A Reprieve But Will Have To Earn Its Independence" - Pink Sheet, 26 May, 2014.). But any chink in AstraZeneca’s R&D armor now could buttress the case for those investors who were ready to sell (Also see "Some AstraZeneca Investors Say Talk, Others Say Walk" - Pink Sheet, 21 May, 2014.).

Taken alone, the decision by FDA’s Oncologic Drugs Advisory Committee not to support accelerated approval for olaparib is not a crushing blow for the company, though a positive recommendation would have certainly put more wind behind its sails. ODAC voted 11 to 2 in favor of delaying approval until confirmatory Phase III data are available, expected in late 2015, citing concerns about toxicity and shortcomings in the key Phase II trial (Also see "FDA Panel Crushes AstraZeneca’s Hopes For Olaparib Accelerated Approval" - Pink Sheet, 25 Jun, 2014.).

Though the first-in-class PARP inhibitor could potentially be an important advance for some patients, investors don’t have enormous expectations for it in the near-term. The drug is initially being developed for a small subset of relapsed ovarian cancer patients, those with germline BRCA mutations, and thus the delay does not greatly impact AstraZeneca’s financials.

“The rejection by ODAC comes at a critical time because failed R&D efforts may make AstraZeneca shareholders more inclined to push AstraZeneca into Pfizer’s arms,” Bernstein Research analyst Tim Anderson said in a June 25 research note. “Is the olaparib ruling a major setback for AstraZeneca that will materially change how investors think about AstraZeneca? No, but every bit of slippage at the company probably does tilt the balance slightly more in favor of a future Pfizer+AstraZeneca tie-up.”

“Filing for accelerated approval involved some risks, but not trying at all would have been worse,” UBS analyst Alexandra Hauber said.

AstraZeneca thus far has been able to hold some of the ground it gained after Pfizer first went public with its interest in acquiring the company in April. The stock jumped 16% to open April 28 at $79.69 on the New York Stock Exchange. It dropped back 9% May 19 after Pfizer made a “final” offer for AstraZeneca, and the UK company’s board of directors promptly rejected it. But the stock has gained back nearly 4% and opened June 26 at $74.13.

Part of the reason is the spotlight AstraZeneca has shown on its pipeline. In a presentation in May, AstraZeneca made its case for why it was best positioned to execute on its renewed pipeline and promised to increase revenues from $25.71 billion in 2013 to $45 billion in 2023 (Also see "AstraZeneca Makes Case For Independence With $23 Bil. Pipeline Potential" - Pink Sheet, 6 May, 2014.). CEO Pascal Soriot held up olaparib as an example of the company’s improved R&D strategy since the drug had been all but abandoned by former management; the compound was resuscitated by targeting a smaller subset of patients where it is believed to hold promise.

UBS analyst Alexandra Hauber said the drug’s delay is insignificant – she forecasts only $125 million in sales from olaparib in 2016. However, she commented in a June 26 note, “rescuing olaparib from the bin (previous management had written it off) and filing based on post-hoc analysis has been a key example for the changed approach to R&D by new management.”

Still, a negative read-across to the pipeline is unjustified, she added. “Filing for accelerated approval involved some risks, but not trying at all would have been worse.”

AstraZeneca will still need to take steps to strengthen its position if it is to continue to fend off Pfizer, including potentially partnerships, acquisitions or divestitures. A recent report in the Financial Times said AstraZeneca may be considering various options to make itself less attractive to Pfizer, like selling off rights to certain future royalties.

AstraZeneca’s VP of Business Development Operations Shaun Grady didn’t give away any surprises during an interview at the Biotechnology Industry Organization convention in San Diego June 24, however. In a statement, the company responded that while it is looking to maximize value and focusing on core areas, monetizing assets in the way suggested in the Financial Times article is not a priority (Also see "BIO 2014 Tuesday Round-Up: AstraZeneca Looking Forward, Not Back" - Pink Sheet, 24 Jun, 2014.).