AZ Doubles Down On Diabetes, Buys Out Bristol’s Share in Alliance

AstraZeneca will acquire all of Bristol’s interests in their current diabetes alliance. In doing so, AZ believes its geographic reach and scale in assets and capabilities position it to succeed, while Bristol retreats from diabetes to focus on specialty biologics, notably its PD-1 franchise.

AstraZeneca PLC will buyout Bristol-Myers Squibb Co.’s interest in their diabetes alliance, including the drug assets, employees, and infrastructure. In a structured deal, AZ is paying $2.7 billion upfront, as well as $1.4 billion in regulatory and commercial milestones, and royalties up to 2025.

The deal, announced on Dec. 19, ends a seven-year diabetes alliance between the two big pharmas, which culminated in the 2012 co-purchase of Amylin Pharmaceuticals Inc. for $7 billion [See Deal]. The change will leave AstraZeneca in charge of directing a multi-billion dollar franchise for diabetes and re-energizing the launch of several products following management changes.

Bristol, on the other hand, is betting heavily on its budding oncology portfolio. The company will have more flexibility to invest in immuno-oncology, namely its promising programmed death 1 (PD-1) anticancer program. At the same time, its ill-starred acquisition of Inhibitex Inc.in 2012 left its place in the hepatitis C market uncertain, and slow sales of the glucagen-like peptide 1 franchise Bydureon/ Byetta (exenatide extended release/ exenatide) are a case study of the challenges in primary care.

The transaction highlights the companies’ diverging strategic visions, with AstraZeneca confident that its geographic reach, particularly in the emerging markets, commercial capabilities and global infrastructure in diabetes, and its portfolio of marketed and developmental assets give it the scale needed to succeed. Bristol will use the breakup to accelerate its transformation into a sharply-focused specialty care company and to re-allocate its resources to its PD-1 program and immuno-oncology more broadly, CEO Lamberto Andreotti said on a same-day business update call.

The transaction is expected to be effective in January 2014.

It’s not clear what sparked the breakup, but AstraZeneca’s Fouzia Laghrissi-Thode, VP for cardiovascular and metabolic disease in the company’s global portfolio and product strategy division, told “The Pink Sheet” DAILY that internal discussions began accelerating around the time she came over from Roche in early September, in tune with “the change in strategic priorities” directed by its new CEO Pascal Soriot.

The companies began collaborating in diabetes in 2007 to co-develop and co-commercialize Bristol’s dipeptidyl peptidase-4 inhibitor saxagliptin, now marketed as Onglyza, and its sodium glucose co-transporter 2 (SGLT2) inhibitor dapagliflozin, marketed outside the U.S. as Forxiga (Also see "BMS Deals Diabetes Drugs, Solidifies Specialist Stance" - In Vivo, 1 Feb, 2007.). Bristol was out ahead of other pharmas in conducting this kind of risk-sharing, peer-to-peer alliance, having entered into a similar agreement with Pfizer Inc. the same year to co-develop and market the antithrombotic Xa inhibitor Eliquis (apixaban) (Also see "Bristol And Pfizer Team Up To Develop Anticoagulant Apixaban In $1 Billion Deal" - Pink Sheet, 26 Apr, 2007.).

In June 2012, Bristol and AstraZeneca expanded their alliance by joining to acquire Amylin after Amylin’s long-term partner Eli Lilly & Co. pulled out of a contractual obligation over a conflict of interest (Also see "Bristol And AstraZeneca Make A Splash In Diabetes With Joint Purchase Of Amylin" - In Vivo, 30 Jul, 2012.). Expectations were that the formidable duopoly of AstraZeneca and Bristol would quickly dominate the GLP-1 space with Bydureon being the first once-weekly injectable product.

But the companies did not have immediate success growing the Bydureon/ Byetta franchise. According to Laghrissi-Thode, one of the problems was the “disruption” caused by Lilly’s withdrawal initially and followed by the acquisition, which led to “problems with staff retention.”

Another problem has been the cumbersome formulation, which requires the product be reconstituted before it is administered, and the administration, which requires patients to use a wide-gauge needle. A dual-chamber pen, which will be easier to use, is in development and should boost Bydureon’s competitive position; earlier this year the partners said it should be for FDA in 2014.

However, Bydureon’s third-quarter sales may signal it is in an upturn; the drug generated $80 million in the quarter, compared to $20 million in 2012. Total sales for the first nine months of 2013 were $205 million.

With the dissolution of the alliance, AZ gets all patents and global rights to DPP-4 inhibitor Onglyza in all combinations and formulations, dapagliflozin, metreleptin (recombinant leptin) for treatment of the orphan metabolic disorder lipodystrophy, and the Bydureon/ Byetta assets.

Mixed Sentiment On The Breakup

Industry analyst Tim Anderson at Sanford Bernstein estimated 2013 sales of Onglyza/ Kombiglyze and Bydureon/ Byetta to be about $1.65 billion in 2013. If AZ and Bristol each take half of the revenues, then “if the selling price were $4 billion, the implied multiple-of-sales would be around 4.8 times,” he wrote in a note. At that price, he sees AstraZeneca as getting a good deal, “and Bristol would seem to be selling them a bit below market value.”

Anderson adds another possible motive for Bristol selling its share: it may be raising cash to do a larger acquisition—although that is highly speculative and BMS gave no indication it might head in that direction. The deal certainly means that BMS is getting more focused and reliant on a few key growth drivers, thereby increasing its risk profile, as Moody’s Investor Service commented in a note.

ISI Group analyst Mark Schoenebaum thought the deal made strategic sense for Bristol, however. “Bristol’s diabetes business is a lower-margin business, so, yes, while the deal may be dilutive in the out years, it is also margin expanding.” And, despite Andreotti’s insistence on the call that Eliquis is a specialty play, Schoenebaum thinks it may be next up for sale.

Jeffrey Holford of Jefferies did not think that AstraZeneca had put its cash to good use. “We believe Bristol-Myers got the better of AstraZeneca in this transaction,” he said in a same-day research note.

Building A Diabetes Portfolio At AstraZeneca

AstraZeneca sees the acquisition as an opportunity to expand its presence in diabetes and connect the joint venture portfolio to the work it is doing independently.

The company will continue its commitment to Onglyza, convinced that, from the patients’ perspective, “Onglyza/ metformin combination treatment gives the best efficacy,” said Laghrissi-Thode. Dapagliflozin has launched in Europe as Forxiga and was recently recommended for approval by an FDA advisory committee by a 13-1 vote, a positive outcome after it initially failed to win regulatory approval in the U.S. (Also see "Dapagliflozin Passes CV Safety Test For Now; FDA Panel Eyes Outcomes Study" - Pink Sheet, 16 Dec, 2013.).

Metreleptin also won support from an advisory committee in December, but not for its intended orphan indication; instead, the committee recommended it for a narrow slice of an already tiny lipodystrophy population.

Much of AstraZeneca’s diabetes focus in 2014 will be on its upcoming launches, primarily dapagliflozin in the U.S. and other non-European territories. After that, resources will be put behind building the Bydureon brand, and on life-cycle management of Onglyza. AstraZeneca is working on a fixed-dose combination of Onglyza and dapagliflozin, nicknamed SaxaDapa.

Laghrissi-Thode summarized some of the diabetes research taking place in AstraZeneca’s research laboratories in Molndal, Sweden, and Gettysburg, PA. She emphasized that the drug maker is not only looking at ways to improve glycemic control or reduce weight.

“We are also investing in new treatments for diabetic complications,” she said. She sees epidemiological trends – 500 million patients with diabetes over the next three decades, 200 million of them from emerging markets, especially from India and China – driving the incidence of diabetic complications. In particular, AstraZeneca is investigating ways to reverse or delay diabetic nephropathy.

She cited a drug in the firm’s portfolio, from AstraZeneca’s partnership with FibroGen Inc., that is an oral anemia drug for patients in dialysis or pre-dialysis, adding that it could benefit patients with advanced diabetes needing dialysis (Also see "AstraZeneca To Share FibroGen’s Anemia Compound With Astellas, But Will Hoard China For Itself" - Scrip, 2 Aug, 2013.).

Lastly, she mentioned triglyceride-lowering fish-oil derivative Epanova, acquired in a partnership with Omthera Pharmaceuticals Inc., for patients with severe hypertriglyceridemia (Also see "AstraZeneca’s Soriot Outlines Epanova Approach, Reviews Tough First Year As CEO" - Pink Sheet, 6 Dec, 2013.). These patients are at risk of pancreatitis. Epanova is pending at FDA with an action date in May 2014.

The idea, said Laghrissa-Thode, is to move away from “glucocentric solutions” and to “bring a comprehensive treatment to the diabetic patient.”