Morningstar | Astra Strikes Deal With Daiichi for Promising Cancer Drug, but Related Equity Raise Is Surprising
AstraZeneca's new partnership with Daiichi Sankyo to co-develop cancer drug DS-8201 does not lead us to change our $35 fair value estimate or wide moat rating for Astra, but its decision to raise new equity to fund the transaction is surprising. Astra's upfront payments of $1.35 billion along with additional milestone payments of $5.5 billion and a 50% profit split seem reasonable relative to peak annual sales potential for DS-8201 of well over $1 billion. The drug should complement Astra's growing cancer drug platform that carries strong pricing power, reinforcing its wide economic moat.DS-8201's early-stage efficacy data support strong sales potential. In a phase 1 study in metastatic breast cancer patients already treated with Herceptin, Perjeta, and Kadcyla, DS-8201 led to a nearly 60% response rate. DS-8201 is a combination of Herceptin and deruxtecan that appears to be stronger and more selective than Kadcyla. However, the selectivity of the drug hasn't shown a better safety profile in early-stage studies. Nevertheless, the strong efficacy, particularly in the refractory settings should drive sales. With 20,000 metastatic breast cancer patients in developed markets treated today with high levels of HER2 mutations, we expect many of these patients will become refractory and be key potential patients for DS-8201. Astra expects to file in the refractory breast cancer indication with regulatory groups later in 2019, and we project a high probability of approval. Several late-stage studies are ongoing in earlier stages of cancer and in lower expressing HER2 patients, but most studies don't read out for several years.
While the prospects for DS-8201 looks compelling, Astra's decision to raise $3.5 billion through issuing equity is surprising. Equity raises can signal stock overvaluation or debt capacity concerns. We continue to view the stock as slightly overvalued, but we would have expected Astra to raise debt instead, as we don't see debt capacity issues.
AstraZeneca is a holding company. Through its subsidiaries, Co. operates as a biopharmaceutical company engaged in discovering, developing, manufacturing and commercializing its pipeline of small molecule and biologic prescription medicines, including targeted business development through collaboration, in-licensing and acquisitions. Co. is focused on three main therapy areas: Oncology, Cardiovascular and Metabolic Diseases, and Respiratory. Co. is also selectively active in autoimmunity, infection and neuroscience. In addition, Co. works across small molecules, oligonucleotides and other drug platforms, as well as biologic medicines.
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