Now the hard work really begins.
AstraZeneca's (NASDAQ:AZN) SGLT-2 inhibitor dapaglifozin has had a difficult path to market, but the company finally got the FDA's go-ahead to market the drug on Wednesday. While SGLT-2 inhibitors are a promising new class of drug, it remains to be seen whether AstraZeneca's Farxiga (it's U.S. brand name) can become a blockbuster in the face of competition from Johnson & Johnson's (NYSE:JNJ) first-to-market Invokana and follow-on drugs from Lilly (NYSE:LLY) and Astellas.
A Relatively Benign Label
There weren't any significant label problems expected with Farxiga, and the actual label did not surprise all that much. There is a front-page warning tied to bladder cancer that is not present on the Invokana label, though, and the company will have to look into the incidence of bladder cancer as part of the six post-marketing studies that the FDA is requiring.
A Hard Road To Major Success
SGLT-2 inhibitors offer the promise of meaningful reductions in blood glucose levels for Type 2 diabetics, along with a pretty clean safety profile. While there is almost always room for more than one drug in a given class, I have my doubts about the extent to which Farxiga will become a major winner for AstraZeneca.
The diabetes drug market has been one where follow-on drugs have had a harder time gaining share from first-in-class competitors than in other therapeutic areas. Based on the experience of GLP-1 inhibitors like Novo Nordisk's (NYSE: NVO) Victoza and AstraZeneca/Bristol-Myers Squibb's (NYSE:BMY) Bydureon and DPP-IV inhibitors like Merck's (NYSE: MRK) Januvia and AZN/BMY's Onglyza, AstraZeneca made be hard-pressed to garner more than one-quarter to one-third of Invokana's sales. With some estimates of Invokana peak sales ranging from $1 billion to $2.5 billion, the implied sales for Farxiga ($250 million to $850 million) are not so exciting.
Another major obstacle to Farxiga's success could be its efficacy. Comparing across Phase II and Phase III studies is always tricky (as the studies aren't designed for head-to-head comparisons), but where Invokana showed placebo-controlled HbA1c reductions in the neighborhood of 0.7% to 1.4%, Farxiga came in around 0.4% to 0.5%. That's more problematic when considering that empagliflozin (a Boeringher Ingelheim drug that Lilly will market) delivered a reduction around 0.74% to 0.85% and Astellas's ipragliflozin has shown HbA1c reductions of more than 1%.
AstraZeneca may have some advantage in being able to combine Farxiga with other diabetes drugs (including Onglyza), but I do not believe that such combinations will be enough to transform the drug into a blockbuster.
Bristol-Myers Gets A Payday
One thing seems pretty clear – if anybody benefits from Farxiga, it will be Bristol-Myers Squibb. The approval of the drug triggers a $600 million milestone payment as part of the companies' agreement to dissolve their diabetes JV and sell BMY's share to AstraZeneca. Moreover, AstraZeneca will owe tiered royalties to BMY ranging from 3% to 25% and the sales of Farxiga count toward the potential overall sales milestones that AstraZeneca may have to pay (two $150 million payments) down the road.
It is certainly true that Bristol-Myers invested considerable resources into the development of Farxiga, so I do not wish to imply that the company is getting a free ride. Nevertheless, the company stands to share in a meaningful portion of the drug's upside with no additional effort on its part.
The Bottom Line
I was not particularly bullish on AstraZeneca's diabetes plans when the company announced its deal with Bristol-Myers in December. The approval of Farxiga does not change that. This should be a profitable drug, but I continue to be more optimistic about the potential for Astra's oncology immunotherapy and anti-inflammatory pipeline to restore the company to a growth footing.