equity analyst pharmaceuticals highlights azn and · pdf filepfizer** pfe $193,273.8 buy...

Mkt. Cap Price Cons. Current EPS Estimates Previous Est.Company Name Ticker (MM) Rating Price Target Next FY 2014 2015 2016 2015 2016 AstraZeneca PLC AZN LN £49,305.8 BUY 3,922.50p 5,600.00p $4.24 $4.28 $4.22 $4.23 $4.22 $4.21Bristol-Myers Squibb BMY $96,514.9 HOLD $57.88 $59.00▼ $1.83 $1.85 $1.93 $2.16 $1.93 $2.18Merck & Co. MRK $144,125.4 HOLD $51.17 $57.00▼ $3.51 $3.49 $3.55 $3.82 $3.53 $3.82Pfizer** PFE $193,273.8 BUY $31.34 $47.00 $2.08 $2.26 $2.07 $2.33 $2.07 $2.34Roche ROG VX CHF218,115.9 BUY CHF257.00 CHF300.00▼CHF14.06 CHF14.29 CHF13.84 CHF15.49 CHF13.84 CHF15.45** Franchise Pick

Target | Estimate Change

Global | Healthcare | Pharmaceuticals August 27, 2015

PharmaceuticalsImmuno-Oncology 2025: Deep-DiveHighlights AZN and Roche in $51bn Market

EQU

ITY R

ESEARC

H G

LOB

AL

Jeffrey Holford, PhD, ACA *Equity Analyst

(212) 336-7409 [email protected] Gu, PhD *

Equity Associate(212) 336-7459 [email protected]

Ian Hilliker §Equity Analyst

44 (0) 20 7029 8672 [email protected] Qiong Hai *

Equity Associate(212) 336-7098 [email protected]

* Jefferies LLC § Jefferies International Limited

Key TakeawayWe have increased our PD-1/L1 peak sales opportunity to $51bn. We reiterateAZN as our "Top Pick" in Europe and as the best way to play IO, as it and Rochehave the best strategic positioning in combination therapy and could threatenBMY's position as the "leader" in IO. BMY remains our "Least Preferred" stock.We remain bullish on Roche and see it as best positioned in IO. MRK and PFElack sufficient leverage from IO, though we remain very bullish on PFE.

Tangible market opportunity increased to $51bn: We have increased our PD-1/L1peak sales opportunity to $51bn (from $40bn), as the market becomes increasingly wellvalidated through product approvals, strong initial launches in melanoma/ NSCLC andindication expansion. BMY remains the "market leader" on a peak sales basis ($13.1bn),closely followed by Roche ($12.7bn), AZN ($11.0bn), MRK ($9.6bn) and PFE ($3.8bn).

Key controversies rage around PD-L1 testing and combo therapy: Keycontroversies continue to rage around opposing corporate strategies on PD-1 vs. PD-L1,patient selection by PD-L1 status and IO-chemo combo vs. IO-IO combos. We see Rochebeing in the "sweet-spot" strategically with the best all-round approach, closely followedby AZN. BMY and MRK appear worst positioned for the longer term with respect to theircombination therapy prospects as well as patient selection strategy in the case of BMY.

As good as it gets for BMY? BMY remains the market leader with our Opdivo peaksales estimate increased to $13.1bn from $11.6bn previously. However, the gap versus thecompetition is narrowing and there are significant threats to its dominance in the mid tolong term for NSCLC and combination therapy in particular. We are also concerned that themore lucrative PD-L1 positive patients may go to the companies most focused on testing andfinding these individuals (Roche, MRK, AZN). We remain below consensus for Opdivo andreiterate BMY as our "Least Preferred" large cap pharmaceutical stock primarily on valuationgrounds and asymmetric downside risk to mid to long term Opdivo estimates.

Roche catching up fast and best-placed strategically: Our $12.7bn peak salesestimate for atezolizumab puts Roche within 3% of our estimate for BMY. We see Rocheas best-placed overall in terms of patient selection and combination therapy, which couldultimately allow it to displace BMY as the category leader. However, our estimates are onlymodestly above consensus and IO may carry less leverage for Roche than some of the otherplayers due to its overall size and drag from biosimilars over the next 3-5 years.

AZN is our "Top Pick" in IO and European Pharma: We believe that AZN's IO programis the most under-appreciated (peak sales est. $11bn), whilst also being best placed toprovide leverage to the company's growth prospects over the next 3-5 years. We expect thatmore tangible progress from the IO franchise as well as the broader pipeline over the next6-12 months should drive multiple expansion as well as mid-term earnings momentum. Asa result, AZN is our "Top Pick" in both European Large Cap Pharma and Immuno-oncology.

MRK and PFE lack leverage from IO: Whilst MRK has good prospects in IO, patent expirydrag, an under-developed combo strategy and downside risk to Januvia estimates leaves iton the sidelines for us. PFE's late-entry and lack of leverage from IO make it less interestingin this regard. However, we remain extremely bullish on PFE with regard to "optionality",accretive M&A and positive EPS momentum from Ibrance/ Prevnar-13.

Jefferies does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that Jefferies may have a conflictof interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 66 to 69 of this report.

Earnings Growth vs P/E

Source: FactSet, Jefferies estimates

Long-Term Financial Model Drivers

2014A-20E Revenues CAGR 5.9%

2014A-20E Earnings CAGR 15.6%

Other Considerations

BMY has successfully reinvented itself as a

pure play in Pharmaceuticals. Management

have been successful in converting the

pipeline into approved products with the

launches of Opdivo, Yervoy and Eliquis.

Potential of the anti-PD-1 clinical program

has been demonstrated in multiple clinical

trials, but appears to be reflected in

consensus. We see an underlying earnings

growth rate in the double-digits after 2015.

1-Year Forward P/E


Bristol-Myers Squibb is engaged in the discovery, development, licensing, manufacturing,

marketing, distribution and sale of pharmaceutical products. With the recent divestment of

its Diabetes franchise, the key disease areas of focus for Bristol-Myers Squibb are now

Oncology and Hepatitis C.

September 7: Updated CheckMate-

012 data for Opdivo/ Yervoy in 1st line

NSCLC at World Lung Conference

September 30: PDUFA for Opdivo/

Yervoy combo in 1st line melanoma

Q3’15E: Phase III readout for Yervoy in

squamous NSCLC

October 28: PDUFA for Yervoy for

adjuvant melanoma

Catalysts

Target Investment Thesis

Strong potential of PD-1 inhibitor

Opdivo appears to be well reflected in

consensus

Safety concerns with the Opdivo/

Yervoy combo and advancement of

competing PD-L1 combos could weigh

on potential

Eliquis sales could accelerate with

approval in VTE, but IPR risk remains

Our $59 PT is based on DCF/ PEG

valuation and implies a 2016E PE

multiple of c27x

Upside Scenario

Faster than expected Opdivo sales

ramp and favourable regulatory

updates

Stronger than expected growth for

Eliquis with the new indications (e.g.,

VTE treatment) and favourable IPR

developments

If achieved we would expect the

shares to trade up to $70 on a 2016E

PE multiple of c32x

Downside Scenario

Pipeline or regulatory setbacks or

delays for the immuno-oncology

franchise, especially for Opdivo/

Yervoy combo in non-small cell lung

cancer

Unfavorable Eliquis IPR decision and/

or significant slow-down or decline in

Eliquis growth

In this scenario, we expect the shares

to trade at $35 on 2016E PE multiple

of c16x

Long Term Analysis

Scenarios

Group P/Es


Recommendation / Price Target

Ticker Rec. PT

BMY Hold $59.00

ABT Hold $54.00

ABBV Buy $90.00

JNJ Hold $107.00

LLY Buy $110.00

MRK Hold $57.00

PFE Buy $47.00

Company Description

THE LO

NG

VIE

W

Peer Group

Bristol-Myers

Hold: $59.00 Price Target

Healthcare


August 27, 2015

page 2 of 69 , Equity Analyst, (212) 336-7409, [email protected] Holford, PhD, ACA

Please see important disclosure information on pages 66 - 69 of this report.

Long Term Financial Model Drivers

2014A-20E Revenues CAGR +3.7%

2014A-20E Earnings CAGR +6.0%

Other Considerations

The restructuring and divestment of

Nutrition and Animal Health segments

along with capital allocation provided

growth for the stock during 2011-12. We

see Ibrance, avelumab and the expected

acquisition of Hospira as important drivers

of growth and expect further accretive

transactions before a potential separation

in 2017.

1 Year Forward P/E


Pfizer was founded in 1849 by Charles Pfizer and Charles Erhart as a fine-chemicals

business. From the company’s early exploits in the field of antibiotics, anti-inflammatory

medicines, diabetes, cardiovascular disease amongst others, combined with a series of

significant mergers and acquisitions, it is now the largest Pharmaceutical company in the

world with household brand names including Lipitor and Viagra. With acquisition of Wyeth

in 2009, Pfizer became one of world’s largest pharmaceutical companies. Pfizer recorded

circa $49bn in revenues in 2014.

Q3’15: Phase III tofacitinib data in

psoriatic arthritis and ulcerative colitis

H2’15: expected closing of Hospira

acquisition

October 2015: Xeljanz PDUFA for

psoriasis

Q1’16: Phase III PALOMA-2 data for

Ibrance in 1st line HR+/HER2- mBC

Catalysts

Target Investment Thesis

Ibrance (palbociclib), Prevnar-13 and

avelumab to be important drivers of

growth

Hospira deal to strategically

complement the GEP business and

drive significant EPS accretion

M&A to bolster the GIP business prior

to a potential separation

Our $47 PT is based on a SOTP

valuation basis to reflect the

restructuring potential at Pfizer; this

implies a c30% premium to the US

market PE multiple

Upside Scenario

Better than expected uptake for Ibrance

Faster than expected clinical

advancement of the immune-oncology

franchise (e.g., avelumab)

Greater than expected revenue or cost

synergies from the Hospira deal

Additional accretive deal(s) that bolster

the innovative business and pipeline

If this scenario is achieved we expect

shares to trade on a c45% premium to

the 2016 US market PE multiple with a

corresponding value of $52.00

Downside Scenario

Poor uptake for Ibrance or failure of

Phase III results to support full

approval

Clinical or regulatory setbacks for

avelumab

Failure to close Hospira acquisition

Lack of accretive M&A transactions

If this scenario occurs, we expect

shares to trade on a c30% discount to

the 2016 US market PE multiple with

a corresponding value of $25.00

Long Term Analysis

Scenarios

Group P/Es


Earnings Growth vs P/E


Recommendation / Price Target

Ticker Rec. PT

PFE Buy $47.00

ABT Hold $54.00

BMY Hold $59.00

ABBV Buy $90.00

LLY Buy $110.00

JNJ Hold $107.00

MRK Hold $57.00

Company Description

THE LO

NG

VIE

W

Peer Group

Pfizer

Buy: $47.00 Price Target

Healthcare


August 27, 2015



Table of Contents

Executive Summary 5

Company Summaries:

Bristol-Myers 9

Roche 11

AstraZeneca 12

Merck & Co. 13

Pfizer 14

Key Clinical and IO Combo Program Summaries 15

Combinations To Redefine Treatment Paradigm 19

Biomarker Strategy for PD-1/ L1 inhibitors 23

Cancer–Specific Discussions:

NSCLC 24

RCC 41

Melanoma 47

Other Tumours 54

Appendix (company models) 61

Healthcare


August 27, 2015



Executive Summary The PD-1/ L1 inhibitor space has evolved tremendously over the past 12-18 months with

progress in multiple cancer indications and a continuing shift towards combination

studies. In addition to reviewing the current landscape for the PD-1/ L1 market, this

comprehensive update analyses the competitive dynamics in the immuno-oncology race

from near, mid and long term perspectives across multiple cancer indications and

examines the key topics of debate. Most importantly, our work systematically analyses

and forecasts the commercial potential for the PD-1/ L1 market and key players with

support from our proprietary immuno-oncology model.

Updates to our IO model suggests $51bn PD-1/ L1 market opportunity

Key updates to our IO market model include:

Addition of new indications (e.g., adjuvant NSCLC, adjuvant bladder, ovarian

cancer, small cell lung cancer and Merkel cell carcinoma) given recent study

initiations,

Break-out of Pfizer’s PD-L1 inhibitor avelumab from the “Other” PD-1/ L1

inhibitors category given the company’s aggressive push in the IO space,

Updates to PD-L1 expression levels and IO combination use for the key

indications (e.g., NSCLC, RCC) based on the latest data, and

Modification of the progress of the various PD-1/ L1 inhibitors in different cancer

indications to reflect clinical or regulatory advancements.

As a result of our updates and improved understanding of the IO market since our last

“deep-dive” report published on June 24, 2014, we see a peak de-risked market sales

opportunity of c$51bn (from c$40bn) for this market.

Exhibit 1: Peak anti-PD-1/ L1 de-risked sales by drug ($m,

rounded to nearest $50m)

Source: Jefferies estimates

Exhibit 2: Peak anti-PD-1/ L1 de-risked sales by tumour

type ($m, rounded to nearest $50m)


Opdivo, $13,100

Keytruda, $9,600

atezolizumab,

$12,700

Durvalumab,

$11,000

avelumab,

$3,800 Other, $950

RCC, $3,600

Squamous

NSCLC, $3,100

Non-squamous

NSCLC, $16,400

Melanoma,

$2,250

Other, $25,800

Healthcare


August 27, 2015



Bristol-Myers a clear leader in monotherapy but race is tight for combos

Following the multitude of pivotal data releases in the last year for the two most

advanced indications, melanoma and non-small cell lung cancer (NSCLC), Bristol-Myers’

PD-1 inhibitor Opdivo (nivolumab) appears to be a clear leader in the monotherapy

treatment of these indications. Merck & Co., however, is not far behind Bristol-Myers as its

PD-1 inhibitor Keytruda (pembrolizumab) is also approved in melanoma and could be

approved for 2nd line NSCLC by its October 2, 2015 PDUFA date.

In terms of combination therapy, Bristol-Myers’ Opdivo/ Yervoy combination (PD-1/

CTLA-4) has a slight edge in melanoma with the impressive CheckMate-067 data and we

expect approval by its September 30, 2015 PDUFA date. The combination therapy race for

the more significant NSCLC commercial opportunity remains tight as Roche, AstraZeneca,

and Bristol-Myers all have pivotal combination studies for 1st line and/ or 2nd/ 3rd line

NSCLC. However, with limited insight into the next wave of multiple PD-1/ L1

combinations still in Phase I development, it remains to be seen if one or more of these

combinations could once again shift the landscape.

Promising PD-1/ L1 data across multiple indications

Outside the two indications where PD-1s are currently approved, development is most

advanced in head and neck cancer, bladder cancer, and renal cell carcinoma (RCC) with

robust data in proof-of-concept studies. AstraZeneca, Merck & Co. and Bristol-Myers all

have ongoing Phase III studies for head and neck cancer, though AstraZeneca may have

an advantage over the competition with its durvalumab/ tremelimumab (PD-L1/ CTLA)

combo. In RCC, Roche and Bristol-Myers could have an advantage through their

respective in-house combos with Avastin and Yervoy, respectively.

Beyond these indications, Merck & Co.’s Keytruda is notable as it has demonstrated early

efficacy as monotherapy across a broad range of cancer indications (e.g., Hodgkin’s,

gastric, TNBC, small cell lung cancer), which could position it well as one of the first

entrants across these tumour types and provide a boost to near-term earnings.

Is anti-PD-L1 better than anti-PD-1 for combination therapy?

While the monotherapy data that we have seen to date would suggest that it is difficult to

distinguish between PD-1 and PD-L1 inhibitors in terms of efficacy and safety, the data for

combination therapy, especially in NSCLC, would suggest that PD-L1 inhibitors may be a

better backbone for combination therapy than PD-1 inhibitors. If this hypothesis is

validated through additional clinical data then Roche, AstraZeneca, and potentially Pfizer

could benefit as immuno-oncology shifts towards combination therapies, while Bristol-

Myers could be relegated to a weaker competitive position, in our view.

PD-L1 biomarker not ready for prime time yet

Despite data that have shown correlation between PD-1/ L1 efficacy and PD-L1 expression

in a range of tumours, some of the KOLs that we consult with think that it is too early to

use PD-L1 biomarker diagnostics for patient selection. This is partly due to the mixed data

that has come out from different studies as well as there being any better alternative for

the PD-L1 negative patients. That said, we expect that the near term approval of

companion PD-L1 diagnostic assays for the PD-1/ L1 inhibitors will start the transition

towards PD-L1 biomarker testing as standard practice in time for when IO combinations

that are more efficacious in PD-L1 negative patients will be introduced.

While early efforts are underway to test for other viable biomarkers, we see very limited

progress here with the exception of mismatch repair deficiency, which showed promising

early data at ASCO 2015.

Healthcare


August 27, 2015



Consensus continues to underestimate the potential of IO for AstraZeneca

We see significant potential for the future of immuno-oncology and believe the market

opportunity for the PD-1/ L1 backbone alone could be worth around c$51bn. While our

model suggests Opdivo and Keytruda will make up a large portion of the PD-1/ L1

inhibitor sales by 2020E, consensus estimates are even higher and appear to leave little

room for error, in our view, even on a de-risked basis. On the other hand, consensus

underestimates the potential of AstraZeneca’s durvalumab in our view.

Exhibit 3 and Exhibit 4 compare our own 2018E and 2020E risk-adjusted and de-risked

estimates versus consensus, respectively, for Opdivo, Keytruda, atezolizumab,

durvalumab, and avelumab.

Exhibit 3: Comparison of 2018E JEF de-risked, risk-adjusted

and Consensus estimates for anti-PD-1/ L1 agents ($m)

Source: First Order, Jefferies estimates

Exhibit 4: Comparison of 2020E JEF de-risked, risk-adjusted

and Consensus estimates for anti-PD-1/ L1 agents ($m)

Source: First Order, Jefferies estimates

Exhibit 5: Total de-risked sales by year for the key anti-PD-

1/ L1 drugs ($m)

Source: Company data, Jefferies estimates

Exhibit 6: Total risk-adjusted sales by year for the key anti-

PD-1/ L1 drugs ($m)


$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

Keytruda Opdivo atezolizumab Durvalumab avelumab

An

nu

al re

ven

ue (

$m

)

2018E De-risked 2018E Risk-adjusted 2018 Consensus

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

Keytruda Opdivo atezolizumab Durvalumab avelumab

An

nu

al re

ven

ue (

$m

)

2020E De-risked 2020E Risk-adjusted 2020 Consensus

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

De-r

iske

d S

ale

s ($

m)

Keytruda Opdivo atezolizumab durvalumab avelumab

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

Ris

k-A

dju

sted

Sale

s ($

m)

Keytruda Opdivo atezolizumab durvalumab avelumab

Healthcare


August 27, 2015



Exhibit 7: Total de-risked sales by year by indication($m)


Exhibit 8: Total risk-adjusted sales by year by

indication($m)


$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

De-r

iske

d S

ale

s ($

m)

Non-squamous NSCLC Squamous NSCLC Renal cell carcinoma

Melanoma Other indications

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

Ris

k-A

dju

sted

Sale

s ($

m)

Non-squamous NSCLC Squamous NSCLC Renal cell carcinoma

Melanoma Other indications

Healthcare


August 27, 2015



Bristol-Myers – As good as it gets? Bristol-Myers is in the enviable position of being the leader in immuno-oncology with two

approved products on the market (Yervoy, Opdivo) as well as having one of the most

advanced pipelines across the broader cancer indications. The Opdivo launch has clearly

begun to accelerate recently as the company begins to make headway into the more

lucrative NSCLC market and looks to leverage off its other IO asset (Yervoy) in melanoma.

Opdivo peak sales estimate raised to $13.1bn

Our update gives a raised peak sales potential of $13.1bn (from $11.6bn) for Opdivo

alone making Bristol-Myers still the “leader” in immuno-oncology as far as the PD-1/ L1

backbone market goes. There is still significant headroom from our risk-adjusted peak

sales of $8.0bn implied within our company model that could drive further upside to

Bristol Myers’ shares if de-risked through clinical and commercial execution. Our risk-

adjusted 2020E revenue estimate for Opdivo of $6.4bn is below consensus of $7.3bn and

investor expectations remain very high for the product.

As a result of the changes we have made to our Opdivo estimates, we have raised our

revenue estimates by up to 2% between 2015E-20E and have changed our EPS estimates

by -1% to +5%. In the mid to long term (2016E-20E), our revenue and EPS estimates

remain below consensus.

Exhibit 9: Changes to estimates for Bristol-Myers, 2014A-20E

(US$) millions 2014A 2015E 2016E 2017E 2018E 2019E 2020E CAGR

‘14A-‘20E

Opdivo

Prior estimates - 815 2,094 2,880 4,031 5,224 5,854

New estimates - 810 2,026 2,924 4,191 5,624 6,374

Absolute change - (5) (68) 44 159 400 520

% change 0% -1% -3% 2% 4% 8% 9%

“Derisked” Opdivo estimates - 810 2,040 3,062 4,664 6,643 7,938

Net sales

Prior estimates 15,873 15,960 16,295 17,816 18,534 20,804 21,856 5%

New estimates 15,873 15,955 16,226 17,860 18,693 21,205 22,375 6%

Change 0% 0% 0% 0% 1% 2% 2%

Sales growth (%)

Prior estimates -3% 1% 2% 9% 4% 12% 5%

New estimates -3% 1% 2% 10% 5% 13% 6%

JEFe vs. Cons.

Cons. sales est. 15,879 15,998 16,828 18,792 20,303 22,036 23,302

JEFe vs. Cons. 0% 0% -4% -5% -8% -4% -4%

DILUTED EPS

Prior estimates $1.85 $1.93 $2.18 $2.73 $3.13 $3.82 $4.19 15%

New estimates $1.85 $1.93 $2.16 $2.75 $3.19 $3.98 $4.40 16%

Change 0% 0% -1% 1% 2% 4% 5%

EPS growth (%)

Prior estimates 2% 4% 13% 25% 15% 22% 10%

New estimates 2% 4% 12% 28% 16% 25% 11%

JEFe vs. Cons.

Cons. EPS est. $1.85 $1.83 $2.24 $2.92 $3.45 $4.01 $4.53

JEFe vs. Cons. 0% 5% -4% -6% -8% -1% -3%

Source: Jefferies estimates, company data

Healthcare


August 27, 2015



Asymmetric downside persists despite room for further upgrades

Whilst future updates to our Opdivo estimates could still see further upgrades as more

new indications are added (including adjuvant opportunities) and existing indications in

development are de-risked, we have some significant concerns on Bristol-Myers’ long

term positioning and strategy, primarily focused on:

Significant increased competition from existing players (Merck & Co., Roche and

AstraZeneca), as well as emerging new competition (Pfizer, Novartis, Sanofi, Eli

Lilly, GlaxoSmithKline),

Potential mis-step in down-playing patient selection on PD-L1 status, and

Signs that Opdivo (and potentially all PD-1s in general) might not be as suitable

as PD-L1s for combination therapy with either conventional (chemo, TKIs, etc)

or other immuno-oncology agents.

PT reduced to $59

Our DCF calculation for Bristol-Myers now points to $59.21 and we have reduced our

price target for the shares to $59 (from $64) to reflect this. The significant discounting of

the upside case of Opdivo into estimates by the market and the likelihood that we will

hear increasing noise from its competitors over the next few years makes Bristol-Myers our

least-preferred name amongst the large cap Pharma companies, primarily on valuation

grounds and the asymmetric downside risk to longer term Opdivo estimates.

Healthcare


August 27, 2015



Roche Continues To Catch Up To Bristol-Myers Roche comes in at 2nd place in terms of our “IO backbone” market potential estimates

with a peak sales opportunity of $12.7bn. Whilst atezolizumab is still not yet expected to

launch until 2016, filings in NSCLC and bladder appear imminent in our view with a filing

in renal cell carcinoma also possible in 2016. More importantly, Roche has built out one

of the most aggressive development programmes in terms of patient selection and

combination therapy, which we believe will allow it to capture significant market share in

the future.

Atezolizumab peak sales estimate raised to $12.7bn

We have raised our 2016E-20E revenue estimates for atezolizumab by 12%-52%, though

the change to overall group revenue and EPS estimates are far more modest (0%-1%).

Our risk-adjusted revenue estimate for atezolizumab in 2020E of $3.4bn is now above

consensus of $3.1bn as we become increasingly optimistic on Roche’s progress in NSCLC

and bladder cancer in particular. Our peak sales estimate for atezolizumab now stands at

$12.7bn, with NSCLC being the most significant opportunity ($6.6bn across all lines of

therapy and histology).

PT cut to CHF300 primarily to reflect market movements

Our EPS estimates remain largely unchanged as a result of our update and we remain

relatively in line with consensus EPS during our forecast period. We have lowered our PT

to CHF300 (from CHF330), primarily to reflect recent market movements.

Exhibit 10: Changes to estimates for Roche, 2014A-20E

(CHF) millions 2014A 2015E 2016E 2017E 2018E 2019E 2020E CAGR

'14A-'20E

Atezolizumab

Prior estimates 0 0 112 384 1,225 2,066 2,937

New estimates 0 0 170 595 1,470 2,352 3,278

Absolute change 0 0 58 211 245 287 341

% change 0% 0% 52% 55% 20% 14% 12%

“Derisked” atezolizumab estimates 0 0 261 916 2,261 3,671 5,147

Net sales

Prior estimates 47,462 47,852 50,561 53,149 55,941 59,469 62,966

New estimates 47,462 47,852 50,619 53,360 56,186 59,756 63,307 4.9%

Change 0% 0% 0% 0% 0% 0% 1%

Sales growth (%)

Prior estimates 1% 1% 6% 5% 5% 6% 6%

New estimates 1% 1% 6% 5% 5% 6% 6%

JEFe vs. Consensus

Consensus Sales est. 47,462 47,714 49,483 52,333 55,300 57,875 59,402

JEFe vs. Cons. Sales 0% 0% 2% 2% 2% 3% 7%

Diluted CORE EPS (CHF)

Prior estimates 14.29 13.84 15.45 16.81 17.69 19.44 21.11

New estimates 14.29 13.84 15.49 16.96 17.86 19.65 21.36 6.9%

Change 0% 0% 0% 1% 1% 1% 1%

CORE EPS growth (%)

Prior estimates 0% -3% 12% 9% 5% 10% 9%

New estimates 0% -3% 12% 9% 5% 10% 9%

JEFe vs. Consensus

Consensus EPS est. 14.29 14.06 15.32 16.52 17.94 19.31 20.42

JEFe vs. Cons. EPS 0% -2% 1% 3% 0% 2% 5%


Healthcare


August 27, 2015



AstraZeneca Continues To Impress in IO Combos We believe that AstraZeneca’s efforts in IO are the most under-appreciated by the market,

as it has built out a broad development program with a focus on IO combinations and

precision medicine. However, visibility has been poor on some aspects of these and the

pressure in the remainder of the business, outside of oncology, has kept it below

investor’s radar screens recently. We continue to see AstraZeneca as the best value play in

IO and it is our Top European pick and Top IO pick.

Durvalumab peak sales estimate raised to $11.0bn

We have increased our estimates for AstraZeneca’s durvalumab (also known as

MEDI4736) to reflect the general IO market upgrades we have made in this revision of our

model as well as for the addition of new indications (e.g., adjuvant NSCLC). Our risk-

adjusted revenue for durvalumab in 2020E of $2.6bn is materially above consensus of

$1.3bn. As a result of our updates, we have modestly increased our revenue and EPS

estimates for AstraZeneca by 0%-1% and 0%-2%, respectively between 2015E-20E.

PT held at 5,600p as significant value still on offer

Following our revisions, our AstraZeneca EPS estimates are now 3-20% ahead of

consensus EPS across our forecast period between 2016E-20E. Our updated DCF

calculation of £56.08 and PEG-relative valuation of £57.61 continue to support our PT of

5,600p. We believe that more tangible progress on AstraZeneca’s IO program over the

next 12 months as well as other oncology franchise news flow (AZD9291 approval

expected H2’15) should drive multiple expansion as well as mid-term earnings

momentum for the shares.

Exhibit 11: Changes to estimates for AstraZeneca, 2014A-20E


'14A-'20E

Durvalumab (PD-L1)

Prior estimates - - - 143 860 1,656 2,500

New estimates - - 33 249 1,045 1,846 2,646

Absolute change - - 33 106 186 190 146

% change 0% 0% 0% 74% 22% 11% 6%

“Derisked” durvalumab estimates - - 50 383 1,608 2,864 4,119

Total Revenues

Prior estimates 26,551 24,380 22,611 22,228 24,412 27,529 30,997 2.6%

New estimates 26,551 24,380 22,644 22,335 24,599 27,720 31,144 2.7%

Change 0% 0% 0% 0% 1% 1% 0%

Sales growth (%)

Prior estimates 3% -8% -7% -2% 10% 13% 13%

New estimates 3% -8% -7% -1% 10% 13% 12%

JEFe vs. Cons.

Cons. Sales est. 26,095 24,392 23,657 23,326 24,698 26,400 28,580

JEFe vs. Cons. Sales 2% 0% -4% -4% 0% 5% 9%

CORE EPS (Diluted)

Prior estimates $4.28 $4.22 $4.21 $4.21 $4.79 $5.80 $7.33 9.4%

New estimates $4.28 $4.22 $4.23 $4.26 $4.90 $5.91 $7.41 9.6%

Change 0% 0% 0% 1% 2% 2% 1%

EPS growth (%)

Prior estimates -15% -1% 0% 0% 14% 21% 26%

New estimates -15% -1% 0% 1% 15% 21% 25%

JEFe vs. Cons.

Cons. EPS est. $4.28 $4.24 $4.11 $4.05 $4.43 $5.28 $6.18

JEFe vs. Cons. CORE EPS 0% 0% 3% 5% 11% 12% 20%


Healthcare


August 27, 2015



Merck’s IO Potential Doesn’t Offset Other Risks Merck & Co has had an impressive run with Keytruda to date with a rapid launch in

melanoma as well as a likely launch in NSCLC later this year (PDUFA October 2, 2015).

However, the long term strategy for Merck & Co. in immuno-oncology is unclear as it still

appears to lack critical mass within oncology generally as well as having few IO

combination assets of its own to drive Keytruda sales in the mid to long term.

Keytruda peak sales estimate raised to $9.6bn

We have increased our estimates for Keytruda to reflect the general IO market upgrades

we have made in this revision of our model as well as for the addition of new indications

(e.g., ovarian, small cell lung cancer, adjuvant NSCLC). Our risk-adjusted revenue

estimates for Keytruda in 2020E of $3.7bn remain below consensus of $4.5bn. As a result

of our updates, we have modestly increased our revenue and EPS estimates for Merck &

Co. by 0%-1% and 0%-4%, respectively, between 2015E-20E.

PT cut to $57 primarily to reflect market movements

Our EPS estimates for Merck & Co. have been raised by up to 4% between 2015E–2020E,

but are mostly in line with consensus during this period. However, the patent drag over

the next few years (e.g., Zetia, Vytorin, Cubicin, Remicade, Nasonex) as well as the

downside risk to Januvia/ Janumet sales from the SGLT2 class leave us on the sidelines for

now. We have cut our PT for Merck & Co. to $57 (from $63) primarily to reflect recent

market movements, but also to discount some of the increased risk to our Januvia

franchise estimates (we currently assume a 4% sales CAGR 2014A-20E).

Exhibit 12: Changes to estimates for Merck & Co., 2014A-20E


‘14A-‘20E

Keytruda

Prior estimates 54 595 1,090 1,475 1,937 2,480 3,171

New estimates 54 637 1,000 1,623 2,252 3,076 3,723

Absolute change - 42 (90) 148 315 596 552

% change 0% 7% -8% 10% 16% 24% 17%

“Derisked” Keytruda estimates 54 637 1,000 1,623 2,373 3,435 4,553

Net sales

Prior estimates 42,237 40,213 41,083 40,284 42,301 43,936 46,661 2%

New estimates 42,237 40,255 40,993 40,432 42,617 44,532 47,213 2%

Change 0% 0% 0% 0% 1% 1% 1%

Sales growth (%)

Prior estimates -4% -5% 2% -2% 5% 4% 6%

New estimates -4% -5% 2% -1% 5% 4% 6%

JEFe vs. Cons.

Cons. sales est. 42,237 39,725 40,961 41,398 43,484 45,094 47,405

JEFe vs. Cons. 0% 1% 0% -2% -2% -1% 0%

DILUTED EPS

Prior estimates $3.49 $3.53 $3.82 $3.72 $4.19 $4.66 $5.36 7%

New estimates $3.49 $3.55 $3.82 $3.78 $4.29 $4.84 $5.55 8%

Change 0% 0% 0% 2% 2% 4% 4%

EPS growth (%)

Prior estimates 0% 1% 8% -2% 13% 11% 15%

New estimates 0% 2% 8% -1% 13% 13% 15%

JEFe vs. Cons.

Cons. EPS est. $3.49 $3.51 $3.82 $4.00 4.40 $4.83 5.46

JEFe vs. Cons. 0% 1% 0% -5% -2% 0% 2%


Healthcare


August 27, 2015



Pfizer IO Program Still A Distant Opportunity In November 2014, Pfizer in-licensed Merck KGaA’s (€81.98, NC) PD-L1 inhibitor

avelumab, making an upfront payment of $850m with up to $2bn in regulatory/

commercial milestone payments. Both companies will jointly fund development and

commercialization costs. Revenues earned from selling anti-PD-L1 or anti-PD-1 products

generated from this collaboration will be shared equally. In addition to avelumab, Pfizer’s

IO portfolio also includes an in-house PD-1 inhibitor, OX40, 4-1BB, and CCR2.

Avelumab peak sales estimate set at $3.8bn

In our first detailed bottom-up break-out of avelumab’s peak sales potential, we have set

it at $3.8bn, which is a minor cut from the c$4bn we previously estimated for it on a top-

down basis. However, Pfizer is building a broad portfolio of IO assets behind avelumab as

well as aggressively advancing monotherapy indications in NSCLC, RCC, ovarian and

Merkel cell carcinoma and we expect to see upgrades to our peak sales estimate for

avelumab in the future as Pfizer initiates more pivotal studies across a broader range of

indications. We would also add that Pfizer’s potential ability to leverage its financial

resources onto its IO combination program could see its iceberg of opportunities rapidly

converted into revenue and earnings momentum over the next 1-3 years.

PT held at $47 as “optionality” and M&A remain key drivers

IO is not a strong driver for Pfizer given its relatively early stage of development and

delayed entry versus competitors. However, it remains a partial driver for the long term

SOTP thesis, for which we see a valuation of $47 per share for Pfizer given our expectation

of a separation of GEP by 2017 as well as accretive M&A over the next 6-12 months.

Exhibit 13: Changes to estimates for Pfizer, 2014A-20E


‘14A-‘20E

Avelumab (PD-L1)

Prior estimates - - - - 37 135 271

New estimates - - - - - 120 266

Absolute change - - - - (37) (15) (4)

% change NA NA NA NA -100% -11% -2%

“Derisked” avelumab estimates - - - - - 296 801

Net Sales

Prior estimates 49,405 46,513 53,420 57,086 60,601 59,951 61,614 3.7%

New estimates 49,405 46,513 53,420 57,086 60,565 59,936 61,609 3.7%

Change 0% 0% 0% 0% 0% 0% 0%

Sales growth (%)

Prior estimates -4% -6% 15% 7% 6% -1% 3%

New estimates -4% -6% 15% 7% 6% -1% 3%

JEFe vs. Cons.

Cons. Sales est. 49,605 46,757 50,809 53,041 55,315 55,572 56,676

JEFe vs. Cons. Sales 0% -1% 5% 8% 9% 8% 9%

Diluted EPS

Prior estimates $2.26 $2.07 $2.34 $2.70 $3.14 $3.07 $3.22 6.1%

New estimates $2.26 $2.07 $2.33 $2.69 $3.12 $3.05 $3.20 6.0%

Change 0% 0% -1% -1% -1% -1% -1%

EPS growth (%)

Prior estimates 2% -8% 13% 15% 16% -2% 5%

New estimates 2% -8% 13% 15% 16% -2% 5%

JEFe vs. Cons.

EPS est. $2.26 $2.08 $2.32 $2.58 $2.90 $2.99 $3.08

JEFe vs. Cons. EPS 0% 0% 0% 4% 8% 2% 4%


Healthcare


August 27, 2015



Key Clinical and IO Combo Program Summaries

Exhibit 14: Summary of estimated data release for key studies for Opdivo and Keytruda Company Drug Cancer Phase Study description JEF data release

BMY Opdivo Melanoma II Combo (ipilimumab), used sequentially with ipilimumab (CM-064) H2 2015

DLBCL II Monotherapy; relapsed/ refractory patients (CM-139) Q2 2016

Follicular lymphoma II Monotherapy; relapsed/ refractory patients (CM-140) Q2 2016

Head and neck III Monotherapy vs. cetuximab, methotrexate, or docetaxel (CM-141) Q3 2016

Bladder II Monotherapy; platinum failures Q3 2016

Hodgkin's lymphoma II Monotherapy in ASCT failures (CM-025) Q3 2016

Colorectal I/II Combo (ipilimumab); recurrent (CM-142) Q1 2017

NSCLC III Monotherapy vs. chemotherapy; 1st line or recurrent, PD-L1+ patients (CM-026) Q2 2017

CLL/ NHL I/II Combo (Imbruvica); relapsed/ refractory patients - JNJ study Q2 2017

NSCLC II Combo (EGF816 or INC280); cMET positive/ previously treated - Novartis study Q4 2017

Melanoma I Monotherapy; biomarker study Q4 2017

Melanoma II Combo (ipilimumab); with brain metastases (CM-204) Q1 2018

Melanoma II Monotherapy; ant-CTLA4 treated patients; safety study (CM-172) Q1 2018

NSCLC III Combo (ipilimumab) vs. platinum-based chemo doublet; untreated (CM-227) Q2 2018

RCC III Combo (ipilimumab) vs. sunitinib; untreated patients (CM-214) Q2 2018

Small cell lung cancer III Monotherapy vs. chemotherapy; after 1st line platinum-based chemo (CM-331) Q3 2018

Chronic myeloid leukemia I Combo (dasatinib); 2 prior TKIs Q1 2019

NSCLC III Monotherapy; safety study after at least 1 prior tx (CM-153) Q2 2019

Adjuvant melanoma III Monotherapy vs. Yervoy (CM-238) Q3 2019

NSCLC III Monotherapy; safety study in 3rd line (CM-171) Q2 2021

MRK Keytruda NSCLC II/III Monotherapy vs. docetaxel; platinum failure patients (KN-010) Q4 2015

Multiple myeloma I Combo (with lenalidomide and dexamethasone); 3rd line (KN-023) Q4 2015

Head and neck II Monotherapy; platinum-based therapy and cetuximab failures (KN-055) Q1 2016

NSCLC III Monotherapy vs. chemo regimens; untreated PD-L1 strong (KN-024) Q3 2016

NSCLC I Monotherapy; PD-L1-positive patients (KN-025) Q4 2016

RCC I Monotherapy; neoadjuvant use (KN-031) Q2 2016

RCC I Combo (with Inlyta); untreated patients Q3 2016

Gastric/ GEJ II Combo (with chemo); untreated and pre-treated pts (KN-059) Q4 2016

Urothelial bladder cancer II Monotherapy; untreated (ineligible for cisplatin) [KN-52] Q4 2016

Urothelial bladder cancer III Monotherapy vs. chemotherapy; platinum-based therapy failures (KN-045) Q1 2017

Melanoma I/II Combo (Amgen's T-Vec); treatment naïve Q1 2017

Head and neck III Monotherapy vs. chemo or cetuximab; platinum-based therapy failures (KN-040) Q2 2017

NSCLC II Combo (BTK inhibitor ACP196); platinum failures (KN-166) Q3 2017

Hodgkin's lymphoma II Monotherapy; after auto-SCT and brentuximab (KN-087) Q3 2017

Melanoma I/II Combo (with dabrafenib or trametinib or both) [KN-022] Q3 2017

NSCLC I Combo (necitumumab) - Eli Lilly led study Q3 2017

Head and neck II Combo (BTK inhibitor ACP196); platinum failures (KN-147) Q4 2017

Colorectal II Monotherapy; pretreated Stage IV microsatellite instability high (KN-164) Q4 2017

NSCLC III Monotherapy vs. platinum-based chemotherapy; PD-L1 positive (KN-042) Q1 2018

Head and neck III Combo (chemo regimen or chemo plus cetuximab) vs. Keytruda alone;

untreated pts (KN-048)

Q1 2018

Adjuvant melanoma III Monotherapy vs. placebo; high risk stage III patients (KN-054) Q3 2018

Gastric/ GEJ III Mono vs. paclitaxel; after 1st line platinum and fluoropyrimidine (KN-061) Q3 2018

TNBC II Monotherapy (KN-086) Q3 2018

NSCLC I Combo (with Xalkori); ALK+ untreated patients (KN-050) Q4 2018

Gastric/ GEJ III Combo (with chemo) vs. Keytruda vs. chemo; 1st line therapy (KN-062) Q3 2019

CRPC I/II Combo (ADXS31-142) [KN-046] Q3 2019

RCC I/II Combo (pazopanib); untreated patients (KN-018) Q3 2020

Note: for drugs already in Phase II/III development, this list excludes Phase I studies evaluating a drug across multiple tumour types

Source: Company data, Clinicaltrials.gov, Jefferies estimates

Healthcare


August 27, 2015



Exhibit 15: Summary of estimated data release for key studies for atezolizumab, durvalumab, and avelumab Company Drug Cancer Phase Study description JEF data release

Roche Atezolizumab Melanoma I Combo (vemurafenib); untreated and BRAF V600 positive patients H2 2015

(MPDL3280A) Urothelial bladder cancer II Monotherapy; naïve or platinum failures H2 2015

NSCLC I combo (Tarceva); TKI-naïve or untreated patients Q4 2015

RCC II Combo (Avastin) vs. sunitinib; untreated patients Q2 2016

NHL (FL/ DLBCL) I Combo (Gazyva); relapsed/ refractory CD20+ patients Q3 2016

NSCLC III Monotherapy vs. docetaxel; platinum failure patients (OAK) 2016

Urothelial bladder cancer III Monotherapy vs. chemo; platinum failure patients Q1 2017

NSCLC I Combo (IDO); platinum failure patients Q2 2017

NSCLC (non-squamous) III Combo (carboplatin/ paclitaxel ± Avastin) vs. carbo/ paclitaxel/ Avastin; chemo-naïve

(IMpower150)

2017 (PFS)

NSCLC (non-squamous) III Monotherapy vs. platinum-based chemo plus pemetrexed; PD-L1 selected, chemo-

naïve (IMpower110)

2017 (PFS)

NSCLC (non-squamous) III Combo (carboplatin/ Abraxane) vs. carbo/Abraxane; chemo-naïve (IMpower130) 2017 (PFS)

NSCLC (squamous) III Monotherapy vs. platinum-based chemo; PD-L1 selected, chemo-naïve (IMpower111) 2017 (PFS)

NSCLC (squamous) III Combo (platinum-based doublet) vs. carboplatin with Abraxane or paclitaxel; chemo-

naïve (IMpower131)

2017 (PFS)

Multiple myeloma I Combo (lenalidomide) vs. atezolizumab alone; following auto-SCT Q1 2019

Myelodysplastic syndrome I Combo (azacitidine) vs. atezolizumab alone; hypomethylating agent-naïve or -treated Q1 2019

TNBC III Combo (Abraxane) vs. Abraxane; untreated patients Q3 2019

RCC III Combo (Avastin) vs. sunitinib; untreated patients Q1 2020

Colorectal II Combo (Avastin and chemo) vs. chemo or biologic regimens; 1st line maintenance

setting

Q1 2021

Adjuvant bladder cancer III Monotherapy vs. no intervention; PD-L1 selected following cystectomy (IMvigor010) Q3 2021

Adjuvant NSCLC III Monotherapy vs. best supportive care after adjuvant cisplatin-based chemo in PD-L1+

patients

Q1 2026

AstraZeneca durvalumab NSCLC II Monotherapy; 3rd line PD-L1 positive (ATLANTIC) H2 2015

(MEDI4736) Myelodysplastic syndrome I Monotherapy Q4 2015

Head and neck II Monotherapy; PD-L1+, platinum failures (HAWK) H2 2016

Head and neck II Combo (tremelimumab) vs. durvalumab vs. treme; PD-L1 negative platinum failures 2016

Head and neck I Combo (tremelimumab) vs. durvalumab Q1 2017

NSCLC III Combo (tremelimumab) vs. durvalumab vs. SOC; 3rd line EGFR/ ALK wt (ARCTIC) Q2 2017

NSCLC III Monotherapy; Stage III unresectable NSCLC, post-chemoradiation (PACIFIC) Q3 2017

NSCLC III Combo (AZD9291) vs. AZD9291; post-EGFR TKI, T780M mutation (CAURAL) Q4 2017

Head and neck III Combo (tremelimumab) vs. durvalumab vs. SOC; PD-L1 +/-, platinum failure (EAGLE) 2017

Gastric/ GEJ I/II Combo (tremelimumab); relapsed/ refractory Q1 2018

Head and neck I/II Combo (AZD9150 or AZD5069) vs. AZD9150; 2nd line Q2 2018

NSCLC III Combo (tremelimumab) vs. durvalumab vs. chemo; 1st line EGFR/ALK wild-type

(MYSTIC)

Q3 2018

NHL (FL/DLBCL) I/II Combo (Imbruvica); relapsed/ refractory - Pharmacyclics led study Q3 2018

Adjuvant NSCLC III Monotherapy; chemotherapy and TKI failures 2020

Pfizer avelumab Merkel cell carcinoma II Monotherapy; one prior chemo regimen (JAVELIN Merkel 200) Q2 2016

(MSB0010718C) RCC I Combo (with Inlyta); untreated patients Q2 2018

NSCLC III Monotherapy vs. docetaxel; PD-L1 positive platinum-failure (JAVELIN Lung 200) Q1 2022

Note: for drugs already in Phase II/III development, this list excludes Phase I studies evaluating a drug across multiple tumour types


Healthcare


August 27, 2015



Exhibit 16: Summary of key anti-PD-1/ L1 drugs in development

Drug MOA Proposed indication Development stage JEF peak sales est ($m) JEF estimated filing

BMY Opdivo anti-PD-1 melanoma - monotherapy Approved $393 NA

melanoma - combo Filed $748 PDUFA (9/30/15)

squamous NSCLC - monotherapy Approved $378 NA

squamous NSCLC - combo III $376 2017

non-squamous NSCLC - monotherapy Filed $2,467 2015

non-squamous NSCLC - combo III $1,846 2017

RCC - monotherapy Filed $493 2015

RCC - combo III $810 2017

Follicular lymphoma II $200 2018

Diffuse large B-cell lymphoma II $500 2018

Glioblastoma II $100 2018

Head and neck III $800 2016

Adjuvant melanoma III $300 2018

Hodgkin's lymphoma II $350 2016

Bladder II $250 2018

Small cell lung cancer III $450 2018

Other tumour types I $2,650 2020

MRK Keytruda anti-PD-1 melanoma - monotherapy Approved $540 NA

melanoma - combo I/II $62 2019

squamous NSCLC - monotherapy Filed $366 PDUFA (10/2/15)

squamous NSCLC - combo I/II $94 2019

non-squamous NSCLC - monotherapy Filed $1,839 PDUFA (10/2/15)

non-squamous NSCLC - combo I/II $462 2019

RCC - monotherapy I/II $84 2019

RCC - combo I/II $337 2019

Head and neck III $800 2017

Bladder III $400 2017

Adjuvant melanoma III $300 2018

Hodgkin's lymphoma II $250 2017

Gastric III $1,350 2018

Colorectal II $350 2019

TNBC II $250 2020


Roche atezolizumab anti-PD-L1 melanoma - monotherapy I $25 2018

melanoma - combo I $312 2018

squamous NSCLC - monotherapy III $247 2015


non-squamous NSCLC - monotherapy III $1,118 2015


RCC - monotherapy III $184 2016

RCC - combo III $1,080 2016

Urothelial bladder cancer III $800 2016

Colorectal II $350 2020

TNBC III $350 2019

Adjuvant bladder III $250 2020

Adjuvant NSCLC III $1,700 2020


AZN durvalumab anti-PD-L1 melanoma - monotherapy I/II $25 2018

melanoma - combo I/II $125 2018

squamous NSCLC - monotherapy III $181 2015


non-squamous NSCLC - monotherapy III $1,035 2015


Head and neck III $1,300 2017

Adjuvant NSCLC III $1,700 2020


PFE avelumab anti-PD-L1 squamous NSCLC - monotherapy III $62 2018

squamous NSCLC - combo I $94 2019

non-squamous NSCLC - monotherapy III $718 2018

non-squamous NSCLC - combo I $462 2019

RCC - monotherapy I $84 2019

RCC - combo I $405 2019

Merkel cell carcinoma II $50 2018

Ovarian I $650 2018



Healthcare


August 27, 2015



Exhibit 17: Anti-PD-1/ L1 – R&D stage for key cancer indications under development, and estimated earliest year of

approval for pivotal studies

Opdivo Keytruda atezolizumab durvalumab Avelumab

Non-squamous NSCLC 2016 PDUFA: 10/2/15 2016 2016 2019

Squamous NSCLC Approved PDUFA: 10/2/15 2016 2016 2019

Renal cell carcinoma 2016 2017

Melanoma Approved Approved

Head and neck carcinoma 2017 2018 2018

Adjuvant melanoma 2019 2019

Small cell lung cancer 2019

Urothelial bladder cancer 2018 2017

Follicular lymphoma

Diffuse large B-cell lyphoma

Hodgkin's lymphoma 2017 2018

Glioblastoma

Colorectal cancer

Hepatocellular carcinoma

Chronic myeloid leukemia

Gastric 2019

Triple negative breast cancer 2020

Multiple myeloma

Prostate cancer

Adjuvant bladder 2021

Adjuvant NSCLC 2020 2020

Myelodysplastic syndrome

Merkel cell carcinoma

Ovarian

Note: Shading = Darkest is Phase III or approved indications, medium is Phase II, and light is Phase I or I/II; chart only reflects known clinical

studies for dedicated indications and exclude Phase I studies in multiple solid or hematological cancers with the exception of Pfizer’s

avelumab in ovarian cancer

Source: Clinicaltrials.gov, company reports, Jefferies Research

Healthcare


August 27, 2015



Combinations to redefine treatment paradigm Combos could redefine NSCLC treatment paradigm, but there is controversy

NSCLC is one of the most important battlegrounds for PD-1/ L1 inhibitors, in our view,

given the potential size of the market relative to other cancer indications. The first wave of

contenders here are currently Roche’s atezolizumab/ platinum-based chemo doublet,

AstraZeneca’s durvalumab/ tremelimumab, and Bristol-Myer’s Opdivo/ Yervoy.

Preliminary data would suggest that Roche and AstraZeneca have the early lead, although

we see the following unanswered questions as critical for the longer term outcome:

Roche: Can the chemo-combination sustain its strong early response for a

prolonged period after all cycles of chemotherapy have been administered? We

acknowledge that there are many variables in play, but if atezolizumab can

translate the early efficacy signal into longer term benefits, we think this drug

could take significant market share given that it is used on top of the cheaper

standard of care. In this case, however, Roche’s lead here might be short-lived if

it can be replicated by other PD-L1 inhibitors (e.g., durvalumab, avelumab). On

the other hand, if atezolizumab’s early efficacy does not translate into longer

term benefits, then AstraZeneca might be in sole possession of the leadership

position. We expect to see additional follow-up data for the Roche combo at the

2015 ESMO conference.

AstraZeneca: Can the strong ORRs in PD-L1 positive and negative patients for the

selected dosing regimen translate into an OS benefit? The durvalumab/

tremelimumab dose that AstraZeneca advanced into the Phase III MYSTIC study

showed promising ORRs and a tolerable safety profile in the most recent update

at ASCO 2015, but there is insufficient patient experience at this point to certain

of its benefits. We are encouraged by initial efficacy data shown for the

durvalumab-tremelimumab combo in NSCLC and would hope that a PFS and/

or OS benefit will be seen with them.

Bristol-Myers: What are the new dosing regimens selected for the Phase III

CheckMate-227 study? And can they show strong efficacy while improving

tolerability? It is still unknown exactly what combination or sequential dosing

regimens Bristol-Myers is using in this study. Detailed CheckMate-012 results

will be presented at the World Lung Conference (Denver, Sept 7, 10:45A –

12:15P MDT) and may shed further light on future regimens. However, the

efficacy and safety data from the World Lung Conference abstract appears

similar to those presented at ASCO 2014. Based on available CheckMate-012

data from ASCO 2014 and the 2015 World Lung Conference abstract, we think

it is unlikely that Bristol-Myers would be successful in NSCLC with the regimens

tested to date. Therefore we would expect that the CheckMate-227 study will

use either different doses and/ or a different sequencing strategy for Opdivo and

Yervoy (e.g. Yervoy induction followed by Opdivo maintenance).

Healthcare


August 27, 2015



The next frontier of novel PD-1/ L1-Immuno-oncology (IO) combinations is

almost here

Beyond the more well-known checkpoint inhibitors, which include PD-1/ L1 and CTLA-4

inhibitors, there are multiple other classes of immuno-oncology agents currently in

development (Exhibit 18). However, the overwhelming majority of experts still view PD-1/

L1 inhibitors as the essential backbone of therapy that a company needs to compete in

the IO arena. This is the likely reason that Novartis, Sanofi and GlaxoSmithKline, while far

behind the rest of the field in PD-1/ L1 research, are still developing PD-1/ L1 inhibitors

along with other novel IO agents (Exhibit 21).

Exhibit 18: Summary list of checkpoints that allow co-stimulation or co-inhibition of T cells

Source: Nature Reviews Immunology, Jefferies research

CD226

CD112

CD155

CD58

CD48

SLAM

TIM4

UnknownTIM1 ligand

CD30L

GITRL

TL1A

OX40L

4-1BBL

CD40

HVEM

LIGHT

CD70

B7-2

B7-1

B7-H2

MHC

Antigen PresentingCell

T-cell

CD2

SLAM

TIM1

CD30

GITR

DR3

OX40

4-1BB

CD40L

LIGHT

HVEM

CD27

CD28

ICOS

TCR

TIGIT

CD113

CD112

CD155

CD48

Galectin 9

TIM4

TIM1

Collagen

PD1H

HVEM

B7-DC

B7-1

B7-2

MHC

Antigen PresentingCell T-cell

2B4

Unknown TIM4 receptor

TIM3

Unknown TIM1 receptor

LAIR1

Unknown PD1H receptor

BTLA

CD160

B7-1

PD-1

B7-H1

CTLA4

TCR

PD1HUnknown PD1H receptor

B7-H1

LAG3

Co-stimulatory interactions Co-inhibitory interactions

Healthcare


August 27, 2015



Beyond the PD-1/ L1 combination with CTLA-4 inhibitors (e.g., Yervoy, tremelimumab),

which are currently in late stage development or are under FDA review (i.e., Opdivo/

Yervoy in melanoma), the leading PD-1/ L1 players are currently evaluating numerous

combinations with other novel immuno-oncology therapeutic classes (e.g., OX40, LAG3,

IDO, GITR, KIR, 4-1BB, CSF-1R) in solid or hematological cancer in Phase I studies.

Exhibit 19: Summary of key ongoing combination clinical studies for PD-1/ L1 drugs with other immuno-oncology

classes

Opdivo Keytruda Atezolizumab Durvalumab

CTLA-4 Yervoy Yervoy Yervoy tremelimumab

IDO INCB024360 INCB024360 INCB024360 or GDC-0919 INCB024360

4-1BB urelumab PF-05082566

CSF-1R FPA008 PLX3397 RO5509554 (emactuzumab)

CD27 varlilumab varlilumab

KIR lirilumab

LAG3 BMS-986016

CCR4 mogamulizumab mogamulizumab

GITR MK-4166

OX40 MOXR0916 MEDI6469

CD40 RO7009789

CEA-IL2v RO6895882

NKG2A IPH2201

PD-1 or PD-L1 MEDI0680

Dark shading = Phase 3; light shading = Phase 1


We have yet to see any data for these novel combinations and expect the unveiling of the

first results from studies with these agents in 2016 to generate significant investor interest

and potentially shift the competitive outlook. Despite limited available data for these new

IO classes, experts we have spoken with are most excited about combining OX40 agonists

with PD-1/ L1s, given the former's ability to activate T cells and deplete regulatory T cells

(T-regs). Some experts also see potential in GITR, IDO, and T-vec as combination agents

with PD-1/ L1s, with some also being less optimistic on the potential for combos with KIR,

CSF-1R, 4-1BB and LAG3.

Healthcare


August 27, 2015



Key immuno-oncology assets for large-cap pharma players

Exhibit 20 contains a summary of key wholly owned or exclusively licensed clinical-stage

immuno-oncology assets for the five leading players, Bristol-Myers, Merck & Co., Roche,

AstraZeneca, and Pfizer.

Exhibit 20: Key clinical stage immuno-oncology assets for the leading players by drug class (only include wholly owned

or exclusively licensed assets)

Bristol-Myers Merck Roche AstraZeneca Pfizer

PD-1 Opdivo Keytruda MEDI0680 PD-L1 BMS-936559 atezolizumab

(MPDL3280A)

durvalumab

(MEDI4736)

avelumab

CTLA-4 Yervoy tremelimumab

KIR lirilumab

4-1BB/ CD137 urelumab PF-05082566

LAG3 BMS-986016

CSF-1R FPA008 RO5509554

(emactuzumab)

CD40 RG7876

CXCR4

GITR MK-4166

OX40 MOXR0916 MEDI6469, MEDI6383,

and MEDI0562

PF-04518600

IDO GDC-0919

CEA-IL2v RG7813

NKG2A IPH2201

CXCR2 AZD5069

STAT3 AZD9150

CCR2

Note: Checkmarks where the company has disclosed presence of an asset, but the internal designation is unknown


Beyond the leading PD-1/ L1 players, we note that Novartis, GlaxoSmithKline and Sanofi

are also making new efforts in immuno-oncology. These companies already have

extensive portfolios of IO assets that could be used to evaluate novel PD-1/ L1-immuno-

oncology or IO-IO combinations that could allow them to participate in the next phase of

the immuno-oncology race.

Exhibit 21: Key known immuno-oncology assets for large-cap pharma players

Novartis GlaxoSmithKline Sanofi

PD-1

PD-L1 (preclinical)

4-1BB

LAG3

OX40

TIM3

ICOS

TLR-4

GITR

Source: Company data, Jefferies Research

Healthcare


August 27, 2015



Biomarker strategy for PD-1/ L1 inhibitors Is PD-L1 the right biomarker for patient selection?

There was a general view at ASCO 2015 that it is still premature to select patients based

on PD-L1 expression. According to ASCO discussants for the CheckMate-057 and

CheckMate-067 trials, issues with PD-L1 as a biomarker include:

Heterogeneous expression within tumours and between tumour types as well as

variations in expression level depending on the antibody used,

Tumour specimen collected (archived vs. fresh, primary vs. metastatic) as

expression can change over time and even in response to treatment,

Defining a positive result (cut-off point) could be complex due to different cells

that can be assayed (immune cell vs. tumour cell), the location and distribution

of expression, and

Biomarker interpretation is also limited by the fact that some studies were not

prospectively stratified and many patients had no measurements.

PD-L1 expression testing could catch up faster than expected

Despite some of the more cautious expert opinions at ASCO 2015 regarding PD-L1

testing, we believe that the FDA is in favor of PD-L1 as a biomarker for patient selection

and, along with payors, could help to accelerate this process through the following ways:

The FDA could approve companion PD-L1 diagnostic assays for Keytruda and

Opdivo in the near term,

The FDA could include Keytruda efficacy data in 2nd line NSCLC by PD-L1

expression in its label, and

Upcoming FDA approval decisions could move physicians to view certain drugs

as more suitable for PD-L1 positive patients (e.g., atezolizumab which has FDA

Breakthrough Therapy Designation for PD-L1 positive 2nd line NSCLC).

Mismatch repair mutation burden could be an exciting genetic marker

One cancer expert that we consulted with mentioned that one of the exciting

developments he saw at ASCO 2015 was the Keytruda data in colorectal (CRC) or non-

CRC cancer patients with or without mismatch repair (MMR) deficiency, where the

tumours are highly mutated and are rich in CD8+ T cells and PD-L1 expression. In this

analysis, it was found that mismatch repair deficient CRC and non-CRC tumours treated

with Keytruda showed ORRs of 62% (n=13) and 60% (n=10), respectively, while the

mismatch repair proficient CRC cohort (n=25) showed no ORR. Additionally, there was a

statistically significant increase in the secondary endpoint of PFS that favored the MMR

deficient over MMR proficient CRC cohorts (NR vs. 2.3m, p=0.0001).

Healthcare


August 27, 2015



Non-small cell lung cancer (NSCLC) Opdivo the early leader, but mid- to long-term race wide open

Opdivo is currently considered the standard of care in 2nd line squamous and non-

squamous NSCLC on the back of superior overall survival data from the CheckMate-017

and -057 studies. However, we think Opdivo’s lead could slowly dissipate as competing

PD-1/ L1 products launch in NSCLC in the next 12-18 months, and see the longer-term

treatment paradigm shifting as pivotal data emerges in the next 2-3 years for novel

immunotherapy combinations from Roche, AstraZeneca and Bristol-Myers.

Opdivo leading in PD-1/ L1 monotherapy

Opdivo is currently approved for the 2nd line treatment of squamous NSCLC on the back

of strong CheckMate-017 data, where it demonstrated significantly improved median OS

compared to docetaxel (9.2m vs. 6.0m, p=0.00025). An OS benefit was observed

regardless of PD-L1 expression across different pre-determined PD-L1 expression levels

and the safety profile was consistent with that observed in prior studies. We note that

according to the Opdivo label, the median duration of therapy in CheckMate-017 was

only 2.3 months.

The Phase III CheckMate-057 in 2nd line non-squamous NSCLC showed that Opdivo

treatment led to a significant improvement in median OS (Opdivo vs. docetaxel: 12.2m

vs. 9.4m, HR=0.73, p=0.0015). Median OS benefits for Opdivo were statistically greater in

patients with high PD-L1 expression levels (Exhibit 22). However, Opdivo did not show an

OS benefit in pooled data for patients with low PD-L1 expression.

Exhibit 22: Summary of Opdivo CheckMate-057 overall survival data by PD-L1

expression level

Source: 2015 ASCO presentation, Jefferies LLC

The ASCO trial discussant, Dr. Roy Herbst, sees Opdivo as the new standard of care in

previously treated non-squamous NSCLC and noted the strong benefit in select patient

populations (e.g., PD-L1 positive). He also stated that it is not yet time to use a PD-L1

biomarker assay for patient selection as the PD-L1 negative Opdivo arm showed

comparable efficacy, but much less toxicity, than docetaxel in this study. However, we

believe that this view is given in the context of there being no real alternatives to drive

patient selection. This will change once new IO combinations are developed that better

address the needs of PD-L1 negative patients.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

med

ian

Overa

ll S

urv

ival (

mo

nth

s)

Opdivo Docetaxel

Healthcare


August 27, 2015



Exhibit 23: Summary of key Opdivo data from CheckMate-017 and CheckMate-057

CheckMate-017 CheckMate-057

NSCLC population 2nd line squamous 2nd line non-squamous

Arm Opdivo docetaxel Opdivo docetaxel

Patients 135 137 292 290

ORR 20% 9% 19% 12%

mPFS (months) 3.5 2.8 2.3 4.2

mOS (months) 9.2 6.0 12.2 9.4

Grade 3-4 treatment-related

AE rate

7% 57% 10% 54%

Source: 2015 ASCO presentations, Jefferies LLC

Bristol-Myers is expected to submit the supplemental filing for 2nd line non-squamous

NSCLC by the end of Q3 2015 and we see potential approval as soon as early 2016.

Additionally, Bristol-Myers has also completed a rolling submission to the FDA for its

companion PD-L1 diagnostic assay that could help physicians assess PD-L1 expression

level in patients.

Multiple PD-1/ L1 monotherapy competitors to emerge soon

We expect PD-1/ L1 monotherapy competition from Merck & Co. and Roche to emerge in

the next 12 months. While Opdivo has a first mover advantage in 2nd line NSCLC, we see

the potential approval of Merck & Co.’s Keytruda, with efficacy data by PD-L1 expression

level in the label and a companion PD-L1 diagnostic assay, as favorable for penetration in

high PD-L1 expressers. Given that available data suggests PD-1/ L1 therapy could lead to a

more prolonged response in high PD-L1 expressers, the revenue opportunity for Keytruda

in NSCLC monotherapy may actually be more substantial than what future patient share

data might imply.

Exhibit 24: Upcoming PD-1/ L1 approval decision in NSCLC

Drug Company indication Estimated approval

Keytruda Merck & Co. 2nd line NSCLC following platinum-failure (and therapy for EGFR or ALK

mutations, if present)

PDUFA on October 2, 2015

Opdivo Bristol-Myers 2nd line non-squamous NSCLC Early 2016

Atezolizumab Roche PD-L1 positive 2nd line NSCLC following platinum-failure (and therapy

for EGFR or ALK mutations, if present)

H1 2016

Durvalumab AstraZeneca PD-L1 positive 3rd line NSCLC H2 2016

Source: Company data, Jefferies LLC

Merck & Co.’s Keytruda is expected to be the second PD-1/ L1 inhibitor to reach the US

market in NSCLC with a PDUFA date on October 2, 2015. Merck & Co. is seeking an

approval for NSCLC following progression on platinum-containing chemotherapy and

has a FDA Breakthrough Therapy Designation for this indication. The submission is based

on data from the Phase I KEYNOTE-001 study, which showed an overall response rate

(ORR) of 18% in pretreated NSCLC patents and includes efficacy data in both PD-L1

positive and negative patients (Exhibit 25). A filing for a companion PD-L1 diagnostic for

Keytruda has also been submitted to the FDA.

While there is concern among some investors that Keytruda may get a “narrow label” in

only the PD-L1 positive 2nd line NSCLC patients, we see this as a low probability scenario

and continue to expect a broad label for Keytruda given the Breakthrough Therapy

Designation and respectable data even amongst low PD-L1 expressors.

Healthcare


August 27, 2015



Exhibit 25: Summary of Keytruda KEYNOTE-001 efficacy data in pretreated

NSCLC patients

Keytruda-treated patients by PD-L1 expression

<1% 1-49% ≥50%

Number of patients 22 77 57

ORR (%) 9.1% 15.6% 43.9%

Median PFS (months) 2.2 2.3 6.1

Median OS (months) 8.6 7.3 NR

Source: 2015 AACR presentation, Jefferies LLC

Roche’s PD-L1 inhibitor atezolizumab was granted a Breakthrough Therapy Designation in

PD-L1 positive NSCLC following progression on platinum-based chemotherapy in

February 2015. Roche reported strong Phase II data for atezolizumab from the Phase II FIR

and POPLAR studies at ASCO 2015, and recently reported favorable topline data from the

pivotal Phase II BIRCH study. Roche is expected to discuss a potential submission for

atezolizumab with regulatory agencies shortly, which could allow atezolizumab to reach

the market as early as H1 2016.

Exhibit 26: Summary of key data for Roche’s atezolizumab in FIR and POPLAR studies

FIR POPLAR

NSCLC population PD-L1 positive (TC2/3 or IC2/3) 2nd line

Arm 1st line ≥2L no brain

met

≥2L treated

brain met

Overall atezo Atezo TC3/IC3 Atezo TC2/3

and IC2/3

Atezo TC1/2/3

and IC1/2/3

Docetaxel

Patients 31 92 13 287 47 105 195 143

ORR 26% 16% 23% 15% 38% 22% 18% 15%

mPFS (months) 4.5 2.7 2.5 2.8 7.8 4 3.3 3.4

mOS (months) NR 10.6 6.8 11.4 NR 13 NR 9.5

Treatment related

grade 3-4 AE rate

6% 17% 15% 13% NA NA NA 39%

Note: TC3 or IC3 = TC≥50% or IC≥10% PD-L1+; TC2/3 or IC2/3 = TC or IC≥5% PD-L1+; TC1/2/3 or IC1/2/3 = TC or IC ≥1% PD-L1+


AstraZeneca is also likely to launch durvalumab during H2’16E, as the company indicated

that it could file this drug on a positive readout from the Phase II ATLANTIC study in 3rd

line PD-L1 positive NSCLC patients, stratified by their EGFR/ALK mutation status (expected

H2’15E).

Best IO combination will win the end game

We see the immuno-oncology treatment paradigm in NSCLC shifting over the next 2-3

years towards combination treatments, catalyzed by data from the ongoing Phase III

studies for Roche’s atezolizumab/ platinum-based chemotherapy combo, AstraZeneca’s

durvalumab/ tremelimumab combo, and Bristol-Myers’ Opdivo/ Yervoy combo. We see

the relatively weak data for the PD-1/ L1 monotherapies in PD-L1 negative non-squamous

NSCLC patients, shown at ASCO 2015, as a clear opportunity for combination therapy.

Combination IO regimens could be a more significant opportunity than monotherapy if

they can demonstrate stronger overall survival data compared to PD-1/ L1 monotherapy

in a broader array of patients and safety profiles remain in line with that observed from

early stage studies.

At this point, we see Roche and AstraZeneca as the leading candidates to win the initial

combination race in NSCLC. However, we are likely to see a number of new IO

combinations developing over the next few years with novel mechanisms of action, which

could once again change the longer term outlook for the current leaders in this space.

ASCO 2016 should give incremental data on key new agents such as anti-OX40

Healthcare


August 27, 2015



antibodies, which are currently tipped to be one of the most exciting new drug classes by

KOLs that we consult with.

Roche’s atezolizumab/ platinum-based chemo doublet combo generated the most

excitement at ASCO 2015 after it demonstrated impressive ORRs of 60% (with

carboplatin/ paclitaxel [c/pa], n=5), 75% (carboplatin/ pemetrexed [c/pe], n=12), and

62% (carboplatin/ Abraxane [c/A]], n=13) in a Phase I study in 1st line NSCLC with similar

efficacy regardless of PD-L1 expression. While the overall rates of drug related grade 3-4

adverse events appear elevated, we note that the side effects that comprise a large

portion of the grade 3-4 AEs (e.g., neutropenia, anemia, decreased neutrophil count) is

likely driven by the platinum-based chemo doublets. Roche has initiated three pivotal

combination studies for atezolizumab with platinum-based chemo doublets in chemo-

naïve NSCLC patients on the back of these strong results, with the primary endpoint (PFS)

expected to be reached in 2017.

Bristol-Myers and Merck & Co. have also presented PD-1 inhibitor data in combination

with chemo doublets (Exhibit 27), the former as part of the Phase I CheckMate-012 study

presentation at ASCO 2014. However, Bristol-Myers mentioned that they have decided

not to advance Opdivo/ chemo doublet combos because while these combos may

achieve high response rates, the company’s extended follow-up suggests that long term

survival was not significantly different than Opdivo monotherapy.

Exhibit 27: Summary of key Phase I data for PD-1/ L1 combinations with doublet chemotherapy

Roche Merck & Co. Bristol-Myers

NSCLC

population

1st line squamous and non-squamous 1st line squamous and non-squamous 1st line

squamous

1st line non-

squamous

1st line sq

and non-sq

1st line sq

and non-sq

PD-1/ L1 dose Atezolizumab 15mg/kg Q3W Keytruda 2mg/kg Q3W Keytruda 10mg/kg Q3W Opdivo 10mg/kg Q3W Opdivo

5mg/kg

Q3W

Chemo

doublet

Paclitaxel/

carboplatin

Pemetrexed/

carboplatin

Abraxane/

carboplatin

Pemetrexed/

carboplatin

Paclitaxel/

carboplatin

Pemetrexed/

carboplatin

Paclitaxel/

carboplatin

Gemcitabine

/ cisplatin

Pemetrexed/

cisplatin

Paclitaxel/

carboplatin

Paclitaxel/

carboplatin

Patients 5 12 13 12 13 12 12 12 15 15 14

ORR 60% 75% 62% 42% 38% 75% 17% 33% 47% 47% 43%

mPFS (weeks) NA NA NA NA NA NA NA 24.7 29.7 21.0 31.0

Treatment

G3/4 AE rate

~63%* ~35% ~87% 33% 38% 42% 25% 25% 47% 73% 29%

*Estimated from presentation charts

Source: 2014 and 2015 ASCO presentations, Jefferies LLC

AstraZeneca’s durvalumab/ tremelimumab combo failed to generate as much excitement

at ASCO 2015 as we anticipated despite the strong data and initiation of the pivotal Phase

III MYSTIC study for this combination in 1st line NSCLC. Combo data presented at ASCO

2015 showed ORR/ DCR (disease control rate) of 27% and 41%, respectively, across all

dosing cohorts. PD-L1 positive patients had an ORR/DCR of 33% and 39%, respectively,

versus 27% and 48%, respectively, in the PD-L1 negative patients. We note with interest

that the ORR/ DCR in the dose selected for Phase III MYSTIC study (20mg/kg durvalumab

Q4W plus 1mg/kg tremelimumab Q4W for six doses followed by Q12W for 12 doses) was

38% and 62%, respectively in the PD-L1 negative patients, which is above market

expectations for an ORR of c30% and showed a treatment related grade 3-4 adverse event

rate of only 22% for all patients treated with this regimen. We were also excited to see

evidence of improved T-cell proliferation and activation for durvalumab/ tremelimumab

compared with durvalumab monotherapy. We also note that AstraZeneca is planning to

initiate Phase III IO-chemo combo studies after seeing Roche’s data at ASCO 2015.

Healthcare


August 27, 2015



Bristol-Myers began the PD-1/ L1 combo race comfortably in the leading position.

However, expectations have fallen significantly following a disappointing Phase I

CheckMate-012 readout at ASCO 2014, where Opdivo/ Yervoy showed modest efficacy

and a poor safety profile with 3 patient deaths due to toxicities related to treatment with

the Opdivo/ Yervoy combo.

Exhibit 28: Summary of key Phase I data for PD-1/ L1 combinations in late stage development

Roche AstraZeneca Bristol-Myers

NSCLC population 1st line Pretreated 1st line

PD-1/ L1 Combo Atezolizumab/ platinum-based chemo doublets durvalumab/

tremelimumab

Opdivo/ Yervoy***

Dose Atezolizumab 15mg/kg Q3W + chemo at standard

doses for 4-6 cycles

durvalumab 10-20mg/kg

Q2W or Q4W + treme

1mg/kg Q4W for 6 doses

then Q12W for 12 doses#

Opdivo 3mg/kg Q3W +

Yervoy 1mg/kg Q3W (4

cycles)

Opdivo 1mg/kg Q3W +

Yervoy 3mg/kg Q3W (4

cycles)

Arm All pts Carboplatin/

paclitaxel

Carboplatin/

pemetrexed

Carboplatin/

Abraxane

PD-L1 +ve PD-L1 -ve Squamous Non-

squamous

Squamous Non-

Squamous

Number of patients 30 5 12 13 9 13 9 16 9 15

ORR 67% 60% 75% 62% 33% 38% 33% 13% 11% 13%

mPFS (weeks) NA NA NA NA NA NA 20.6 9.9 8.9 32.9

Treatment related

grade 3-4 AE rate

~65%** ~63% ~35% ~87% 22%* 22% 50% 44% 67%

*AstraZeneca selected durvalumab 20mg/kg Q4W/ Treme 1mg/kg for Phase III MYSTIC study and the related grade 3-4 AE rate is for the

selected dose only; **estimated from presentation charts, and a majority of grade 3-4 AEs are due to platinum-based chemo doublet; ***3

patients died due to drug-related toxicities.


Despite the unspectacular results, Bristol-Myers has selected an undisclosed dosing

regimen for the Opdivo/ Yervoy combination and initiated a Phase III study in 1st line

NSCLC patients (CheckMate-227 study). The Opdivo/ Yervoy dosing regimens selected

for Phase III is still unclear, although we could get further clarity from updated

CheckMate-012 results to be presented at the upcoming World Lung Conference on

September 7th (Monday, 10:45A – 12:15P MDT) at the Colorado Convention Center (Four

Seasons Ballroom F1+F2). Initial efficacy and safety data contained in the World Lung

Conference abstract for CheckMate-012 appear similar to data presented at the 2014

ASCO conference with ORRs at or below 20% regardless of regimen and an unimpressive

ORR in PD-L1 negative patients.

Exhibit 29: Bristol-Myers Phase III CheckMate-227 study design

Source: Bristol-Myers 2015 ASCO presentation

Healthcare


August 27, 2015



At ASCO 2015, Merck & Co. presented data for its anti-PD-1 Keytruda in combination

with Yervoy in NSCLC and demonstrated robust results.

Exhibit 30: Summary of key Phase I data for PD-1 combinations with Yervoy

Merck & Co. Bristol-Myers

NSCLC population Pretreated 1st line

Dose Keytruda 10mg/kg

Q3W + Yervoy 1 or 3

mg/kg

Keytruda 2mg/kg Q3W

+ Yervoy 1 mg/kg

Opdivo 3mg/kg Q3W + Yervoy 1mg/kg

Q3W (4 cycles)

Opdivo 1mg/kg Q3W + Yervoy 3mg/kg

Q3W (4 cycles)

Tumour histology Squamous and non-squamous Squamous Non-squamous Squamous Non-Squamous

Number of patients 6 12 9 16 9 15

ORR 50% 33% 33% 13% 11% 13%

mPFS (weeks) NA NA 20.6 9.9 8.9 32.9

Treatment related

grade 3-4 AE rate

NA 17% 22% 50% 44% 67%


PD-1/ L1 chemotherapy combo controversy at ASCO 2015

After seeing the unimpressive CheckMate-012 data for Opdivo/ platinum-based

chemotherapy doublets in 1st line NSCLC at ASCO 2014, the key questions that investors

focused on at ASCO 2015 are:

Why did Roche’s atezolizumab showed a much stronger response than

Opdivo when combined with similar chemotherapy?:

One hypothesis is that PD-L1 inhibitors (e.g., atezolizumab) could make better

combination agents, in terms of tolerability, than PD-1 inhibitors (e.g., Opdivo).

In addition to the Roche data, another piece of evidence supporting this is that

AstraZeneca’s PD-L1 inhibitor durvalumab could be used at very high doses

when combined with the CTLA-4 tremelimumab in NSCLC, whereas the

Opdivo/ Yervoy combination appeared to have higher serious adverse event

rates in multiple cancer indications (e.g., melanoma, NSCLC, RCC). Another

potential explanation is that Roche may have used fewer steroids in their study

(particularly with Abraxane), leading to a greater immune response.

Is the strong response sustainable?: Bristol-Myers have stated that they halted

development of the Opdivo-chemo combo because their extensive clinical

experience showed that the initial response could not be sustained after

concluding administration of all cycles of chemotherapy and the longer term

survival was no different than Opdivo monotherapy. In contrast, preliminary

Roche data suggests that early response appears to be maintained even

following dosing of all chemotherapy cycles. That said, we do not yet have a

follow-up period of sufficient duration to reach a firm conclusion and eagerly

await updated Roche data at the upcoming ESMO conference.

The answer to these questions could have significant implications on the long term

outlook for not only the PD-1/ L1 players, but also for the broader immuno-oncology

space, since PD-1/ L1s are viewed as the backbone of further combination therapy. If the

hypothesis that PD-L1s make better combinations is validated through additional clinical

data, then we see Roche, AstraZeneca, and possibly Pfizer being potential beneficiaries as

the IO competition shifts to combination therapies, while Bristol-Myers could be relegated

to a weaker competitive position.

Healthcare


August 27, 2015



Key PD-1/ L1 updates from Merck & Co. and Roche coming up in 2015

Given the recent wave of data from the major players, we look forward to the data

readouts in the next 12 months below from the major PD-1/ L1 players and note that

monotherapy data for durvalumab could enable a “fast to market” filing.

Exhibit 31: Upcoming key PD-1/ L1 readouts in NSCLC

Drug Company Readout Venue/ estimated timing

Opdivo Bristol-Myers Updated Phase I CheckMate-012 data for Opdivo/ Yervoy World Lung conference (September 6-9, Denver)

Keytruda Merck & Co Phase II/III KEYNOTE-010 study (vs. docetaxel) in platinum-failures Q4’15E

Atezolizumab Roche Updated Phase I combination data with platinum-based chemo

doublets in 1st line

ESMO (September 25-29, Vienna)

Phase I data in combination with Tarceva in TKI-naïve untreated

patients

Q4’15E

Phase III OAK study readout in 2/3 line NSCLC 2016 (OS data)

durvalumab AstraZeneca Updated Phase I combination data for durvalumab/ tremelimumab ESMO (September 25-29, Vienna)

Phase II ATLANTIC data in 3rd line PD-L1 positive patients H2’15E

Source: Company data, Clinicaltrials.gov Jefferies Research

Updates to anti-PD-1/ L1 market model

The key changes to the squamous and non-squamous NSCLC sections of our anti-PD-1/

L1 model are similar. In addition to updating our model for new study initiations and

progression of ongoing studies, data readouts, and increased visibility around approval

timelines, we made the following key revisions:

1. Allocated higher market share to Roche in the combo NSCLC market on the back

of strong atezolizumab/ platinum-based chemo doublet data,

2. Allocated higher patient treatment year share to Merck & Co. in the

monotherapy NSCLC market as Merck & Co., with potential PD-L1 stratification

data in its label, could be used in a greater proportion of PD-L1 positive patients,

3. New market share allocation to Pfizer in the monotherapy market with initiation

of a Phase III study, and

4. Assumed an even split between PD-L1 positive and negative patient populations

given conflicting expression data from the various companies, who each have

their own PD-L1 diagnostic assays.

Healthcare


August 27, 2015



Exhibit 32: Anti-PD-1/ L1-treated patient years by line of

non-squamous NSCLC therapy

Source: Jefferies estimates, Globocan 2012, company data

Exhibit 33: Peak anti-PD-1/ L1 sales by line of non-

squamous NSCLC therapy, ($m, rounded to nearest $50m)


Exhibit 34: Bristol-Myers – Summary of enabling studies for Opdivo in non-squamous NSCLC

Regimen Line of

treatment

Year of

approval (JEFe)

Enabling

study

Study

stage

Study description/ comments

Monotherapy 1st 2017 NCT02041533/

CheckMate 026

III Monotherapy in squamous and non-squamous untreated or recurrent PD-L1

positive pts vs. chemotherapy (CheckMate 026).

2nd 2016 NCT01673867/

CheckMate 057

III Monotherapy in platinum-failure pts vs. docetaxel (CheckMate 057).

3rd 2016 NCT01673867/

CheckMate 057


Combination 1st 2018 CheckMate 227 III Opdivo/ Yervoy combo vs. Opdivo monotherapy vs. platinum-based

chemotherapy

2nd 2018 CheckMate 227 III Opdivo/ Yervoy combo vs. Opdivo monotherapy vs. platinum-based

chemotherapy

3rd 2018 CheckMate 227 III Opdivo/ Yervoy combo vs. Opdivo monotherapy vs. platinum-based

chemotherapy

Source: Clinicaltrials.gov, Jefferies estimates, company data

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

1st line 2nd line 3rd line

An

ti-P

D-1

/L1

Tre

ate

d P

ati

en

t Y

ears

PD-1 monotherapy PD-1 combo therapy

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000


Peak

Sale

s ($

m)


Healthcare


August 27, 2015



Exhibit 35: Merck & Co. – Summary of enabling studies for Keytruda in non-squamous NSCLC

Regimen Line of

treatment

Year of approval

(JEFe)

Enabling

study

Study

stage



KEYNOTE-024

III Monotherapy in untreated PD-L1 strong, stage IV patients

2nd PDUFA 10/2/2015 NCT01905657/

KEYNOTE-010

II/III Monotherapy in platinum-failure pts vs. docetaxel (KEYNOTE-010).

3rd PDUFA 10/2/2015 NCT01905657/

KEYNOTE-010


Combination 1st 2020 Unknown NA Assume approval on a Phase III study initiated after gathering sufficient data from

Phase I/II study (NCT02039674 or KEYNOTE-021) evaluating combos with

bevacizumab, ipilimumab, erlotinib, gefitinib, and other chemos, and Phase I

study (NCT01840579 or KEYNOTE-011) evaluating combos with chemo

2nd 2020 Unknown NA Assume approval on a Phase III study initiated after gathering sufficient data from




3rd 2020 Unknown NA Assume approval on a Phase III study initiated after gathering sufficient data from





Exhibit 36: Roche – Summary of enabling studies for atezolizumab in non-squamous NSCLC

Regimen Line of

treatment

Year of

approval (JEFe)

Enabling study Study

stage



IMpower110

III Monotherapy vs. platinum-based chemo plus pemetrexed in PD-L1

positive, chemo-naïve patients

2nd 2016 NCT02031458/

BIRCH

III Assume filing based on the combination of Phase II BIRCH, POPLAR, and FIR

studies

3rd 2016 NCT02031458/

BIRCH


studies

Combination 1st 2018 NCT02366143/

IMpower150 and

NCT02367781/

IMpower130

III Atezolizumab combined with carboplatin/ paclitaxel ± Avastin vs. carbo/

pac/ Avastin, or combined with carboplatin/ Abraxane vs. carbo/ Abraxane

in chemo-naïve patients

2nd 2018 NCT02366143/

IMpower150 and

NCT02367781/

IMpower130




3rd 2018 NCT02366143/

IMpower150 and

NCT02367781/

IMpower130





Healthcare


August 27, 2015



Exhibit 37: AstraZeneca – Summary of enabling studies for durvalumab in non-squamous NSCLC

Regimen Line of

treatment

Year of

approval (JEFe)

Enabling

study

Study

stage



PACIFIC

III Monotherapy in untreated patients following chemoradiation in stage III pts

2nd 2018 NCT02125461/

PACIFIC


3rd 2016 NCT02087423/

ATLANTIC

II Monotherapy in 3rd line NSCLC


MYSTIC

III Durvalumab plus tremelimumab vs. durvalumab vs. chemotherapy in 1st line

EGFR/ALK wild-type patients

2nd 2018 NCT02453282/

MYSTIC

III Durvalumab plus tremelimumab vs. durvalumab vs. chemotherapy in 1st line


3rd 2018 NCT02352948/

ARCTIC

III Anti-PD-L1 vs. tremelimumab vs. Anti-PD-L1/treme combo in 3rd line NSCLC

to read out in 2017. Assume 2017 filing


Exhibit 38: Pfizer – Summary of enabling studies for avelumab in non-squamous NSCLC

Regimen Line of

treatment

Year of

approval (JEFe)

Enabling

study

Study

stage


Monotherapy 1st NA Unknown NA NA

2nd 2020 NCT02395172/

JAVELIN Lung

200

III Monotherapy vs. docetaxel in PD-L1 positive platinum-failure patients

3rd 2020 NCT02395172/

JAVELIN Lung

200


Combination 1st NA Unknown NA NA

2nd NA Unknown NA NA

3rd NA Unknown NA NA


Company-specific estimates (non-squamous NSCLC)

Based on our estimates, we estimate Merck & Co.’s Keytruda could reach c$2.3bn in peak

sales in the non-squamous NSCLC indication, Roche’s atezolizumab could reach c$4.1bn,

Bristol-Myers’ Opdivo could reach c$4.3bn, AstraZeneca’s durvalumab could reach

c$4.0bn in peak sales, and Pfizer’s avelumab could reach c$1.2bn. Our market share

allocations are based on timing of market entry, combinations under development, and

the currently available data for the drugs.

Healthcare


August 27, 2015



Exhibit 39: Bristol-Myers – Non-squamous NSCLC revenue estimates for

Opdivo, ($m, rounded to nearest $50m)

Regimen Line of treatment Market share (JEFe) Revenue ($m)

Monotherapy 1st 35% $2,200

2nd 30% $250

3rd 30% $0

Combination 1st 20% $950

2nd 20% $700

3rd 20% $200

Total $4,300


Exhibit 40: Merck & Co. – Non-squamous NSCLC revenue estimates for

Keytruda, ($m, rounded to nearest $50m)


Monotherapy 1st 25% $1,550

2nd 30% $250

3rd 30% $0


2nd 5% $200

3rd 5% $50

Total $2,300


Exhibit 41: Roche – Non-squamous NSCLC revenue estimates for

atezolizumab, ($m, rounded to nearest $50m)


Monotherapy 1st 15% $950

2nd 20% $150

3rd 15% $0

Combination 1st 33% $1,550

2nd 33% $1,100

3rd 33% $350

Total $4,100


Healthcare


August 27, 2015



Exhibit 42: AstraZeneca – Non-squamous NSCLC revenue estimates for

durvalumab, ($m, rounded to nearest $50m)



2nd 10% $100

3rd 15% $0

Combination 1st 33% $1,550

2nd 33% $1,100

3rd 33% $350

Total $4,050


Exhibit 43: Pfizer – Non-squamous NSCLC revenue estimates for avelumab,

($m, rounded to nearest $50m)



2nd 10% $100

3rd 10% $0


2nd 5% $150

3rd 5% $50

Total $1,200


Exhibit 44: Non-squamous NSCLC - De-risked anti-PD-1/ L1

drug sales by year ($m)


Exhibit 45: Non-squamous NSCLC - Risk-adjusted anti-PD-1/

L1 drug sales by year ($m)


$0

$2,500

$5,000

$7,500

$10,000

$12,500

$15,000

$17,500

De-r

iske

d S

ale

s ($

m)

Keytruda Opdivo atezolizumab Durvalumab Avelumab

$0

$2,500

$5,000

$7,500

$10,000

$12,500

$15,000

$17,500

Ris

k-A

dju

sted

Sale

s ($

m)


Healthcare


August 27, 2015




squamous NSCLC therapy


Exhibit 47: Peak anti-PD-1/ L1 sales by line of squamous

NSCLC therapy ($m, rounded to nearest $50m)


Exhibit 48: Bristol-Myers – Summary of enabling studies for Opdivo in squamous NSCLC

Regimen Line of

treatment

Year of

approval (JEFe)

Enabling

study

Study

stage



CheckMate 026

III Monotherapy in squamous and non-squamous untreated or recurrent PD-L1

positive pts vs. chemotherapy (CheckMate 026).

2nd Approved NCT01642004/

CheckMate 017


3rd Approved NCT01721759/

CheckMate 063

II Monotherapy in 3rd line (CheckMate 063).

Combination 1st 2018 CheckMate 227 III Opdivo/ Yervoy combo vs. Opdivo monotherapy vs. platinum-based

chemotherapy

2nd 2018 CheckMate 227 III Opdivo/ Yervoy combo vs. Opdivo monotherapy vs. platinum-based

chemotherapy

3rd 2018 CheckMate 227 III Opdivo/ Yervoy combo vs. Opdivo monotherapy vs. platinum-based

chemotherapy


0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000


An

ti-P

D-1

/L1

Tre

ate

d P

ati

en

t Y

ears


$0

$500

$1,000

$1,500

$2,000

$2,500


Peak

Sale

s ($

m)


Healthcare


August 27, 2015



Exhibit 49: Merck & Co. – Summary of enabling studies for Keytruda in squamous NSCLC

Regimen Line of

treatment

Year of

approval (JEFe)

Enabling

study

Study

stage



KEYNOTE-024

III Monotherapy in untreated PD-L1 strong, stage IV patients

2nd PDUFA

10/2/2015

NCT01905657/

KEYNOTE-010


3rd PDUFA

10/2/2015

NCT01905657/

KEYNOTE-010


Combination 1st 2020 Unknown NA Assume approval on a Phase III study initiated after gathering sufficient data from




2nd 2020 Unknown NA Assume approval on a Phase III study initiated after gathering sufficient data from




3rd 2020 Unknown NA Assume approval on a Phase III study initiated after gathering sufficient data from





Exhibit 50: Roche – Summary of enabling studies for atezolizumab in squamous NSCLC

Regimen Line of

treatment

Year of

approval (JEFe)

Enabling

study

Study

stage



IMpower111

III Monotherapy vs. platinum-based chemo in PD-L1 positive, chemo-naïve

patients

2nd 2016 NCT02031458/

BIRCH


studies

3rd 2016 NCT02031458/

BIRCH


studies


IMpower131

III Atezolizumab combined with platinum-based chemo doublet vs. carbo/pac or

carbo/Abraxane in chemo-naïve patients

2nd 2018 NCT02367794/

IMpower131



3rd 2018 NCT02367794/

IMpower131




Healthcare


August 27, 2015



Exhibit 51: AstraZeneca – Summary of enabling studies for durvalumab in squamous NSCLC

Regimen Line of

treatment

Year of

approval (JEFe)

Enabling

study

Study

stage



PACIFIC


2nd 2018 NCT02125461/

PACIFIC


3rd 2016 NCT02087423/

ATLANTIC

II Monotherapy in 3rd line NSCLC


MYSTIC

III durvalumab plus tremelimumab vs. durvalumab vs. chemotherapy in 1st line


2nd 2018 NCT02453282/

MYSTIC

III durvalumab plus tremelimumab vs. durvalumab vs. chemotherapy in 1st line


3rd 2018 NCT02352948/

ARCTIC

III Anti-PD-L1 vs. tremelimumab vs. Anti-PD-L1/treme combo in 3rd line NSCLC

to read out in 2017. Assume 2017 filing


Exhibit 52: Pfizer – Summary of enabling studies for avelumab in squamous NSCLC

Regimen Line of

treatment

Year of

approval (JEFe)

Enabling

study

Study

stage


Monotherapy 1st NA Unknown NA NA

2nd 2020 NCT02395172/

JAVELIN Lung

200


3rd 2020 NCT02395172/

JAVELIN Lung

200


Combination 1st NA Unknown NA NA

2nd NA Unknown NA NA

3rd NA Unknown NA NA


Company-specific estimates (squamous NSCLC)

Based on our estimates, Merck & Co.’s Keytruda could reach c$450m in peak de-risked

sales in the squamous indication, Roche’s atezolizumab could reach c$850m, Bristol-

Myers’ Opdivo could reach c$750m, AstraZeneca’s durvalumab could reach c$800m, and

Pfizer’s avelumab could reach c$150m each. Our market share allocations are based on

timing of market entry, combinations under development, and the currently available

data for the drugs.

Exhibit 53: Bristol-Myers – Squamous NSCLC revenue estimates for Opdivo




2nd 40% $50

3rd 35% $0


2nd 20% $100

3rd 20% $50

Total $750


Healthcare


August 27, 2015



Exhibit 54: Merck & Co. – Squamous NSCLC revenue estimates for Keytruda




2nd 25% $0

3rd 25% $0


2nd 5% $50

3rd 5% $0

Total $450


Exhibit 55: Roche – Squamous NSCLC revenue estimates for atezolizumab




2nd 20% $0

3rd 18% $0


2nd 33% $200

3rd 33% $50

Total $850


Exhibit 56: AstraZeneca – Squamous NSCLC revenue estimates for

durvalumab ($m, rounded to nearest $50m)



2nd 10% $0

3rd 18% $0


2nd 33% $200

3rd 33% $50

Total $800


Exhibit 57: Pfizer – Squamous NSCLC revenue estimates for avelumab ($m,




2nd 5% $0

3rd 5% $0


2nd 5% $50

3rd 5% $0

Total $150


Healthcare


August 27, 2015



Exhibit 58: Squamous NSCLC - De-risked anti-PD-1/ L1 drug

sales by year ($m)


Exhibit 59: Squamous NSCLC - Risk-adjusted anti-PD-1/ L1

drug sales by year ($m)


$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

De-r

iske

d S

ale

s ($

m)


$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

Ris

k-A

dju

sted

Sale

s ($

m)


Healthcare


August 27, 2015



Renal Cell Carcinoma (RCC) Two-horse race with Bristol-Myers holding a tenuous lead

Renal cell carcinoma was one of the first indications where we saw PD-1/ L1 data.

Following the initial wave of data releases, only Bristol-Myers and Roche have advanced

their PD-1/ L1 inhibitors into Phase III studies and we see Bristol-Myers’ Opdivo as the first

market entrant in this indication following a successful CheckMate-025 top line readout.

While we are uncertain of the progress that Merck & Co. and AstraZeneca have made for

their PD-1/ L1 inhibitors in RCC, we feel that these companies have the development

experience and resources to quickly ramp up and become competitive in this race.

Bristol-Myers has a tenuous lead in RCC

Bristol-Myers recently announced that the CheckMate-025 study was halted early on

superior overall survival benefits for Opdivo vs. Afinitor in pre-treated RCC patients.

However, a superior OS is really not that surprising, in our view, based on the relatively

weak comparison for Afinitor (Exhibit 60). We see Bristol-Myers filing on this data in H2

2015 with potential approval in H1’16.

Exhibit 60: Summary of key Opdivo and Afinitor data in pretreated RCC

Opdivo

Afinitor plus best

supportive care

Study size 54 54 277

Dose 2mg/kg Q3W 10mg/kg Q3W 10mg daily

ORR 22.0% 20.0% 2.0%

mPFS (months) 4.0 4.2 4.9

mOS (months) 25.5 24.8 14.8

Grade 3-4 AE rate 17% 17% 65%

Source: 2015 ASCO CheckMate-010 data, Afinitor prescribing information, Motzer RJ et

al. (Cancer, 2010, 116[18]), Jefferies LLC

We expect the real competition to take place in 1st line RCC, where Roche has a chance to

be first to market if the company decides to file on Phase II data. In this setting, Bristol-

Myers is evaluating the Opdivo/ Yervoy combination against current standard of care

Sutent (sunitinib) in untreated RCC patients in the Phase III CheckMate-214 study.

Bristol-Myers has released early data for Opdivo in combination with Yervoy, Stutent

(sunitinib), and pazopanib. Phase I CheckMate-016 data for the Opdivo/ Yervoy combo

presented at ASCO 2015 showed that:

Opdivo/ Yervoy combo generated ORRs of 38.3% for the 3mg/kg Opdivo/

1mg/kg Yervoy Q3W (following by 3mg/kg Q2W Opdivo) dose and 40.4% for

the 1mg/kg/ 3mg/kg Q3W (followed by 3mg/kg Q2W Opdivo) dose,

Median PFS were 7.7m and 10.9m for the 3mg/kg + 1mg/kg and 1mg/kg +

3mg/kg doses, respectively,

In terms of side effects, the 3mg/kg Opdivo/ 1mg/kg Yervoy appears to be more

well tolerated with 34% grade 3-4 treatment related adverse events compared

to 64% for the 1mg/kg Opdivo/ 3mg/kg Yervoy dose.

Given the data, it is not surprising that Bristol-Myers is utilizing the 3mg/kg Opdivo plus

1mg/kg Yervoy Q3W (for 4 doses) followed by 3mg/kg Opdivo Q2W regimen in the

pivotal CheckMate-214 study. It is difficult to assess the efficacy of the Opdivo/ Yervoy

combo relative to Sutent based on available data, but we feel that the combination may

have a more tolerable safety profile.

Healthcare


August 27, 2015



Exhibit 61: Summary of key data for Bristol-Myers’ Opdivo/ Yervoy combo and Sutent in RCC

Opdivo 3/ Yervoy 1 Opdivo 1/ Yervoy 3 Opdivo 3/ Yervoy 3 Sutent

RCC population Naïve and pretreated patients Naïve patients Naïve patients

Size 47 47 6 375

Dose 3mg/kg plus 1mg/kg Q3W (4

Yervoy doses)

1mg/kg plus 3mg/kg Q3W (4

Yervoy doses)

3mg/kg plus 3mg/kg Q3W (4

Yervoy doses)

50mg orally once daily

ORR 38.3% 40.4% 0% 27.5%

mPFS (weeks) 33.3 47.1 na 47.3

mOS (weeks) NR NR na 114.6

Overall grade 3-4 treatment-

related AE rate

34.0% 63.8% 83.8% 77%

Source: 2015 ASCO CheckMate-016 data, Sutent prescribing information, Jefferies LLC

Roche tackling 1st line opportunity with atezolizumab/ Avastin combination

Roche is focusing on a combination approach for its PD-L1 inhibitor atezolizumab

(atezolizumab) in RCC, evaluating atezolizumab plus Avastin vs. Sutent in untreated RCC

patients in Phase II and Phase III studies. Early data for Roche’s atezolizumab/ Avastin

combo led to a promising 40% ORR in 1st line RCC (n=10) at 2014 ESMO, but it is still too

early to gauge its profile relative to Sutent.

Roche also presented early monotherapy data for atezolizumab at ESMO 2014 that

showed an overall ORR of 15%. The ORR was 10% in PD-L1- patients (IHC 0) and 20% in

PD-L1+ patients (IHC 1/2/3).

We estimate a read out for the Phase II study for the atezolizumab/ Avastin combo in Q2

2016, and see the potential for Roche to file on this study and be the first PD-1/ L1

inhibitor to market in 1st-line RCC.

Exhibit 62: Objective response rates for anti-PD-1/ L1

regimens in RCC

Source: Company reports, Jefferies LLC

Exhibit 63: Objective response rates by PD-L1 expression for

anti-PD-1/ L1 regimen in RCC

Note: For atezolizumab, PD-L1+ is IHC 1/2/3 and PD-L1- is IHC0


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

% O

RR

0%

10%

20%

30%

40%

50%

60%

70%

% O

RR

PD-L1 positive PD-L1 negative

Healthcare


August 27, 2015



Exhibit 64: Upcoming key PD-1/ L1 readouts in RCC in the next 12 months

Drug Company Readout Estimated timing

Atezolizumab Roche Phase II study in combination with Avastin, vs. Sutent, in 1st line Q2 2016

Keytruda Merck & Co Phase I study in combination with Inlyta in 1st line Q3 2016

Source: Company data, Clinicaltrials.gov Jefferies Research


In addition to updating our model for study initiations, progress of ongoing studies and

readouts, and increased visibility around approval timelines, we made the following key

revisions:

Allocated higher monotherapy market share to Opdivo on the CheckMate-025

results,

Allocated higher combo market share to Roche as its Avastin/ atezolizumab

combo could be first to market,

New market share allocation to Pfizer in the combination market, but not in the

monotherapy market, with initiation of a Phase I study specifically in RCC, and

Assumed 25% of patients are PD-L1 positive based on available data from Roche.


RCC therapy


Exhibit 66: Peak anti-PD-1/ L1 sales by line of RCC therapy,



0

5,000

10,000

15,000

20,000

25,000


An

ti-P

D-1

/L1

Tre

ate

d P

ati

en

t Y

ears


$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000


Peak

Sale

s ($

m)


Healthcare


August 27, 2015



Exhibit 67: Bristol-Myers – Summary of enabling studies for Opdivo in RCC

Regimen Line of

treatment

Year of

approval (JEFe)

Enabling

study

Study

stage


Monotherapy 1st 2018 NA NA Assume approval on a Phase III study initiated after gathering sufficient data

from Phase I results in multiple solid tumour types (including study

NCT01358721) evaluating Opdivo monotherapy.

2nd 2016 NCT01668784/

CheckMate 025

III Monotherapy vs. everolimus in pretreated patients (CheckMate 025)

3rd 2016 NCT01668784/

CheckMate 025

III Monotherapy vs. everolimus in pretreated patients (CheckMate 025)


CheckMate 214

III Nivo/ ipi combo vs. sunitinib in 1st line RCC (CheckMate214)

2nd 2018 NCT02231749/

CheckMate 214


3rd 2018 NCT02231749/

CheckMate 214



Exhibit 68: Merck & Co. – Summary of enabling studies for Keytruda in RCC

Regimen Line of

treatment

Year of

approval (JEFe)

Enabling

study

Study

stage


Monotherapy 1st NA NA NA No dedicated study for Keytruda monotherapy

2nd NA NA NA No dedicated study for Keytruda monotherapy

3rd NA NA NA No dedicated study for Keytruda monotherapy

Combination 1st 2020 Unknown I Assume approval on a Phase III study initiated after gathering sufficient data

from Phase I/II study (NCT02014636 or KEYNOTE-018) and Phase I study

(NCT02133742) evaluating combo with pazopanib or Inlyta in untreated pts.

2nd 2020 Unknown I Assume approval on a Phase III study initiated after gathering sufficient data



3rd 2020 Unknown I Assume approval on a Phase III study initiated after gathering sufficient data




Exhibit 69: Roche – Summary of enabling studies for atezolizumab in RCC

Regimen Line of

treatment

Year of

approval (JEFe)

Enabling

study

Study

stage


Monotherapy 1st NA NA NA No dedicated study for atezolizumab monotherapy

2nd NA NA NA No dedicated study for atezolizumab monotherapy

3rd NA NA NA No dedicated study for atezolizumab monotherapy

Combination 1st 2017 NCT02420821 III Atezolizumab plus Avastin vs. sunitinib in 1st line RCC (assume approval on

Phase II study)

2nd 2017 NCT02420821 III Atezolizumab plus Avastin vs. sunitinib in 1st line RCC (assume approval on

Phase II study)

3rd 2017 NCT02420821 III Atezolizumab plus Avastin vs. sunitinib in 1st line RCC (assume approval on

Phase II study)


Healthcare


August 27, 2015



Exhibit 70: AstraZeneca – Summary of enabling studies for durvalumab in RCC

Regimen Line of

treatment

Year of

approval (JEFe)

Enabling

study

Study

stage


Monotherapy 1st NA NA NA NA

2nd NA NA NA NA

3rd NA NA NA NA

Combination 1st NA NA NA NA

2nd NA NA NA NA

3rd NA NA NA NA


Exhibit 71: Pfizer – Summary of enabling studies for avelumab in RCC

Regimen Line of

treatment

Year of

approval (JEFe)

Enabling

study

Study

stage



2nd NA NA NA NA

3rd NA NA NA NA

Combination 1st 2020 Unknown I Assume approval on a Phase III study initiated after gathering sufficient data

from the Phase I study (NCT02493751) evaluating avelumab/ Inlyta combo

2nd 2020 Unknown I Assume approval on a Phase III study initiated after gathering sufficient data


3rd 2020 Unknown I Assume approval on a Phase III study initiated after gathering sufficient data



Company-specific estimates

Based on our estimates, we estimate Bristol-Myers’ Opdivo could reach c$1.3bn in peak

de-risked sales in the RCC indication, Merck & Co.’s Keytruda could reach c$400m,

Roche’s atezolizumab could reach c$1.3bn, and Pfizer’s avelumab could reach c$500m.

We do not include any revenue estimates for AstraZeneca in this indication. Our market

share allocations are based on timing of market entry, combinations under development,

and the currently available data for these drugs.

Exhibit 72: Bristol-Myers – RCC revenue estimates for Opdivo ($m, rounded

to nearest $50m)



2nd 70% $100

3rd 70% $0


2nd 30% $250

3rd 30% $100

Total $1,300


Healthcare


August 27, 2015



Exhibit 73: Merck & Co. – RCC revenue estimates for Keytruda ($m, rounded

to nearest $50m)



2nd 5% $0

3rd 5% $0


2nd 13% $100

3rd 13% $0

Total $400


Exhibit 74: Roche – RCC revenue estimates for atezolizumab ($m, rounded to

nearest $50m)



2nd 20% $50

3rd 20% $0


2nd 40% $300

3rd 40% $100

Total $1,250


Exhibit 75: Pfizer – RCC revenue estimates for avelumab ($m, rounded to

nearest $50m)



2nd 5% $0

3rd 5% $0


2nd 15% $100

3rd 15% $50

Total $500


Exhibit 76: RCC - De-risked anti-PD-1/ L1 drug sales by year

($m)


Exhibit 77: RCC - Risk-adjusted anti-PD-1/ L1 drug sales by

year ($m)


$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

De-r

iske

d S

ale

s ($

m)

Keytruda Opdivo atezolizumab Avelumab

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

Ris

k-A

dju

sted

Sale

s ($

m)

Keytruda Opdivo atezolizumab Avelumab

Healthcare


August 27, 2015



Metastatic Melanoma Bristol-Myers leads in melanoma due to strong IO portfolio

Bristol-Myers and Merck & Co. have invested heavily in melanoma and are reaping the

rewards with approved PD-1 inhibitors. We see Bristol-Myers as the leader in this

indication given its breadth of mono and combination IO therapeutic offerings supported

by strong pivotal data. Merck & Co.’s Keytruda has had strong sales since launch and

appears to have an early commercial advantage, though we see the lack of an in-house

combination as a possible drag on its competitiveness against Opdivo in melanoma.

Bristol-Myers’s Opdivo/ Yervoy combo shows strong efficacy

While Bristol-Myers’ Opdivo and Merck & Co.’s Keytruda appear similar as

monotherapies, the impressive efficacy data in the Phase III CheckMate-067 study for the

Opdivo/ Yervoy combo in 1st line melanoma supports Bristol-Myers’ front-runner

position, in our view. The PDUFA for Opdivo/ Yervoy in 1st line melanoma is coming up

on September 30, 2015. Key results from CheckMate-067 (Exhibit 78) showed that:

The median OS were not reached for either arm as of ASCO 2015 and will be

important for assessing the efficacy of Opdivo/ Yervoy combo relative to a PD-1

monotherapy,

Opdivo/ Yervoy combo showed a statistically significant improvement over

Opdivo or Yervoy monotherapy in median PFS for PD-L1- patients (Opdivo/

Yervoy vs. Opdivo vs. Yervoy: 11.2 months vs. 5.3 months vs. 2.8 months), but

not in the PD-L1+ patients (14.0 months vs. 14.0 months vs. 4 months).

Exhibit 78: Bristol-Myers Phase III CheckMate-067 study summary

Arms Opdivo/ Yervoy Opdivo Yervoy

Dose Opdivo 1mg/kg + Yervoy 3mg/kg Q3W,

then Opdivo 3mg/kg Q2W

Opdivo 3mg/kg Q2W Yervoy 3mg/kg Q3W (4 doses)

ORR 58% 44% 19%

mPFS (months) 11.5 6.9 2.9

HR (vs. Yervoy, both

p<0.00001)

0.42 0.57

Overall grade 3-4 TRAE rate 55% 16% 27%

Grade 3-4 rates for select AEs

Skin 6% 2% 3%

Gastrointestinal 15% 2% 12%

Hepatic 19% 3% 2%

Endocrine 5% 1% 2%


The CheckMate-067 ASCO presentation discussant, Dr. Michael Atkins, was aligned with

many other KOLs in that they do not believe that the current data are sufficient to allow

for patient stratification by PD-L1 expression. However, Dr. Atkins proposed that in the

absence of a better biomarker, the Opdivo/ Yervoy combo could be a preferred treatment

for those who need a quick response and can tolerate the higher toxicity associated with

the combo, while Opdivo monotherapy should be used irrespective of PD-L1 expression

in patients where toxicity is a concern. At ASCO 2014, early Phase I data showed that the

Opdivo/ Yervoy combo can lead to impressive 2-year OS rate of 79% for melanoma.

Healthcare


August 27, 2015



Merck & Co’s Keytruda similar to Opdivo as monotherapy

Both Opdivo and Keytruda are approved as monotherapies in Yervoy-relapsed patients

and both drugs already have NCCN recommendation supporting 1st line use. We and

many physicians see these two drugs as similar in melanoma monotherapy, with the only

tangible difference being dosing as Keytruda is administered once every three weeks

while Opdivo is administered once every two weeks.

Strong Phase III KEYNOTE-006 and CheckMate-066 data for Keytruda and Opdivo,

respectively, have solidified confidence in these drugs as 1st line melanoma treatments

(Exhibit 79).

Bristol-Myers is expecting a FDA approval decision for Opdivo in 1st line melanoma by

November 27, 2015 while Merck is expecting a similar decision for Keytruda by December

19, 2015.

Exhibit 79: Comparison of Bristol-Myers’ CheckMate-066 and Merck & Co.’s KEYNOTE-006 studies

CheckMate-066 KEYNOTE-006

Patient population Untreated BRAF wildtype Yervoy naïve

Arm Opdivo dacarbazine Keytruda Keytruda Yervoy

Dose 3mg/kg Q2W 1000mg/m2 Q3W 10mg/kg Q2W 10mg/kg Q3W 3mg/kg Q3W (4 doses)

ORR 40% 14% 34% 33% 12%

mPFS (months) 5.1 2.2 5.5 4.1 2.8

1-year OS (%) 73% 42% 74% 68% 58%

Overall grade 3-4 drug-

related AE rate

12% 18% 13% 10% 20%


Keytruda and Opdivo are the only approved PD-1 inhibitors in the US

In September 2014, Merck & Co.’s Keytruda became the first PD-1 inhibitor to be

approved in the US. The drug is administered as 2mg/kg infusion Q3W, and is prescribed

for the treatment of melanoma following progression on Yervoy, or following the

progression of both Bristol-Myers’ Yervoy and a BRAF inhibitor in BRAF V600 mutation

positive patients. Merck & Co. priced Keytruda at wholesale acquisition cost of $2,158 for

a 50mg vial (lyophilized), or around $9,200 per month for an average patient with a

weight of 80kg.

While Keytruda was first PD-1 inhibitor to reach the market, it lost much of its first-mover

advantage when Bristol-Myers’ Opdivo received accelerated approval (brand name:

Opdivo) on December 22, 2014, more than three months ahead of the scheduled PDUFA

of March 30, 2015. The Opdivo indication is similar to that for Keytruda, although it is

approved as a 3mg/kg infusion Q2W, which is slightly less convenient than that for

Keytruda but has not been mentioned as a significant disadvantage relative to Keytruda in

the physician community. For an average patient, Bristol-Myers estimates the monthly

cost of Opdivo at around $12,500.

Healthcare


August 27, 2015



Exhibit 80: Objective response rates for anti-PD-1/ L1 regimens in melanoma


Exhibit 81: Objective response rates for anti-PD-1/ L1 regimens by PD-L1

expression in melanoma



In addition to updating our model for new study initiations, progression of ongoing

studies, key data readouts, and increased visibility around approval timelines, we made

the following important revisions:

Allocated higher monotherapy market share to Opdivo and Keytruda based on

their strong launches, and

Allocated higher combo market share to Bristol-Myers and Roche given the

potential for their in-house combos.

0%

10%

20%

30%

40%

50%

60%

70%

OR

R (

%)

0%

10%

20%

30%

40%

50%

60%

70%

80%

% O

RR

PD-L1 positive PD-L1 negative

Healthcare


August 27, 2015




melanoma therapy


Exhibit 83: Peak Anti-PD-1/ L1 sales by line of melanoma

therapy, ($m, rounded to nearest $50m)


Exhibit 84: Bristol-Myers – Summary of enabling studies for Opdivo in melanoma

Regimen Line of

treatment

Year of

approval (JEFe)

Enabling

study

Study

stage


Monotherapy 1st 2015 (NCCN

recommended)

NCT01721772/

CheckMate 066

III Monotherapy in untreated pts, vs. dacarbazine. (CheckMate 066)


CheckMate 037

III Monotherapy in anti-CTLA4-treated pts, vs. dacarbazine or carboplatin plus

paclitaxel. (CheckMate 037)


CheckMate 037

III Monotherapy in anti-CTLA4-treated pts, vs. dacarbazine or carboplatin plus

paclitaxel. (CheckMate 037)

Combination 1st 2015 (PDUFA

Sept 30)

NCT01844505/

CheckMate 067

III Opdivo/Yervoy combo vs. Opdivo vs. Yervoy in untreated pts. (CheckMate

067)

2nd 2015 (PDUFA

Sept 30)

NCT01844505/

CheckMate 067


067)

3rd 2015 (PDUFA

Sept 30)

NCT01844505/

CheckMate 067


067)


0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1st line 2nd line 3rd lineAn

ti-P

D-1

/L1

Tre

ate

d P

ati

en

t Y

ears


$0

$500

$1,000

$1,500

$2,000


Peak

Sale

s ($

m)


Healthcare


August 27, 2015



Exhibit 85: Merck & Co. – Summary of enabling studies for Keytruda in melanoma

Regimen Line of

treatment

Year of

approval (JEFe)

Enabling

study

Study

stage


Monotherapy 1st 2015 (NCCN

recommended)

NCT01866319/

KEYNOTE-006

III Monotherapy in Yervoy-naïve pts, vs. Yervoy (KEYNOTE-006)


NCT01704287

III Phase I (001) study of Keytruda in advanced melanoma pts and Phase II (002)

study in pretreated pts vs. investigator's choice (e.g., carboplatin plus

paclitaxel, paclitaxel, dacarbazine).


NCT01704287

III Phase I (001) study of Keytruda in advanced melanoma pts and Phase II (002)

study in pretreated pts vs. investigator's choice (e.g., carboplatin plus

paclitaxel, paclitaxel, dacarbazine).

Combination 1st 2020 Unknown NA Assume approval on a Phase III study initiated after gathering sufficient data

from Phase I/II study (NCT02089685/ KEYNOTE-029) evaluating Keytruda in

combo with pegInterferon or Yervoy and Phase I/II (NCT02130466/ KEYNOTE-

022) evaluating Keytruda in combo with Tafinlar or Mekinist or both.

2nd 2020 Unknown NA Assume approval on a Phase III study initiated after gathering sufficient data




3rd 2020 Unknown NA Assume approval on a Phase III study initiated after gathering sufficient data





Exhibit 86: Roche – Summary of enabling studies for atezolizumab in melanoma

Regimen Line of

treatment

Year of

approval (JEFe)

Enabling

study

Study

stage



2nd NA NA NA NA

3rd NA NA NA NA


from Phase I study (NCT01656642) of atezolizumab/ vemurafenib combo in

untreated pts with BRAF V600 mutation.








Healthcare


August 27, 2015



Exhibit 87: AstraZeneca – Summary of enabling studies for durvalumab in melanoma

Regimen Line of

treatment

Year of

approval (JEFe)

Enabling

study

Study

stage



2nd NA NA NA NA

3rd NA NA NA NA


from Phase I/II study (NCT02027961) of durvalumab in combination with

dabrafenib/ trametinib or trametinib alone in BRAF V600 mutation positive or

wild type BRAF pts.




wild type BRAF pts.




wild type BRAF pts.


Company-specific estimates

Based on our estimates, we estimate Bristol-Myers’ Opdivo could reach c$1.2bn in peak

de-risked sales in the melanoma indication, Merck & Co.’s Keytruda could reach c$600m,

Roche’s atezolizumab could reach c$350m, and AstraZeneca’s durvalumab could reach

c$150m. Our market share allocations are based on timing of market entry, combinations

under development, and the currently available data for these drugs. We have not

included any revenue estimates for Pfizer in this indication.

Exhibit 88: Bristol-Myers – Melanoma revenue estimates for Opdivo ($m,




2nd 40% $0

3rd 40% $0


2nd 60% $350

3rd 60% $50

Total $1,150


Exhibit 89: Merck & Co. – Melanoma revenue estimates for Keytruda ($m,




2nd 55% $0

3rd 55% $0


2nd 5% $50

3rd 5% $0

Total $600


Healthcare


August 27, 2015



Exhibit 90: Roche – Melanoma revenue estimates for atezolizumab ($m,




2nd 3% $0

3rd 3% $0


2nd 25% $150

3rd 25% $0

Total $350


Exhibit 91: AstraZeneca – Melanoma revenue estimates for durvalumab ($m,




2nd 3% $0

3rd 3% $0


2nd 10% $50

3rd 10% $0

Total $150


Exhibit 92: Melanoma - De-risked anti-PD-1/ L1 drug sales

by year ($m)


Exhibit 93: Melanoma - Risk-adjusted anti-PD-1/ L1 drug

sales by year ($m)


$0

$250

$500

$750

$1,000

$1,250

$1,500

$1,750

$2,000

$2,250

$2,500

De-r

iske

d S

ale

s ($

m)

Keytruda Opdivo atezolizumab Durvalumab

$0

$250

$500

$750

$1,000

$1,250

$1,500

$1,750

$2,000

$2,250

$2,500

Ris

k-A

dju

sted

Sale

s ($

m)

Keytruda Opdivo atezolizumab Durvalumab

Healthcare


August 27, 2015



Other Tumour Indications This section includes an overview of available PD-1/ L1 inhibitor data and development

progress for 20 key cancer indications (Exhibit 97) beyond metastatic melanoma,

metastatic NSCLC, and metastatic RCC. One or more of the top five PD-1/ L1 players have

ongoing studies in each of these indications, which collectively comprise approximately

half of the c$51bn peak de-risked sales potential for the anti-PD-1/ L1 class, based on our

model.

Head and neck cancer

AstraZeneca and Merck & Co. have both shown solid data for their PD-1/ L1s in this

indication, although Bristol-Myers has an ongoing Phase III study for Opdivo

monotherapy in this indication (CheckMate-141). It is not possible yet to determine which

PD-1/ L1 inhibitor is better in this indication, but we note that AstraZeneca is in a unique

position of having ongoing pivotal studies for durvalumab as both monotherapy and in

combination (with tremelimumab), which could give the company a competitive edge in

the long run.

At 2014 ESMO, updated Phase I monotherapy data for AstraZeneca’s durvalumab showed

an overall ORR of 11% in head and neck cancer patients, which is numerically lower than

the 25% ORR for Keytruda (n=117) presented at ASCO 2015. Both drugs have exhibited

benign tolerability profiles with limited Grade 3+ adverse events. Given the limited sample

sizes and different eligibility and screening criteria, it is not possible yet to say which drug

is better at this point.

Exhibit 94: Summary of key Phase I data for head and neck cancer

Keytruda Durvalumab

Dose 200mg Q3W 10mg/kg Q2W

Arm Overall HPV+ HPV- Overall PD-L1+ PD-L1- HPV+

Size 117 34 81 61 17 33 23

ORR 24.8% 20.6% 27.2% 11.3% 23.5% 3.0% 4.3%

Drug related grade

≥3 AE rate

9.8% na na 6.6% na na na

Source: 2014 ESMO and 2015 ASCO presentations, Jefferies LLC

Bladder cancer

The leading players in this indication are currently Roche and Merck & Co. It is difficult to

assess which product is superior based on available OS and safety data, but the

atezolizumab data in PD-L1 positive patients is impressive, in our view.

Exhibit 95: Summary of key Phase I data for bladder cancer

Keytruda* atezolizumab

Dose 10mg/kg Q2W 15mg/kg or 1200mg Q3W

Arm Overall Overall PD-L1+ (IC 2/3) ** PD-L1- (IC 0/1)

Number of patients 29 87 48 44

ORR 28% 34% 50% 17%

mPFS (months) 2 na 6 1

mOS (months) 12.7 na NR 8

Drug related grade

3-4 AE rate

15% 8% na na

*Keytruda study population are PD-L1 positive patients (≥1% expression); ** IC0 = <1% of IC PD-L1+, IC1= ≥1% but <5%, IC2 = ≥5%, IC3 =

≥10%


Healthcare


August 27, 2015



Colorectal cancer

At ESMO 2014, Roche presented early Phase I data for atezolizumab in combination with

Avastin with or without FOLFOX in colorectal cancer (CRC). A combination with Avastin

only demonstrated an 8% ORR in CRC (n=13), which we see as disappointing, but in line

with our low expectations for anti-cancer drug candidates in CRC in general.

Atezolizumab treatment resulted in 44% and 36% ORRs in the 1st line (n=18) and overall

CRC (n=25) populations, respectively, when combined with Avastin and FOLFOX.

However, the impact of atezolizumab is unclear as Avastin plus IFL (irinotecan/ 5-FU/

leucovorin) and IFL alone have demonstrated ORRs of 45% and 35%, respectively, in this

indication, according to the Avastin label.

Exhibit 96: Summary of key Phase I data for colorectal cancer

Atezolizumab/ Avastin Atezolizumab/ Avastin/ FOLFOX

Line of CRC therapy All lines All lines 1st line

Number of patients 13 25 18

ORR 8% 36% 44%

Drug related grade

3-4 AE rate

49% across multiple tumour types (but

only 3% attributed to atezo)

67% (but only 17% attributed to atezo) na

Source: 2014 ESMO, Jefferies LLC

Roche has initiated a Phase II biomarker-driven study evaluating atezolizumab in

combination with Avastin and chemotherapy vs. chemotherapy or biologic regimens in

1st-line CRC in the maintenance setting with estimated primary study completion in

December 2020.

In addition to Roche, a leading cancer expert that we spoke with mentioned that one of

the exciting developments he saw at ASCO 2015 was the Keytruda data in colorectal

(CRC) or non-CRC cancer patients with or without mismatch repair (MMR) deficiency,

where the tumours are highly mutated and are rich in CD8+ T cells and PD-L1 expression.

In this analysis, it was found that mismatch repair deficient CRC and non-CRC tumours

treated with Keytruda showed ORRs of 62% (n=13) and 60% (n=60%), respectively, while

the mismatch repair proficient CRC cohort (n=25) showed no ORR.

Hepatocellular carcinoma

At ASCO 2015, early Opdivo data showed an ORR of 19% (n=42) and 12-month overall

survival rate of 62%, suggesting the mOS could be much higher than 12 months in

patients who have received at least 1 systemic therapy for HCC. In contrast, the current

standard of care for advanced HCC, sorafenib, has only demonstrated mOS ranging from

6.5m-10.7m.

Triple negative breast cancer

At the 2014 San Antonio Breast Cancer Symposium, Roche and Merck & Co. presented

early data for atezolizumab and Keytruda, respectively, in this indication.

Keytruda: data in 27 PD-L1 positive patients showed an overall response rate of

18.5% and the median duration of response had not been reached at the time of

analysis, with 3 of 5 responders in therapy for 11 months or more.

Atezolizumab: In 9 evaluable patients, ORRs were 17% and 67% in IHC3 and

IHC2, or overall ORR of 33% in these high PD-L1 expressing patients.

Healthcare


August 27, 2015



Gastric cancer

Merck & Co. presented robust early data for Keytruda at ESMO 2014. Keytruda showed

an Initial ORR of 31% in PD-L1 positive gastric cancer patients (n=39), 67% of which had

received at least two prior lines of therapy. Whilst Keytruda monotherapy was generally

well-tolerated, there was one treatment related death from hypoxia and another

incidence of grade 4 pneumonitis. Merck & Co. plans to initiate a Phase II study in

advanced gastric cancer in 2015.

Ovarian cancer

Pfizer and Merck & Co. have released early data for their anti-PD-1/ L1s in this indication.

Given Pfizer’s robust early data for avelumab in ovarian cancer, we think the company

will likely accelerate development in this indication, with the potential to initiate a

registrational study in 2015.

Pfizer’s avelumab showed an ORR of 11% in 75 ovarian patients in updated data

at ASCO 2015.

Merck & Co.’s Keytruda showed a similar ORR of 12% in 26 patients in PD-L1

positive ovarian patients (≥1% PD-L1 expression) at ASCO 2015.

Adjuvant NSCLC

While we have not seen any data in this indication, Roche and AstraZeneca have initiated

or announced plans to initiate pivotal studies in this indication. We see this as a

potentially lucrative indication for the PD-1/ L1 players and we are currently modelling

peak de-risked sales of c$4.2bn for anti-PD-1/ L1 products, with the majority going to

Roche and AstraZeneca at the moment. However, we expect this to be a much longer

term opportunity since the studies will take a significant duration of time to reach its

primary endpoint of disease-free survival.

Adjuvant melanoma looks like the next frontier

We do not expect significant readouts in melanoma for PD-1 inhibitors in the near term

and see this space as a two-horse race between Bristol-Myers and Merck & Co. Both

companies have also initiated pivotal studies in adjuvant melanoma, which could support

use across a broader spectrum of melanoma patients.

Bristol-Myers: Phase III CheckMate-238 study comparing Opdivo to Yervoy in

stage III b/c and stage IV patients with estimated primary completion of the

study around June 2019.

Merck & Co.: Phase III KEYNOTE-054 study comparing Keytruda to placebo in

high risk stage III patients with estimated primary completion of the study

around May 2018.

Hodgkin lymphoma

At ASH 2014, Bristol-Myers and Merck & Co. presented impressive Phase I data for Opdivo

and Keytruda, respectively.

Phase I data for Opdivo (n=23) showed an overall objective response rate (ORR)

of 87% and a complete response rate (CR) of 17%. 3 of the 4 CRs were in

Adcetris-naïve patients.

Phase I data (KEYNOTE-013, n=29) for Keytruda demonstrated an overall ORR of

66% and a CR of 21%. In the 20 transplant failure patients, the ORR was 75%

with a CR of 20%.

Both drugs showed favorable tolerability profiles and pneumonitis was not a

concern.

Healthcare


August 27, 2015



While the early response rate data favour Opdivo, we note that the patient populations

were different (e.g., 78% Adcetris failures in the Opdivo study vs. 100% for Keytruda;

unknown PD-L1 expression observed in the Opdivo study vs. 100% for Keytruda). In line

with the Keytruda data presenter, we do not see any major differences in the data

between Opdivo and Keytruda in this setting.

Non-Hodgkin lymphoma

Phase I Opdivo monotherapy data presented at 2014 ASH demonstrated ORRs of 36%

and 40% in diffuse large B-cell lymphoma and follicular lymphoma, respectively. Single

arm Phase II studies for Opdivo monotherapy in these two cancer indications are ongoing

with study completions in February and August 2016.

Multiple myeloma

Opdivo monotherapy showed no ORR in 27 multiple myeloma (MM) patients, although a

67% stable disease rate was observed. These data suggest that a combination strategy

may be the most viable path forward for PD-1/ L1 inhibitors in MM.


Important updates to the “Other tumour indications” section of our anti-PD-1/ L1 model:

Addition of five new cancer indications to our model (i.e., adjuvant bladder,

ovarian cancer, small cell lung cancer, Merkel cell carcinoma, and adjuvant

NSCLC), which brings the total number of explicit cancer indications included in

our model to 24,

Breakout of Pfizer’s avelumab from the “Other” anti-PD-1/ L1 players given the

company’s commitment to accelerating development of this PD-L1 inhibitor and

participating in the initial wave of single agent PD-1/ L1 approvals in key

indications, and

Reallocation of market shares by indication between the five key players (i.e.,

Bristol-Myers, Merck & Co., Roche, AstraZeneca, Pfizer) based on initiation of

new studies and recent data presentations.

Healthcare


August 27, 2015



Following our update, we estimate that the total “Other tumour indications” could add

c$25.8bn in peak de-risked sales to anti-PD1/L1 drugs. We estimate Opdivo will take a

c$5.6bn share, Keytruda a c$5.9bn share, atezolizumab a c$6.2bn share, durvalumab a

c$6.0bn share, and avelumab a c$2.0bn share.

Exhibit 97: Estimated sales for “other” cancer indications by anti-PD-1/ L1 drug, ($m, rounded to nearest $50m)

($ in millions, rounded) Opdivo Keytruda atezolizumab durvalumab avelumab other Total

Head and neck cancer $800 $800 $150 $1,300 $150 $0 $3,200

Colorectal cancer $350 $350 $350 $50 $50 $0 $1,150

Hepatocellular carcinoma $1,000 $300 $300 $300 $100 $0 $2,000

TNBC $50 $250 $350 $50 $50 $0 $750

Cervical $50 $100 $50 $50 $50 $0 $300

Follicular lymphoma $200 $50 $150 $150 $50 $0 $600

DLBCL $500 $50 $500 $300 $50 $0 $1,400

Chronic myeloid leukemia $250 $50 $150 $150 $50 $50 $700

Glioblastoma $100 $50 $50 $50 $0 $0 $250

Hodgkin's lymphoma $350 $250 $50 $50 $50 $0 $750

Multiple myeloma $200 $450 $350 $200 $50 $0 $1,250

Adjuvant melanoma $300 $300 $50 $50 $50 $0 $750

Urothelial bladder cancer $250 $400 $800 $100 $100 $0 $1,650

Myelodysplastic syndrome $150 $150 $400 $600 $50 $0 $1,350

Gastric cancer $250 $1,350 $250 $650 $150 $0 $2,650

Adjuvant bladder $0 $100 $250 $0 $0 $0 $350

Ovarian $150 $350 $150 $150 $650 $0 $1,450

Small Cell lung cancer $450 $300 $100 $100 $50 $0 $1,000

Merkel cell carcinoma $0 $0 $0 $0 $50 $0 $50

Adjuvant NSCLC $200 $200 $1,700 $1,700 $200 $200 $4,200

Total $5,600 $5,850 $6,150 $6,000 $1,950 $250 $25,800

Source: Globocan 2012, company data, clinicaltrials.gov, Jefferies estimates

Exhibit 98: Bristol-Myers Opdivo peak sales estimates for other indications


$0

$200

$400

$600

$800

$1,000

$1,200

Op

div

op

Peak

an

nu

al sa

les

est

imate

($

m)

Total = $5,600m

Healthcare


August 27, 2015



Exhibit 99: Merck & Co. Keytruda peak sales estimates for other indications


Exhibit 100: Roche atezolizumab peak sales estimates for other indications


$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Keytr

ud

a p

eak

an

nu

al sa

les

est

imate

($

m)

Total = $5,850m

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

Ate

zolizu

mab

peak

an

nu

al sa

les

est

imate

($

m)

Total = $6,150m

Healthcare


August 27, 2015



Exhibit 101: AstraZeneca durvalumab peak sales estimates for other

indications


Exhibit 102: Pfizer avelumab peak sales estimates for other indications


$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

Du

rvalu

mab

peak

an

nu

al sa

les

est

imate

($

m)

Total = $6,000m

$0

$100

$200

$300

$400

$500

$600

$700

Avelu

mab

peak

an

nu

al

sale

s est

imate

($

m)

Total = $1,950m

Healthcare


August 27, 2015



APPENDIX: Company Models

Exhibit 103: AstraZeneca annual income statement, 2014A-2020E

($) millions 2014A 2015E 2016E 2017E 2018E 2019E 2020E Incr. abs.

'14A-'20E

CAGR

'14A-'20E

Net sales 26,095 23,500 21,844 21,535 23,799 26,920 30,344 4,249 3%

Externalisation revenue 456 880 800 800 800 800 800 344

Total Revenue 26,551 24,380 22,644 22,335 24,599 27,720 31,144 4,593

COGS 4,888 3,944 3,531 3,540 3,898 4,449 5,039 151

Gross profit 21,663 20,436 19,112 18,795 20,701 23,272 26,105 4,442

Distribution (324) (317) (292) (289) (294) (309) (322) 2

R&D (4,941) (5,255) (5,153) (5,256) (5,361) (5,469) (5,578) -637

SG&A (10,216) (9,267) (7,331) (6,818) (7,636) (8,171) (8,579) 1,637

Other income 755 1,293 840 857 874 524 535 -220

Operating profit 6,937 6,890 7,176 7,289 8,283 9,848 12,161 5,224 10%

Net Finance Expense (493) (492) (552) (606) (621) (616) (602) -109

Joint Ventures (6) (17) (20) (20) (20) (20) (20) -14

Profit before Tax 6,438 6,381 6,603 6,663 7,643 9,212 11,540 5,102 10%

Taxation (1,040) (1,031) (1,222) (1,233) (1,414) (1,704) (2,135) -1095

Tax rate 16.2% 16.2% 18.5% 18.5% 18.5% 18.5% 18.5% +235bps

Profit after Tax 5,398 5,350 5,382 5,430 6,229 7,508 9,405 4,007 10%

Non-controlling interest (2) (21) (40) (40) (40) (40) (40) -38

Net Profit 5,395 5,329 5,342 5,390 6,189 7,468 9,365 3,970

CORE EPS $4.28 $4.22 $4.23 $4.26 $4.90 $5.91 $7.41 3.13 10%

Weighted avg. shares 1,262 1,264 1,264 1,264 1,264 1,264 1,264 2

Dividend per share 2.80 2.80 2.80 2.80 3.00 3.51 4.03 1.23 6%

Margin Analysis 2014A 2015E 2016E 2017E 2018E 2019E 2020E

COGS 18.7% 16.8% 16.2% 16.4% 16.4% 16.5% 16.6% -213bps

Gross margin 83.0% 83.2% 83.8% 83.6% 83.6% 83.5% 83.4% +38bps

R&D 18.9% 22.4% 23.6% 24.4% 22.5% 20.3% 18.4% -55bps

SG&A 39.1% 39.4% 33.6% 31.7% 32.1% 30.4% 28.3% -1088bps

Operating margin 26.6% 29.3% 32.9% 33.8% 34.8% 36.6% 40.1% +1350bps

Pretax margin 24.7% 27.2% 30.2% 30.9% 32.1% 34.2% 38.0% +1336bps

Net margin 20.7% 22.8% 24.6% 25.2% 26.2% 27.9% 31.0% +1031bps

Dividend payout ratio 65.4% 66.3% 66.3% 65.7% 61.2% 59.3% 54.4% -1103bps

% YoY Change 2014A 2015E 2016E 2017E 2018E 2019E 2020E

Net sales 1% -10% -7% -1% 11% 13% 13%

Gross profit 2% -6% -6% -2% 10% 12% 12%

Distribution 6% -2% -8% -1% 2% 5% 4%

R&D 16% 6% -2% 2% 2% 2% 2%

SG&A 15% -9% -21% -7% 12% 7% 5%

Other income 13% 71% -35% 2% 2% -40% 2%

Operating profit -17% -1% 4% 2% 14% 19% 23%

Profit before Tax -19% -1% 3% 1% 15% 21% 25%

Profit after Tax -15% -1% 1% 1% 15% 21% 25%

CORE EPS -15% -1% 0% 1% 15% 21% 25%

Weighted avg. shares 1% 0% 0% 0% 0% 0% 0%


Healthcare


August 27, 2015



Exhibit 104: Bristol-Myers annual income statement, 2014A-2020E (US$m)

(US$) millions 2014A 2015E 2016E 2017E 2018E 2019E 2020E Incr. abs.

'14A-'20E

CAGR

'14A-'20E

Net sales 15,873 15,955 16,226 17,860 18,693 21,205 22,375 6,502 6%

COGS 3,781 3,841 3,932 4,439 4,849 5,424 5,730 1,949

Gross profit 12,092 12,114 12,294 13,421 13,844 15,780 16,645 4,553 5%

MS&A 3,983 3,655 3,349 3,209 2,952 3,159 3,254 (729)

A&P 734 753 851 846 809 849 875 141

R&D 3,913 4,077 4,162 4,245 4,288 4,331 4,417 504

Operating income 3,462 3,630 3,933 5,121 5,795 7,441 8,099 4,637 15%

EBITDA 3,778 4,164 4,479 5,685 6,379 8,049 8,735 4,957 15%

Equity in (income) from affiliates (107) (92) (60) (40) (20) - - 107

Other (income)/expense, net (309) (314) (442) (446) (646) (552) (676) (367)

Pretax income 3,878 4,036 4,434 5,608 6,461 7,993 8,775 4,897 15%

Taxes 775 776 842 1,065 1,228 1,519 1,667 892

Tax rate 20.0% 19.2% 19.0% 19.0% 19.0% 19.0% 19.0% -0 bps

Minority interest expense 26 33 0 0 0 0 0 (26)

Net income 3,077 3,228 3,592 4,542 5,233 6,474 7,107 4,030 15%

Diluted EPS $1.85 $1.93 $2.16 $2.75 $3.19 $3.98 $4.40 16%

Wt. avg. dil. shares outstanding 1,667 1,676 1,666 1,652 1,639 1,626 1,614

Shares repurchased 0 4 14 13 13 12 12

Dividends per share $1.44 $1.48 $1.53 $1.57 $1.81 $2.44 $2.61 10%


Gross margins 76.2% 75.9% 75.8% 75.1% 74.1% 74.4% 74.4% -179 bps

MS&A 25.1% 22.9% 20.6% 18.0% 15.8% 14.9% 14.5% -1,055 bps

A&P 4.6% 4.7% 5.2% 4.7% 4.3% 4.0% 3.9% -71 bps

R&D 24.7% 25.6% 25.7% 23.8% 22.9% 20.4% 19.7% -491 bps

Operating margin 21.8% 22.8% 24.2% 28.7% 31.0% 35.1% 36.2% +1,439 bps

EBITDA margin 23.8% 26.1% 27.6% 31.8% 34.1% 38.0% 39.0% +1,524 bps

Pretax margin 24.4% 25.3% 27.3% 31.4% 34.6% 37.7% 39.2% +1,478 bps

Net margin 19.4% 20.2% 22.1% 25.4% 28.0% 30.5% 31.8% +1,238 bps

Dividend payout ratio 77.9% 76.9% 70.3% 56.8% 54.8% 57.4% 58.4% -1,953 bps

YOY % Change 2014A 2015E 2016E 2017E 2018E 2019E 2020E

Net sales -3% 1% 2% 10% 5% 13% 6%

Gross profit 0% 0% 1% 9% 3% 14% 5%

Marketing, selling & admin -2% -8% -8% -4% -8% 7% 3%

Advert. & Product promotion -14% 3% 13% -1% -4% 5% 3%

R&D 5% 4% 2% 2% 1% 1% 2%

Operating income 0% 5% 8% 30% 13% 28% 9%

EBITDA -3% 10% 8% 27% 12% 26% 9%

Pretax income 8% 4% 10% 26% 15% 24% 10%

Net income 2% 5% 11% 26% 15% 24% 10%

Diluted EPS 2% 4% 12% 28% 16% 25% 11%

Wt. avg. dil. shares outstanding 0% 1% -1% -1% -1% -1% -1%


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August 27, 2015



Exhibit 105: Merck & Co. annual income statement, 2014A-2020E (US$ millions)

($) millions 2014A 2015E 2016E 2017E 2018E 2019E 2020E Incr. abs.

'14A-'20E

CAGR

'14A-'20E

Net sales 42,237 40,255 40,993 40,432 42,617 44,532 47,213 4,976 2%

COGS 11,032 9,999 10,091 10,240 10,570 10,742 11,125 93

Gross profit 31,205 30,257 30,902 30,192 32,047 33,789 36,088 4,883 2%

SG&A 10,979 10,043 10,041 9,740 10,032 10,333 10,643 (336)

R&D 6,532 6,602 6,606 6,672 6,806 6,806 6,942 410

Operating income 13,694 13,612 14,255 13,780 15,209 16,651 18,503 4,809 5%

EBITDA 15,102 15,712 16,355 15,880 17,309 18,751 20,603 5,501

Equity (income) from affiliates (256) (161) (24) (23) (21) (20) (19) 237

Other (income)/expense, net 361 678 611 635 634 623 618 257

Pretax income 13,589 13,094 13,668 13,167 14,597 16,048 17,904 4,315 5%

Taxes 3,305 2,984 3,007 2,897 3,211 3,531 3,939

Tax rate 24% 23% 22% 22% 22% 22% 22% (232)bps

Net income 10,215 10,102 10,641 10,251 11,366 12,497 13,945 3,730 5%

Non controlling interest 69 8 20 20 20 20 20

Diluted EPS 3.49 3.55 3.82 3.78 4.29 4.84 5.55 8%

wt. avg dil. shares outstanding 2,928 2,848 2,786 2,712 2,650 2,584 2,515

Dividend per share 1.77 1.81 1.90 2.05 2.18 2.51 2.85 8%


COGS 26.2% 24.8% 24.6% 25.3% 24.8% 24.1% 23.6% (269)bps

Gross margin 73.9% 75.2% 75.4% 74.7% 75.2% 75.9% 76.4% 256bps

SG&A 26.0% 24.9% 24.5% 24.1% 23.5% 23.2% 22.5% (345)bps

R&D 15.5% 16.4% 16.1% 16.5% 16.0% 15.3% 14.7% (76)bps

Operating margin 32.4% 33.8% 34.8% 34.1% 35.7% 37.4% 39.2% 677bps

EBITDA margin 35.8% 39.0% 39.9% 39.3% 40.6% 42.1% 43.6% 788bps

Pretax margin 32.2% 32.5% 33.3% 32.6% 34.3% 36.0% 37.9% 575bps

Net margin 24.2% 25.1% 26.0% 25.4% 26.7% 28.1% 29.5% 535bps

Dividend payout ratio 50.6% 51.2% 49.7% 54.4% 50.8% 51.8% 51.3%

% YOY Change 2014A 2015E 2016E 2017E 2018E 2019E 2020E

Net sales -4% -5% 2% -1% 5% 4% 6%

Gross profit -5% -3% 2% -2% 6% 5% 7%

Operating income -1% -1% 5% -3% 10% 9% 11%

EBITDA -1% 4% 4% -3% 9% 8% 10%

Pretax income 1% -4% 4% -4% 11% 10% 12%

Net income -2% -1% 5% -4% 11% 10% 12%

Diluted EPS 0% 2% 8% -1% 13% 13% 15%

wt. average diluted shares -2% -3% -2% -3% -2% -2% -3%


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August 27, 2015



Roche annual income statement, 2014A-2020E

(CHF) millions 2014A 2015E 2016E 2017E 2018E 2019E 2020E Incr. abs.

'14A-'20E

CAGR

'14A-'20E

Sales 47,462 47,852 50,619 53,360 56,186 59,756 63,307 15,845 5%

Pharmaceuticals Sales 36,696 37,032 39,170 41,324 43,628 46,671 49,747 13,051 5%

Diagnostics Sales 10,766 10,820 11,450 12,036 12,558 13,085 13,560 2,794 4%

Royalties and Other Operating Income 2,404 2,292 2,466 2,635 2,143 2,149 2,255 -149 -1%

Total Revenues 49,866 50,144 53,086 55,995 58,329 61,905 65,562 15,696 5%

CORE Cost of Goods Sold 12,341 12,772 13,420 14,070 14,690 15,474 16,239 3,898 5%

Gross Profit 37,525 37,372 39,666 41,926 43,639 46,431 49,323 11,798 5%

CORE Marketing & Distribution 8,436 8,667 9,096 9,475 9,945 10,445 10,978 2,542 4%

CORE Research & Development 8,913 9,037 9,278 9,526 9,796 10,092 10,416 1,503 3%

CORE General & Administration 2,079 1,810 1,896 1,988 2,089 2,199 2,318 239 2%

Corporate General & Administration 461 401 420 441 463 488 514 53 2%

CORE Group Operating Income 17,636 17,481 18,976 20,495 21,346 23,209 25,097 7,461 6%

Associates - - - - - - - 0

Financial Income 246 (22) 101 127 145 168 211 -35 -3%

Financial Costs 1,362 1,094 972 815 635 455 410 -952 -18%

EBITDA 19,553 19,434 20,907 22,585 23,592 25,612 27,658 8,105 6%

Profit Before Tax 16,520 16,370 18,105 19,807 20,856 22,923 24,899 8,379 7%

Tax 3,987 4,231 4,526 4,952 5,214 5,731 6,225 2,238 8%

Tax Rate 24.1% 25.8% 25.0% 25.0% 25.0% 25.0% 25.0% 0bps

Net Income 12,533 12,139 13,578 14,855 15,642 17,192 18,674 6,141 7%

Non controlling interests / Minorities 204 222 231 241 250 260 271 67 5%

Net Attributable Profits 12,329 11,928 13,347 14,615 15,392 16,932 18,404 6,075 7%

CORE EPS (diluted) 14.29 13.84 15.49 16.96 17.86 19.65 21.36 7.07 7%

Dividend per Share 8.00 8.31 8.83 9.33 9.82 10.81 11.75 3.75 7%

Weighted Ave No of shares (m) 863 862 862 862 862 862 862 -1

Year end No of shares, diluted (m) 863 862 862 862 862 862 862


COGS margin 26.0% 26.7% 26.5% 26.4% 26.1% 25.9% 25.7% -35bps

Gross margin 79.1% 78.1% 78.4% 78.6% 77.7% 77.7% 77.9% -115bps

M&S margin 17.8% 18.1% 18.0% 17.8% 17.7% 17.5% 17.3% -43bps

R&D margin 18.8% 18.9% 18.3% 17.9% 17.4% 16.9% 16.5% -233bps

G&A margin 4.4% 3.8% 3.7% 3.7% 3.7% 3.7% 3.7% -72bps

CORE Operating Profit margin 37.2% 36.5% 37.5% 38.4% 38.0% 38.8% 39.6% 249bps

EBITDA margin 41.2% 40.6% 41.3% 42.3% 42.0% 42.9% 43.7% 249bps

PBT Margin 34.8% 34.2% 35.8% 37.1% 37.1% 38.4% 39.3% 452bps

Net Income Margin 26.4% 25.4% 26.8% 27.8% 27.8% 28.8% 29.5% 309bps

Payout Ratio 56% 60% 57% 55% 55% 55% 55%

Growth Metrics 2014A 2015E 2016E 2017E 2018E 2019E 2020E

Reported sales growth 1% 1% 6% 5% 5% 6% 6%

COGS growth 4% 3% 5% 5% 4% 5% 5%

Gross Profit growth 2% 0% 6% 6% 4% 6% 6%

M&S growth 2% 3% 5% 4% 5% 5% 5%

R&D growth 2% 1% 3% 3% 3% 3% 3%

G&A growth 35% -13% 5% 5% 5% 5% 5%

Group Operating Profit growth -1% -1% 9% 8% 4% 9% 8%

EBITDA growth -1% -1% 8% 8% 4% 9% 8%

Net Income growth 0% -3% 12% 9% 5% 10% 9%

CORE EPS growth 0% -3% 12% 9% 5% 10% 9%


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August 27, 2015



Exhibit 106: Annual income statement for Pfizer, 2014A-2020E (US$)

($) millions except EPS 2014A 2015E 2016E 2017E 2018E 2019E 2020E Incr. abs.

'14A-'20E

CAGR

'14A-'20E

Pharmaceuticals 45,706 42,672 49,394 52,831 56,108 55,267 56,718 11,012 3.7%

Other Non-Pharma 3,699 3,841 4,026 4,254 4,457 4,669 4,892 1,193 4.8%

Net sales 49,405 46,513 53,420 57,086 60,565 59,936 61,609 12,205 3.7%

COGS 9,134 8,468 11,439 11,844 12,474 12,532 12,958 3,824

Gross profit 40,271 38,046 41,981 45,242 48,091 47,404 48,652 8,381

SI&A 13,721 13,551 14,091 14,388 14,448 14,723 14,993 1,272

R&D 7,153 7,522 8,066 8,260 8,360 8,550 8,725 1,572

Operating income 19,397 16,973 19,823 22,594 25,284 24,131 24,933 5,537 4.3%

EBITDA 21,049 18,419 21,259 24,030 26,710 25,545 26,338 5,289 3.8%

Adj. non op. (inc.)/exp. (414) (373) 531 861 820 757 697 1,111

Pretax income 19,811 17,346 19,292 21,733 24,464 23,374 24,236 4,426 3.4%

Taxes 5,250 4,358 4,847 5,433 5,871 5,376 5,574 324

Tax rate 26.5% 25.1% 25.1% 25.0% 24.0% 23.0% 23.0% -350bps

Minority interest and d/c

ops

32 35 40 40 40 40 40 8

Net income 14,529 12,953 14,405 16,260 18,553 17,958 18,622 4,093 4.2%

DILUTED EPS $2.26 $2.07 $2.33 $2.69 $3.12 $3.05 $3.20 6.0%

Diluted shares outstanding 6,432 6,262 6,175 6,053 5,956 5,883 5,824

Dividends per share $1.04 $1.12 $1.20 $1.28 $1.36 $1.44 $1.52 6.5%


COGS 18% 18% 21% 21% 21% 21% 21%

Gross margin 82% 82% 79% 79% 79% 79% 79% -254bps

SI&A 28% 29% 26% 25% 24% 25% 24% -344bps

R&D 14% 16% 15% 14% 14% 14% 14% -32bps

Operating margin 39% 36% 37% 40% 42% 40% 40% +121bps

EBITDA margin 43% 40% 40% 42% 44% 43% 43% +14bps

Pretax margin 40% 37% 36% 38% 40% 39% 39% -76bps

Net margin 29% 28% 27% 28% 31% 30% 30% +82bps

Dividend Payout ratio 45% 54% 51% 47% 43% 46% 47%

YOY % Change 2014A 2015E 2016E 2017E 2018E 2019E 2020E

Net sales -4% -6% 15% 7% 6% -1% 3%

COGS -1% -7% 35% 4% 5% 0% 3%

Gross profit -5% -6% 10% 8% 6% -1% 3%

SI&A -3% -1% 4% 2% 0% 2% 2%

R&D 9% 5% 7% 2% 1% 2% 2%

Operating income -10% -12% 17% 14% 12% -5% 3%

EBITDA -10% -12% 15% 13% 11% -4% 3%

Pretax income -6% -12% 11% 13% 13% -4% 4%

Net income -5% -11% 11% 13% 14% -3% 4%

Diluted EPS 2% -8% 13% 15% 16% -2% 5%

Diluted shares outstanding -2% -3% -2% -2% -1% -1% -1%


Healthcare


August 27, 2015



Company DescriptionAstraZeneca was formed in April 1999 when the UK-based Zeneca merged with Sweden's Astra AB, creating a company with 2011 revenuesof $33.6bn. AstraZeneca is an almost pure play Pharma/Biologics/Vaccines company, with only minor interests in other healthcare areas suchas patient care (Aptium), which accounts for less than 1% of group sales. AstraZeneca also has a significant joint venture with Merck & Co.from which the latter receives substantial royalties on a number of significant products including Prilosec and Nexium.

Bristol-Myers Squibb Company was incorporated under the laws of the state of Delaware in August 1933 under the name of Bristol-MyersCompany. In 1989, Bristol-Myers Company changed its name as a result of a merger. The company is engaged in the discovery, development,licensing, manufacturing, marketing, distribution and sale of pharmaceutical products.

Merck is a global research-driven company that discovers, manufactures, and markets a broad range of innovative products to improve humanand animal health. The company merged with Schering-Plough & Co. in 2009.

Pfizer Inc. is a research-based, global pharmaceutical company that was incorporated in Delaware in 1942 and discovers, develops,manufactures and markets leading prescription medicines. In 2009 the company acquired Wyeth.

Roche is a global healthcare company. The Group operates through two divisions: Pharmaceuticals and Diagnostics. The Pharmaceuticalsdivision develops prescription drugs through its discovery operations at Roche, Genentech in the US and Chugai in Japan. Its diagnosticsegment provides products and services in all fields of medical testing, and is the global leader. Roche has a controlling interest and fullyconsolidated sales from Chugai in which it has a 61.5% stake.

Analyst Certification:I, Jeffrey Holford, PhD, ACA, certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurity(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specificrecommendations or views expressed in this research report.I, David Gu, PhD, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Ian Hilliker, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.I, Sissi Qiong Hai, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) andsubject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendationsor views expressed in this research report.Registration of non-US analysts: Ian Hilliker is employed by Jefferies International Limited, a non-US affiliate of Jefferies LLC and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore maynot be subject to the NASD Rule 2711 and Incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearancesand trading securities held by a research analyst.

As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receivescompensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research asappropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majorityof reports are published at irregular intervals as appropriate in the analyst's judgement.Jefferies Group LLC is advising Bristol Myers Squibb on its business combination with Reckitt Benckiser Group Plc regarding Latin American licenses

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Explanation of Jefferies RatingsBuy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.Underperform - Describes securities that we expect to provide a total return (price appreciation plus yield) of minus 10% or less within a 12-monthperiod.The expected total return (price appreciation plus yield) for Buy rated securities with an average security price consistently below $10 is 20% or morewithin a 12-month period as these companies are typically more volatile than the overall stock market. For Hold rated securities with an averagesecurity price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. ForUnderperform rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is minus20% or less within a 12-month period.

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August 27, 2015



https://javatar.bluematrix.com/sellside/Disclosures.action

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NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/or Jefferies policies.CS - Coverage Suspended. Jefferies has suspended coverage of this company.NC - Not covered. Jefferies does not cover this company.Restricted - Describes issuers where, in conjunction with Jefferies engagement in certain transactions, company policy or applicable securitiesregulations prohibit certain types of communications, including investment recommendations.Monitor - Describes securities whose company fundamentals and financials are being monitored, and for which no financial projections or opinionson the investment merits of the company are provided.

Valuation MethodologyJefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected totalreturn over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of marketrisk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,and return on equity (ROE) over the next 12 months.

Jefferies Franchise PicksJefferies Franchise Picks include stock selections from among the best stock ideas from our equity analysts over a 12 month period. Stock selectionis based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/rewardratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the numbercan vary depending on analyst recommendations for inclusion. Stocks will be added as new opportunities arise and removed when the reason forinclusion changes, the stock has met its desired return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility inthe bottom quartile of S&P stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intendedto represent a recommended portfolio of stocks and is not sector based, but we may note where we believe a Pick falls within an investment stylesuch as growth or value.

Risks which may impede the achievement of our Price TargetThis report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, thefinancial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions basedupon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance ofthe financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, andincome from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financialand political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates mayadversely affect the price of, value of, or income derived from the financial instrument described in this report. In addition, investors in securities suchas ADRs, whose values are affected by the currency of the underlying security, effectively assume currency risk.

Other Companies Mentioned in This Report• AstraZeneca PLC (AZN LN: p3,922.50, BUY)• Bristol-Myers Squibb (BMY: $57.88, HOLD)• Eli Lilly & Co. (LLY: $78.26, BUY)• GlaxoSmithKline Plc (GSK LN: p1,274.50, HOLD)• Merck & Co. (MRK: $51.17, HOLD)• Novartis AG (NOVN VX: CHF90.65, BUY)• Pfizer, Inc. (PFE: $31.34, BUY)• Roche (ROG VX: CHF257.00, BUY)• Sanofi (SAN FP: €85.00, HOLD)

Distribution of RatingsIB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY 1108 52.99% 309 27.89%HOLD 838 40.08% 166 19.81%UNDERPERFORM 145 6.93% 15 10.34%

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August 27, 2015



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