Novartis’ Revenue Slides on Generic Competition

Blockbuster drug Gleevec faces generic competition on loss of U.S. exclusivity

Source: Wikipedia
Source: Wikipedia

Swiss pharma giant Novartis International AG (NYSE: NVS) announced its Q2 FY16 financial results on July 19th, 2016. Headquartered in Basel, Switzerland, Novartis researches, develops, manufactures, and markets a range of healthcare products worldwide. It operates through three segments: Innovative Medicines (formerly Pharmaceuticals), Alcon, and Sandoz.

The Innovative Medicines segment offers patented prescription medicines for oncology, neuroscience, retina, immunology and dermatology, respiratory, cardio-metabolic, established medicines, and cell and gene therapies.

The Alcon segment provides eye care products, including ophthalmic surgical equipment, instruments, disposable products, and intraocular lenses; medicines to treat chronic and acute diseases of the eye, and over-the-counter medicines for the eye; and contact lenses and lens care products.

The Sandoz segment offers generic prescription medicines that include active ingredients and finished dosage forms of pharmaceuticals for dermatology, respiratory and ophthalmic, cardiovascular, metabolism, pain, gastrointestinal, and hormonal therapies; active pharmaceutical ingredients and cytotoxic products for hospitals, as well as biotechnology manufacturing services for other companies.

The company has collaboration and licensing agreements with Intellia Therapeutics Inc. (NASDAQ: NTLA) for the discovery and development of new medicines using CRISPR genome editing technology; and with Caribou Biosciences Inc. for the development of drug discovery tools. Read more about Novartis’s financial results below.

Q2 FY16 financial highlights

Source: Company's Presentation
Source: Company’s Presentation

Novartis’s Q2 FY16 revenue declined 2% to $12.5 billion, unchanged in constant currencies from the year-ago quarter, but higher than forecasts of $12.2 billion. Revenue fell mainly because its blockbuster Gleevec faced generic competition in the U.S. and sales at Alcon declined during the reporting quarter. Growth products accounted for 35% of net sales, or $4.4 billion, a growth of 19% (in USD) over the prior-year quarter. As shown alongside, sales volume was offset by generics impact.

Like many of its peers, Novartis is facing generic competition and pricing pressure for key products in its Innovative Medicine segment. Novartis’s blockbuster drug, Diovan, lost exclusivity both in the U.S. and E.U. and entry of generics is impacting sales.

The Company’s Q2 FY16 operating income fell 8% to $2.1 billion and by 4% on a constant currency basis. Core adjustments amounted to $1.2 billion as compared to $1.3 billion in the prior-year quarter. Core operating income fell 7% to $3.3 billion and by 4% on a constant currency basis during the reporting quarter. Core operating income margin in constant currencies decreased 1.1%, mainly due to loss of exclusivity on Gleevec on February 1st, 2016, investments for new launches, and the Alcon growth plan. Currency had a negative impact of 0.5%, resulting in a net decrease of 1.6% in US dollar terms to 26.7% of net sales.

As a result of lower operating income and revenues in Q2 FY16, the drugmaker’s net income fell 3% to $1.8 billion. Core net income also fell 5% to $2.9 billion and 2% on a constant currency basis. However, EPS inched up 1% to $0.76 and by 2% on a constant currency basis, benefitting from a reduction in the number of shares outstanding. Core EPS fell 3% to $1.23 and fell 1% on a constant currency basis during the reporting quarter.

Segmental highlights

Innovative Medicines’ Q2 FY16 net sales fell 3% to $8.4 billion and 1% on a constant currency basis, with volume growth of 6%. Generic competition had a negative impact of 6% and pricing had a negative impact of 1% during the reporting quarter. Growth Products grew 23% on a constant currency basis to $3.8 billion, or 45% of division net sales.

Source: Company's Filings
Source: Company’s Filings

Sandoz’s Q2 FY16 net sales grew by 2% to $2.6 billion and 3% on a constant currency basis, as volume growth of 8% more than offset 5% of price erosion. Global sales of Biopharmaceuticals, which include biosimilars, biopharmaceutical contract manufacturing and Glatopa, grew 11% on a constant currency basis to $249 million.

Alcon net sales fell by 2% to $1.5 billion and 1% on a constant currency basis in Q2 FY16. Surgical sales fell 1% on a constant currency basis, as strong performance of cataract consumables was more than offset by weaker sales of intraocular lenses.

Other highlights

Source: Company's Presentation
Source: Company’s Presentation

Going forward, Novartis is depending on heart drug Entresto, multiple sclerosis treatment Gilenya, and psoriasis drug Cosentyx for future growth. Cosentyx brought in $260 million, beating estimates of $206 million. Novartis has projected Entresto sales to hit a peak of $5 billion a year. Hence, Novartis is investing an additional $200 million to double sales support for Entresto from the current 600. Novartis hopes that Entresto sales will pick up in Q3 FY16, since public health officials in Europe and the U.S. endorsed the use of Entresto in heart failure patients in May 2016.

Novartis is expecting cross-divisional synergies of $1 billion per year from manufacturing and development by 2020.

Source: Company's Presentation
Source: Company’s Presentation

Meanwhile, the Company’s ophthalmologic division, Alcon, is facing challenges due to falling surgical equipment sales as well as intense generic competition. In a bid to revamp its Alcon business, Novartis announced that its ophthalmic pharmaceuticals business will be moved to the pharmaceuticals division.

Novartis is looking to sell its $14 billion stake in Roche Holding AG (OTC: RHHBY), which was acquired when it envisioned a broader alliance with its Swiss rival.

Novartis loses biosimilar drug battle with Amgen

During the quarter under review, the FDA rejected one of Novartis’ biosimilar therapy, which is a copycat version of Amgen Inc.’s (NASDAQ: AMGN) white blood cell booster Neulasta for cancer patients. On the brighter side, advisers to the FDA backed last week Novartis’ biosimilar of Amgen’s Enbrel for approval. Enbrel is an anti-inflammatory drug for rheumatoid arthritis and one of the best-selling drugs in the world.

Focus on R&D in biosimilars

Source: Company's Filings
Source: Company’s Filings

During Q2 FY16, Novartis’s generic unit Sandoz is stepping up its R&D efforts in biosimilars to compensate for loss of revenue caused by the expiry of patents of blockbuster drugs and providing cost-effective treatments to patients. By the end of 2016, Sandoz plans to submit 11 biosimilar molecules for FDA approval.

Novartis already has a robust biosimilar drug pipeline, which includes five oncology molecules, immunology molecules undergoing Phase 3 clinical trials, and hematology drugs. By 2018, the drugmaker has plans to expand the biosimilar pipeline with six more molecules.

Biosimilars are expected to generate revenue in the range of about $25 billion to 35 billion by 2020 according to industry experts. In 2015, Sandoz’s biosimilar unit generated $772 million, while the unit’s total annual revenue came in at $9.2 billion, according to Novartis. Sandoz has plans to spend another $1 billion in the next 10 years to expand its R&D facilities in Austria.

Stock Performance

N7Novartis’s stock stood at $83.02, gaining 1.83%, at the close on Wednesday, July 20th, 2016, having vacillated between an intraday high of $83.19 and a low of $81.92 during the session. The stock’s trading volume was at 1,601,650 for the day. The Company’s market cap was at $218.32 billion as of Wednesday’s close.

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