Novartis’s Profits Dive as Generics Hurt Gleevac Sales

Worldwide revenue declined 1% to $12.1 billion during Q3 FY16

n1Swiss pharma giant Novartis International AG (NYSE: NVS) announced its Q3 FY16 financial results on October 25th, 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, disposable products, and intraocular lenses; 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. 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.

Q3 FY16 financial highlights

Novartis’s Q3 FY16 revenue declined 1% to $12.1 billion in both reported and constant currency (CC) terms, as volume growth of 5% points was more than offset by the negative impact of generic competition (4%) and pricing (2%). Growth Products contributed $4.3 billion, or 36% of net sales, up 20% Y-o-Y.

During the reporting quarter, operating income of $2.3 billion grew 2% on a reported basis and 1% on a CC basis. Core adjustments amounted to $1.1 billion versus $1.3 billion in the prior year’s quarter. However, core operating income of $3.4 billion fell 3% on a reported basis and CC basis. Core operating income margin in CC decreased 0.6%, mainly due to investments for new launches and the Alcon growth plan, partially offset by productivity improvements. Currency had a positive impact of 0.1%, resulting in a net decrease of 0.5% in US dollar terms to 27.9% of net sales.

In all, Novartis’s net income grew 7% to $1.9 billion in both reported and CC terms, mainly due to higher income from associated companies. EPS of $0.81 jumped 8% in both reported and CC terms due to a reduction in the number of shares outstanding. However, core net income of $2.9 billion fell 4% in both reported and CC terms, while core EPS of $1.23 fell 3% in both reported and CC terms due to a reduction in the number of shares outstanding. Core profits fell for the seventh straight quarter as generic competition eroded sales of blockbuster cancer treatment Gleevec.

During the reporting quarter, free cash flow fell 7% Y-o-Y to $2.6 billion due to higher net investments in intangible assets, mainly due to the Ofatumumab milestone payment, which more than offset an increase in cash flows from operating activities.

Segmental highlights

Innovative Medicines: This segment’s Q3 FY16 net sales fell 1% to $8.2 billion due to generic competition for Gleevec and pricing pressure. Growth products, Gilenya, Tasigna, Tafinlar+Mekinist, Jakavi and Promacta/Revolade, surged 21% to $3.8 billion, and comprised 46% of this segment’s sales during the reporting quarter.

Alcon: This segment’s Q3 FY16 net sales fell 1% to $1.4 billion. Surgical sales were down as strong performance of cataract consumables was more than offset by weak sales of intraocular lenses. Vision care sales were flat as contact lenses, which were driven by persistently strong performance of Dailies Total1, offset the decline in contact lens care.

Sandoz: This segment’s Q3 FY16 net sales fell 1% to $2.5 billion, as volume growth was offset by price erosion. Sales were also impacted by lower Y-o-Y launch activity in the U.S. Biopharmaceuticals sales surged 41% to $262 million during the reporting quarter.

FDA approvals

Novartis’ pipeline progress got a boost after the FDA approved the expanded use of the company’s arthritis drug, Ilaris, for the treatment of three distinct types of periodic fever syndromes – tumor necrosis factor-receptor associated periodic syndrome (TRAPS), hyperimmunoglobulin D syndrome/mevalonate kinase deficiency (HIDS/MKD) and familial Mediterranean fever (FMF). In August 2016, the Sandoz unit strengthened its biosimilars portfolio when it obtained FDA approval for Erelzi, the biosimilar version of Amgen Inc.’s (NASDAQ: AMGN) blockbuster drug Enbrel.

Other highlights

Restructuring and productivity initiatives: Novartis announced on October 5th, 2016 that it is undertaking a massive restructuring of its global operations, which includes closing down its research units in Switzerland and China, as well as slashing 175 jobs, in an effort to centralize control over its drug discovery programs and contain costs. This is in addition to the implementation of cost-cutting measures in May 2016 and a revamp of its pharmaceuticals division. During the reporting quarter, productivity initiatives generated gross savings of approximately $0.6 billion.

Novartis, which employs 120,000 people globally, will close down its biologics group in Shanghai, axing 18 positions, with plans to maintain much of these operations at its newly opened $1 billion 500-strong R&D facility in the same city. As part of its new research strategy, Novartis said it is creating 20 to 25 new positions at its Basel headquarters.

n2The company will move the Novartis Institute for Tropical Diseases (NITD) to California from Singapore in 2017 as part of the Company’s restructuring plans. The relocation of NITD will place it next to Novartis Institute for Biomedical Research (NIBR) facility focusing on infectious diseases. The NITD currently has nearly 90 employees.

Novartis to open two Centers of Excellence: Novartis has also announced that it will open two Centers of Excellence for biotherapeutic research in n3Basel, Switzerland, and Cambridge, Massachusetts, shutting down ESBATech, a biologics unit based in Schlieren, Switzerland, and trimming about 73 jobs. The initiative will lead to the creation of the Chemical Biology and Therapeutics (CBT) team from two of its existing drug discovery teams. Accordingly, the new team will focus on harnessing the power of chemical biology and other cutting edge technologies such as CRISPR, DNA-encoded libraries, and targeted protein degradation to discover new drug targets. CBT will also include teams focused on pathway biology and high throughput screening.

n4Cell and gene therapies unit to be shut down: On August 31st, 2016, Novartis announced that it would dissolve its standalone specialized cell and gene therapies development unit, and merge it with other parts of the company, leading to about 120 job cuts. However, the change would not affect the Company’s plan to apply for U.S. approval for a type of cell therapy called chimeric antigen replacement therapy or CAR-T, for children with an aggressive form of blood cancer, in early 2017. The therapy, known as CTL019, will be submitted for European approval in 2017.

Novartis targets breast cancer drug approval: On October 8th, 2016, Novartis stated that Ribociclib, its experimental breast cancer drug, in combination with older breast-cancer medicine letrozole, cut the risk of worsening or death by 44% over letrozole alone, in a study of more than 600 people. More than 50% of women taking both medicines saw their tumor size shrink by at least 30%. This in turn paves the way for the Company to seek regulatory approval in the U.S. and Europe by the end of 2016, following the FDA’s decision in August 2016 to designate ribociclib as a breakthrough therapy. Novartis is targeting to win the first approval for ribociclib by the end of June 2017.

The ribociclib study results assumes significance since Novartis is trying to compete with Pfizer Inc. (NYSE: PFE), whose rival medicine Ibrance may generate sales of $2.16 billion in 2016 as per industry experts. Sales of ribociclib, or LEE011, may reach $1 billion by 2020, according to forecasts. Further, Novartis also said that two further trials to evaluate ribociclib in combination with other therapies are fully enrolled.

Focus on R&D in biosimilars: In August 2016, the Sandoz unit strengthened its biosimilars portfolio

Source: Company Filings
Source: Company Filings

when it obtained FDA approval for Erelzi, the biosimilar version of Amgen Inc.’s (NASDAQ: AMGN) blockbuster drug Enbrel. Sandoz is stepping up its R&D efforts in biosimilars to compensate for loss of revenue caused by the patent expiry of blockbuster drugs. 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.

Guidance for FY16

Novartis affirmed its FY16 outlook, as per which net sales are expected to be broadly in-line with the prior year and core operating income is expected to be broadly in-line or to decline by a low single-digit percentage. Growth products are expected to offset the impact of generic competition (primarily Gleevec). Moreover, unfavorable currency movement is anticipated to hurt sales by 1% in 2016. Novartis is banking on newer treatments like heart medicine Entresto and Cosentyx for psoriasis. Novartis forecasts $200 million in sales of Entresto in FY16.

Stock Performance

n6Novartis’s stock stood at $73.49, slipping 0.78%, at the close on Friday, November 11th, 2016, having vacillated between an intraday high of $73.97 and a low of $72.97 during the session. The stock’s trading volume was at 2,836,031 for the day. The Company’s market cap was at $193.21 billion as of Friday’s close.

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