Memorandum

Novartis 2Q18 – Entresto >doubles YOY to $239 million; Galvus sales rise a strong 7% YOY to $332 million; Lucentis grows 8% YOY to $515 million; SGLT-1/2 inhibitor discontinued for obesity – July 19, 2018

Executive Highlights

  • Novartis’ diabetes portfolio posted a relatively strong performance in 2Q18. Sales of DPP-4 inhibitor Galvus increased 7% YOY and 4% sequentially to $332 million, on the strength of its performance in Emerging Markets, especially China. We believe far more people in China could benefit from DPP-4 inhibitors, particularly in pre-diabetes (where, granted, there is no pathway globally – but we’d like there to be.) Diabetic retinopathy drug Lucentis showed similarly steady growth, climbing 8% YOY (4% operationally) to $515 million, driven by strong performances in Europe and China.

  • Heart failure medication Entresto continues to shine as a bright spot for Novartis,  more than doubling with 117% YOY growth, as reported, to $239 million. Performance was strong both in the US (+95% YOY to $129 million) and OUS (+145% YOY to $110 million). Novartis continues to highlight a post-hoc analysis of PARADIGM-HF that indicated a renal-protective benefit with Entresto, especially in people with diabetes – now we’re waiting for news on whether they’ll investigate further. We’re also looking forward to PARAGON-HF, the trial of Entresto in HFpEF (Heart Failure with a Preserved Ejection Fraction) to complete next March, which could help fill an unmet need in HFpEF treatment.

  • In disappointing pipeline news, SGLT-1/2 dual inhibitor LIK066 was discontinued for obesity in phase 2 due to a lack of efficacy. Management was unclear about the candidate’s future in heart failure (they’re “re-evaluating”), and we’re curious how the Entresto franchise might affect their decision to pursue this indication. A phase 2 trial is ongoing in NASH, with expected completion in September 2019; one other SGLT-2 inhibitor remains in the NASH competitive landscape.

Novartis reported 2Q18 financial results on Wednesday morning in a call led by CEO Dr. Vasant Narasimhan and Novartis Pharmaceuticals CEO Mr. Paul Hudson. Access the presentation slides, press release, webcast, and detailed (supplementary) financial report.

Product

1Q18 Revenue (Millions)

YOY Reported (Operational) Growth

Sequential Reported Growth

Galvus

$332

+7% (+7%)

+4%

Lucentis

$515

+8% (+4%)

-1%

Entresto

$239

+117% (+113%)

+20%

Financial Highlights

1. DPP-4 Inhibitor Galvus Posts $332 Million, Growing 7% YOY and 4% Sequentially on Strength of Performance in China/Emerging Markets

DPP-4 inhibitor Galvus (vildagliptin) sales grew 7% YOY and operationally to $332 million in 2Q18, climbing from a base of $310 million in 2Q17. Sequentially, Galvus revenue rose 4% from $318 million in 1Q18. The product is marketed exclusively OUS, and Novartis attributed Galvus’ continued success to a solid performance in China and Emerging Markets, a paradigm that makes sense given the strong competition from SGLT-2s and GLP-1s in more established markets. In 1Q18, we noted uncertainty about whether Galvus sales were returning to growth; YOY growth was 1% in each of the first three quarters of 2017, before stronger 10% and 11% increases, as reported, in 4Q17 and 1Q18, respectively. As such, 7% YOY growth in 2Q18 is encouraging, but we certainly don’t expect sustained double-digit growth from any DPP-4 in coming quarters. Moreover, we note that sales fell YOY every quarter from 3Q14 through 1Q16. We do believe we’ll continue to see this class grow in the near term.

Pooled sales for the class have been fluctuating around a very modest growth trajectory for the past few years, but it’s hard to make out what might be happening in terms of volume. Manufacturers rarely comment on DPP-4s, though Merck recently shared that volume for Januvia, at least, is increasing, commenting on pricing pressure and discounts without sharing any specific numbers. Novartis management continues to make no mention of Galvus or diabetes on its quarterly calls – by our record, the last mention of the DPP-4 was in 3Q16, when management discussed their strategy of promoting Galvus for elderly patients and those early in the course of disease or with renal impairment. That’s too bad since Novatis has such a strong narrative about helping patietns who are in most need.

  • We expect DPP-4 inhibitors to continue giving solid performances across the class. Despite the emergence of more efficacious drug classes in GLP-1s and SGLT-2s, which offer better glucose lowering, weight loss, and often even cardio and renal protection, DPP-4 inhibitors have maintained strong sales overall and still have by far the best safety profile known in diabetes – by far! In addition to safety, they are also the most tolerable by far and the least hassle to take. Indeed, in 2017, $9.7 billion in sales for the DPP-4 class rivaled $9.9 billion in revenue for all basal insulin analogs, and we think they could break $10 billion this year. There’s no doubt that DPP-4s remain a favored agent among HCPs for their remarkable safety and tolerability profile, and the familiarity of both HCPs and patients with these drugs leads us to suspects DPP-4s will keep up their strong sales for some time to come – in fact, it’s still less than 10% of all patients who can access them and where we think they could play a major role is in pre-diabetes. While they are not that popular among thought leaders (at Keystone 2018, Dr. Ralph DeFronzo call these agents “pretty much worthless,” a sentiment echoed by Drs. Jay Skyler and Steve Nissen), these are not the PCPs who are prescribing drugs every day and seeing 15-20 patients per day! Our view is that they need to be used in optimal patient groups - that is among patients who are recently diagnosed whose A1c has a flatter rather than steeper slope – and, where patients can afford it, possibly in pre-diabetes though we acknowledge this is not a group in which they are approved. Obviously we understand why GLP-1 and SGLT-2 would be more powerful compounds for the vast majority of patietns – on the other hand, you can’t beat this side effect profile or this tolerability for those early in disease progression. Other providers continue advocate for their continued use in early-stage diabetes as well, and we’re quite interested in what role they might play in prediabetes – if not now, after they go generic.

2. Lucentis Climbs 8% YOY to $515 million in Strong Quarter for OUS Sales

Novartis’ revenue from Lucentis (intravitreal ranibizumab) climbed 8% YOY (+4% operationally) to $515 million in 2Q18, also falling 1% sequentially. This was from a base of $520 million in 1Q18 and $477 million in 2Q17 and follows strong 17% YOY and 7% sequential growth in 1Q18. We’re glad to see somewhat stronger gains from Lucentis after a lackluster 3% YOY rise in 2017 overall and discouraging 16% and 11% drops for 2015 and 2016, respectively. For reference, ranibizumab currently holds indications for retinopathy with DME in most regions (plus retinopathy without DME in the US as of April 2017); Novartis markets the drug outside the US, while Roche markets it in the US. We’ll be back with more on Lucentis on July 26 when Roche reports 2Q18 earnings, where we’ll be keeping a particular eye on the impact of the non-DME indication on US sales. Lucentis was not mentioned on the call in the context of diabetes, nor did we hear mention of the phase 3 RAINBOW trial (completed December 2017) targeting a new indication for retinopathy of prematurity (ROP). Of final note, Novartis has another anti-VEGF candidate (RTH258) in phase 3 for DME, with filing for that indication targeted for 2020.

3. Entresto Sales >Double YOY (117%) to $239 Million; Shows Wide and Strong Performances in the US (95% YOY) and Rest of World (145% YOY).

Novartis’ heart failure drug Entresto continues to shine with 117% YOY growth as reported (113% operationally), more than doubling for $239 million in sales in 2Q18. This was from a base of $110 million in 2Q17 and $200 million in 1Q18, translating to 20% sequential growth for 2Q18, a sizable uptick following 8% sequential growth in 1Q18. We’re certainly encouraged to see Entresto continue on its upward trajectory, building on strong +198% growth in 2017 overall. Moreover, the breakthrough HF therapy is doing well across geographies, climbing 95% YOY operationally in the US to $129 million and 145% YOY OUS to $110 million, for which management highlighted improved access in China and Europe. Touting Entresto as “standard of care” for heart failure, Novartis emphasized that new patient numbers for the therapy continue to grow steadily in the US. The company also continued to point to a recent post hoc analyses of PARADIGM-HF showing that Entresto preserves kidney function and improves quality of life. It would be great to see the drug further investigated in people with CKD; SGLT-2 inhibitor Invokana just met its primary endpoint a year early in CREDENCE, the therapy’s renal outcomes trial, but patients and providers are still sorely lacking for quality CKD treatment options. If Entresto truly is renal-protective, we would certainly love it to be indicated as such!

  • Entresto remains under phase 3 investigation in chronic heart failure with preserved ejection fraction (HFpEF), and submission for that indication is slated for 2019, following expected March 2019 completion of PARAGON-HF. An interim analysis is expected in 3Q18. Importantly, HFpEF is likely much more important and prevalent as far as diabetes is concerned – it’s associated with adiposity, whereas HF with reduced ejection fraction is more related to direct myocardial insults. Moreover, HCPs’ ability to treat HFpEF is seriously lacking (SGLT-2 inhibitors hold promise to this end, as well), so an approval of Entresto for this indication would be a triple win for patients, providers, and Novartis alike. The company also plans to submit Entreso for a post-acute MI indication in 2020, so we see miles of headroom for Entresto to continue to grow for years to come.

4. Novartis Avoids Price Increases for Remainder of 2018

Dr. Narasimhan announced that Novartis would abstain from price increases for the remainder of 2018. Merck has also made a similar commitment to lower some net prices and is limiting average net price increase to the rate of inflation, while Pfizer will delay increases through 2018 or until President Trump puts a new drug pricing “blueprint” into place. Dr. Narasimhan commented that the company believed this decision was the “prudent approach, given the dynamic environment we are currently in,” but it’s hard to say what impact these decisions will really have. There’s no doubt that, with increased attention from the federal government, the drug pricing debate has reached a fever pitch. We’re glad to see manufacturers acknowledging and taking some action on the situation, but we struggle to see imagine these moves having a deep, long-term impact on the country’s nebulous pricing and reimbursement situation, which hurts patients and providers alike – get a full rundown on the situation from Dr. Irl Hirsch just last week at Keystone 2018. More than anything, the fact that the Trump Administration thinks a temporary freeze in drug prices is cause for celebration speaks volumes.

Pipeline Highlights

5. SGLT-1/2 Inhibitor LIK066 for Obesity Discontinued in Phase 2 Due to Efficacy Concerns, Uncertain Future in Heart Failure, Remains Under Investigation in NASH

In very unfortunate new, Novartis has discontinued its investigation of phase 2 SGLT-1/2 dual inhibitor LIK006 in obesity, a decision based on lack of weight loss efficacy. The study was initially scheduled to be completed by August 2018.  According to management during Q&A, the company is now “re-evaluating how [it] might take an SGLT-1/2 forward in heart failure”; as such, it’s very unclear whether Novartis will continue to investigate LIK006 in type 2/heart failure, and it’ll be interesting to see how management considers the candidate in light of both the Entresto franchise and the four-member SGLT-2 inhibitor class (which is broadly under investigation in heart failure). Moreover, we’ll be interested to see an eventual publication of the weight loss data; Lexicon, whose SGLT-1/2 dual inhibitor sotagliflozin has been submitted for type 1 diabetes and is under investigation in type 2, has continually emphasized the weight loss benefits of dual inhibition over SGLT-2 monoinhibitors. However, our sense is that the bar is being seriously raised for obesity pharmacotherapy, driven mainly by Novo Nordisk and semaglutide, and the mechanism of SGLTs doesn’t lend itself well to a primary purpose of weight loss.

  • Notably, LIK066 remains under phase 2 investigation in NASH. The trial (n=110) is expected to complete September 2019 and is broadly enrolling patients with F1-F3 fibrosis. We haven’t heard much about the utility or mechanism of SGLT inhibition in NASH (we wonder how much is mediated by weight loss?), and there is only one other SGLT-2 inhibitor in the otherwise very robust NASH competitive landscape – a phase 2 candidate from Avolynt, with a pivotal trial slated to begin in 2018, according to the company’s website).

Candidate

Indication

Status

Timeline/Notes

ACZ885 (Anti-interleukin – 1ß monoclonal antibody)

 

CV risk reduction

Phase 3

Submitted to FDA and EMA for CV risk reduction in 1Q18; Phase 3 showed secondary CV prevention, secondary endpoint of time to new-onset diabetes in people with prediabetes

RTH258 (anti-VEGF therapy)

Neovascular age-related macular degeneration, DME

Phase 3

Two phase 3 trials: KITE expected in June 2021, KESTREL expected to complete May 2021; Company aiming to file candidate for DME in 2020; First priority is neovascular age-related macular degeneration

RLX033 (recombinant relaxin-2 hormone)

Heart failure, NASH

Phase 3/Undisclosed

In phase 3 for heart failure; Also being investigated for NASH with data expected in 2019

Cenicriviroc (CVC)/FXR agonist

NASH

Phase 3

Phase 3 AURORA trial expected to complete July 2024; Through partnership with Allergan, Novartis will investigate CVC in combination with an FXR agonist; Phase 2 CENTAUR study of standalone CVC completed November 2017

LIK066 (SGLT-1/2 dual inhibitor)

Obesity (discontinued), heart failure, NASH

Phase 2

Phase 2 trial in obesity discontinued, results to be published; Phase 2 study vs. empagliflozin in people with type 2 diabetes/heart failure expected to complete November 2018, results promised 2H19; Phase 2 trial in NASH expected to complete April 2019

LJN452 (FXR agonist)

NASH

Phase 2

Phase 2 FLIGHT-FXR study expected to complete September 2019; IA readout achieved as planned in 1H18

Emricasan (oral pan-capase inhibitor)

NASH

Phase 2

Being developed for NASH in partnership with Conatus Pharmaceuticals; Conatus leading phase 2b studies; Novartis will be responsible for phase 3 development

LMB763 (FXR agonist)

NASH

Undisclosed

Data expected in 2018

 

--by Martin Kurian, Ann Carracher, Payal Marathe, and Kelly Close