Novartis 3Q17 – DPP-4 Galvus sales flat at $310 million; Lucentis sales rise modest 6% YOY; Bright spot in heart failure drug Entresto – October 25, 2017

Novartis provided its 3Q17 update in a call led by CEO Mr. Joseph Jimenez earlier this week. In this highlights report, you’ll find updates on the company’s Galvus franchise (DPP-4 inhibitor vildagliptin), its Lucentis franchise (intravitreal ranibizumab), and pipeline products relevant to diabetes, obesity, and NASH.

Come February 1, 2018, Mr. Vas Narasimhan will assume the CEO position, a promotion from his current role as Global Head of Drug Development and Chief Medical Officer. Mr. Jimenez announced his retirement in early September, and his last day at the company will be January 31, closing an era of eight years as CEO. Mr. Narasimhan has been with Novartis since 2005, and we wish him the best of luck at the helm!

Top Four Highlights

1. Sales of DPP-4 inhibitor Galvus were essentially flat at $310 million (up ever-so-slightly YOY, rising 1% as reported from $306 million in 3Q16, and entirely flat sequentially from $310 million in 2Q17). Thus, in 3Q17, there was no change in the pattern of low-to-no growth for Novartis’ DPP-4 business.

2. Novartis recorded $481 million in Lucentis revenue, marking 6% YOY growth as reported. This was the first quarter of meaningful growth for the product (a treatment for diabetic macular edema/retinopathy) following consistent decline in 2015 and 2016. Also of note, the company is planning to file another anti-VEGF candidate RTH258 (brolucizumab) for a DME indication by 2020.

3. Heart failure drug Entresto continued its strong financial performance in 3Q17, with sales more than doubling YOY to reach $128 million (albeit, from a low base of $53 million in 3Q16). We remain incredibly curious about Entresto’s potential applications in diabetes. See our ACC 2017 coverage of a PARADIGM-HF sub-analysis in diabetes patients (the post-hoc results were positive, but can only be considered hypothesis-generating).

4. There was minimal pipeline discussion on the call, and once again, we heard no updates on the glucose-sensing contact lens that Novartis is supposed to be developing with Verily.

Top Four Highlights

1. DPP-4 Inhibitor Galvus Posts $310 Million, Flat YOY and Sequentially

Sales of DPP-4 inhibitor Galvus (vildagliptin) were essentially flat at $310 million (up ever-so-slightly YOY, rising 1% as reported from $306 million in 3Q16, and entirely flat sequentially from $310 million in 2Q17). On a constant currency basis, the company listed 3% YOY growth for the franchise. This continues a trend of low growth for Novartis’ DPP-4 inhibitor business: Quarterly revenue has increased 1% YOY consistently since 4Q16, totaling $298 million in 4Q16, $286 million in 1Q17, and $310 million in 2Q17 and 3Q17. By our calculations, Galvus accounted for a 14% share of growth in Novartis’ diabetes portfolio ($791 million revenue from two main diabetes products, up 4% YOY), the lion’s share of growth (86%) attributed to diabetic retinopathy drug Lucentis (more on this below). Despite the sluggish financial performance of late, it’s too soon to determine whether the Galvus franchise is plateauing around ~$300 million in quarterly sales – we certainly hope not, as there are so many more people with diabetes who could benefit from a safe, well-tolerated, and effective glucose-lowering agent like vildagliptin. Novartis markets Galvus ex-US only, and we’d love to learn which geographies are driving or inhibiting growth (how does this parallel rates of diagnosis vs. under-diagnosis?). Management has previously outlined a clear, three-pronged plan to market Galvus to specific pockets of the diabetes patient population – (i) the elderly, (ii) people with renal impairment, (iii) and anyone diagnosed, earlier in the course of their disease progression. With this commercial strategy in tow, we imagine there’s still a chance for Novartis to stimulate decent volume/sales growth for Galvus in future quarters. Many thought leaders have defended DPP-4 inhibitors as the agents of choice for older patients (i) and for individuals with lower eGFR (ii), despite growing competition from newer therapy classes like SGLT-2 inhibitors and GLP-1 agonists (we heard this commentary most recently from Dr. Per-Henrik Groop at EASD, and previously, from Dr. Robert Ratner at Keystone 2016). Moreover, we’d love to see prescriptions written for DPP-4 inhibitors as first-line treatment, ahead of metformin (iii) – all in all, we view Novartis’ three-pronged strategy as very smart and potentially fruitful. On the other hand, we can’t ignore that SGLT-2 and GLP-1 agents offer better weight loss (most DPP-4 products are weight neutral), superior glycemic efficacy, and possible cardioprotection. At Keystone 2017, Drs. Jay Skyler and Steven Nissen argued that DPP-4 inhibitors should be de-prioritized in diabetes treatment algorithms for all these reasons, and the market as a whole is certainly affected by the between-class competition. Pooled DPP-4 sales were down ~4% YOY in 1H17.

2. Lucentis Sales Rise 6% YOY; First Quarter of Meaningful Growth Following Consistent Decline in 2015/2016

Novartis recorded $481 million in Lucentis (intravitreal ranibizumab) revenue, marking 6% YOY growth as reported (5% in constant currencies). By our calculations, this therapy for diabetic macular edema (DME) and diabetic retinopathy drove 86% of growth in the company’s diabetes portfolio (together, Lucentis and Galvus sales summed to $791 million in 3Q17 – a 4% YOY increase). Sequentially, Lucentis sales rose 1% from $477 million in 2Q17. We’re pleased to note growth for this product, however small, following consistent decline throughout 2015 and 2016 – of course, this also means Lucentis faced an easy YOY comparison in 3Q17, given the 6% YOY drop in 3Q16 to $456 million. Revenue was flat YOY in 2Q17 and was down 2% YOY in 1Q17. Novartis licenses intravitreal ranibizumab from Genentech and markets the drug ex-US. Roche markets Lucentis in the US, and also reported single-digit (7%) YOY growth in 3Q17, to $415 million. Notably, Roche management suggested that its Lucentis business has “stabilized” in 2017, after two straight years of falling sales in 2015 and 2016 (in close parallel to Novartis’ ex-US Lucentis business). We’d like to see an even greater return to growth, and the opportunity is there, in new indications and more patient-friendly injection devices. For example, the FDA approved Lucentis for the treatment of diabetic retinopathy without DME in April 2017 (note that this would only impact Roche’s recorded revenue for the drug, and not Novartis’), and Roche is also developing a port delivery device for intravitreal ranibizumab (phase 2 LADDER study ongoing, enrollment completed ahead of schedule). Novartis is investigating Lucentis toward a new indication for retinopathy of prematurity (outside the context of diabetes), and the phase 3 RAINBOW trial remains on track for a readout in 1Q18. In the past, both companies have cited in-class competition from Genentech’s Avastin (bevacizumab) and from Bayer/Regeneron’s Eylea (intravitreal aflibercept) and as a reason for sluggish performance, and we note that Lucentis has a higher list price compared to Avastin, which is likely slowing commercial uptake.

• Of note, Novartis is planning to file another anti-VEGF candidate RTH258 (brolucizumab) for a DME indication by 2020. There was no mention of this during prepared remarks or Q&A, but it is listed as a planned filing in the company’s slide deck. Novartis’ first priority for RTH258 seems to be neovascular age-related macular degeneration, and to this end, two phase 3 trials (HARRIER and HAWK) will report at a scientific meeting in November 2017 – full completion for both studies is expected in 2Q18.

3. Entresto Soars with Sales >Doubling YOY; No Word on Applications in Diabetes

Heart failure drug Entresto (sacubitril/valsartan) continued its very strong financial performance in 3Q17, with sales more than doubling YOY to reach $128 million (albeit, from a low base of $53 million in 3Q16). Entresto revenue increased 16% sequentially from $110 million in 2Q17, and notably, this product has only been on the market since 1Q16. While the agent is strictly prescribed in cardiology clinics for now, we’re immensely curious about the potential applications in diabetes. Our interest was piqued after a PARADIGM-HF sub-analysis presented at ACC 2017: The post-hoc focused on participants with diabetes, and found a statistically significant A1c benefit (0.2% treatment difference over three years, p=0.001) as well as 29% risk reduction for new initiation of insulin therapy over three years (p=0.005) with Entresto vs. enalapril. Diabetes is a major risk factor for heart failure and other CV events, so any therapy that offers improvements in glycemic control as well as cardioprotection would be a huge win for patients, and for the healthcare system. This diabetes/CV medicine would also face a vast market with a very sizeable patient population, and so developing an agent for both indications could be a smart business move. With companies like Lilly/BI and AZ exploring CV indications for their diabetes drugs (both manufacturers have launched dedicated heart failure trials for their SGLT-2 inhibitors, Jardiance and Farxiga, respectively), we wonder if Novartis might call a reverse play, initiating a dedicated study of Entresto in people with diabetes.

4. No Mention of Diabetes, Obesity, or NASH Pipeline/Partnerships

There was minimal pipeline discussion on the call, and once again, we heard no updates on the glucose-sensing contact lens that Novartis is supposed to be developing with Verily. We haven’t heard anything concrete on this project since a Wall Street Journal article published in August 2015, reporting that the contact lens was meant to enter high-volume production and large-scale clinical trials in 2016 (which has come and gone). The radio silence from Novartis and Verily could mean that the project has been pushed further back on the docket (if it’s still planned at all). On the other hand, we acknowledge that both of these large companies have a long list of products to discuss on quarterly earnings calls – a glucose-sensing contact lens is an ambitious endeavor to be sure, and is perhaps taking more groundwork than Novartis/Verily initially anticipated before the partners can forge ahead, and before they have something tangible to discuss. Novartis also has strategic diabetes partnerships with Parvus – to develop a nanotechnology-based treatment for type 1 – and with Qualcomm (focused on digital medicine). There was no mention of either during this 3Q17 update.

• We’ve been impressed by the company’s commitment to NASH – though not a major focus on this call, management did review many ongoing clinical development projects for NASH during Novartis’ 1Q17 update. Most notably, Allergan-partnered cenicriviroc was highlighted as a “trailblazer” for this disease area at the recent NASH Summit Europe. Novartis/Allergan launched a phase 3 trial (AURORA) in April 2017, with an expected completion date of October 2024, per ClinicalTrials.gov. Moreover, Novartis has several FXR agonists in its NASH pipeline, as well as Conatus-partnered emricasan (in phase 2) and SGLT-1/2 dual inhibitor LIK066 (also being developed for obesity). See the pipeline summary table below for more details.

Novartis Diabetes-Related Pipeline Summary

-- by Payal Marathe and Kelly Close