Memorandum

Novartis 1Q15 – Galvus up 9% in constant currencies to $292 million and down 5% as reported with sequential 1% drop; SGLT-2 dual inhibitor in phase 2 delayed by a year; management notes reallocation of marketing away from Galvus – April 23, 2015

Executive Highlights

  • Sales of the DPP-4 inhibitor Galvus (vildagliptin), marketed ex-US only, grew 9% year-over-year (YOY) in constant currencies (-5% as reported) in 1Q15 to $292 million.
  • During Q&A, management mentioned the Galvus franchise as an area from which resources have been removed, in the company’s reallocation efforts to support the upcoming launches of products in psoriasis and chronic heart failure.
  • Lucentis (for diabetic macular edema and other ophthalmologic indications) sales were flat in constant currencies and declined 13% as reported in 1Q15 to $539 million.

Novartis CEO Mr. Joseph Jimenez led the company’s 1Q15 financial update this morning. Below are our top five highlights from the presentation, followed by relevant Q&A.

1. The DPP-4 inhibitor franchise Galvus (vildagliptin) grew 9% YOY in constant currencies (-5% as reported) to $292 million in 1Q15. Sales fell 1% sequentially.

2. During Q&A, management mentioned the Galvus franchise as an area from which resources have been removed in the context of the company’s reallocation efforts.

3. There was no mention of Novartis’ collaboration with Google or the company’s recent establishment of a joint investment company in digital medicines with Qualcomm Ventures.

4. No updates were provided on the rest of Novartis’ diabetes pipeline, which includes the SGLT-1/SGLT-2 dual inhibitor LIK066 as well as LEZ763, an unspecified phase 2 oral once-daily treatment for type 2 diabetes.

5. Sales of the ophthalmologic drug Lucentis (intravitreal ranbizumab) for diabetic macular edema and other indications remained constant with 0% growth in constant currencies (-13% as reported) at $539 million in 1Q15.

Top Five Highlights

1. The DPP-4 inhibitor franchise Galvus (vildagliptin) grew 9% YOY in constant currencies (falling 5% as reported) to $292 million in 1Q15. This follows 4Q14’s 1% decline in constant currencies; sales sequentially declined very slightly by 1% as reported following 4Q14’s ~1% sequential growth. As a reminder, Galvus and its metformin fixed-dose combination Eucreas are only marketed outside of the US – Novartis didn’t submit in the US due to onerous FDA guidance. The financial supplement mentioned that Novartis’ focus with Galvus continues to be as an add-on to metformin and increasingly also in elderly and renal-impaired patients. Galvus is the only DPP-4 inhibitor other than Merck’s market-leading Januvia (sitagliptin) that is likely to hit blockbuster status in 2015 – AZ’s Onglyza (saxagliptin) is the next closest with annual sales that have plateaued in the mid-$800 million range. 

  • Management called Galvus “quite dynamic,” highlighting that (excluding Germany) Galvus sales grew 22% in constant currencies. As a reminder, Novartis disclosed in its 2Q14 call that Galvus would be withdrawn from Germany as of July 1, 2014 due to a failure to negotiate an acceptable price with German authorities. The Galvus franchise has taken a significant hit from this decision, as Germany represented ~9% of total Galvus sales ($57 million) in 1H14. As background, this German distribution halt is a consequence of the country’s Institute for Quality and Efficiency in Health Care (IQWiG) ruling in 3Q13 that Novartis’ Galvus showed “no additional benefit” relative to sulfonylureas – this seems absurd to us, as clearly SFUs cause weight gain and hypoglcyemia, for a start, and many believe that at least in some forms and some doses, SFUs prompt beta cell burnout (the FDA doesn’t allow SFUs in most placebo-controlled outcomes trials so it’s impossible to assess – we look forward to BI/Lilly’s CAROLINA trial to learn more. IQWiG and the German Federal Joint Committee (G-BA) have historically been challenging and have provided similarly negative rulings for Lilly’s Tradjenta (linagliptin) and AZ’s Onglyza (saxagliptin) as monotherapy, but notably not for Merck’s Januvia (sitagliptin), which is interesting given that the class is fairly homogenous – BI/Lilly’s linagliptin from our view is the most differentiated in terms of compounds as it can be used in people with diabetes who have lower than usual kidney function. For more on this and its negative impacts on pricing, please read our 4Q14 update.

2. During Q&A, management highlighted the Galvus franchise as an area from which resources have been removed in the context of the company’s reallocation efforts – we were surprised to hear this initially as a blockbuster drug (albeit one for which pricing pressure has clearly emerged). This came up when management was asked a question regarding reallocation of resources to support upcoming launches of psoriasis and chronic heart failure drugs. Although 1Q15 Galvus sales demonstrated slightly greater growth than recent quarters, we are not particularly surprised to hear this as Novartis has clearly not made diabetes a priority as it has listed recently the therapeutic areas of focus for the company. Moreover, the DPP-4 inhibitor class has experienced clear pricing pressure, and so whereas revenue has not increased much, the impact on profitability is likely quite negative. The company and call attendees didn’t pay much attention to Galvus during Q&A sessions.

  • This slowdown within the DPP-4 inhibitor class stems from a number of factors, including: (i) the growing pricing pressure from payers, driven by increased focus on cost-effectiveness; (ii) the increased price competition due to the entry of more competitors; (iii) the introduction of SGLT-2 inhibitors, which have many of the same benefits but more pronounced for many (greater A1c drop) – while they also have more pronounced side effects, these have been viewed by most as fairly manageable; (iv) the slowdown of patient transfers from TZDs to other oral agents (albeit, due in part to the decreasing number of patients still on TZDs); (v) the reverberations of the incretin-pancreatitis/pancreatic cancer scare peaking in 2013; as well as (vi) nagging concerns of heart failure as a class effect, as discussed at the recent FDA EMDAC meeting on SAVOR and EXAMINE CVOT results. We do believe from a safety perceptive, concerns about euglycemic DKA are increasing – this is more a type 1 issue at present. Keys to reversing this trend will be fixed dose combinations (Lilly/BI’s Glyxambi [empagliflozin/linagliptin] recently became the first DPP-4 inhibitors/SGLT-2 inhibitor combination to reach the market), new longer-acting formulations (such as the excitement surrounding Merck’s phase 3 once-weekly omarigliptin that was discussed at EASD), and some good luck on the safety front. Notably, it will be a very big deal to see whether concerns of heart failure will be disproven by the TECOS CVOT for Januvia, which should be announced at ADA 2015.

3. There was no mention of Novartis’ collaboration with Google or the company’s recent establishment of a joint investment company in digital medicines with Qualcomm Ventures (an investor in wireless technologies and digital health).

  • We were a bit surprised to hear no updates on Google’s recently approved patent for the glucose-sensing contact lens. This patent, approved in March, covers the method by which a user would power the glucose-sensing smart contact lens and extract data to a user interface. While this patent filing does not necessarily reflect Google’s or Novartis’ most updated plan for the product design, we see this as a very notable update, especially considering the lack of attention to the project or partnership in recent quarters. Still, Novartis will likely be pretty stealth about Google goings on. As a reminder, Novartis’ presentation at this year’s JP Morgan and its 4Q14 update highlighted Google’s joint smart contact lens as a key project, but attention seems to be shifting away from the diabetes application and more towards broader ophthalmologic indications. At both JP Morgan and the 4Q14 update, management only referred to the “accommodating lens” project, which (as we understand it) refers to the lens application for presbyopia and myopia. We heard no mention of either project in this 1Q15 call. That said, this is still an early stage project and so it may indeed be too early to read into lack of regular mentions of the Google project. But the recent patent news has dispelled some of our previous suspicions that the glucose-sensing contact lens project may not be as of higher priority as much as it was formerly expressed. For more background on this Google partnership’s goals and rough timelines, please read Novartis’ 2Q14 update.
  • In addition, the call featured no updates on Novartis’ establishment earlier this year of a joint investment company with Qualcomm Ventures. As background, Qualcomm Ventures is the venture investment group of Qualcomm Incorporated that invests in wireless technologies and digital health; in working with the group, Novartis stressed its goals to move into supporting digital medicines that go “beyond the pill.” Novartis partnered with the group in January, with a joint investment company of up to $100 million to support early stage companies with technologies, products, or services in digital medicine – please read our 4Q14 coverage for more on the company’s goals. While no details have yet been specified on this initiative, we unfortunately do not foresee Novartis targeting diabetes as a key area of this work due to its lower prioritization (see highlight #2) compared to the company’s prioritization of other areas such as oncology. 

4. In addition, no formal updates were provided on the rest of Novartis’ diabetes pipeline, which includes the SGLT-1/SGLT-2 dual inhibitor LIK066 as well as LEZ763, an unspecified phase 2 oral once-daily treatment for type 2 diabetes – notably, management did push back timing expectations for LIK066 for one year and we would not be surprised to see this dropped.

  • The SGLT-1/SGLT-2 dual inhibitor LIK066 remains in phase 2, and its future seems to be increasingly uncertain. For the past year, the guidance on regulatory filing has kept getting pushed back – now, the company’s pipeline shows that a regulatory submission is not expected before 2019 – this itself is a major change from 3Q14, when the regulatory submission was a year ahead of this estimate (i.e., not expected before 2018). A 12-week dose-finding study of LIK066 was withdrawn in April of last year prior to enrollment, according to ClinicalTrials.gov (Identifier: NCT01824264), while a study testing the candidate’s effect on glucose absorption was completed in January of last year (ClinicalTrials.gov Identifier: NCT01915849). While LIK066 struggles to move into phase 3 for type 2 diabetes, its main SGLT-1/2 dual inhibitor competitor, Lexicon’s LX4211, has recently moved into phase 3 for type 1 diabetes, with the first registered phase 3 trial’s (ClinicalTrials.gov Identifier: NCT02384941) primary completion date estimated to be March 2016 – see Lexicon’s 4Q14 update for more. Overall, SGLT-1/SGLT-2 dual inhibitors appear to be having a tough time for type 2 diabetes, perhaps because there are already enough selective SGLT-2 inhibitors on or near the market, or perhaps because companies simply don’t have it in them to conduct additional CVOTs.
  • Novartis completed a phase 2 trial of LEZ763, an unspecified oral once-daily treatment for type 2 diabetes (ClinicalTrials.gov Identifier: NCT01619332), in September 2013. The status of this trial has not changed since 4Q13. This candidate has flown under the radar for quite some time, as (to our knowledge) we have not heard any mention of this compound from management and it continues to not appear even on the company pipeline. All in all, many signs that Novartis continues to move away from diabetes.

5. Sales of the ophthalmologic drug Lucentis (intravitreal ranbizumab) for diabetic macular edema and other indications remained stable with flat sales in constant currencies (down 13% as reported) for a total of $539 million in 1Q15. Sequentially, sales declined ~8% as reported, following a ~4% sequential decline in 4Q14 – far from a positive trend. According to the financial supplement, Lucentis revenues were driven by the uptake in non-AMD (age-related macular degeneration) indications, which include diabetic macular edema (DME), macular edema, and choroidal neovascularization secondary to pathologic myopia. Gains here were offset by competition in the neovascularization AMD indications. Similar to 4Q14, the financial supplement stated again that the drug’s pre-filled syringe continues to perform “solidly” after its launch in all key European countries, as well as Japan, Australia, and Canada.

  • Non-AMD indications were reported to contribute to 43% of 1Q15 Lucentis’ sales, equivalent to 4Q14’s 43% non-AMD contribution and slightly higher than 1Q14’s 40% non-AMD contribution. In addition, emerging growth markets contributed to 20% of Lucentis’ sales, also slightly higher than 1Q14’s 17%. The DME indications are newer and previously we have heard that they have been drivers of growth.
  • According to the financial supplement, Novartis has also been appealing decisions made in Italy and France that allow for more widespread off-label use and reimbursement of Roche’s Avastin (bevacizumab). In Italy, Novartis continues to press an appeal of the Italian Medicines Agency’s decision to include Avastin in a list of drugs to be reimbursed off-label. Meanwhile in France, the company is appealing a decree that provides the legal basis for the adoption of the temporary recommendation of off-label use of Avastin for eye care indications. Indeed, Lucentis may find it difficult to grow with its higher price tag compared to Avastin as well as the FDA’s recent approval of Bayer/Regeneron’s Eylea (intravitreal aflibercept) for diabetic retinopathy with DME (diabetic macular edema). In addition, the unimpressive results for Lucentis in a recent NIH study comparing Lucentis,. Eylea, and Avastin may stiffen the competition in coming quarters.
  • There were no updates on wet AMD candidate RTH258 (formerly ESBA 1008), as Alcon (Novartis’ eye care division) initiated a phase 3 trial last December. As a reminder, this candidate is a novel single chain antibody fragment; its phase 3 trial (ClinicalTrials.gov Identifier: NCT02307682) looks at the efficacy and safety of RTH258 vs. Eylea and began dosing in the first patient this past December. According to ClinicalTrials.gov, the estimated enrollment has decreased to 1,600 patients (compared to management’s estimation of 1,700 patients in 4Q14) and has an estimated primary completion date of June 2017. For more on this candidate, please see our 4Q14 update.
  • As a reminder, Novartis markets Lucentis ex-US only. Roche/Genentech market the drug within the US, and received FDA approval for diabetic retinopathy with DME in February.

Questions and Answers

Q: You've previously talked about the fact that you felt you could reallocate a lot of the resources that you had within the existing organization to support the launches coming up in 2015 and 2016. Seeing 1Q now as a base, how should we think of that reallocation?

A: So, you're right, the majority of the support for the launch of these brands will be a reallocation, which we largely worked through as we’ve taken our resources off Diovan, Exforge, and even Galvus and others. Particularly when it comes to field force, incremental field force is really, really tiny. Having said that, whenever one launches with the potential that Cosentyx (psoriasis) and LCZ (have, there is some additional marketing spending. There is some additional space for clinical trials that are needed to support the brand, to drive health economic data, etc. So there will be some increase in spending.

 

-- by Melissa An, Manu Venkat, and Kelly Close