Novartis 2Q15 – Galvus down 1% YOY in constant currencies (down 17% as reported) and down 7% sequentially to $273 million; New phase 2 study for SGLT-1/2 dual inhibitor – July 21, 2015

This morning, Novartis CEO Mr. Joseph Jimenez led the company’s 2Q15 financial update. Below are our top five highlights from the presentation, followed by relevant Q&A. We love how Jimenez often has a video on the website before their call –here it is if you want to watch – though as a big point, he doesn’t talk at all about diabetes, and although much of it might be perceived as investor-speak, we liked how he talked about margin expansion in pharma (though not sure diabetes is included here) and we loved his views on “capturing cross-divisional synergies” and focusing more on quality assurance.

1. Sales for the DPP-4 inhibitor Galvus (vildagliptin) franchise dropped 1% year over year (YOY) in constant currencies (-17% as reported, due to brutal currency effects) to $273 million in 2Q15; sales fell 7% sequentially.

2. According to the company’s supplementary data, Galvus received a first-line monotherapy approval in China for type 2 diabetes. Whoa! First line was very surprising to see and we want to get more information on this and the implications for patients in China.

3. While it was not mentioned during the call, we learned from ClinicalTrials.gov that the company has begun recruiting patients in a new phase 2 study investigating the effect of SGLT-1/2 dual inhibitor LIK066 on body weight.

4. 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. Notably, Alcon’s growth rate slowed, which Mr. Jimenez talked about  – that’s the partner for the Google contact lens project, so that was a bit of a bummer. Mr. Jimenez did emphasize that Novartis wants to increase innovation across all divisions.

5. Sales of the ophthalmologic drug Lucentis (intravitreal ranibizumab) grew 2% in constant currencies (-13% as reported) to $537 million in 2Q15; sales were essentially flat sequentially (0.4% decline).

Honorable mention: We thought it was interesting and cool that Mr. Jimenez went out of his way to stress that Novartis cares a great deal about what he characterized as “cross divisional synergies” and noted that Novartis was re-committing to six key values. What are those? They are innovation, quality, collaboration, performance, courage, and integrity. As part of this part of the video, he made a big deal about Novartis’ expanded focus on quality insurance – there were 79 site inspections during the first half of the year with 100% rated “good or acceptable”. How good is that? Certainly it seems a positive that none were badly rated though we are the first to admit we don’t know how frequent that is. Do you? If so, please email us! 

Top Five Highlights

1. Sales for the DPP-4 inhibitor Galvus (vildagliptin) franchise dropped 1% year over year (YOY) in constant currencies (-17% as reported) to $273 million in 2Q15. This follows 1Q15's 9% decline in constant currencies (-5% as reported); sequentially, sales declined 7% as reported following a ~1% sequential drop in 1Q15. As a reminder, Galvus and Eucreas (vildagliptin/metformin fixed-dose combination) are only marketed outside of the US – Novartis opted not to resubmit in the US years ago due to what it perceived (correctly, it turns out – a CVOT wouldn’t have been worth it in our view) as onerous FDA requirements. The financial supplement mentioned that Novartis’ focus with Galvus continues to be on people whose diabetes is uncontrolled on metformin and increasingly also in elderly and renal-impaired patients.

• Management pointed out that excluding Germany, Galvus sales grew 5% YOY in constant currencies. During prepared remarks, management labeled Galvus as “the only negative on the chart” out of Novartis’ pharmaceutical products; however, the company also highlighted last year’s decision to pull Galvus off the German market and noted double-digit growth volume growth across many markets elsewhere in the world. In our eyes, it is still not reassuring that 2Q15’s ex-Germany 5% growth is significantly lower than 1Q15’s 22% ex-Germany growth and we suspect pricing has a lot to do with that.
  
  • As a reminder, Novartis disclosed in its 2Q14 call that it would withdraw Galvus 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 implausible to us, and the ongoing CAROLINA CVOT evaluating Lilly/BI’s Tradjenta (linagliptin) vs. glimepiride should help shed more light on this question. IQWiG and the German Federal Joint Committee (G-BA) have historically been challenging for DPP-4 inhibitors and other new diabetes drugs – Novo Nordisk’s recent decision to withdraw its novel basal insulin Tresiba (insulin degludec) from the German market in response to a similar negative decision is just the latest example. We wonder the extent to which German authorities look at or care about “real world” data.

2. Notably, according to the company’s supplementary data, Galvus received a first-line monotherapy approval in China for type 2 diabetes. We found it interesting that Novartis did not mention this news during prepared remarks or in the press release given the potential growth this new approval could bring to the Galvus franchise. However, management did note during Q&A that general growth in China has been slowing down – that’s broader commentary, though this lack of attention could be perceived as another sign that Novartis is shifting its focus away from diabetes. More likely, we assume Mr. Jimenez and team did not want to draw too much attention to what sounds like its least profitable franchise. As a reminder, in 1Q15, management noted that the company had reallocated resources away from the Galvus franchise in order to support upcoming launches of its psoriasis and chronic heart failure drugs. In this call, the company devoted no more than two sentences to Galvus and there was also no Q&A focused on the franchise. Novartis is not the only company to shift resources away from a DPP-4 inhibitor in recent months – AZ announced a similar decision in 1Q14 to de-prioritize its DPP-4 inhibitor Onglyza (saxagliptin) in favor of other products with more prospects for growth. These decisions seem logical to us given the sluggish performance for, the DPP-4 inhibitor class over the past year or two, which we do not expect to change dramatically in the near future. Besides lack of growth, given the hard time companies have to differentiate this class, presumably the prices and profitability are dropping. We will be keeping touch on how the DPP-4 inhibitor class fares this quarter – as a reminder, after growing 31% in 2012 and 10% in 2013, the class rose just 2% in 2014, and just 1% in 1Q15. That said, the slight growth was positive to see in early 2015 following the first “down” quarter ever in 4Q15, when the class fell 2%. Overall, ending 2014, the DPP-4 class had $8.8 billion in sales – it’s by far the biggest class in revenue since TZDs hit $4.9 billion in 2010, which was their peak.  

• 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 potent for some (greater A1c drop) – while they also have more pronounced side effects, these have been viewed by many as fairly manageable (and, easier to identify than the side effects of GLP-1 in terms of knowing whether the patient can stay on the drugs or not); (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); and (v) the reverberations of the incretin-pancreatitis/pancreatic cancer scare peaking in 2013 – this was particularly unfortunate and we believe media hype had a decidedly negative effect. Notably, nagging concerns of heart failure as a class effect, as discussed at the recent FDA EMDAC meeting on SAVOR and EXAMINE CVOT results, should to be slightly alleviated by the neutral results of the TECOS CVOT for Merck’s Januvia (sitagliptin). However, given Januvia’s historical dominance within the class, we do not anticipate that these results will significantly affect the market share of other DPP-4 inhibitors though abatement of safety fears could have a positive effect. We think one hope for reversing the class’ slowdown will be fixed dose combinations (Lilly/BI’s Glyxambi [empagliflozin/linagliptin] recently became the first DPP-4 inhibitor/SGLT-2 inhibitor combination to reach the market); new longer-acting formulations (such as Takeda’s Zafatek [trelagliptin] and Merck’s phase 3 omarigliptin) may also help. We would be particularly interested in understanding how recently diagnosed patients who are treated early with DPP-4 inhibitors do compared to those treated early with SFUs – we’re surprised we do not hear or see more observational data, especially from countries that are “one-payer” systems where this information is easy to find.

3. While it was not mentioned during the call, we learned from ClinicalTrials.gov that the company has begun recruiting patients in a new phase 2 study investigating the effect of SGLT-1/2 dual inhibitor LIK066 on body weight. According to ClinicalTrials.gov, Novartis began a phase 2 study in June to assess the effect of LIK066 on body weight in obese people (BMI 35-50 kg/m²) with and without diabetes – that’s very interesting to se that it may well be trying to see the impact on pre-diabetes and obesity. The double-blind, placebo-controlled study has an estimated enrollment of 176 adults and will randomize participants to receive either LIK066 or placebo once or three times daily. Primary outcomes include percent change in body weight from baseline and number of participants with adverse events. The study is currently recruiting participants and has an estimated completion date of March 2016. We would be interested to know more about dosing – three times a day seems like a lot.

• Overall, we were slightly surprised to see a new trial begin with LIK066 since its future had seemed increasingly uncertain in recent quarters. Over the past year, the guidance on regulatory filing has been repeatedly pushed back. As of 1Q15, the company’s pipeline stated that a regulatory submission was not expected before 2019 – this itself was 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 may or may not move into phase 3 for type 2 diabetes, its main SGLT-1/2 dual inhibitor competitor, Lexicon’s sotagliflozin, has recently moved into phase 3 for type 1 diabetes (ClinicalTrials.gov Identifier: NCT02384941). The trial’s primary completion date, however has been pushed back to September 2016 from the original estimate of March 2016 – see Lexicon’s 4Q14 update for more. Overall, SGLT-1/SGLT-2 dual inhibitors appear to be having a slower time in type 2 diabetes, perhaps because there are already enough selective SGLT-2 inhibitors on or near the market, or perhaps because companies are deterred by the prospect of conducting additional CVOTs. We wonder whether this trial could potentially signal an attempt at an obesity or prediabetes indication for LIK066; while on some level, we assume those pathways would be even more challenging than a type 2 diabetes indication, testing for this indications would certainly reinforce Mr. Jimenez’s words about the company being focused on innovation (see his video remarks about the quarter here).  
• We did not hear any updates on Novartis’ other diabetes candidate, LEZ763, an unspecified phase 2 oral once-daily treatment for type 2 diabetes. Novartis completed a phase 2 trial of LEZ763 (ClinicalTrials.gov Identifier: NCT01619332) in September 2013 and 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 because it continues to not appear even on the company pipeline, we’re sort of assuming it is kaput. All in all, there are multiple signs that Novartis continues to move away from diabetes – thanks FDA! We’re very disappointed about this particularly given what an innovative company Novartis is and how much they could help the field.

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

• We have not heard Novartis bring up its collaboration with Google since 4Q14 and Google similarly provided no mention of the partnership in its 2Q15 call. This is not particularly surprising since we assume work is in progress but that the companies do not want to share information at this stage. As a reminder, the last major news we heard on this work was 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 saw this as a very notable update although we do expect Novartis to 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 – although some speculated that attention had seemed to be shifting away from the diabetes application and more towards broader ophthalmologic indications, we don’t think there has been nearly enough public information on this to know either way. 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 2Q15 call. To be sure, this is still an early stage project and we believe it is too early to read into lack of regular mentions of the Google project. The recent patent news did reinforce the historic priority of this project for Google. For more background on this Google partnership’s goals and rough timelines, please read Novartis’ 2Q14 update. We will be continuing to follow Google increasingly closely.
• 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 in its 4Q14 call 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 (whoa) 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. No details have yet been specified on this initiative, and it is impossible to see at this stage which areas Novartis is targeting as key focus areas of this work. We believe if interesting pilots arose in diabetes, this could be a key area of success given the very high needs and the more straightforward (ostensible) regulatory landscape compared to diabetes drugs – as well, the arena of diabetes drugs now has a very high bar, while we do not think the same is for digital health, which is in its relative infancy. What areas will be cost-savings will continue to be key to assess.

5. Sales of the ophthalmologic drug Lucentis (intravitreal ranibizumab) for diabetic macular edema and other indications grew 2% in constant currencies (down 13% as reported) to $537 million in 2Q15. Sequentially, sales declined very slightly by 0.4%, following an ~8% decline in 1Q15. The financial supplement stated that the wet age-related macular degeneration (AMD) segment had “stabilized” and that new indications experienced “slower growth” due to the entry of new competitors, but did not provide any specific quantitative details on the contribution of each indication. Similar to past quarters, the company also noted that the Lucentis pre-filled syringe has continued to perform “solidly” after its launch in 22 countries. In addition, the financial supplement stated that the database of the Lucentis PROMETHEUS study has recently been locked for an interim analysis of six-month data.

• While management did not present on any updates on wet AMD candidate RTH258 (formerly ESBA 1008) during the call, the financial supplement stated that the company initiated the candidate’s second phase 3 study this past June. According to ClinicalTrials.gov, the randomized, two-year study (ClinicalTrials.gov Identifier: NCT02434328) compares RTH258 ophthalmic solution to aflibercept solution, with change in best corrected visual acuity from baseline at week 48 as the primary outcome. The study is not yet open for participant recruitment (its estimated enrollment is 1,200 participants) but is said to begin in July 2015 and has an estimated completion date of March 2018. Throughout the call, while management did not bring up this new phase 3 study, management did repeatedly point to the potential of RTH258’s positive phase 2 results. We hope that additional studies in DME and/or diabetic retinopathy might be in the cards if results continue to be positive.
• We recently learned that Intas Pharmaceuticals has launched Razumab, the first biosimilar version of Lucentis. Razumab is said to be priced at a quarter of the cost of Lucentis, presenting another challenge to Lucentis’ struggling revenues.
  • We heard no updates on Novartis’ appeal of decisions made in Italy and France that allow for more widespread off-label use and reimbursement of Roche’s Avastin (bevacizumab). In Italy, Novartis’ appeal of the Italian Medicines Agency’s decision to include Avastin in a list of drugs to be reimbursed off-label remains “pending.” Meanwhile in France, the company had appealed 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, we believe Lucentis will find it very 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 as well as a comparative effectiveness trial presented at ADA is very likely to stiffen the competition in coming quarters. Management calls the use of Avastin “off-label”, which it certainly is – that said, the issue is complicated since the same company (Genentech) that created the drug has no interest in submitting the drug for a “real” indication given that it markets a more expensive version (Lucentis).  
• 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: Would you agree that Lucentis from here on is a declining asset given the multiple pressures on it?

A: For Lucentis, we were happy to see growth, although modest growth now for the first two quarters of this year. The market for VEGF inhibitors continues to surprise in terms of demand. So as patients are aging, as these products get increased use in the emerging world, we're seeing demand continue to increase. So that's a positive. On the other side, we see continued pressure from Bayer. And in addition, we see price pressure because payers are trying to leverage off-label use of Avastin, which is the negative. So, I wouldn't characterize it exactly the way that you spoke to.

Q: I have a quick question on RTH258 positioning. If eye drops with Lucentis-like efficacy that can either replace Lucentis or significantly reduce the injection frequency became available, what proportion of the current VEGF market patients would still be interested in an RTH258 injection and how does that depend on a potential efficacy advantage? I was just wondering if you'd done any market research on that?

A: On RTH258, I really don't think we've done any consumer research. I can go back and check regarding the drop form of anti-VEGF. I think a lot of it would really depend on efficacy. I think if there were a drop that people could take that had similar or better efficacy to Lucentis, Eylea and RTH, then people would take it. It’s hard for me to estimate how much of the market would go that way. What I can say is that we're excited not only about the phase 2 primary endpoints being met vs. Eylea and Lucentis in terms of efficacy, but also the durability of action that we see, where there's the potential for about two-thirds of patients to have quarterly dosing.

Q: I have a question on Alcon as I'd like to understand what's happening overall in the marketplace, in particular with many of your competitors going to be in disarray with a lot of the M&A that was taking place in the industry and particularly around cost-cutting there. It seems that what we're in is a very, very competitive and acceleratingly competitive environment.

A: On the pharmaceutical front, we still have work to do. I think we have an exciting early stage pipeline with respect to dry eye and glaucoma with LME636 and MGB354, but those are relatively early stage, and RTH in wet AMD is out a couple of years. I'm very positive about the phase 2 data there, and the phase 3 recruitment is progressing well, but given the loss of exclusivities that we face, we do have work to do to accelerate our growth.

Q: Could you go into a little bit more detail of what you're seeing across the different business segments, specifically on China?

A: We have seen slowing of growth in China, specifically across, I think, every one of the segments. So, what's happened is because the Chinese government has increased the coverage in terms of ensuring that every citizen in China has at least some level of medical coverage, you can imagine that the expense from a healthcare standpoint has been growing. Just in pharma, it's been in the mid-teens. And I think there's a conscious effort to slow it down a bit. And then, on top of that, you have what's happening from an economy standpoint and the stated shift towards what they're calling sustainable economic growth, which is leading to lower overall growth rates. So, we're starting to feel it. At the same time, we're a diverse-enough company where those growth rates are still at a level that are accretive to the global growth rates and I don't see that changing, because you know that you still got high demand, just probably not at the rates that we've been seeing.

-- by Melissa An, Emily Regier, and Kelly Close