Novartis 3Q16 – Galvus sales up 9% YOY; Lucentis sales down 6% YOY; No mention of glucose-sensing contact lens collaboration with Verily – October 27, 2016

Novartis provided its 3Q16 update on Tuesday in a call led by CEO Mr. Joseph Jimenez. We brought you hot-off-the-press takeaways in Closer Look just after the call ended, and we’re back now with our full coverage on the performance of the company’s diabetes-related portfolio, organized into top three highlights.

Top Three Highlights

1. Sales of DPP-4 inhibitor Galvus (vildagliptin) rose 9% year-over-year (YOY) as reported and 6% in constant currencies to $306 million. Though diabetes did not receive much attention during the call, management shared the company’s strategy to promote Galvus for elderly patients, patients with renal impairment, and anyone with type 2 diabetes earlier in the course of disease.

2. Lucentis (intravitreal ranibizumab, prescribed for the treatment of diabetic macula edema and diabetic retinopathy), which the company licenses from Genentech and markets ex-US, posted $456 million in ex-US sales, down 6% YOY as reported (4% in constant currencies).

3. Once again, there was no mention of the glucose-sensing contact lens that Novartis is said to be developing with Verily as part of the Alcon ophthalmology division, although management emphasized that expanding Alcon is a top priority.

Top Three Highlights

1. Sales of DPP-4 inhibitor Galvus (vildagliptin) rose 9% year-over-year (YOY) as reported and 6% in constant currencies to $306 million. Sales were flat sequentially, as revenue also totaled $306 million in 2Q16. This marks a second consecutive quarter of growth for Galvus following seven successive quarters of decline. As in 2Q16, the drug brought in more than $300 million in revenue, which hadn’t happened previously since 2Q14. As a class, DPP-4 inhibitors have somewhat plateaued in recent years, although our 1H16 industry round-up showed positive YOY growth in both 1Q and 2Q16. Within the class, Galvus captured ~12% of the market in 2Q16, the third largest share after Merck’s Januvia (sitagliptin, 63% share) franchise and Lilly/BI’s Tradjenta (linagliptin, 13% share) franchise. So far for 3Q16, Merck and Lilly have both reported strong performances by their DPP-4 inhibitor products ($1.6 billion in sales for the Januvia franchise and $321 million for the Tradjenta franchise), and we’ll be compiling a whole class analysis after Takeda reports Nesina (alogliptin) sales on October 28 and AZ reports Onglyza (saxagliptin) franchise sales on November 10. Notably, Novartis is one of the few companies beyond Merck in this particular competitive landscape that has expressed commitment to promoting its DPP-4 inhibitor during quarterly updates, and we’re encouraged by the plans management has outlined for Galvus’ continued growth.

• Management highlighted the company’s strategy of promoting Galvus for elderly patients, patients with renal impairment, and anyone with type 2 diabetes earlier in the course of disease. The first two components of this strategy were also highlighted during Novartis’ 2Q16 update. Many proponents of DPP-4 inhibitors in the diabetes field, including ADA’s Dr. Robert Ratner, argue that their favorable tolerability profile make them agents of choice for specific populations within the diabetes community, namely older patients and people with kidney complications. We agree that older individuals, at higher risk for hypoglycemia, could benefit from incretin-based agents to mitigate this risk. By the same token, renal impairment limits a patient’s ability to take certain diabetes drugs such as SGLT-2 inhibitors, so it makes sense in our view to market DPP-4 inhibitors like Galvus to this segment of the patient population. In addition, we’ve heard strong commentary at recent conferences in favor of earlier use of diabetes drugs beyond metformin – clinical inertia is not an insignificant problem in diabetes care. We’d love to see earlier consideration of DPP-4 inhibitors or DPP-4 inhibitor/metformin combinations, and we look forward to watching how this three-part strategy influences Galvus sales in future quarters.

2. Lucentis (intravitreal ranibizumab), which the company licenses from Genentech and markets ex-US, posted $456 million in ex-US sales, down 6% YOY as reported (4% in constant currencies). Sequentially, revenue fell 4% from 2Q16. Prescribed for the treatment of diabetic macular edema (DME), among other indications, Lucentis has experienced sluggish sales since 1Q14 and near-consistent sequential and YOY decline. Roche markets the drug in the US, where sales also fell 8% YOY operationally in 3Q16. Like Roche, Novartis highlighted the pre-filled syringe for Lucentis in its 3Q16 announcement, now launched in 26 countries including the US. Moreover, Novartis’ presentation slides mentioned an expanded indication to include choroidal neovascularization (currently in registration) and an ongoing phase 3 trial of the drug for retinopathy of prematurity (with plans to file by 2019). The company remains greatly invested in Lucentis, but the focus for growth seems to have shifted away from diabetes care, perhaps because of new in-class competition for the treatment of DME and diabetic retinopathy. This competition, coming primarily from Bayer/Regeneron’s Eylea (intravitreal aflibercept) and Genentech’s Avastin (bevacizumab), has been cited repeatedly as a challenge by both Roche and Novartis.

3. Once again, there was no mention of the glucose-sensing contact lens that Novartis is said to be developing with Verily as part of the Alcon ophthalmology division, although management emphasized that expanding Alcon is a top priority. A substantial amount of time was dedicated to Alcon during the call – management attributed the 2% YOY decline in division revenue (3% in constant currencies) to investments in the growth plan for further innovation in ophthalmology. Diabetes was not a part of this discussion, contributing to our impression that a glucose-sensing contact lens may be further out in the development timeline (if at all). The glucose-sensing contact lens is a particularly ambitious and challenging endeavor and Novartis management acknowledged that return on investment for Alcon is going to take longer than initially expected. We haven’t heard any news on the project since a Wall Street Journal article in August 2015. For background on Alcon and the expansion plan, see our reports on Novartis’ 1Q16 and 4Q15.

-- by Payal Marathe, Helen Gao, and Kelly Close