Novartis 4Q16 – Galvus (vildagliptin) sales grow modestly YOY to $298 million, totaling $1.2 billion for full year 2016; Substantial focus on NASH pipeline – January 27, 2017

Novartis recently provided its 4Q16 and full year 2016 financial update in a call led by CEO Mr. Joseph Jimenez. While there was little discussion of diabetes during the webcast (direct link here; presentation slides here and development report here), this report covers the essential updates on Novartis’ diabetes projects.

Top Four Highlights

1. DPP-4 inhibitor Galvus (vildagliptin) posted $1.2 billion in sales for the full year 2016, marking 5% year-over-year (YOY) growth vs. 2015. In 4Q16, Galvus revenue totaled $298 million, which represents modest 1% YOY growth and the lowest YOY growth in three consecutive quarters. We’re happy to see sustained growth – however modest – following nearly two years of Galvus revenue decline, although it’s important to note that sales growth in 2Q16, 3Q16, and 4Q16 occurred against very easy comparisons.

2. The company’s separate slide deck on development updates prominently featured its NASH pipeline products and outlined specific timing for upcoming data:

• (i) phase 2 FXR agonist LJN452 (which management described as potential best-in-class) is expected to read out in 2018;
• (ii) FXR agonist LMB763 (phase undisclosed) is expected to read out in 2018;
• (iii) SGLT-1/SGLT-2 dual inhibitor LIK066, slated to enter phase 2 soon according to Mr. Jimenez’s JPM 2017 remarks, is expected to read out in 2018 – this is noted for weight loss rather than diabetes;
• (iv) relaxin receptor RLX030 (phase undisclosed) is expected to read out in 2019; and
• (v) phase 2 oral pan-capase inhibitor emricasan, being developed in partnership with Conatus Pharmaceuticals, is expected to read out in 2018.
• The presentation also foreshadows an anti-inflammatory/antifibrotic agent to be investigated in NASH patients.

3. Sales of Lucentis (intravitreal ranibizumab, prescribed for the treatment of diabetic macular edema and diabetic retinopathy, among other indications) declined 9% YOY and 1% sequentially to $452 million in 4Q16. Sales fell 11% YOY for the full year 2016 to $1.8 billion.

4. Yet again, there was no mention of the glucose-sensing contact lens that Novartis’ ophthalmology division Alcon is said to be developing with Verily. We haven’t heard any updates on the project, nor confirmation that it’s still on the docket, in over a year.

Top Four Highlights

1. Galvus Sales Up 1% YOY to $298 Million for 4Q16; Up 5% YOY to $1.2 billion for 2016

DPP-4 inhibitor Galvus (vildagliptin) posted $1.2 billion in sales for the full year 2016, marking 5% year-over-year (YOY) growth vs. 2015. In 4Q16, Galvus revenue totaled $298 million, which represents modest 1% YOY growth and the lowest YOY growth in three consecutive quarters (the franchise grew 12% YOY in 2Q16 and 9% YOY in 3Q16). Sequentially, sales dropped 3% from $306 million in 4Q16. While we’re disappointed to see the product’s quarterly revenue again dip below $300 million, we’re happy to see sustained sales growth – however modest – following nearly two years of decline leading into 2016. That said, YOY growth in 2Q16, 3Q16, and 4Q16 occurred against very easy comparisons. There was no discussion of marketing strategy around Galvus in Novartis’ 4Q16 update, but management has previously described the company’s focus on target populations such as the elderly and patients with renal impairment – we think this is a smart move, especially because these segments of the diabetes patient population may be limited in their use of newer agents like SGLT-2 inhibitors, which are contraindicated in patients with renal impairment due to lack of efficacy. Moreover, management has previously outlined a strategy to encourage patients/providers to initiate Galvus therapy earlier in the course of disease progression – the general consensus of diabetes thought leaders also supports early treatment intensification with DPP-4 inhibitors and other oral medications following metformin first-line therapy. While some companies in the DPP-4 inhibitor business seem to have shifted priorities elsewhere – for example, AZ management appears to accept that many patients are switching away from DPP-4 inhibitors and has emphasized its positioning of its SGLT-2 inhibitor Farxiga (dapagliflozin) as the preferred option for patients switching off its DPP-4 inhibitor Onglyza (saxagliptin) – Novartis is one of the few that has shown commitment to growing its DPP-4 inhibitor franchise with a clear approach, and we certainly hope this commitment remains strong despite the lack of discussion in today’s call (though we understand that the size and scope of Novartis’ pharmaceutical business makes it difficult to discuss every disease area during a short update).

• We’ll be back with a pooled analysis of DPP-4 inhibitors for 4Q16 after all companies report their quarterly earnings: Merck for Januvia (sitagliptin; February 2), AZ for Onglyza (February 2), Lilly/BI for Tradjenta (linagliptin; January 31), and Takeda for Nesina (alogliptin; February 2). Despite fluctuating sales for DPP-4 inhibitors in the past few years, the class as a whole performed well in the first half of 2016 (3% YOY growth in 1Q16, 8% YOY growth in 2Q16) and in 3Q16 (2% YOY growth). Ultimately, we continue to still see an important role for these agents in diabetes care given their benign safety and tolerability profile, particularly for newly-diagnosed patients, the elderly, and those with renal impairment. The class benefits from familiarity among primary care physicians, as well, and we expect generic versions of DPP-4 inhibitors will be incredibly popular when they become available in the next decade or so (perhaps they can – finally! – displace the dreaded sulfonylureas as the “cheap” diabetes medication).

2. Management Outlines Six Clinical Programs in NASH

The company’s separate slide deck on development updates prominently featured its NASH pipeline products and outlined specific timing for upcoming data:

• (i) Phase 2 results from the FLIGHT-FXR trial of FXR agonist LJN452 (which management described as potential best-in-class) are expected to read out in 2018 (expected completion in November 2017, according to ClinicalTrials.gov).  LJN452 is Novartis’ most advanced pipeline product for NASH, and the FXR agonist has received a Fast Track designation from the FDA (it’s great that regulators are recognizing the pressing need for NASH therapies and are encouraging innovation on this front). Intercept Pharmaceuticals will likely be first-to-market for NASH, however, its FXR agonist Ocaliva (obeticholic acid) is already approved by the FDA for primary biliary cholangitis (PBC) and is currently in a phase 3 trial for NASH (completion expected October 2021). Gilead also has an FXR agonist in phase 2, with expected trial completion in January 2018.
• (ii) phase 2 FXR agonist LMB763 is expected to read out in 2018. According to ClinicalTrials.gov, the ongoing phase 2 trial for the candidate is expected to complete in February 2018. This would tentatively place LMB763 as the potential fourth-to-market candidate and based on Novartis management’s emphasis on LJN452’s best-in-class potential, we wouldn’t be surprised to see only LJN452 eventually advanced into phase 3.
• (iii) SGLT-1/SGLT-2 dual inhibitor LIK066, slated to enter phase 2 soon according to Mr. Jimenez’s JPM 2017 remarks, is expected to read out in 2018. As of now, the candidate is only listed on Novartis’ pipeline page as an oral agent in phase 2 for a weight loss indication. The last update we’ve heard on LIK066 was during Novartis’ 2Q15 update, during which we learned that the company had initiated a phase 2 study investigating the effect of LIK066 on body weight in people with and without diabetes – this trial completed in April 2016 according to ClinicalTrials.gov through we have not yet heard anything on its results. At the time, we speculated that the company may be moving toward an obesity or prediabetes indication for LIK066, as the candidate’s future in type 2 diabetes had looked increasingly uncertain with the guidance on regulatory filing being repeatedly pushed back. As of 1Q15, the company’s pipeline had 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 2014 prior to enrollment, and a study testing the candidate’s effect on glucose absorption was completed in January 2014. We view this eventual apparent decision to settle on a NASH indication to better reinforce Mr. Jimenez’s previous words on the company’s focus on innovation – NASH is certainly an area of massive unmet need with huge potential for intervention with pharmacotherapies (unlike obesity and prediabetes, where much more patient and provider education must be done to lay the groundwork for pharmacotherapy uptake). Sanofi/Lexicon’s SGLT-1/2 dual inhibitor sotagliflozin is currently in phase 3 for type 1 and type 2 diabetes indications – we’re curious if providers might prescribe sotagliflozin off-label for NASH or weight loss once its available on the market.
• (iv) Relaxin receptor RLX030 (phase undisclosed; generic name serelaxin) is expected to read out in 2019. The candidate is also under investigation for acute heart failure (phase 3) and has been investigated for a host of other indications as well, ranging from end-stage renal disease to liver cirrhosis.
• (v) Phase 2 oral pan-capase inhibitor emricasan, being developed in partnership with Conatus Pharmaceuticals, is expected to read out in 2018. It’s clear through this partnership that Novartis is committed to its efforts in NASH, and to exploring multiple mechanisms and candidates for this indication. The company is clearly hedging its bets and has a vested interest in addressing this unmet need.
• The presentation also foreshadows an anti-inflammatory/antifibrotic agent to be investigated in NASH patients, though no further information was provided.

Overall, this is the greatest emphasis on NASH that we’ve seen from Novartis management during a quarterly update, which is not entirely surprising given the company’s recent decision to double down on its NASH investments through the exclusive deal with Conatus. NASH is a common comorbidity of type 2 diabetes and an area of high unmet need – despite a robust competitive landscape, no therapies are yet approved for the treatment of NASH. Given this, we’re glad to see a pharma giant like Novartis, with so much expertise in clinical and commercial development of medicines, commit to its NASH pipeline, and we very much hope to see some positive results emerge in 2018.

3. Lucentis Revenue Falls 9% YOY to $452 Million for 4Q16; Falls 11% YOY to $1.8 Billion for 2016

Sales of Lucentis (intravitreal ranibizumab, prescribed for the treatment of diabetic macular edema and diabetic retinopathy) declined 9% YOY and 1% sequentially to $452 million in 4Q16. Sales fell 11% YOY for the full year 2016 to $1.8 billion. We imagine the drug continues to struggle under competition from Bayer/Renegeron’s Eylea (intravitreal aflibercept) and Genentech’s Avastin (bevacizumab), as indicated by the consistent YOY decline since 4Q14. As a reminder, Novartis markets Lucentis ex-US while Roche profits from US sales of the product, and both companies have repeatedly cited intra-market competition as a major challenge. We’ll be back with US revenue from Lucentis when Roche reports its 4Q16 earnings on February 1. Novartis management highlighted advances for Lucentis outside of diabetes, including the EMA approval of a new indication to treat visual impairment stemming from choroidal neovascularization (CNV).

4. No Mention of Glucose-Sensing Contact Lens Project with Verily

Yet again, there was no mention of the glucose-sensing contact lens that Novartis’ ophthalmology division Alcon is said to be developing with Verily. We haven’t heard any updates on the project, nor confirmation that it’s still on the docket, in over a year – the most recent mention we can find is an August 2015 Wall Street Journal article which reported that the product was meant to enter high-volume production and large-scale clinical trials in 2016. We interpret the radio silence from both Novartis and Verily to mean that the project has been pushed much further back (if it’s still planned at all). This is quite disappointing for a couple of reasons: (i) a glucose-sensing contact lens would be a truly exciting and disruptive innovation for diabetes care, and (ii) Novartis seems to be investing a lot in expanding its Alcon division as a whole, without prioritizing this particular product. That said, Mr. Jimenez remarked recently at JPM 2017 that returning Alcon to a state of profit and growth is taking longer than expected, so perhaps there is some hope yet for the glucose-sensing contact lens if this goal succeeds.

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