Memorandum

Novartis 3Q14 – Galvus down 7% YOY to $293 million due to German distribution halt; Lucentis up 6% YOY to $614 million – October 29, 2014

Executive Highlights

  • The DPP-4 inhibitor Galvus (vildagliptin), marketed ex-US only, fell 7% as reported in 3Q14 to $293 million, largely due to the withdrawal of the product in Germany.
  • Lucentis (for diabetic macular edema and other ophthalmologic indications) grew 6% as reported to $614 million, driven by new indications and its new pre-filled syringe.
  • No update was provided on Novartis’ diabetes pipeline or the company’s joint smart contact lens project with Google.

On Tuesday morning, Novartis CEO Mr. Joseph Jimenez led the company’s 3Q14 financial update. Below are our top five highlights from the presentation, followed by Q&A.

1. The DPP-4 inhibitor franchise Galvus (vildagliptin) declined 7% YOY (5% in constant currencies) to $293 million in 3Q14, due primarily to the cessation of sales in Germany; ex-Germany, sales rose 8% in constant currencies.

2. The ophthalmologic drug Lucentis (intravitreal ranbizumab) for diabetic macular edema and other indications rose 6% YOY (7% in constant currencies) to $614 million due to market expansion from new indications and the continued rollout of a new pre-filled syringe.

3. A recent NIH-sponsored study in diabetic macular edema that showed that Regeneron’s Eylea (afilbercept) injection demonstrated greater gains in visual acuity than Lucentis (ranibizumab), and appeared to show a possible cardiovascular safety signal with Lucentis.

4. Management did not provide any updates on Novartis’ recently licensed Google smart contact lens project.

5. 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.

Top Five Highlights

1.Global sales of the Galvus (vildagliptin) franchise declined 7% year-over-year (YoY) as reported (5% in constant currencies) in 3Q14 to $293 million. Sequentially, sales declined 11% following a 7% increase in 2Q14. As a reminder, Galvus and its metformin fixed-dose combination Eucreas are only marketed outside of the US. This sharp decline shows the negative impacts of the distribution halt in Germany that started on July 1. As a reminder, this news was disclosed in Novartis’ 2Q14 call, in which management announced that Galvus will no longer be marketed in Germany following a failure to negotiate an acceptable price with German authorities. The Galvus franchise took a hit from this decision as Germany represented ~9% of total Galvus sales in 1H14. However, excluding Germany, Galvus sales rose 8% (in constant currencies); comparing this to 2Q14’s growth of 14% and 1Q14’s growth of 15%, the DPP-4 inhibitor franchise has slightly slowed down.

  • There has been a broader slowdown in the DPP-4 inhibitor class in recent quarters potentially due to factors, including: (i) the growing focus on cost-effectiveness by payers; (ii) the increased price competition due to the entry of more competitors; (iii) the introduction of SGLT-2 inhibitors; (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. Keys to reversing this trend will be new longer-acting formulations (such as the excitement surrounding Merck’s phase 3 once-weekly omarigliptin at EASD), combinations, and some good luck on the safety front (we are hoping that the concerns of heart failure around TECOS [CVOT for Januvia] will not follow through).
  • For context, in 3Q14, Merck’s Januvia (sitagliptin) grew 5% YoY (from a high base of $1.4 billion) and Lilly’s Tradjenta (linagliptin) grew 22% (from a lower base of $65 million). Merck management shared that the company is redoubling its efforts on Januvia marketing, which likely had an impact on the dynamics of the entire DPP-4 inhibitor market. We will learn more about other DPP-4 inhibitors’ performance when Takeda and AZ report on October 30 and November 6, respectively.
  • For more context on the DPP-4 inhibitor situation in Germany, the country’s Federal Joint Committee (G-BA) had ruled that Novartis’ Galvus showed “no additional benefit” relative to sulfonylureas in 3Q13. This G-BA decision was part of a class-wide review of DPP-4 inhibitors’ cost effectiveness, which resulted in similarly negative rulings for Lilly’s Tradjenta (linagliptin) and AZ’s Onglyza (saxagliptin), but notably not for Merck’s Januvia (sitagliptin). The “no additional benefit” ruling subjects the products to generic-level pricing. Adding to the frustration is the fact that the negative G-BA rulings were not due to the clinical trial results, but rather due to the G-BA’s narrow requirements for trial design. The G-BA vendetta has impacted other drug classes as well, but intriguingly AZ managed to renegotiate with the G-BA on pricing following the withdrawal of its product, leading to a re-launch – perhaps other companies can replicate that success, although it probably involves a degree of concessions on pricing.

2.Novartis’ share of sales from the ophthalmologic drug Lucentis (intravitreal ranbizumab) rose 6% YoY (7% in constant currencies) to $614 million due to market expansion from new indications and the new pre-filled syringe. This result is roughly in line with 2Q14’s Lucentis franchise growth of 8%. Sequentially, Lucentis sales declined 1%. Management noted that Lucentis’ growth was largely driven by new indications, including a Japanese indication for diabetic macular edema this past February. In addition, management pointed out an EMA label update approved in the EU that allows for flexible and individualized treatment regimen .

  • In 3Q14, Lucentis’ pre-filled syringe was successfully launched in Belgium, Denmark, Spain, Netherlands, and Australia – management highlighted that physicians have expressed that they prefer this form of Lucentis delivery over the original form.
  • As background, Novartis markets Lucentis ex-US only. Roche/Genentech market the drug within the US, and recently received FDA Priority Review status for a diabetic retinopathy indication – a very exciting development for the product, although not one that Novartis will benefit from directly.

3.During Q&A, management fielded a question about a recent NIH-sponsored study in diabetic macular edema that showed that Regeneron’s Eylea (afilbercept) injection demonstrated greater gains in visual acuity than Lucentis (ranibizumab) injection as well as a potential cardiovascular risk signal for Lucentis. The 52-week study compared Genentech’s Avastin (bevacizumab), Lucentis, and Eylea; reported results found that Eylea was associated with a significantly greater improvement in mean change in best-corrected visual acuity compared to both Lucentis and Avastin. Notably, patients in the Lucentis experienced significantly (nominal p < 0.01) more overall cardiovascular events compared to patients on Eylea. Full results are working their way towards publication. Management responded that more work will need to be done to reach more definitive conclusions, noting that efficacy is difficult to determine as the dose used in the study was the US dose for DME which is much lower than the EU dose. In addition, management called the study’s definition of side effects “odd” and “un-validated” and not traditionally used in eye trials. We do find this cardiovascular finding interesting and something to follow, but it is hard to speculate much until we see the full results published.

4.Management did not provide any updates on Novartis and Google’s smart contact lens project, which received significant focus during Novartis’ 2Q14 call. Then, Novartis presented the project as one of the company’s biggest 2Q14 accomplishments with a major focus on the development of a glucose-sensing contact lens. The 2Q14 call did not reveal any specific timelines, but management had suggested during that call’s Q&A that the product is more likely to be a few years out rather than a decade out. As more background, Google and Novartis have also introduced a focus area of developing an autofocus lens technology for presbyopia, although this will be a longer-term project.

5.The call also did not mention Novartis’ diabetes drug pipeline, which includes the SGLT-1/SGLT-2 dual inhibitor LIK066 and LEZ763, an unspecified oral once-daily treatment for type 2 diabetes.

  • The SGLT-1/SGLT-2 dual inhibitor LIK066 remains in phase 2, with a regulatory submission not expected before 2018 (consistent with previous guidance). A 12-week dose-finding study of LIK066 was withdrawn in April prior to enrollment, according to ClinicalTrials.gov (Identifier: NCT01824264), while a study testing the candidate’s effect on glucose absorption was completed in January (ClinicalTrials.gov Identifier: NCT01915849). Both LIK066 and its main SGLT-1/2 dual inhibitor competitor, Lexicon’s LX4211, appear to be somewhat mired in phase 2, and we are excited to hopefully see both move into phase 3.
  • In September, Novartis completed a phase 2 trial of LEZ763, an unspecified oral once-daily treatment for type 2 diabetes (ClinicalTrials.gov Identifier: NCT01619332). The status of this trial has not changed since 4Q13. This candidate has flown under the radar for quite a ways, as (to our knowledge) we have not heard any mention of this compound from management and it continues to not appear on the company pipeline.

Questions and Answers

Q: On Lucentis, we saw the NIH headline data on Lucentis, Eylea, and Avastin. I know it's a US study, but there was obviously not great efficacy for Lucentis in that study and the CV safety signals were a bit buoyant. Do you expect any reactions from the EU to impact your business?

A: This was a comparison between Lucentis, Eylea, and Avastin in diabetic macular edema, and I think that was an open label trial and a relatively modest-sized trial. The key issue there, in terms of trying to extrapolate that as a dose, is that they used the US dose for DME, which is very low compared to the EU dose. So there is really no efficacy conclusion that could be made to doses that are higher. And they had what I would call an odd, un-validated definition of side effects, which is not traditionally used in eye trials, so I think we have to get deeper into the data and see if there is anything really there or not.

 

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