Novartis Climbs Out of Its Growth Pit
Incoming Novartis AG CEO Vas Narasimhan is taking over at the right time.
As it reported fourth-quarter earnings on Wednesday, the company predicted it will grow sales in 2018 after a multi-year slump. Departing CEO Joe Jimenez is leaving many difficult decisions for Narasimhan as he cedes control next week. But he is also leaving a company with an unusually rich set of assets and a pretty high margin for error.
One of Jimenez's nicest parting gifts is a return to sales growth for the company's troubled Alcon eye-care division. That makes the decision (delayed until 2019) to sell or spin off the unit less urgent; it's no longer an obvious drag on the share price. And there's real hope of increasing the return of an eventual divestiture by further improving results.
But generics unit Sandoz has emerged as a new problem child, hurt by a difficult pricing environment. U.S. sales fell 17 percent in the fourth quarter from a year ago, Novartis said Wednesday. Narasimhan on the earnings call outlined a strategy to help Sandoz, moving away from products most subject to pricing pressure and toward more-complex (read, expensive) alternatives. But several other generic drugmakers are pursuing the same strategy, and it won't be an easy or quick fix.
Sandoz's success depends largely on the progress of Novartis's heavy investment in biosimilars -- the equivalent of generics for complex drugs made in living cells. But it's far from alone in that endeavor, and the lucrative U.S. market is proving highly difficult and time-consuming to crack.
On the novel drug side -- the source of 67 percent of Novartis's revenue in 2017 -- Narasimhan will inherit a broad set of new medicines to help overcome sales declines of older stalwarts such as Gleevec. But heavy competition awaits. Cosentyx, the firm's best recent launch, is fighting it out in psoriasis with both well-settled blockbusters such as Humira and newer drugs such as Taltz and Tremfya. Breast-cancer drug Kisqali and an upcoming migraine medicine are also in intensely competitive classes.
Pharmacy benefit managers will likely have a field day extracting big discounts on these drugs, and the marketing battles will be fierce.
Novartis's heart failure drug Entresto has been dogged by payer restrictions since its 2015 approval due to its cost and large patient population. It's still far from the company's diminished $3 billion plus estimate of its potential peak sales.
Still, at least Novartis has new drugs. Some of its medicines are in less-competitive markets. And while I am constitutionally skeptical of Narasimhan's claims that the company will boost productivity via investment in automation and AI, his pledge to prune the firm's research pipeline more aggressively is promising.
Though Novartis hasn't done much on the M&A front, it has the capacity to invest if pharma growth lags once more or if Sandoz proves tough to fix. Its balance sheet is strong. And it can generate a flood of cash by selling out of its consumer joint venture with GlaxoSmithKline PLC and its separate multi-billion-dollar equity stake in Swiss rival Roche Holding AG. It could also speed up its decision on what to do with Alcon.
But its financial position gives it the luxury of waiting for the best return on these disposals, while enjoying a cheap boost to its income in the meantime.
There are pitfalls ahead for Narasimhan. But at least he's not starting in one.
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