How Novartis Plans to Avoid the 'Patent Cliff'
Novartis Chief Executive Officer Joseph Jimenez had worked in the pharmaceutical industry only four years before taking the helm of the Swiss drug giant in February 2010. Yet his brief tenure in the business hasn’t kept him from crafting a bold solution to a problem that’s long stumped drug industry veterans: how to manage the so-called patent cliff when lucrative medicines lose patent protection. Veteran executives at some companies, such as Sanofi, are acquiring smaller rivals with more promising drug pipelines. Others, such as managers at Pfizer, are cutting back on expensive research and development to save cash. But Jimenez, only 13 months away from the U.S. patent expiration of his company’s best-selling drug, Diovan, doesn’t feel pressed to do either. Instead, he’s targeting administrative costs while aggressively promoting medicines in emerging markets and cranking out new drugs from his own labs.
The longtime consumer-products executive is betting Novartis can maintain a third of the $6.1 billion in annual sales of Diovan, a hypertension drug, by focusing on sales in emerging markets. That may seem like a big drop, but it’s smaller than the post-patent nose dives suffered by former blockbusters such as Pfizer’s Norvasc hypertension pill and Merck’s cholesterol drug, Zocor. “We can get through the Diovan patent expiration if things go to plan,” says Jimenez. “The market hasn’t digested that fully.”
Investors have beaten down Novartis shares 14 percent this year, making it the third-worst performer in the Bloomberg Europe Pharmaceutical Index. The company also faces the loss of patents on its second-best seller, the cancer medicine Gleevec, starting in 2014. That puts an additional $4.27 billion in annual sales at risk. “They’ve got two cliffs with Diovan and Gleevec,” says MF Global analyst Justin Smith in London.
Jimenez says that shifting Diovan’s growth focus to emerging markets in Latin America and parts of Asia, where the blood pressure medicine already competes largely without patent protection, will help keep its blockbuster status. Diovan sales continue to rise in those fast-growing parts of the world even though the drug costs more than generic versions. (Many patients in markets where drug counterfeiting is widespread are willing to pay more for a brand’s perceived quality.) Jimenez figures he can expand promotion of the drug to doctors in these markets aggressively enough to retain at least $2 billion in Diovan sales worldwide. If he’s right, the strategy might buy him time for Novartis’s year-old Gilenya pill for multiple sclerosis and an upcoming asthma treatment to gain momentum in Western markets where drugs sell at much higher prices.
Novartis isn’t alone at the edge of the patent cliff. Drugs with $139 billion in combined annual sales will be going off patent in the next five years, according to researcher EvaluatePharma. Yet history suggests Jimenez’s stick-it-out strategy is risky: Sales of brand-name medicines often plunge more than 90 percent within a few years after the introduction of generic competition. Merck’s Zocor cholesterol pill, which logged $5.2 billion in revenue in 2004, had sales of just $468 million last year.
Jimenez is following a different course to retain sales of Gleevec, which will lose protection in Japan, the U.S., and Europe by 2016. He’s ramping up sales of Tasigna, a medicine based on Gleevec which, like its cousin, is approved for use against leukemia. Tasigna had $399 million in sales last year, but the drug could bring in more than $2 billion in 2015, according to the average estimate of analysts surveyed by Bloomberg. “We have time to convince physicians and the industry that patients are better off with Tasigna,” Jimenez says.
Besides maneuvering the patent transition in its pharma business, Jimenez is still managing the integration of Alcon, the eye-care company that his predecessor, Dr. Daniel Vasella, bought in stages for $50 billion several years ago. Vasella figured eye care holds slightly faster growth prospects than pharmaceuticals. But the business has come with a learning curve. While Novartis already sold contact lenses and the Lucentis eye drug, the Basel (Switzerland)-based drugmaker has no experience in Alcon’s main business: products for eye surgery. “We partly bought Alcon for the management team because it’s a device business and we’re not a device company,” Jimenez says. “I’m spending a lot of my time ensuring that the management team is getting what it needs from Novartis so that they can maximize the value of their business for Novartis shareholders.”
The company’s real hope, however, lies in its promising new drugs. Products introduced since 2007, such as Afinitor for kidney cancer, now account for 28 percent of its business. Afinitor had sales of $102 million in the second quarter, almost double its revenue the year before. Gilenya’s revenue was $79 million and may exceed $2 billion by 2015, based on the average estimate of six analysts. “You can easily build a case that says that because the pipeline is so rich, that we could get through this period [without having to look outside the company for growth],” Jimenez says. “I can’t guarantee that it’s going to happen, but I can say that there’s a clear path to deliver it.”
Jimenez joined Novartis’s drug division in 2007 after eight years at H.J. Heinz and a short stint at Blackstone Group. He made a name for himself by aggressively bringing down costs while he was head of Heinz’s European division, says CEO William Johnson. “He was very analytical and decisive, and he was prepared to make decisions that were very unpopular,” Johnson says.
Soon after becoming Novartis CEO, Jimenez overhauled U.S. pharma operations, eliminating the company’s primary care unit and cutting 383 jobs. This March he proposed reducing operations at a research site in Horsham, England, and has announced that about 1,400 sales positions will be cut in the U.S., in part because of the Diovan patent loss.
Jimenez inherited a company that Vasella, who remains Novartis’s chairman, forged out of the Swiss drugmakers Sandoz and Ciba-Geigy. That created an entity diversified much like Johnson & Johnson, which sells prescription drugs, eye care, vaccines, consumer-health products, and animal medicines. “Some have said that Vasella built an empire, now the focus should be on making it more efficient,” says Gbola Amusa, a UBS analyst in London. “Daniel was a guy who came from a medical perspective,” says James Shannon, head of Novartis’s development unit until 2008. “Joe is very much a numbers-oriented guy.”
One area where Jimenez isn’t wielding the knife is R&D. Novartis’s R&D spending last year rose 21 percent, to more than $9 billion, and was about $4.6 billion in the first half of 2011. By contrast, rival Sanofi’s R&D spending last year declined 4 percent, and Pfizer plans to cut its budget to develop new drugs by as much as $3 billion in the next two years. “If the industry is about innovation and growth, you’d better keep your R&D spending strong,” Jimenez says. “All of the non-innovation costs need to be aggressively managed.”
To accomplish that, Jimenez aims to boost the use of Novartis’s manufacturing capacity to 80 percent from 50 percent. He also has introduced cost-saving purchasing methods such as reverse auctions, where suppliers bid against one another to give Novartis the lowest price for goods and services. The company already has found more than the targeted $300 million of annual cost savings from the Alcon purchase, Jimenez says. Yet managing Diovan’s decline will be his real test.