Cosentyx woes, generics weakness cast cloud on otherwise solid Q1 for Novartis

Novartis headquarters
Novartis beat estimates in the first quarter but is facing challenges in many key product areas. (Wikimedia Commons/Andrew/Flickr)

Novartis’s first-quarter sales and earnings beat consensus estimates. So why did the company’s stock dip more than 2% first thing Thursday morning?

The answer speaks to the high expectations investors have set for Novartis’s new CEO, Vas Narasimhan—and for his promise to focus the company on high-margin markets that have the most potential to drive earnings growth over the long term.

Narasimhan made one big move towards meeting that goal during the quarter—selling off the company's stake in its consumer health business to GSK for $13 billion—but there were some notable weaknesses during the quarter that clearly troubled investors.

The No. 1 concern among analysts during the first-quarter earnings call was psoriasis drug Cosentyx, which brought in $580 million, significantly short of the average estimate of $635 million. The company blamed destocking by specialty pharmacies and rebates it offered to win more prescriptions in previously untreated patients. But there’s no doubt Novartis faces increasing pressure from both rivals and payers in this market. It had an early, first-to-the-punch lead in 2015 but has since acquired tough rivals in Johnson & Johnson’s Tremfya, Eli Lilly’s Taltz and Valeant’s Siliq.

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Paul Hudson, CEO of Novartis pharmaceuticals, tried repeatedly during the earnings call to ease fears about Cosentyx’s prospects by asking analysts to focus on its 60% volume growth year over year. “I’m very pleased with the underlying performance in Q1 in terms of volume,” Hudson said. “When you do provide more rebates … to access new patients all you’re looking for is a kick-up in volume to show you’ve made the right choice. And the volume numbers really do speak for themselves.”

But when asked whether Novartis was locked into contracts that guarantee rebates over the long term, Hudson declined to provide details.

Novartis continues to grapple with challenges in its generics unit, Sandoz, namely price erosion in the U.S. Despite volume growth of 2 percentage points, competitive pressure and price erosion drove U.S. sales down 18%, according to the earnings release (PDF).

It doesn’t help that the FDA just put the kibosh on one of Narasimhan’s biggest hopes for this year, the launch of Novartis's generic version of GlaxoSmithKline’s respiratory blockbuster Advair. Novartis had hoped to roll the product in the first half of this year, but the FDA asked for more data instead of approving it. During the earnings call, Narasimhan confirmed the company would need to do a “small bridging study” to address the FDA’s concerns. He could only promise that the drug will be on the market sometime in 2019.

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Then there’s Alcon, Novartis’s long-struggling eye unit, which some investors were hoping might be sold or spun off this year. Its first-quarter performance wasn’t bad: The unit’s sales grew 7% to $1.8 billion. When nudged by one analyst to provide some hints about the company’s plans for divesting Alcon, Narasimhan said he wants to wait until the first half of next year to make a decision. “We have always said that we wanted to be able to make a decision on Alcon from a position of strength,” Narasimhan said.

The bright spot during the quarter was Novartis’s oncology business, thanks to strong sales of products like blood cancer drug Jakavi, which was up 44% year over year to $234 million, and Mekinist/Taflinar for melanoma and lung cancer, which scored sales growth of 43% to $267 million.

But even the strong overall performance of the oncology unit was overshadowed, namely by a shortfall for breast cancer drug Kisqali, which brought in just $44 million in sales—performance that Bernstein analyst Tim Anderson blasted as “mediocre” in a note to investors. The product has struggled to gain traction against Pfizer’s dominant Ibrance, despite some key wins, such as a a breakthrough designation from the FDA for first-line treatment of premenopausal women with HER2-negative, HR-positive cancer.

Elizabeth Barrett, who moved from Pfizer in January to take over as CEO of Novartis Oncology, admitted during the conference call that the company needs to improve its sales strategy for Kisqali. “We’ve taken the opportunity to refine our messaging and our strategy against our targets and are rolling those out now in the U.S. We feel very confident,” she said, noting that the company has observed some volume growth in the product.

Overall, Novartis revenue came in at $12.7 billion, and earnings per share hit $1.28. 

The earnings report came just days after Novartis announced an $8.7 billion purchase of AveXis—one of the biggest moves it's made towards expanding in gene and cell therapies, a market it pioneered with its CAR-T cancer treatment Kymriah. AveXis is in phase 3 trials of a gene therapy for spinal muscular atrophy (SMA).

Because the deal hasn’t closed, Narasimhan couldn’t say much about his plans for AveXis, but he did say he's optimistic the buy would boost Novartis’ share of the emerging gene-therapy market. “We look at this as an opportunity first in SMA1, expanding to SMA2, and importantly the prevalent pool of patients, which we view as sizeable,” he said, calling the efficacy seen in clinical trials as “transformative.” No doubt growth-hungry investors will watch Novartis’s handling of the AveXis acquisition carefully.