Novartis beats Q3 estimates but investors balk at plans to delay Alcon exit

Joe Jimenez
Novartis CEO Joe Jimenez says Alcon needs to turn in several more quarters of growth before the company will be ready to divest it.

Novartis has been riding high over the last few months, with the FDA approval of its groundbreaking CAR-T cell therapy for leukemia, Kymriah, and a European nod for Kisqali to treat some patients with breast cancer.

So why did the company’s stock dip 2% this morning after the company beat expectations for both sales and earnings in the third quarter?

The answer is likely Alcon, Novartis’ long-struggling eye division, which investors expected would be spun off or sold next year. Not so, said CEO Joe Jimenez. Alcon’s sales grew 7% to $1.5 billion during the third quarter—its second straight quarter of growth—so the company won’t be ready to say goodbye to the unit until 2019.

An ongoing strategic review of Alcon suggests Novartis could generate more shareholder value if it waits a bit longer to decide what to do with the business, Jimenez said during a conference call with investors after the earnings release. “But the issue is Alcon really needs to show multiple quarters of top and bottom line growth,” he said. That’s because if Novartis decides to exit Alcon via the a public offering “we want the business to come to market from a position of strength, so there is investor confidence in a standalone business called Alcon,” Jimenez explained.

No doubt Alcon did contribute to Novartis’ strong third quarter. The company’s net sales grew 2% year-over-year to $12.4 billion and its net income was up 10% to $2.1 billion ($1.29 per share). The company reaffirmed its earlier forecast for the full year, telling investors to expect sales and earnings to be in line with last year’s results, even though it’s taking a hit from generic competition to its star cancer drug Gleevec.

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Still, during the conference call analysts hammered Jimenez about the decision to hold onto Alcon for at least another year. What do you need to see to decide on Alcon’s future? Do you prefer a complete spinoff or an IPO? Is Alcon’s recent growth really sustainable for another full year, or will the company need to make acquisitions to boost its top line? Those were just some of the questions.

Jimenez pointed to Novartis’ announcement today that it moved a line of over-the-counter eye products from its pharma division into Alcon. That product line brings in about $700 million in sales a year and “good margins” that should improve Alcon’s overall profit profile, Jimenez said. No acquisitions would be necessary to beef up the eye unit, he suggested—just more quarters of the growth the business has achieved of late.

Meanwhile, Novartis is counting on five key growth drivers to offset the patent cliff on older medications: Entresto to treat heart failure, psoriasis drug Cosentyx, cancer newcomers Kisquali and Kymriah and biosimilars. The company is so confident in its newer medications that it bumped up its full-year sales expectations for its innovative medicines unit.

That said, the company is facing significant sales challenges. Sales of Entresto, for example, did grow 138% year-over-year during the quarter to $138 million, but Jimenez noted that prescription rates dropped over the summer. Ever since the drug was launched two years ago at $4,600 a year, it has struggled to win over payers and physicians who have less expensive options. Data from new clinical trials showing the drug is superior to older products has helped, but the company has a long way to go to reach the $3 billion in peak sales analysts have been forecasting.

Novartis struck pay-for-performance deals on Entresto with Cigna and Aetna, and it has a similar arrangement for Kymriah with the Centers for Medicare and Medicaid Services (CMS). When asked during the conference call whether such outcomes-based reimbursement models are catching on with payers, Jimenez said there are still technical and regulatory issues that have to be worked out before the practice can spread, but eventually it will happen, he predicted.

“I’m a big believer that eventually outcomes-based contracts are going to take over,” he said. “One of the reasons why CMS was willing to agree to [the Kymriah deal] is that they’re looking for ways to bring these new technologies to the U.S. in a way that will not break the bank.”

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As for the decision about what to do with Alcon, Jimenez said Novartis hasn’t defined specific financial metrics it needs to see to pull that trigger—just continued growth in the unit. “Really this has always been about maximizing shareholder value, not necessarily what the mother ship could get out of it,” said Jimenez, who is retiring in February and handing the reins to Vas Narasimhan, the current head of drug development  for the company. “And so if we do make a decision to spin [Alcon out], we’re going to do it in the best interest of the shareholders.”