NVSEF - Novartis: Chasing Revenue Might Lose Sight Of Medicine

Summary

• Novartis is one of the world’s most successful pharma companies and it is undergoing a major change to become a pure-play innovative medicines company.
• Part of this also involves Novartis pursuing a “US-First mindset”, which might prefer money at the expense of products. This is potentially risky for Novartis' business.
• The “US-First mindset” is useful for potential Novartis investors to consider when deciding about balancing big pharma investment with new product developments at the Biotech end of the medical investment.

It is not often that one gets a frank insight into the new broad strategic direction of a big pharma company, but Novartis ( NVS ) has done just that recently. It is a brave new direction, going all in on customer stickiness and walking away from a focus on new medical strategies. Perhaps my takeaway is simplified, but it seems to me that this is a big pharma losing sight of its core business in search of the mighty dollar. For some investors this might be appealing. For me I like to see a core philosophy along with profits. Here I give my thoughts about where Novartis is heading as it adopts a “US-first mindset”.

What is big pharma, how does it relate to biotech and medicine?

Revolutions mean lots of change and in the biomedicine area the whole structure of the system is under review. This is where the changes, which I describe below, fit in Novartis’ new direction.

I’m interested in the nexus between basic science, medicine and the products that power new medical developments. To get a sense of the early stuff an interview with Lovisa Afzelius, an origination Partner at Boston-based Flagship Pioneering, is worth checking out. She looks at new developments and how to bring different technologies together, in her case the interface between biology, chemistry and computational science.

How Novartis presents itself

Earlier this month Novartis CEO Vasant Narasimhan gave a presentation at the 41st Annual JPMorgan Healthcare Conference which involved a Q&A after his presentation. This is the most recent presentation by senior management that I could find. As one might expect from one of the world’s biggest of the big pharma companies (No. 1 in Europe, No. 10 is the US, significant presence in China and Japan), Narasimhan spoke of a deep 250 year history, that 25 years ago was a healthcare conglomerate with 8 units spanning nutritionals, animal health, innovative medicines, pharmaceuticals and oncology. The big news is that with the spinout of Sandoz , its generics and biosimilars division, into a new standalone company, Novartis will become a scaled ($40 billion sales) pure-play Innovative Medicines company. The goal is to become the most-valued and trusted medicines company in the world. The new Novartis will have 5 core therapeutics areas, 5 technology platforms and 4 priority geographies (with a footprint in more than 100 countries). To get there Novartis has invested $100 billion in transactions over the past 5 years. CEO Narasimhan believes that the pure-play focused on high-end innovation will deliver better shareholder outcomes than its diversified past.

"US-first mindset", what does it mean?

The above presentation has hints of the US-Mindset and how it will be embedded within the development teams, commercial organization and within target product profiles, but I didn’t get an explicit understanding as to what it actually implied for the organisation.

An interview at the JPMorgan Healthcare Conference with a rising star at Novartis, Victor Bulto, who is US Innovations Medicines President, makes clearer what the “US-first mindset” means. Bulto’s comments followed on from a Sept 2022 press release by Novartis which emphasised a new “US-first mindset” which aims to have Novartis as a top-five player in the US by 2027 (it is currently No. 10). The press release referred to the new strategy to transform Novartis into a “pure play” Innovative Medicines company with 5 core therapeutic areas. The 5 core therapeutic areas are : cardiovascular, immunology, neuroscience, solid tumors and hematology. There are 8 current in-market brands (Cosentyx, Entresto, Zolgensma, Kisqali, Kesimpta, Leqvio, Pluvicto and Scemblix), each with multi-billion dollar peak sales potential. The details of the specific products and the technology platforms are considered at length in the JPMorgan presentation.

Bulto’s interview was clear as to how deep the plans are to have the “US-first mindset” become a core feature of the company. The areas of focus include early research, drug profile selection, dealmaking, clinical development and commercialization and patient services. The last areas set off alarm bells for me. Bulto contrasted the European and US Pharma markets. In Europe, Governments use national medical schemes to get patients access to new medicines at the lowest cost. So the negotiations about price and reimbursement happen up front. Launch of a product in the US is just the start of the commercialisation challenge.

Bulto’s view is all about the money and getting medicines to patients, but more importantly to keep the patients on the medication. Novartis wants to reduce “patient friction” as much as possible.

The scary comment from Bulto is that he claims that CEO Narasimhan has made it very clear that for every function in the organization, when there is a trade-off, the US comes first. This also means that, whereas in the past commercial teams focused on therapeutic areas relatively independently (i.e. product focus), the new focus is on functions such as market access, patient services, marketing and customer engagement. Bulto says the focus used to be on therapeutic area knowledge, but today that has changed. Today 80% of problems causing “frictions” are shared across therapeutic areas (authorization requirements, copayment burdens). Getting away from the medicine and focusing on the cash seems a dangerous path to tread. This is not to say that frictions are unimportant and that they are not common to many areas, but it is to say beware if the power gets away from the medicine and moves to monetizing the game.

Medicine versus money

Investors want to make money but do they also want to invest in companies that do good? Personally, this is important for me, but I acknowledge that some investors don’t care. Even if you don’t care whether or not your investment is messing things up, you are impacted by the effect this has on the investment community, because money ends up controlling a lot that happens in today’s world.

The opioid crisis in the US is perhaps a good example of where pharma became a contributor to a national problem that had an adverse impact on specific companies as well as the industry as whole. While drug dealers are a major part of the opioid problem, it is now clear that privately owned Purdue Pharma contributed through policies that motivated unsafe opioid use . It was all about money. Note that McKinsey & Company paid almost $600 million to settle investigations about its role in helping turbocharge opioid sales.

My argument here is that Novartis is embarking on a path that might have some unintended consequences for its business. The danger is when money becomes more important than the products that big pharma sell, because their products' impact on people’s lives. This seems to be exactly what might end up driving the “US First mindset”. I’ve used the opioid crisis as a worst case scenario that is clearly unacceptable, but the change in business orientation with “US-First mindset” opens the company up to these kinds of unanticipated consequences.

Of course, Novartis does not see it this way as a key professed focus of the company involves focus on ESG matters and building trust with society. The Novartis view of strengthening its ESG focus involves improving broad access to innovation for patients. This includes increasing patient diversity in clinical trials, getting medicines to more patients in low and middle income countries faster.

The Pharma business has lots of challenges

I’ve focused in this article on a big planned shift in the Novartis business model, which involves a narrowly US-focused approach, which may be needed in the US, but the rest of the world?

Other Pharma companies face issues with how they manage their businesses in a global climate that is not easy to navigate. To give a couple of examples of some challenges, both AbbVie ( ABBV ) and Eli Lilly ( LLY ) are encountering drug pricing issues in the UK, while Pfizer ( PFE ) is seeking to behave as a good corporate citizen by making all of its drugs available “at cost” in poor countries (notably on the African continent).

A bigger additional problem for Big Pharma is the extreme cost of some new drugs. This was highlighted in the disaster of Biogen’s ( BIIB ) Aduhelm launch. A drug that has questionable effect and dangerous side effects priced at $56,000 annual cost was never going to work. Pricing needs to be looked at. I understand that it is good to know the costs avoided by a successful drug, but to base pricing on that figure is another matter.

Conclusion

My history is in biotech and so I’ve been interested as an investor in the different kinds of investment that medicine/life sciences offer. Big Pharma is a battleship in the medicines space. It costs a lot to invent (or acquire) a drug, get it registered and then get it to market and become successful. Battleships tend to be very difficult to change and slow to respond. It also takes a lot to change market sentiment (stock price). Novartis is making huge changes with the 100% spinout of Sandoz and laser-like focus on innovative medicine. It is interesting but as I consider here, the US-First mindset is not without the possibility of unintended consequences. So I’m on the sidelines on this one. In fact, the recent developments at Novartis have helped me reconsider whether big pharma is a good fit for me. My mindset is much more around innovation and dramatic change, and those who follow me will be aware that I’ve invested recently in Seres Therapeutics ( MCRB ) as a turnaround possibility in the microbiome, a new field of medicine. I’ve done well with Pfizer in relation to COVID treatment (Paxlovid) and its involvement with BioNTech ( BNTX ) and the development and commercialisation of the COVID mRNA vaccines, but research involved with this story convinced me to sell Pfizer and buy Tesla ( TSLA ) at its currently depressed price. Now I just need Elon Musk to lose interest in Twitter!

I am not a financial advisor but I pay close attention to major transitions in biotech, energy, and transport. I hope that my comments about Novartis may be of some interest to you and your financial advisor as you consider a possible investment in Novartis.

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