NVSEF - Novartis: Strong Growth And Continued Expansion For KISQALI

2023-07-18 15:17:27 ET

Summary

• Novartis AG Q2 2023 earnings topped Wall Street expectations on both the top and bottom lines.
• A $15 billion share buyback was announced and is expected to be completed by year end 2025.
• Novartis has several drugs in its pipeline, which should carry it forward in the coming quarters, such as: Entresto, KISQALI, Pluvicto and Kesimpta.
• Data readout from the phase 3 NATALEE study, using KISQALI plus Endocrine Therapy in early breast cancer patients, expected 2nd half of 2023; Label expansion filings of KISQALI for early breast cancer patients expected in Europe and U.S. in Q3 and Q4 of 2023, respectively.

Novartis AG ( NVS ) had made great progress thus far to deliver growth, and that's what it was able to achieve in its most recently reported Q2 2023 earnings . It expects to continue forward with strong growth because of its raised 2023 guidance . Not only that, but I believe it will be strong for the coming quarters, because of the growth it expects with its breast cancer drug KISQALI. Analysts at Bank Of America believe that this drug could reach sales of $12 billion.

Speaking of which, there is a catalyst for investors to look forward to in the 2nd half of 2023. This would be the release of updated results from the phase 3 NATALEE study, which is using its drug KISQALI for the treatment of patients with hormone receptor-positive epidermal growth factor receptor 2-negative [HR+/HER2-] early breast cancer [EBC] at risk of recurrence.

It is expected that updated invasive disease-free survival [iDFS] and overall survival [OS] are going to be released in the 2nd half of 2023. Not only that, but it expects to file regulatory applications to reflect a broader label for this breast cancer drug in the U.S. and European Union. The reason why is because it would more than double the number of early breast cancer patients who could receive treatment with it. Plus, there were many other growth drivers that helped boost sales for Q2 of 2023 as well, such as: Entresto, Kesimpta, and Pluvicto. Along with another strong drug in its pipeline, such as COSENTYX.

The final positive is that Novartis AG was able to give back to shareholders with a $15 billion buyback as well. It wasn't able to find very many deals, but if it could find a way to add more bolt-on deals in the coming year, then it could potentially add new drugs into its pipeline. It was able to at least acquire a company recently, by the name of DTx Pharma. Such an acquisition brings on board an RNA delivery platform, along with the targeting of rare diseases.

KISQALI Continues To Deliver Strong Growth

As I noted above, a major driver of Novartis' pipeline would be its breast cancer drug known as KISQALI. Why do I make such a claim? That's because sales of this breast cancer drug came in at $490 million in Q2 of 2023, compared to only $308 million in the same quarter the prior year. This means that sales of KISQALI grew by as much as 66% year-over-year. As I stated above, analysts from Bank Of America think that KISQALI could be a $12 billion drug. How can this even be possible? Well, there are two ways to see this heading that direction in the short term. The first would be the continued strong momentum of it in the marketplace. It has been gaining persistence in the market and it is believed that it will continue to do so. A second item would be the possible expansion opportunity that would be possible.

An expansion opportunity could come with respect to the possibility of it receiving an expanded label of KISQALI for early Breast cancer [EBC] patients. Such a possibility would be with respect to a catalyst that is approaching for Novartis, which would be the release of results from the phase 3 NATALEE study. Such a late-stage study is using KISQALI for the treatment of these patients with EBC. It is said that more than 90% of patients diagnosed with breast cancer have early breast cancer [EBC]. However, about 30% to 60% of HR+/HER2- stage II and stage III EBC patients only given endocrine therapy [ET] remain at risk of breast cancer recurrence. The risk of recurrence peaks within the first 3 years and then continues to carry on for many decades.

This is a major problem, because for such breast cancer recurrence there are no currently targeted therapeutic options outside of receiving either one of these treatments:

• Standard of care chemotherapy.
• Endocrine therapy.

Thus, if KISQALI has its label expanded to include these patients, then it would bring such a targeted therapeutic into the fold.

The global phase 3 NATALEE study , evaluated the safety and efficacy of KISQALI with endocrine therapy [ET] as an adjuvant treatment versus ET alone in patients with HR+/HER2- Breast cancer [BC]. The primary endpoint of this late-stage study was invasive disease-free survival [iDFS]. One important thing to note about iDFS is that it is a composite clinical endpoint. Thus, it has several endpoint measures involved, with are as follows:

• Locoregional relapse.
• Ipsilateral and contralateral invasive breast cancer.
• Distant recurrence.
• Types of new cancer events.
• Death from any cause.

A total of 5,100 adults with HR+HER2- EBC were randomized to receive either 400 mg of KISQALI plus ET or ET alone. The intended goal of this study was met in that the primary endpoint of iDFS was achieved . Matter of fact, the independent Data Monitoring Committee recommended stopping the trial early because this primary endpoint was met. Thus, KISQALI plus ET significantly reduced the risk of disease recurrence compared to standard adjuvant ET alone, with consistent benefit in patients with stage II and stage III EBC regardless of nodal involvement.

Even though this data was already released from the phase 3 NATALEE study, there are still a few catalysts that Novartis investors should anticipate. The first catalyst to consider would be with respect to additional data from this late-stage study. That is, it plans to release updated iDFS and overall survival data from this trial in the 2nd half of 2023. If all goes well, then this would open up other catalysts, which would be regulatory filings of KISQALI for a broader EBC patient population The European Union regulatory application for an expanded label of the drug for this patient population would be in Q3 of 2023 and then in the United States in Q4 of 2023.

These filings are very important, because as I described above it would open up the market opportunity that could be targeted by this drug. That is, the NATALEE results have the potential to more than double the number of patients who could benefit from treatment with a CD4/6 inhibitor in the EBC setting.

Financials

Novartis is a big pharmaceutical company, and as such it already generates a lot of revenue from several approved products. Its recent earnings report highlights an increase in sales from several of its popular drugs, along with continued expansion. Q2 of 2023 sales grew by 7% to $13.6 billion, which was above the analyst consensus of it only coming in at $13.2 billion. Operating profit for this quarter increased by 9% to $4.67 billion, which passed analysts expectations of about $4.3 billion.

Sales came in very strong during Q2 of 2023 and could get stronger per share, and I state this because of two reasons. The first reason would be that Novartis implemented a $15 billion buyback, which is expected to be completed by year-end 2025. The thing is that despite this share buyback program, it stated that it will still look for bolt-on deals. Meaning it will look for partnerships or small companies to acquire to add to its pipeline.

Matter of fact, such an acquisition was made just the other day, whereby Novartis announced that it would acquire DTx Pharma , which is a preclinical stage biotech that deals with the use of oligonucleotide therapeutics with its Fatty Acid Ligand Conjugated OligoNucleotide [FALCON] platform. Not only does the big pharma gets its hands on such a platform technology, but some assets in the pipeline as well. For instance, DTx-1252 was being advanced for the treatment of patients with Charcot-Marie-Tooth Disease Type 1A [CMT1A] patients. This is in addition to other early-stage programs that target neuromuscular and Central Nervous System [CNS] indications. Novartis paid an upfront $500 million to acquire it and expects to pay up to an additional $500 million in pre-specified milestones as well.

A major driver of growth for Novartis for its Q2 of 2023 earnings was its heart-failure drug Entresto, whereby sales were up by 37% to $1.52 billion. It has some other good drugs in its pipeline such as KISQALI as noted above, plus Kesimpta and Pluvicto. Kesimpta, which is a once-a-month injection treatment option for patients with multiple sclerosis [MS] not only beat expectations, but saw quarterly revenues more than doubling to $489 million. Another drug that is doing pretty well in the pipeline would be Pluvicto, which was approved by the FDA as a targeted radioligand therapy for the treatment of progressive PSMA-Positive metastatic castration-resistant prostate cancer patients. Sales of newly launched Pluvicto came in at $240 million during this period. These strong growth in sales allowed Novartis to raise its 2023 guidance. Sales for this year are now expected to grow high single-digit [up from mid single-digit] and core operating income is expected to grow low double-digit to mid-teens [up from high single to low double].

The company has a growing pipeline and there is potential for it to go after other large markets. For instance, it is advancing a drug known as Remibrutinib, in a phase 3 study treating patients with chronic spontaneous urticaria [CSU]. Why is this important? Well, I believe it has potential to make up for possible patent loss of Entresto. The reason why is because the Chronic Spontaneous Urticaria market is expected to reach $7.66 billion by 2032 . It expects to release interim results from this late-stage study in the 2nd half of 2023 and then have a final data readout from it [52 weeks treatment duration] in 2024. Should both the interim analysis and the final results from this phase 3 study go well, then Novartis expects that it will be able to file a regulatory application of Remibrutinib for marketing approval.

Risks To Business

There are several risks that investors should be aware of before investing in Novartis. The first risk to consider would be with respect to Entresto. As I noted above, this drug was a huge driver for sales. Sales of this heart failure medicine increased by 37% to $1.52 billion. A risk here is that the big pharma is in a legal battle with generic drugmakers who are seeking to launch cheaper copies of this drug ahead of an anticipated end to its patent protection. It is expected that patent protection of Entresto will end in 2025. Speaking of which, there was a patent update listed in the most recent Q2 of 2023 earnings report. It was noted that there was a negative decision from the U.S. District Court for the District of Delaware. Novartis intends to appeal this ruling to the U.S. Court of Appeals for the Federal Circuit to uphold a validity of its patent covering Entresto and combinations of sacubitril and valsartan. Hopefully, an appeal can be achieved and it will be able to block the sale of generics for as long as possible. That's because Entresto generated $4.6 billion in sales in 2022 and was Novartis' second top-selling medicine.

A second risk to consider would be with respect to KISQALI. Even though analysts at Bank Of America believe that sales of this breast cancer drug could reach sales of $12 billion there is no guarantee it will do so. This is especially true if there are some setbacks. For starters, overall-survival [OS] results from the phase 3 NATALEE study are expected to be released by the 2nd half of 2023. There is no guarantee that this data will be viewed in a positive manner by the stock market. Secondly, the hope is that Novartis will be able to file regulatory applications to the U.S. and European Union to expand the label of KISQALI for this early breast cancer [EBC] patient population.

The European filing for the label expansion of KISQALI is expected in Q3 of 2023, whereas the one for the United States is not expected until Q4 of 2023. There is no assurance that the label of KISQALI will be expanded to one or both of these territories for early breast cancer patients.

Conclusion

Novartis was able to report strong sales for its Q2 earnings. It was able to beat on earnings per share with $1.83, which was above consensus of analysts who only expecting $1.71 per share. Revenue also saw an increase of 9% year over year as well, which shows that it has several products that can carry it forward in the coming quarters.

I think that KISQALI is going to be a highly important clinical asset for Novartis AG going forward. That's because of the possibility that sales of it could eventually reach $12 billion. Whereas, peak sales of Entresto are expected to be about $5 billion. If Novartis can continue to expand upon the label for KISQALI, then I believe it will be good for the long term, regardless of the patent litigation ongoing with Entresto. Even then, this big pharma is working on appeals in court to keep generics at bay for as long as possible.

Novartis does have the cash to do bolt-on deals, which is not bad. It is already enacting such a strategy, whereby on July 17, 2023, it acquired DTx Pharma for $500 million. Plus, another $500 million upon completion of pre-specified milestones. Novartis AG is not a one-hit wonder, either, it is seeing growth with respect to several of the drugs in its pipeline. Again, such drugs with growth are KISQALI, Entresto, Kesimpta, and Pluvicto.

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