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Novartis Needs to Stem the Bleeding From Gleevec Decline

- By Sangara Narayanan

Novartis (NVS) and Pfizer (PFE) are the two largest pharma companies in the world by market capitalization - so close that they often swap their No. 2 and 3 positions with the whims of Mr. Market.

Above them is the more diversified Johnson & Johnson (JNJ), sitting at the top of the health care industry with more than $300 billion in market cap while Pfizer and Novartis are in the $210 billion to $220 billion range.


In my recent article Pfizer Investors Mood Dampened by Second Quarter Earnings, I covered in detail Pfizer's performance this past quarter and how the stock looks inexpensive with respect to its overall performance. Now, let's take a closer look at Novartis and see the bright spots that can help shape the future of the company.

What's the story with Gleevec and Entresto?

As revenue growth slowed down due to the impact of generics on Gleevec, Novartis' blockbuster cancer treatment that brought in $4.658 billion in 2015, its stock price followed and is now down nearly 17.58% in one year. With sales from Gleevec slowing down and its eye care product Alcon not performing up to expectations, Novartis is betting on the success of new products such as Entresto and Cosentyx to get out of its revenue slump.

The company says that heart drug Entresto's sales could potentially reach $5 billion a year, but things have been a bit slow on this front as well. Sales of Entresto were $32 million during the recent quarter so during the earnings call Novartis said it will be increasing its marketing spend and expects to hit $200 million in sales by the end of this year.

A healthy pipeline cannot be a short-term fix

Novartis had more than 200 projects in clinical development by the end of last year, possibly one of the largest pipelines in the industry. The problem is its short-term troubles aren't going to be covered by any size pipeline if it can't show some immediate results. The company's own estimate on Gleevec is that generic drugs will likely wipe out about $3.2 billion in sales. That's nearly $800 million in quarterly revenues the company will have to make up somewhere.

But where is the question on investors' minds at this point.

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Looking at its key growth drivers and with Entresto expected to hit only $200 million by the end of this year, sales growth is out of bounds for Novartis in 2016. The company expects net sales to be broadly in line with last year on a constant currency basis so it wouldn't be a gross mistake to expect its reported sales numbers to be a couple of percentage points down compared to last year.

A possible solution

It is never easy to replace a billion-dollar drug, and it's even more difficult to replace a drug that earned $1 billion in a single quarter. On the positive side, there are products like Gilenya growing at double-digit rates, but, unfortunately, this was the first full quarter for Gleevec's loss of exclusivity in the U.S. It's hard to predict the sales erosion it will face over the next six months, but the odds are high that the decline will be far lower than the increasing sales from new growth drivers.

It's understandable that the company is now pushing double time to increase Entresto sales so that it provides some sort of buffer to Gleevec's decline. Depending on how things shape up internally, the company might decide to pull the trigger to buy a new asset. Novartis is already in the market trying to sell off its stake in Roche, and their recent announcement that they are ready to sell the stake without a premium is a clear indication that it is hunting for new deals as a possible way to stem short-term bleed.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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This article first appeared on GuruFocus.