Novartis CEO Vas Narasimhan joins Yahoo Finance Live to discuss company earnings, focusing efforts on fighting cancer, consumer health, and cutting roughly 10% of the global healthcare company’s experimental drug pipeline.
Video Transcript
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JULIE HYMAN: Well, Swiss pharma giant Novartis beat analyst estimates in late April, delivering strong sales growth, margin expansion, also raised its full-year guidance. The company also announced plans to cut its experimental drug pipeline by roughly 10% and is focusing efforts on fighting cancer in particular.
Here to discuss is Vas Narasimhan, who is Novartis CEO, joined by Yahoo Finance's Anjalee Khemlani. Well, Vas, it's great to see you in person here in New York.
VAS NARASIMBAN: It's great to see you as well, Julie.
JULIE HYMAN: Yeah.
VAS NARASIMBAN: Great to be here.
JULIE HYMAN: Thanks for being here. So you have been making some interesting moves here in terms of focusing your drug portfolio. But there is one drug I want to ask you about in particular, and that's Kisqali, if I'm saying that--
VAS NARASIMBAN: That's right. That's right, yeah.
JULIE HYMAN: --correctly, which is to treat breast cancer. And you've seen some progress there. What's the potential for a drug like that for Novartis?
VAS NARASIMBAN: Yeah, look, this is one of the most exciting medicines that we've had readout on this year. And what we were able to show with this medicine is we have the potential to delay the onset or maybe stop the onset of breast cancer in patients with early breast cancer who are at risk of recurrence. And this is really important because this is the largest segment within the breast cancer market important-- most importantly for these patients.
And it gives us an opportunity to take a multi-billion dollar medicine outlook today for Kisqali and add another multibillion dollar indication on top. And that really helps us underpin this mid-term growth that we've-- guidance we've given of 4% growth and 40% core margin. So Kisqali will be one pillar. And we some other drug readouts I'm sure we'll talk about. But I think it really just shows that that innovation engine is really starting to hit for us.
ANJALEE KHEMLANI: First of all, [NON-ENGLISH SPEECH]. I had to throw that in there. Let's talk about your company pipeline. I know that you pulled back. You're starting to focus on five core areas.
And I feel like this is part of a trend we're seeing in pharma right now, which is looking at being more efficient. You're seeing spinoffs of generics, which Novartis is doing, and then spinoffs of consumer health as well. Talk to me about why this is happening right now.
VAS NARASIMBAN: When you think about the strategy in a big pharma company like-- like ours, as the science moves as fast as it's moving with all of the new technologies like cell and gene therapies or RNA technologies or areas that we're in like radioligand therapy, you have to ask yourself, can you allocate capital to be a leader in these high-tech areas while also holding very different businesses? And I think our conclusion is it's hard to do that. And if you really want to be a leader at the cutting edge in science, you have to focus the company around that.
So really, over the last 10 years but accelerating since I became CEO, we've completely focused Novartis from being a broad conglomerate-- we had seven divisions. We were in animal health, contact lenses, consumer health-- and now we're just focusing on high-end, innovative medicines. Our goal is to regularly develop them, launch them well, and then hopefully get them to countries, patients all around the world. We market these drugs in over 100 countries.
But I think it's that science that's driving the focus. And so-- and then within, it's even hard within the world of pharmaceuticals. You have to focus on a few therapeutic areas. Hard to be good at everything from women's health to cancer to cardiovascular disease. So we've picked five, and we're really focusing down, and that's why we trimmed the pipeline.
BRAD SMITH: How has that changed how you earmark capital for everything from research and development all the way into where you might look to acquire in the future too?
VAS NARASIMBAN: Yeah, absolutely. I mean, when you think of just a few years ago when I started in this role, we had to allocate capital into everything from consumer health to eye care lenses and devices alongside pharmaceuticals. Now we focus all of the company's capital in building a leading pipeline and building that business. And from a B&L, M&A standpoint, it also allows us to focus primarily on bolt-on biotechs. And that's, really, where we've been active.
Over the years, every year or two, we've done a couple of these acquisitions. And of course, we're looking now-- you've probably talked on the show, I'm sure, the XBI is at a really periodic low. So there's a lot of interesting companies. But the key is does the science support the valuation? And if that science supports the valuation, we're certainly willing to make the acquisition.
JULIE HYMAN: And as you said, you're seeing maybe some cheap stuff out there to add in those five focus areas that you spoke about. When you look at the science that's out there right now, where do you think there is the most excitement? Where are we-- I mean, obviously, all the excitement over the past couple of years has been over mRNA and vaccines, et cetera.
VAS NARASIMBAN: Sure.
JULIE HYMAN: What's happening in your focus areas that you're really excited about?
VAS NARASIMBAN: I think a couple of things. One, we continue to be excited on what we call these next technology platforms, advanced technology platforms. We believe we're the world leader in cell and gene therapies. So certainly, our acquisition of gene-- of AveXis a few years ago, a drug called Zolgensma, has been really pivotal in our building cell and gene therapies. We're a leader in RNA therapeutics. And so we think RNA therapeutics will continue to be a really important part of the market.
And then looking forward, we have this whole new area of cancer that we're pioneering called radioligand therapy. We have a great new prostate cancer drug Pluvicto, which has had so much demand we just can't keep up with the demand for the medicine. So I think continuing to build out in these technology areas is a big focus for us on our BD&L and M&A.
And then more broadly, it's interesting. Cancer is the hottest area still. You see the most biotechs in cancer. But it's also the hardest area. I think where investors always have to remember is that it has the lowest success rate of any therapeutic area.
So when you bring a cancer drug into phase I, it has the lowest success rate versus any other therapeutic area that you bring a medicine forward. So you have to make the bets. We also have to be aware that it probably won't work.
ANJALEE KHEMLANI: Speaking of that, getting to this more focused pipeline, you also sit on the chair of PhRMA. And so looking at it from the broader perspective, industry perspective, you have got the Inflation Reduction Act and the pressure that it's putting on the industry, also in the EU, the new patent proposal. So there's a lot going on. How much of an impact is that all having?
VAS NARASIMBAN: I think it's going to shape how we make investment decisions in the future if we don't fix some of the policy problems I think the IRA created. The biggest issue on our mind, and I think the industry overall, is the distortion created by having biologics protected from price setting for 13 years but small molecule drugs, so pills and other drugs which are much simpler to make, only protected for nine. And what that's going to do over time is shift capital away from these medicines. Important things to note about that. There are many diseases you can only treat with small molecule drugs.
Second, many of the most-- things that we're most excited about, like Kisqali, cancer drugs, you need more than nine years to actually be able to take that medicine and study it in all of the patient populations that are going to benefit. If the government price sets early, you destroy that market. We won't invest in learning about where these medicines can help more patients. So I think it's a big challenge. We're really focused. I'm hopeful, by 2025 when this all gets implemented or supposed to be implemented, we can fix that nine and 13 distortion.
The other big topic in Washington is pharmacy benefit manager reform. There are multiple efforts ongoing. We're highly hopeful as an industry that sector also gets reformed. We think it creates all kinds of distortions for patients where patients are not getting the medicines at the pharmacy counter at the price that we're selling it to the pharmacy benefit manager. They're getting it at these inflated prices where they're not benefiting from the rebates that we pay through.
Lastly, I'd say in Europe, it's really important that the European governments really understand they have to create the right innovation ecosystem. And if they erode patent protections in even small ways, it just erodes the ability for us to invest in that region. And that's what we're really trying to educate those policymakers on.
JULIE HYMAN: I sort of have a related question to the middle part of that about pharmacy benefit managers. And this is also related to the changing face of the health care industry. You talk about the more focus for Novartis.
On the other side among your customer base, there's more consolidation. So you talk about UnitedHealth Optum. You talk about Amazon buying clinics, et cetera. What does that do in terms of customers that you're selling to? Is it a tougher negotiation process? How is that changing your business?
VAS NARASIMBAN: You're absolutely right, Julie. Over the last decade, that consolidation has led to a lot of buying power from those pharmacy benefit managers, who are largely integrated with the insurers and their ability then to extract these very large rebates. I mean, if you look at in general in our industry, most companies are paying half of their gross sales into rebates.
And that's because of the power of these relatively small number of entities, which is controlling how patients get diagnosed and how they get their medicines. So it's a concern. And I think the real question that I'm hoping Congress will tackle is to take that money and give it to patients or give it to plans and not have it only be driving up the profits of those organizations.
ANJALEE KHEMLANI: Well, let's talk about that, too, because you also have these smaller players like Cost Plus and those discounts players in the background also trying to negotiate directly, bragging about the ability to even get brands at lower prices. What is the whole market looking like right now in terms of these new players and the actual impact they can have for customers?
VAS NARASIMBAN: You know, I think it's really good that all this innovation is happening, which I would say, broadly speaking, is trying to bring more transparency into the system so patients can understand where can they get their prescription filled in the most cost effective way, which actually, from our perspective, makes total sense because our goal is that patients fill their prescriptions.
And all of the barriers that are created, whether it's co-pays, whether it's step edits, all of the things that-- I won't bore you with all of the ways, the lingo-- but, I mean, this creates a real barrier. I mean, we know that less than half of patients really fill their prescriptions on an ongoing basis because of all of these barriers. So I'm hopeful these startups can help and can help us improve how the whole system works. The biggest challenge for them is they've got to get to scale. Back to Julie's point, I mean, the other players are so big that you'll easily get squeezed out of the market if you don't get to scale quickly.
JULIE HYMAN: And we talked about this a little bit back in January when we spoke at Davos about recession and the effect or not on a company like Novartis because many of your medicines are necessary for people to have. But what you just said points to the idea that even if they are necessary, some people are not filling their prescriptions. They're not paying their co-pays or, if they don't have insurance, they're not spending on those. So what are you seeing in your customer base that reflects that?
VAS NARASIMBAN: So, first, I always think of our Davos meeting because you took a picture of my shoe, I think, didn't you?
JULIE HYMAN: Yes, I did. I do remember taking pictures of people's shoes, yes.
VAS NARASIMBAN: It's very memorable. I get-- do a lot of interviews, but I remember--
JULIE HYMAN: Good. Good.
VAS NARASIMBAN: --I remembered the Yahoo one. You know, I think-- I think on this point, the key is that we have to increase affordability at the pharmacy counter. And I actually do think one of the positives of the IRA legislation we discussed earlier is that we have co-pays capped now. And when that gets implemented in 2025, it's going to be really interesting to see when Medicare patients have their co-pays capped at $2,000 a year, now do we see prescriptions getting filled because they should. I mean, they should be getting filled if that's the barrier.
And that's going to lead to a big shift. I mean, we're hopeful that means in areas like heart disease and cancer and immunology disease that people will then get on our medicines and stay on our medicines over time. So that'll be a really, really big positive because I think what happens is once you hit the current system, once you get past a certain point, the out-of-pocket costs are just simply too high. So that's going to be a really important moment in our industry when that happens.
JULIE HYMAN: All right, well, we'll keep in touch then. Vas, I won't be taking pictures of your shoes this time.
VAS NARASIMBAN: All right.
JULIE HYMAN: It's a little different. We're not out on the icy tundra like we were there. Vas Narasimhan, Novartis CEO, and our Anjalee Khemlani. Thanks so much. Great to see--
VAS NARASIMBAN: Yeah, great to see you all.
JULIE HYMAN: --you in person once again.
VAS NARASIMBAN: Thank you, all.
