Novartis Executives Outline Strategy and Cost-Savings InitiativesBy
Following the closing of its three-part transaction with GlaxoSmithKline and the divestiture of its animal health business to Eli Lilly earlier this year, Novartis executives outlined the company’s strategic and operational goals at a recent investor day, including the company’s progress in realizing cost-savings from procurement and manufacturing rationalization.
Novartis held an investor day in Boston last week in which 20 of the company’s top executives from its Pharmaceutical Division, Alcon (its eye-care division), Sandoz (its generics division), and the Novartis Institutes for BioMedical Research (NIBR) met with approximately 100 investors and analysts to outline the company’s strategic objectives, offer commercial and pipeline highlights, provide the company’s progress in achieving its cost-savings goals from Novartis Business Services (NBS), the company’s recently formed shared services organization, inclusive of procurement, and update its manufacturing network strategy.
Novartis provided the update following the closing in March 2015 of its three-part transaction with GlaxoSmithKline (GSK) in which Novartis obtained oncology products and right of first negotiation to the oncology pipeline compounds from GSK, formed a consumer healthcare joint venture with GSK that combined the two companies’ consumer healthcare divisions, and divested its non-influenza vaccines business to GSK. The closing of the three-part deal followed the divestment of Novartis’ animal health to Eli Lilly and Company, in a deal completed in January 2015.
“With the portfolio transformation behind us, management is focused on execution against our strategic priorities, including strengthening innovation across our three businesses,” said Novartis CEO Joseph Jimenez, in a company release. “In Pharmaceuticals, we have a deep portfolio with Entresto (LCZ696) for chronic heart failure, Cosentyx for psoriasis, our newly acquired oncology assets, and a strategy to lead in second-generation immuno-oncology. At Alcon, IOL [intraocular lens] innovation is accelerating, and at Sandoz, we have a strong biosimilar and generic pipeline. With strong innovation in each of our businesses, we are well positioned for the future.”
Key portfolio adjustments
With the closing of its deal with GSK, Novartis gained approximately 1,800 new employees in approximately 60 countries, which included having the sales force in its top 20 markets fully operational. The acquisition of GSK’s oncology assets strengthened Novartis’ position in hematology, breast cancer, and renal cell carcinoma and provided Novartis with key assets in melanoma. Novartis acquired GSK’s oncology products, including two pipeline candidates, for an aggregate cash consideration of $16 billion. Up to $1.5 billion of this amount is contingent on certain development milestones. With the closing of the deal, Novartis’ oncology portfolio now includes 22 oncology and hematology medicines to treat more than 25 conditions. Some key products from GSK’s acquisition include: Tafinlar (dabrafenib), a BRAF inhibitor, and Mekinist (trametinib) , a MEK inhibitor, both approved for the treatment of metastatic melanoma; Votrient, a VEGFR inhibitor for treating renal cell carcinoma; Promacta (eltrombopag) for treating thrombocytopenia; Tykerb (pazopanib) for treating HER2+ metastatic breast cancer; and Arzerra (ofatumumab) for treating chronic lymphocytic leukemia. Sales of the acquired GSK oncology products in 2014 were approximately $2.0 billion.
In the new consumer healthcare joint venture, GSK Consumer Healthcare, Novartis holds a 36.5% share and GSK the remaining amount. GSK Consumer Healthcare has positions in four key over-the-counter categories: wellness, oral health, nutrition, and skin health and a commercial presence in developed and key emerging markets. Novartis also has four of eleven seats on the joint venture’s board. Furthermore, Novartis has certain minority rights and exit rights, the latter of which would be executed using a pre-defined, market-based pricing mechanism.
As part of its three-part transaction with GSK, Novartis divested its vaccines business (excluding its vaccines influenza business) to GSK for up to $7.1 billion plus royalties. The $7.1 billion consists of $5.25 billion paid upon completion and up to $1.8 billion in future milestone payments. In October 2014, Novartis agreed to divest its influenza vaccines business to CSL Limited for $275 million, which is on track to be completed in the second half of 2015.
Since 2013, Novartis has executed other strategic transactions to transform the company’s portfolio. In January 2015, Novartis completed the sale of its animal health business to Eli Lilly and Company for approximately $5.4 billion. Also, in January 2014, Novartis completed the sale of its blood transfusion diagnostics unit to Grifols S.A. for $1.7 billion.
With these major portfolio adjustments made, Novartis said at its investor day that it will continue to pursue bolt-on acquisitions up to $5 billion. In its pharmaceutical business, Novartis said this would include products that fit with its existing therapeutic focus. For Alcon, its eye-care business, potential mergers and acquisitions (M&A) would be targeted to its surgical business and ophthalmic pharmaceuticals, and for Sandoz, its generic business, bolt-on M&A would focus on differentiated generics and select geographies.
Looking forward, Novartis projects that growth in its pharmaceutical business and Sandoz will each be in the mid-single-digit range (on a constant currency basis), and revenue growth for Alcon is projected in the mid- to high single-digit range. Pharmaceuticals represent the largest piece of Novartis, accounting for 61% of the company’s $52.2 billion sales (from continuing operations) in 2014, followed by Alcon at 21%, and Sandoz at 18%.
Pharmaceutical growth is key
David Epstein, Division Head, Pharmaceuticals at Novartis, outlined the company’s position in the company’s pharmaceuticals at the company’s recent investor day, including highlights for near-term growth and pipeline potential. Overall, Novartis’ Pharmaceutical Division has 143 active programs, including 74 new molecular entities (NMEs), more than 500 trials ongoing and more than 300 trials planned to start through the end of 2016, with key programs in oncology, cardio-metabolic, immunology and dermatology, and respiratory.
Novartis points to high growth potential for Cosentyx (secukinumab), a drug to treat adults with moderate-to-severe plaque psoriasis, which was approved in the US and Europe in January 2015, and Entresto (sacubitril and valsartan) for treating chronic heart failure, which is under accelerated review in the US and the European Union (EU). Industry analysts are also bullish on those drugs, pegging them as potential blockbusters. A recent Thomson Reuters analysis estimates 2019 sales for Cosentyx at nearly $1.1 billion and for Entresto at $3.7 billion.
Secukinumab is an antibody that binds to a protein (interleukin (IL)-17A), which is involved in inflammation. By binding to IL-17A, secukinumab prevents it from binding to its receptor, and inhibits its ability to trigger the inflammatory response that plays a role in the development of plaque psoriasis. In addition to the US and EU, Cosentyx has been approved in Switzerland, Chile, Australia, Canada, and Singapore for the treatment of moderate-to-severe plaque psoriasis and in Japan for the treatment of moderate-to-severe plaque psoriasis and active psoriatic arthritis. Cosentyx is also in Phase III development for psoriatic arthritis and ankylosing spondylitis with regulatory applications made for the US and EU. Novartis said that is expects an opinion from the European Medicines Agency’s Committee for Medicinal Products for Human Use in the first half of 2016 and potential approval by the US Food and Drug Administration in the second half of 2016 for these indications. Overall, Novartis said that Cosentyx is expected to be a blockbuster and that a scenario where it could reach peak sales of $4 billion to $5 billion in psoriasis and the arthridities is possible.
Entresto (sacubitril and valsartan) received accelerated review in the EU and priority review and fast-track status in the US. It is an ARNI (angiotensin receptor neprilysin inhibitor) and has a mode of action that is thought to reduce the strain on the failing heart. It harnesses the body’s natural defenses against heart failure, simultaneously acting to enhance the levels of natriuretic and other endogenous vasoactive peptides while also inhibiting the renin-angiotensin-aldosterone system (RAAS), according to Novartis.
In oncology, Novartis estimates that it is the number two player globally following the acquisition of the GSK oncology assets combined with the company’s existing portfolio and pipeline. Novartis’ oncology position is built around targeted therapies, immuno-oncology assets, and chimeric antigen receptors T cells (CART) as both monotherapies and combination therapies.The recent acquisition of GSK’s oncology assets enhanced Novartis’ position in targeted therapies, which included the targeted therapies of Votrient, Tafinlar, Mekinist, and Promacta. Novartis said it sees the potential to increase sales to reach three blockbusters through market expansion and new indications, such as a combination of Tafinlar and Mekinist. This combination was granted accelerated approval in the US in January 2014, and submissions were completed in the EU and Japan for first-line melanoma in the second quarter of 2015. The combination of Tafinlar and Mekinist is also being investigated in non-small cell lung cancer and colorectal cancer.
In immuno-oncology, Novartis is advancing its own assets as well as advancing candidates through acquisition and alliances, most notably, the 2014 acquisition of CoStim Pharmaceuticals Inc., a Cambridge, Massachusetts-based, privately held biotechnology company, which gave Novartis late-discovery stage immunotherapy programs directed to several targets, including PD-1, and a 2015 alliance formed with Aduro Biotech, which is focused on the discovery and development of cancer immunotherapies targeting the STING (Stimulator of Interferon Genes) pathway. With the Aduro alliance, Novartis launched a new immuno-oncology research group led by cancer vaccine expert Glenn Dranoff. a researcher at the Harvard Medical School and the Dana-Farber Cancer Institute. STING is a signaling pathway that, when activated, is known to initiate broad innate and adaptive immune responses in tumors. Aduro’s small-molecule cyclic dinucleotides have shown an immune response in preclinical models that specifically attacks tumor cells.
Novartis is advancing several immunotherapies. Its anti-PD1 checkpoint inhibitor (PDR001) started first-in-human trials in April 2015. Its anti-LAG3 (LAG525), anti-TIM3 (MBG453) and anti-CSF1 (MCS110) therapies are on track to be in clinical trials in 2015, and doublets of those monotherapies with PDR001 are planned to enter the clinic in 2015 and 2016. Its STING agonist MIW815 (through collaboration with Aduro Biotech), and its GITR (glucocorticoid-induced TNFR family-related gene) agonists are progressing toward first-in-human in 2016. Novartis also has formed collaborations to evaluate the potential of targeted therapy/immuno-oncology combinations through several external collaborations, including one with MedImmune /AstraZeneca on the triple combination of Tafinlar, Mekinist, and an anti-PDL1 in melanoma as well as three combinations with Bristol-Myers Squibb’s Opdivo (nivolumab) entering the clinic in the first half of 2015. Novartis also is partnered with University of Pennsylvania (Penn) in CAR T cell technology, and its CART program, CTL019, is in Phase II clinical trials. In 2014, Novartis established a Cell and Gene Therapies Unit to advance innovative cell-based therapies, including the development of CARs. Novartis holds the worldwide rights to CARs developed through the collaboration with Penn for all cancer indications, including the lead program, CTL019.
On the R&D front, NIBR, headquartered in Cambridge, Massachusetts, conducts research into various disease areas at sites located in the US, Switzerland, UK, Italy, Singapore, and China. It is also focused on a next wave of therapeutics, based on principles of regenerative biology, that address common disorders of aging, including muscle weakness, loss of vision and hearing, and heart and liver failure, including nonalcoholic steatohepatitis. New NIBR-derived drugs and drug candidates also address a range of auto-immune and other disorders. In addition to driving innovation in-house, NIBR manages a network of alliances, including more than 300 collaborations with academic institutions and more than 100 collaborations with biotech and pharmaceutical organizations (270 including those managed by the Pharmaceuticals Division). Jointly NIBR and Pharmaceuticals added 37 new alliances in 2014.
Alcon and Sandoz also contribute
Alcon is Novartis’ second largest division behind pharmaceuticals. Key recent developments include the roll-out of Centurion, an advanced phacoemulsification platform, improved pull-through on sales of consumables from its cataract refractive suite, and pipeline advances for intraocular lens (IOL) projects. In addition, Alcon is developing its early-stage ophthalmic pharmaceuticals pipeline, exploring glaucoma treatment pathways, and early-stage opportunities for treating dry eye. Alcon is also expecting to innovate in the retina market with RTH258, which has shownvisual acuity gains in patients with wet age-related macular degeneration (wet AMD). Alcon initiated a Phase III study of RTH258 in wet AMD in December 2014.
Sandoz, Novartis’ generics arm, is focusing on differentiated generics and advancing its biosimilar products and pipeline. Biosimilars accounted for $514 million of Sandoz’s total 2014 sales of $9.6 billion. Sandoz has three in-market biosimilar products (Omnitrope, Binocrit and Zarzio) and five molecules in Phase III development/registration with plans to announce 10 further biosimilar filings over the next three years. In the US, where the biosimilars market is still evolving, Sandoz received approval in March of this year for a biosimilar of filgrastim, (Zarxio (filgrastim-sndz) under the new regulatory pathway in the US. In addition to biosimilars, Sandoz has a broad range of innovative development capabilities, including generic injectables, dermatology medicines, ophthalmics, inhalables, and anti-infectives. Sandoz’s Glatopa (glatiramer acetate injection) is an example of a differentiated generic. It was recently approved as a generic version of Teva Pharmaceutical’s Copaxone 20 mg. Sandoz has accelerated growth in the US behind a focus on differentiated generics, including the Fougera specialty dermatology business, which the company acquired in 2012.
Procurement and manufacturing rationalization improve bottom line
Novartis Business Services (NBS), the company’s new shared services organization that covers approximately $5 billion in spend, became fully operational in 2015 and is contributing to margin improvement. NBS consolidated a number of business support services previously spread across divisions, including information technology, financial reporting and accounting operations, real estate and facility services, procurement, payroll and personnel administration and the Pharmaceuticals Global Business Services. This reorganization was designed to improve profitability and free up resources that could be reinvested in growth and innovation, and to allow its divisions to focus more on customer-facing activities.
Key recent highlights from NBS include the transfer of 1,200 employees from other divisions to NBS (which now consists of approximately 8,700 employees), procurement savings of approximately $350 million in the first quarter of 2015, and the selection of five locations for Global Service Centers. The company’s target is to keep the cost under NBS management flat versus prior year. NBS has outlined several key goals: keep managed costs flat and absorb inflation and volume/demand growth; streamline and consolidate (e.g., optimize size of the organization, rationalize IT applications); optimize geographical footprint (centralization and offshoring of certain transactional activities); leverage scale (e.g., accelerate sourcing productivity, vendor spend, and process optimization); and facilitate cross-divisional coordination (e.g. real estate and facility services spend optimization). Overall, since 2011, Novartis has generated savings of approximately $10 billion, of which half was derived from procurement that was achieved by leveraging, scale and category and demand management.
On the manufacturing front, since 2010, Novartis has exited, divested, or restructured 17 sites from continuing operations, and reduced its manufacturing network from 98 sites in 2010 to 84 facilities in 2015, which included the addition of three new sites: the former Dendreon facility for cell and gene therapy in Morris Plains, New Jersey and two plants from Sandoz’s 2012 acquisition of Fougera Pharmaceuticals. The site tally does not include two sites not yet operational, a site in St. Petersburg, Russia, and the Biotech Center in Singapore.
On the pharmaceutical side, this restructuring was targeted for sites in: Casablanca, Morocco; Huningue, France; Torre, Italy (chemical operations); biopharmaceutical operations in Switzerland; Mexico City, Mexico; Taboão da Serra, Brazil (also produced for Sandoz); Horsham, UK; and Vacaville, California (site was transferred from pharmaceuticals to animal health in October 2014 and animal health business was later divested to Eli Lilly). The reduction in its manufacturing network improved the capacity utilization rate of its pharmaceutical facilities by 20 percentage points from 2010 to 2015. This improvement was also further realized by a portfolio shift from high-volume equipment for primary care products toward smaller-scale, multipurpose equipment.
In Sandoz, site adjustment was at the following locations: Jena, Germany; Buenos Aires, Argentina; and Taboão da Serra, Brazil. Streamlining of Sandoz manufacturing network is continuing with discussions initiated with works councils at Gerlingen and Frankfurt, Germany. And in Alcon, such restructuring was aimed for sites in Amwiler (Atlanta), Georgia; Mississauga, Ontario, Canada; Aliso Viejo, California; Cidra, Puerto Rico; Farnham, UK, Mexico City, Mexico; and Des Plaines, Illinois.