Should Novartis Shareholders Be Worried About This?

As an investor in the health care sector, it can sometimes feel like everything -- and everyone -- is out to get you. The ongoing threat of competing drugs being brought to market that are superior to existing drugs means that biopharmaceutical companies need to constantly be on their toes and investing for the future, as well as closely protecting existing therapies with patents and specially designated drug statuses (e.g., orphan drug status).

Shareholders in pharmaceutical giant Novartis (NYSE: NVS  ) are learning that there are always new and various ways that uncertainty can creep into the picture.

Source: Melanie Tata, Flickr.

In late July, Novartis alerted the Food and Drug Administration that one of its approximately 71,000 patients who had been treated with relapsing multiple sclerosis capsule Gilenya had developed a case of progressive multifocal leukoencephalopathy, also known as PML, a rare viral disease of the white matter of the brain. According to Novartis at the time, it did not believe that Gilenya was the cause behind this patient in the U.K. developing PML, but it notified the FDA of the occurrence. However, yesterday we received word that the FDA is officially probing the cause of this patient's PML.

Should shareholders be worried?
A probe by the FDA is never a good thing, but I feel that the precedent and facts here are likely to put Novartis in the clear.

According to Novartis, the patient in question who was treatment naive of Biogen Idec's (NASDAQ: BIIB  ) Tysabri was also taking other drugs in addition to Gilenya, had atypical MRI lesions present before starting Gilenya, had multiple instances of taking corticosteroids (thought to be a risk factor for PML), and was only on Gilenya for seven months.

Let's also recall that Incyte (NASDAQ: INCY  ) and Novartis went through a similar scare with their FDA-approved myelofobrosis drug Jakafi. In March, Incyte noted in a regulatory filing that a patient on Jakafi had developed PML, which caused its stock to fall by double digits at the time. But, it's worth noting that more than 10,000 prescriptions of Jakafi had been written (at the time of the securities filing) with just this lone case of PML arising. In addition, Incyte pointed out that the condition of myelofibrosis puts patients at a higher risk of developing PML to begin with. Shares of Incyte have more than recovered since that regulatory filing.

What shareholders should really be concerned about
The good news for shareholders is that a new warning about PML incidence is unlikely -- in my opinion, at least -- to be placed on Gilenya, and its sales should be rebound on that accord very soon. The bad news, though, is that competition in the MS space is only increasing.

Gilenya still looks like a strong option compared to Sanofi's (NYSE: SNY  ) Aubagio, which was once expected to lead the charge in MS treatments. However, a black box warning that Aubagio can lead to severe liver problems, which can in turn lead to death, have seriously slowed sales of the relapsing MS drug.

What Gilenya should be most concerned about is newly approved relapsing MS drug Tecfidera from Biogen Idec. A twice-daily pill, Tecfidera reduced relapse rates in clinical trials by 49% compared to the placebo and reduced new or expanding lesions by 71% to 99% depending on the trial. More importantly, the safety profile of Biogen's Tecfidera is much improved with a decrease in white blood cell counts, flushing, and stomach problems being the most common adverse effects. By contrast, Gilenya can lower a patient's heart rate to the point where it can, in rare cases, cause cardiovascular problems. 

Gilenya sales have been strong outside the U.S. and should remain so as long as Tecfidera isn't approved in many markets abroad. But, the threat of improving safety profiles for relapsing-MS drugs clearly has to be the biggest concern on the minds of Novartis shareholders as it relates to Gilenya. Thankfully, Novartis has a deep product pipeline, so one drug doesn't make or break the company, but it nonetheless is a blockbuster worth keeping an eye on at $1.2 billion in annual sales.

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