Novartis: Running Fast to Stand Still?

Novartis' recent setback may not be all bad news for the company’s long-term prospects.

Jan 26, 2014 at 3:30PM

Setbacks are just part of life for health-care companies. Even the majors have their fair share of disappointments, as was seen last week when a European Advisory panel said that it wouldn't recommend Novartis' (NYSE:NVS) serelaxin acute heart failure treatment.

In response, Novartis will ask the committee to examine the drug for a second time, as it hopes to receive conditional approval to market it in Europe. This could mean a further trial but would also allow Novartis to launch the drug in Europe.

This is disappointing news for Novartis, although it does seem as though the drug hasn't yet reached a dead-end. However, it is doubtless a major setback for the company, which is running fast to try to stand still in terms of attempting to fill the void left by many of its drugs that are going off-patent, which will lead to generic competition and a reduction in sales and margins.

One company that knows how this feels is AstraZeneca (NYSE:AZN), which is currently in the midst of trying to address its own "patent cliff," where many key drugs are going off-patent and the company doesn't have suitable replacements. It has seen shares pinned back until very recently by a lack of clear strategy on how to address the problem, but in 2013, it made considerable progress under a new management team, which, among other things, cancelled the share-buyback program, conducted an acquisition spree, and restructured the business to make it more streamlined and efficient.

The market now seems to be warming to AstraZeneca, with shares breaking out of their $40-$50 range and now sitting at $64.21. While earnings are set to fall in the next couple of years, it seems as though the market is buying into the turnaround plan and looking beyond the short term to take into account the longer-term potential of the business.

Of course, it wasn't all bad news for Novartis, and it's currently not in a position as challenging as the one AstraZeneca found itself in. Indeed, last week also saw the release of encouraging news flow regarding its drug pipeline, with European authorities issuing a positive opinion for the use of its Xolair treatment as an add-on therapy for treating a chronic form of hives, a skin disease.

However, one company that's been experiencing fewer setbacks and more positive news flow of late is GlaxoSmithKline (NYSE:GSK). Indeed, 2013 was a good year for developments on the company's drug pipeline, and 2014 has gotten off to a good start, too, with three positive pieces of news flow in the past week alone. GlaxoSmithKline received a positive opinion on a type 2 diabetes drug, Eperzan, from the CHMP in Europe, upbeat results from a Phase 3 study of a combination drug for the treatment of metastatic melanoma, and approval for a new HIV medicine called Tivicay in Europe.

Of course, GlaxoSmithKline is unlikely to have it all its own way with regard to news flow surrounding its drug pipeline. Therefore, while the news on Novartis' setback is disappointing, AstraZeneca is proof that running fast to stand still is something the market can eventually reward. 

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Fool contributor Peter Stephens owns shares of AstraZeneca plc and GlaxoSmithKline. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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