Novartis AG Seeks to Pump More Value into its R&D

Pharmaceutical companies, like Novartis, facing constant competition from lower-priced generics are placing greater focus on the ways they invest in R&D.

Apr 7, 2014 at 9:30AM

Investments in R&D are in need of an overhaul, according to one Big Pharma chairman.

Novartis AG's (NYSE:NVS) new chairman Joerg Reinhardt sees many challenges in the pharmaceutical sector, as branded drugs face ever-increasing competition from generics. Reinhardt sees a critical need to invest in research that delivers value, in terms of prolonging life or improving the quality of life. He told The Wall Street Journal, "with every new product coming off patent, the benchmark comes up."

And Novartis is certainly going after that benchmark, with 10 planned filings for 2014, including five new molecules and five new indications. One of them, LCZ696, is generating buzz about its potential to become a mainstay therapy for heart failure, and analysts predict it could add an additional $3 billion to revenue by 2026. Novartis' pipeline has about 144 pharmaceutical products under development and three have received FDA Breakthrough Therapy designations. This should expedite the development and review of LDK378 for lung cancer, RLX030 for acute heart failure, and BYM338 for a muscle wasting disease. BYM338 is the type of rare disease treatment many pharmaceutical companies are interested in developing due to their market potential. Analysts predict the drug could have peak sales of $300 million.

As the company retools its R&D scope, Novartis' top pharmaceutical products such as Lucentis, Gilenya, Tasigna, Galvus, Afinitor, and Xolair should deliver healthy revenues over the medium term. Combined 2017 worldwide sales for these products are estimated to reach $11.5 billion. Novartis' sky-high 2013 R&D budget of $9.85 billion is expected to hold steady going into 2014, and the company is looking for ways to better optimize that expense.

Centralizing research effort
For example, Novartis is consolidating its research centers to four cities – Shanghai, Basel, Boston, and La Jolla, California – known for their academic centers. The move is intended to encourage more teamwork among researchers and facilitate more brainstorming of new ideas. Reinhardt's commitment to R&D was evident upon his arrival at Novartis when he created a board subcommittee to stay on top of Novartis' R&D strategy and organization and advise the board on the latest research updates.

Reinhardt's comments and proposed strategy resonate through out an industry where its biggest players are reshuffling their businesses and partnering with outside labs to develop experimental drugs with greater market potential. Companies like Merck & Co. (NYSE:MRK) and Roche Holding AG (NASDAQOTH:RHHBY) are engaging in this type of strategy.

Merck and Roche's R&D focus
During fiscal 2013, Merck's R&D expenses were $7.1 billion, a decrease from $7.9 billion in 2012. The decrease in spending is part of the company's increased focus on select therapies, while reductions are implemented and clinical development is decreased in other research areas of lower priority.

R&D spending targets for 2014 are expected to be below 2013 levels due to the continuation of spending on specific core and upcoming products. Merck has 12 therapies undergoing Phase III testing and 10 treatments under FDA review. Analysts are predicting that two key treatments – cancer drug MK-3475 and an all-oral hepatitis C cocktail drug – may add as much as $5 billion to revenue in 2020. It's important for investors to keep in mind that these estimates are highly variable and Merck also faces stiff competition in the hep C market.

Meanwhile, Roche reported higher 2013 R&D expenses in its three core business groups:


R&D expenditure growth (CER)

R&D as a percentage of sales

Roche Group









Source: Roche Business Report 2013 

The company is investing heavily in the areas of oncology, immunology, ophthalmology, infectious diseases, and neuroscience, and has 66 new molecular entities under development, with 15 in late-stage trials. Roche is known for its oncology product line; however, CEO Severin Schwan noted recently that the company is also focusing on inflammation and ophthalmology. One of its cancer drugs, Kadcyla, currently under further study after receiving early FDA approval for its ability to treat breast cancer, is having favorable results so far. Analysts are guiding for between $2 billion and $5 billion in peak sales for the drug.

Roche places a high reliance on collaboration within their in-house research teams, which are supported by its Japanese subsidiary Chugai and other external partners, which include more than 150 outside companies. The company is also looking into new ways to improve R&D productivity to contain the costs of turning their research into viable products. Some of these cost-saving measures include engaging in data-sharing of clinical trial results and decreasing its number of clinical trails to 2,184, a 6.5% reduction from 2011 to 2013 .

My Foolish conclusion
As giant pharmaceutical companies work to keep up with their generic and other branded competitors, their focus on improving the R&D process is a step in the right direction for shareholders. I urge investors to watch this issue to see how changes unfold and impact these companies in the next few years. In the short term, Novartis may show some weakness but over the long haul I like the opportunity presented by its current and prospective pipeline.

3 stocks to own for the rest of your life
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

Eileen Rojas has no position in any stocks mentioned. 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 may not 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.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

Something big just happened

I don't know about you, but I always pay attention when one of the best growth investors in the world gives me a stock tip. Motley Fool co-founder David Gardner (whose growth-stock newsletter was rated #1 in the world by The Wall Street Journal)* and his brother, Motley Fool CEO Tom Gardner, just revealed two brand new stock recommendations moments ago. Together, they've tripled the stock market's return over 12+ years. And while timing isn't everything, the history of Tom and David's stock picks shows that it pays to get in early on their ideas.

Click here to be among the first people to hear about David and Tom's newest stock recommendations.

*"Look Who's on Top Now" appeared in The Wall Street Journal which references Hulbert's rankings of the best performing stock picking newsletters over a 5-year period from 2008-2013.