Swiss pharmaceutical giant Novartis (NVS 1.10%) prides itself on the breadth and depth of its oncology portfolio. Despite this, the company has failed to offer a drug in a specific class of treatments known as PD-1 inhibitors, causing it to miss out on large and highly lucrative market opportunities. A month ago, Novartis appeared to be on the verge of addressing this gap, but now must wait a little longer to hear the Food and Drug Administration's (FDA) verdict.
Novartis produces its drug candidate
After watching from the sidelines for the past decade as Merck's Keytruda and Bristol Myers Squibb's Opdivo generated mega-blockbuster sales, Novartis finally looked set to introduce its own competing drug into the market. Last year, Novartis bought partial rights to BeiGene's tislelizumab, a monoclonal antibody that blocks the PD-1 protein to help the immune system recognize and destroy cancer cells. The $650 million deal gave Novartis rights to market the drug in North America, Europe, and Japan.
Novartis hopes that the drug will ultimately be approved for multiple indications. Tislelizumab is already approved in China for the throat cancer indication under FDA review, as well as for several other cancers, including Hodgkin lymphoma, and certain lung and bladder cancers. Novartis has 17 pivotal clinical trials underway across a wide spectrum of solid tumors, and it already has regulatory applications submitted for non-small cell lung cancer and throat cancer.
Tislelizumab performed well in the phase 3 study for esophageal squamous cell carcinoma, an aggressive and difficult-to-treat throat cancer, reducing the risk of death by 34% compared to chemotherapy. Study patients were enrolled from Europe, the U.S., and Asia, so the study seems applicable across multiple geographic regions.
FDA puts off approval decision
The FDA had been scheduled to decide on July 12 regarding the throat cancer indication. Last week, however, the agency deferred action on the drug, stating that it was unable to inspect the Chinese manufacturing sites in time due to travel restrictions related to COVID-19. The FDA did not raise other concerns about tislelizumab, suggesting that the drug's safety and efficacy performance were acceptable.
This bodes well for its ultimate approval, but leaves the timeline very much in question. Novartis must wait for COVID-19 restrictions to lift, and then still may need to address the FDA's concerns if the Chinese site doesn't pass the inspection. Novartis' cholesterol drug candidate Leqvio was stalled for a year earlier in the pandemic due to regulatory issues with the Italian manufacturing facility, although it ultimately won approval last year after Novartis switched manufacturing to its Austrian locations.
Shortening the earnings lifetime
The FDA delay will impact Novartis' bottom line since the company must now hold off on launching the drug. Analysts expect $2 billion in revenue annually from tislelizumab, adding as much as 4% to Novartis' total revenue, which was $52 billion in 2021.
The delay will also further shorten an earnings lifetime that is already relatively limited. Key competitor drugs Keytruda and Opdivo are both staring at patent expirations in 2028, after which biosimilar competition will likely impose cost pressures on the entire class of PD-1 inhibitor drugs.
Ultimately, Novartis seems likely to win approval for tislelizumab based on the drug's strong clinical performance and its similar mechanism of action to other well-established cancer treatments. It is a matter of waiting for Chinese travel restrictions to lift and the FDA to work through a busier-than-average schedule in the back half of 2022.
So this news is a setback for Novartis, but not a deal breaker. The company has a strong pipeline to back the 4% growth that is projected by management over the next five years. The drugmaker also offers an attractively low price-to-earnings ratio of 8, which is near the bottom end of its pharmaceutical peer group, while the generous 3.9% dividend falls near the top. The stock remains a solid pick.
