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3 Reasons Novartis Stock Could Rise

By Cory Renauer – Mar 4, 2016 at 10:04AM

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Amid overall negative industry sentiment, Novartis shareholders have a few reasons to remain hopeful.

Image source: Wikimedia Commons.

So far, 2016 has been a lousy year for Novartis (NVS -0.34%) stock. The negative sentiment dragging down the pharmaceutical industry as a whole has taken its toll on the Swiss giant. 

Tense political rhetoric about drug pricing could continue to drag Novartis stock down with the rest of the SPDR S&P Pharmaceuticals index. At times like these, it's important to remember that behind every stock there's a business. While Novartis is not without its own risks, here are some key business developments that could help the stock rise once Wall Street's done fretting over tough talk from politicians.

1. Biosimilar blitz
Biosimilars (which are copycat versions of branded biologic drugs) are far more difficult to pass through regulatory hoops than small-molecule generics, which allows them to fetch prices far closer to their reference products. In Europe, where the first biosimilars won approval nearly a decade ago, discounts of around 30% from the branded product are the norm. That allows for much better margins than the typical 80% to 85% price knockdown small-molecule generics wield over their branded competitors. For a large company such as Novartis, with its "generic" subsidiary Sandoz's immense manufacturing capacity and global salesforce in place, biosimilars represent a significant opportunity to continue growing despite increasingly austere end payers. 

Image source: Novartis.

Last September, Novartis became the first company to launch an FDA-approved biosimilar, Zarxio, its take on Amgen's (AMGN -0.53%) white blood cell booster, Neupogen. This drug generated just over $1 billion of Amgen's sales last year. Previously launched outside the U.S. under the name Zarzio, the copycat is already a thorn in Amgen's side.

Last June, Sandoz also began the U.S. launch of Glatopa, a generic version of the popular multiple sclerosis injectable Copaxone, which racked up over $4 billion in sales for Teva Pharmaceuticals last year. Although Glatopa is too "simple" to be considered a biosimilar, along with Zarzio and some other offerings, it propelled Sandoz's Biopharmaceuticals & Oncology Injectables segment up to $1.38 billion last year, a 39% annual gain if you exclude the negative effects of currency exchange.

As impressive as last year's gain was, I believe this segment will continue growing by leaps and bounds. After acquiring Hospira, Pfizer found itself owning two biosimilars of Johnson & Johnson's popular anti-inflammatory Remicade, which brought in $4.45 billion last year in the U.S alone. To please European antitrust officials, it recently sold to Novartis the European rights to one of these biosimilars, PF-06438179, which is currently in late-stage trials. 

While Novartis completes development of PF-06438179 in the E.U., regulatory agencies on both sides of the Atlantic are mulling applications for Novartis' biosimilar version of Enbrel, a drug that last year generated $5.4 billion in U.S. and Canadian sales for Amgen, and $3.3 billion for Pfizer in its licensed territories.

Amgen's biosimilar threat from Novartis doesn't end with Neupogen and Enbrel -- the FDA is also considering an application for a biosimilar version of Neulasta, a drug used to reduce infections among chemotherapy patients that generated $4.7 billion of Amgen's sales last year.

2. Another breakthrough
Novartis recently bagged another "breakthrough therapy" designation from the FDA for midostaurin, or PKC412. The drug impressed hematologists late last year after showing impressive results in acute myeloid leukemia, a deadly blood cancer that affects perhaps 90,000 people worldwide. About one-third of these patients have a mutation in the FLT3 gene that's associated with even worse survival rates than the general AML population.

Image source: National Cancer Institute.

Standard treatment of AML has been the same for decades, but for a genetically defined subset of patients, that could change soon. Midostaurin targets FLT3 and, when added to the standard chemotherapy regimen, extended median overall survival to 74.7 months, versus 25.6 months in patients receiving the standard regimen alone. 

Without any approved targeted AML therapies, it's difficult to estimate midostaurin's peak potential. Given the six-figure annual price tags we've seen for other targeted cancer therapies that vastly improve the standard of care, reaching blockbuster status is a possibility. 

Innovative therapies given the coveted breakthrough designation from the FDA enjoy increased access to agency staff to insure the application process goes as smoothly and quickly as possible. Novartis is on track to submit applications on both sides of the Atlantic in the first half of the year, which means the drug could begin improving patient outcomes, and the company's top line, by year's end.

3. A $10 billion game-changer
Recently launched in the U.S. and approved in the E.U., Entresto is a potential needle mover for Novartis. Its currently approved indication of heart failure with reduced ejection fraction affects more than 7 million people in the combined regions. In trials leading to its approval, it reduced patients' risk of death from cardiovascular causes by 20% over enalapril, the present standard of care. With such a large addressable population, astronomical peak sales estimates north of $10 billion aren't so hard to swallow.

Image source: Novartis.

What could make Entresto a game changer isn't just its ability to improve outcomes, but Novartis' approach to marketing it to end payers. At about $12.50 each, Entresto pills are far more expensive than enalapril, which after years of generic competition can be purchased for pennies. However, when you account for Entresto's ability to reduce heart failure related hospitalizations by 21%, it represents a long-term bargain. Novartis is so confident it represents a bargain that it went as far as offering a value-based pricing model that offers discounts up front but expects bonus payments if the drug lowers overall costs through reduced hospitalizations. 

Whether end payers will pick up what Novartis is putting down remains to be seen, but I do expect Entresto sales to help the stock rise in the long term. In the meantime, the company's willingness to adopt value-based pricing models could keep it out of the political crosshairs if the rhetoric heats up.

Cory Renauer owns shares of Johnson & Johnson. The Motley Fool recommends Johnson & Johnson and Teva Pharmaceutical Industries. 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.

Stocks Mentioned

Novartis Ag Stock Quote
Novartis Ag
$91.42 (-0.34%) $0.31
Amgen Stock Quote
$284.25 (-0.53%) $-1.51

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