The acquisition of GlaxoSmithKline PLC’s portfolio of marketed oncology products by Novartis AG for $16 billion might be considered on the high side for half a dozen products with total sales of around $1.6 billion. But the Swiss company believes three of the products could be blockbusters in its hands, emphasizing the advantages of having a longstanding marketing focus on cancer drugs.

The purchase was part of a series of transactions announced April 22 that will see Novartis divesting its vaccines business to GSK (excluding flu vaccines) and forming an OTC-consumer joint venture with the U.K.-based multinational. Novartis also sold its animal health business to Eli Lilly & Co. ([A#(14140422001]). The deals are inter-conditional – they all need to be completed, but completion is expected in the first half of 2015.

The oncology products Novartis is inheriting are a mix of recently launched (Tafinlar, Mekinist) and more established products (Tykerb, Arzerra). Novartis also acquired rights to GSK’s AKT inhibitor, afuresertib, which is expected to enter Phase III trials in multiple myeloma in 2014 and 2015. Further, Novartis acquired rights of first negotiation on any products in GSK’s current or future oncology pipeline that it wants to license out – GSK is continuing with its cancer-related R&D in immunotherapy, epigenetics and the tumor environment ([A#(14140421007]).

2013 Sales Of GSK’s Oncology Products

Product

Indication

Sales

Annual Growth (CER)

Votrient (pazopanib)

Renal cell carcinoma, soft tissue sarcoma

£331 mil.

80%

Arzerra (ofatumumab)

Chronic lymphocytic leukemia

£75 mil.

23%

Promacta/Revolade (eltrombopag olamine)

Thrombocytopenia (idiopathic and hepatitis C related)

£186 mil.

46%

Tykerb/Tyverb (lapatinib)

Metastatic/advanced breast cancer

£207 mil.

(13%)

Tafinlar (dabrafenib)

Metastatic/advanced melanoma

£16 mil.

Mekinist (trametinib)

Metastatic/advanced melanoma

£10 mil.

Source: GSK

Whether the oncology products were worth the price paid for them was questioned by analysts, as was the $5.4 billion price tag on Lilly’s acquisition of Novartis’s animal health business ([A#14140422004]).

But such worries were dismissed by Novartis execs. “Votrient will be a blockbuster,” Novartis Pharmaceuticals Division Head David Epstein argued during the company’s first-quarter earnings call on April 24.

He asserted Tafinlar and Mekinist will also become blockbuster products, “assuming the COMBi-D trial is positive for overall survival, something we should know either at the end of this year or early next year.” The COMBi-D trial is evaluating a combination of Tafinlar and Mekinist for the treatment of melanoma, with $1.5 billion of the purchase price of the oncology portfolio dependent on an improvement in overall survival being found in the study.

Mekinist and Tafinlar were approved as stand-alone agents in May 2013, but brought in only a combined £26 million for the year. They were approved for combination use in the U.S. in January, but have faced delay in Europe ([A#14140109006]).

Why the drugs should be big-sellers in Novartis’s hands but not necessarily in GSK’s created some confusion in analysts’ minds, but Epstein was bullish about Novartis’s capabilities: “When you take these products and add them to our considerable development and commercialization capabilities, we believe these products can be bigger in our hands than they ever could have been in GSK’s hands.”

Epstein also stressed the advantages of becoming a recognized leader in a particular therapeutic field. “Market leaders have preferential access to leading investigators who conduct clinical trials, and to physicians that prescribe the products,” he remarked.

“A company like GSK frankly just does not have access to physicians in a way that a company like [Novartis does], so you’re getting immediate synergy once we have the products in our hands that we can grow them much faster than others.”

Aside from the commercial stage, the play gives Novartis a jumpstart in some areas where GSK was ahead of it, for example in melanoma, where the Tafinlar plus Mekinist combination was ahead of Novartis’ efforts. “When you are late to the market in oncology, it is difficult to do new clinical trials, so the deal is a good step forward for us,” he said.

Epstein urged commentators to look beyond the initial indications of the products to gauge their true potential. There are clinical trials under way where the products are being used in earlier disease, as adjuvant therapy, and a number of trials where Votrient, and Tafinlar/Mekinist, are being evaluated in combination with immuno-oncology drugs, including PD-1 or PD-L1 checkpoint inhibitors.

Ongoing Clinical Trials Of GSK’s Top 3 Oncology Assets
Drug	Potential Indication	Clinical Phase
Votrient	Adjuvant therapy in renal cell carcinoma	Phase III
Tafinlar + Mekinist	Metastatic BRAF-mutant melanoma (COMBi-D Study)	Phase III
Tafinlar +Mekinist	Metastatic BRAF-mutant melanoma (COMBI-V study)	Phase III
Tafinlar + Mekinist	Adjuvant therapy in BRAF-mutant melanoma	Phase III
Tafinlar +/- Mekinist (with Amgen’s panitumumab)	Metastatic BRAF-mutant colorectal cancer	Phase II
Tafinlar	Metastatic BRSF-mutant non-small cell lung cancer	Phase II
Votrient + PD-1 (with Merck’s anti-PD-1 MK3475)	Metastatic/advanced renal cell carcinoma	Phase I/II
Tafinlar +/- Mekinist + PD-L1 (with MedImmune/AZ’s anti-PD-L1 MED14736)	Metastatic BRAF-mutant melanoma	Phase I/II
Source: Novartis

These studies could potentially extend the duration of therapy as survival increases, thereby increasing the top-line sales of those brands, Epstein said. He also cautioned that many of these studies do not report results until nearer 2018, beyond the point when analysts end their sales analysis.

Novartis has some notable oncology products of its own, for example, Afinitor (everolimus) for renal cell carcinoma and advanced breast cancer, with sales of $357 million in the first quarter of 2014, and Tasigna (nilotininb) for the treatment of chronic myeloid leukemia, with sales of $337 million.

Novartis has also strengthened its position in the hot area of cancer immunotherapy by acquiring the U.S. company CoStim Pharmaceuticals Inc., which “is going to help us build strong combinations with our own kinase inhibitor portfolio in oncology” Also see "Novartis Ups The Ante In Immunotherapy With CoStim Buy" - Pink Sheet, 18 February, 2014.. Novartis is also developing CART cell therapy technology in collaboration with the University of Pennsylvania ([A#00131202015]).

Combination strategies are expected to be the significant growth driver for immunotherapy, and in addition to the steps already taken, Epstein noted that the GSK arrangement has advantages there as well. “We expect the addition of these molecules will allow us to position the right combination for the right patient,” he said.

There’s no doubt that Novartis has a much bigger presence in oncology, being ranked second in the sector in terms of worldwide sales of cancer drugs; in 2012 it had anti-cancer sales of around $5.6 billion Also see "In Oncology, Drug Makers Jostle For Second Place" - Pink Sheet, 19 November, 2012.. In contrast, GSK is ranked 14. Novartis is also putting greater effort into oncology R&D, with one of the largest oncology pipelines in the industry. Around 25 NMEs are being evaluated, and 24 pivotal clinical studies are underway exploring new products and indications. The firm’s pipeline covers most of the known oncogenic targets and offers platforms for combinations Also see "Novartis Counting On Depth Of Insight To Continue Success In Oncology" - Pink Sheet, 29 July, 2013..

GSK had made an attempt at developing into an oncology powerhouse, but it’s been beset by a string of disappointments – most recently its therapeutic cancer vaccine MAGE-A3 Also see "Three Strikes But Not Out: GSK Maneuvers Through A Third R&D Setback" - Pink Sheet, 2 April, 2014.. The firm has other MAGE-A3 programs in development, as well as its PRIME and WT1 immunotherapies, but its cancer pipeline has been largely dependent on Mekinist and Tafinlar Also see "GSK’s Oncology Expansion Heavily Dependent On Dabrafenib, Trametinib" - Pink Sheet, 1 September, 2012..

Novartis Oncology Performance

Novartis could use an influx in oncology. The firm reported $2.7 billion in oncology sales for the first quarter, down 3% year over year. Sales were led by its Bcr-Abl franchise of Gleevec/Glivec (imatinib) and Tasigna (nilotinib), which were up 1%, driven by Tasigna growth of 21%. Still, the franchise is stalling ahead of expected generic competition to imatinib and Gleevec is already taking a hit (-4%).

The firm said it does have additional patents that should push that date back, but would not specify the timeline. The introduction of generic imatinib will also affect the follow-on Tasigna, which could become subject to step therapy requirements from payers looking to prioritize generic imatinib.

“It’s quite possible there will be … patients who are put on Gleevec first and moved over to Tasigna due to non-sufficient efficacy, a complete molecular response or due to side effects from Gleevec,” Epstein said, but Tasigna has a low share of new patient starts anyway (about 5%). The firm has ongoing trials with Tasigna to see if patients can eventually stop therapy after they go into remission – “if positive, this would be a strong incentive for payers to want to cover the drug,” Bernstein analyst Tim Anderson noted.

Even if Gleevec generics arrive in 2015, the introduction of the GSK oncology into the mix that year means total oncology sales for Novartis should be flat for 2015.

Novartis’ other marketed oncology products include the mTOR inhibitor Afinitor (everolimus) ($357 million for the quarter, up 19%), the aromatase inhibitor Femara (letrozole) ($94 million, down 3%), the JAK inhibitor Jakavi for myelofibrosis ($57 million for the U.S. market, where Novartis holds rights, up 60%) and IL-2 drug Proleukin ($13 million, down 41%). The firm also credits its acromegaly drug Sandostatin ($384 million, up 6%), hypercalcemia therapy Zometa ($74 million, down 69%) and iron overload therapy Exjade ($208 million, up 5%) in the oncology segment.

During the quarterly call, Epstein announced the firm was lowering expectations for Afinitor. In March the firm announced the drug had failed to improve overall survival in the BOLERO-2 trial in breast cancer, though there was a non-significant trend in favor of Afinitor Also see "Pfizer’s Latest Palbociclib Data Could Mean Slimmer Lead Over CDK4/6 Rivals" - Pink Sheet, 14 April, 2014.. “As a result our hope that the overall survival data would be used in order to expand duration of therapy is likely not [going] to happen now and due to that, we are adjusting our breast cancer sales outlook down from $2 billion to somewhere between $1.5 billion and $1.7 billion.”

Afinitor also failed to improve overall survival in the EVOLVE-1 trial in advanced hepatocellular cancer ([A#14130807003]).

The first quarter sales were driven by ex-U.S. growth, but use in the U.S. is limited to later lines of use and shorter treatment durations. Without the overall survival benefit in breast cancer and given the product’s side effect profile, “you’re seeing the drug used third- and fourth-line,” Epstein acknowledged.

While some analysts have concluded that the Afinitor downgrade has a negative impact on Novartis oncology in general, Epstein dismissed this as “a little bit negative.” “Keep in mind there are still multiple new indications for this product, in carcinoid, in lymphoma and other indications,” he said. And, the exec added, “we have other oncology products coming that are not yet in most people’s forecast models.”

The firm is awaiting FDA approval on its ALK inhibitor LDK378 for non-small cell lung cancer, and it submitted an NDA in March for the combination of Velcade with its LBH589, which will be filed in Europe in the second quarter.

New Realities Under Novartis

Credit Suisse analysts noted that GSK’s profit margin on its oncology business, at around 25%, was being weighed down by having to build a global therapeutic infrastructure on a limited number of products, whereas Novartis already possesses that infrastructure. In the final analysis, some analysts were pleased to see the products leave GSK. “We have long viewed its oncology assets as sub-scale and overly small molecule,” commented Deutsche Bank’s Mark Clark.

“Additional value will be created by Novartis expanding margins more than GSK would have been able to, and by virtue of a lower tax base for these products under Novartis' ownership,” Bernstein’s Anderson said in an April 25 research note.

The deal is a revenue play on the three main molecules, but Novartis is promising that there will be a combination of cost synergies and revenue synergies under its ownership compared to a standalone GSK model.

“As the products get bigger and as we leverage our infrastructure, the margins will go up substantially as well and all of a sudden rather than looking expensive, the deal actually from an oncology perspective looks reasonable, if not quite cheap,” Epstein said.

Selling GSK’s oncology products to Novartis was not part of the original plan between the two companies. They were originally talking about developing their relationships in the vaccines space, in which Novartis has been a long-term supplier of intermediate ingredients for GSK’s vaccines, GSK CEO Andrew Witty explained in a media briefing on April 22. The vaccine conversations began in earnest more than six months ago, and the two companies have been in active negotiations, including the oncology assets, for only the past three to four months, Witty said.

The U.K. executive has long been an advocate of simplifying GSK’s business through divestments – the company made £2.5 billion from divestments in 2013, and it has set up an “Established Products” portfolio to facilitate such sell-offs.

Novartis’ chief exec stressed that the move was not an afterthought, but is a good strategic fit. “Obviously when we started this portfolio review we cast a very wide net, so we essentially talked to everybody and we looked at what we wanted, what we needed to get done surgically, and ended with GSK,” Jimenez said on the earnings call. “We did not sacrifice on any of [the four deals] relative to what we could have done with some other partner and I feel very confident to be able to say that because we basically talked to everybody.”

During the first quarter of 2014, Novartis’ net sales increased by 3% in constant currencies to reach $14 billion, with pharmaceutical net sales increasing by 1% to $7.8 billion. Generic erosion held back sales growth by 6 percentage points, mainly due to the loss of Zometa/Aclasta (zoledronic acid). Novartis kept its financial outlook for 2014 unchanged, with group net sales expected to grow at a low to mid-single digit rate. This assumes the U.S. launch of generic competitors to its best-selling Diovan monotherapy at the beginning of the third quarter, although the timing of this event remains uncertain ([A#14140407004]).

The deals aren’t the only steps Novartis is taking to revamp its business. The retirement of long-time head of the Alcon Inc. division, Kevin Buehler, led to some personnel switches and the introduction of new blood into the firm’s generic subsidiary Sandoz International GMBH. Jeff George has moved over from Sandoz to lead Alcon; Jimenez described him as someone who can focus on top-line growth, “because with 35% core operating income margins the only thing that matters at Alcon is driving the top line.”

“This is going to be a company that is focused and that is unstoppable, and that’s really what the whole portfolio review was all about,” Jimenez said.

Alcon remains a “long term play for the company,” Jimenez said. Thinking about industry dynamics going forward, eye care will be essential with the aging population. “So Alcon is going to have significant ability to grow in the next 10 years and then you put an innovative pharma business next to that and a generics business that allows us to help these health systems around the world lower their total cost – this is going to be a company that is focused and that is unstoppable, and that’s really what the whole portfolio review was all about.”

George’s move to Alcon left a hole at Sandoz that is being filled with former Biogen Inc. exec Richard Francis. “If you think about generics and how fast it moves, somebody from the biotech industry is a great profile for that business, and as well Richard has biologics experience which is going to be important as we develop our biosimilars portfolio in Sandoz,” Jimenez said.

Novartis is also undertaking a cost-saving initiative to streamline back-office functions like IT, procurement, financial reporting and accounting. Novartis Business Services is “a key step for us to better leverage the fact that we are a diversified portfolio,” Jimenez said. “We have businesses that are quite different, if you think about innovative pharma and generics, so the division structure is right, but there are a lot of back office functions … that can be consistent across all divisions across 60 countries, so we’re very interested in getting after this.”

NBS will be led by Novartis veteran Andre Wyss, who will report directly to Jimenez and sit on the company’s executive committee. Wyss has worked in various operating positions in Europe, the U.S and emerging markets.

Swaps Not Mega-Mergers?

The exchange of product assets between GlaxoSmithKline, Novartis and Lilly announced April 22 will likely not only transform the companies but also the competitive landscape of several pharmaceutical sectors. It might also serve as a how-to guide for other companies wanting to undergo radical reshaping without the poor outcomes usually associated with mega-mergers.

But the fact that such an asset-swap on this scale – involving more than $25 billion in assets – has not been attempted before might make companies wary, as might a comment from Witty about the transactions being extremely complex. The deals were worked on by more than 500 lawyers. The re-assortment comes at a time when speculation is rife about possible mega-mergers, including a potential tie-up between AstraZeneca AB and Pfizer Inc. ([A#14140424002]).

Following the transactions, Novartis will have disposed of two of its smaller businesses to become more sharply focused on oncology, eye care and its Sandoz generics businesses. Lilly will be ranked number two in animal health. GSK will be the market leader in vaccines and its joint venture with Novartis will be ranked number two in OTC and number one in the wider consumer health segment.

Novartis Thinks It Can Do Better With GSK’s Oncologics Than GSK Did

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