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In Part 1 of our recent Novartis (NVS) report (Novartis: 5-Year Revenue Outlook), we discussed that the declining drug sales for key products (e.g. Diovan) would impact its revenues for 2013, whereas the newly approved drugs would eventually contribute to future revenue growth. In this section, we will analyze Novartis' drug pipeline and its impact on the revenues going forward. Novartis plans to file 9 New Drug Applications (NDA) for existing drugs and new molecular entities in 2013. We estimate that the new drugs will generate aggregate revenues of $1.4B, $2.2B, $3.1B, and $4.3B from 2014 to 2017, representing an annual growth rate of 46%. It is important to mention that, if approved, some of these drugs have the potential to become blockbuster drugs for Novartis in the future.

In 2013, Novartis will file NDAs for several existing drugs to extend their uses in other indications. Specifically, it will submit Afinitor as a second-line therapy for breast cancer, Afinitor for hepatocellular carcinoma (HCC), Signifor for acromegaly, Xolair for chronic idiopathic urticaria (CIU), Ilaris for gouty arthritis, Zortress (everolimus) for liver transplant rejection, and Lucentis for pathological myopia. Their contribution to future revenue growth is incorporated in the higher growth rates that we assign to these drugs in the previous section.

Novartis has a deep pipeline for new drugs based on new molecular entities. Below are the drugs that Novartis plans to file for NDA in 2013.

Figure 2: Potential revenues for drug pipeline

(click to enlarge)

LBH589 is a histone deacetylase (HDAC) inhibitor developed for the treatment of relapsed multiple myeloma. HDAC inhibitors developed by Merck (MRK) and Celgene (CELG) were approved for the treatment of cutaneous T cell lymphoma in 2006 and 2009. Several companies are now developing HDAC inhibitors for various cancer types. As the phase 3 data are not available, we assign a 50% probability that this drug will receive regulatory approval, and project its sales to be $250M in 2014, eventually reaching over $800M in 2017.

TKI258 is a multi-receptor-tyrosine-kinase inhibitor developed for the treatment of renal cell carcinoma. Phase 3 data will be available in 2013 for Novartis to file for NDA. We assign a 50% probability that this drug will receive regulatory approval and estimate its sales to be $250M in 2014, if approved.

Novartis has two new drugs for cardiovascular diseases in late-stage development, with both RLX030 in development for acute heart failure and LCZ696 in development for hypertension and chronic heart failure. LCZ696 is an angiotensin receptor inhibitor. If approved, this will be a first-in-class hypertension drug acting through a new pathway. RLX030 is a Relaxin-2 hormone. If approved, it will provide a novel treatment for acute heart failure. Results from a Phase III study showed that investigational compound RLX030 reduces the mortality rate in patients with acute heart failure (RLX030 improved symptoms and reduced deaths in patients with acute heart failure). Chronic heart failure currently affects 20 million people worldwide and is projected to grow by 2.3% per year over the next decade. Both RLX030 and LCZ696 have the potential to address large patient populations, as the prevalence of heart failure is increasing. We estimate that both drugs have an 80% probability of receiving FDA approval. If approved, the combined sales of these two drugs are estimated to be $550M in 2014 and reach $1.7B.

AIN457 is an antibody against IL17. It is developed for the treatment of inflammatory diseases. Novartis will apply for an NDA for the treatment of psoriasis in 2013. Although psoriasis is a small market, the implication for the potential benefit of AIN457 in other inflammatory and autoimmune diseases is much more significant in the future. There is a solid biology for the involvement of IL17 in autoimmune diseases. Therefore, we assign a 90% probability that AIN457 will receive FDA approval.

QVA149 is a long-acting beta-2 agonist (LABA) and long-acting muscarinic (LAMA) antagonist. It was developed for chronic obstructive pulmonary disease (COPD). The COPD market was $11.8B in 2012 and is expected to grow at a CAGR of ~4.6%. As COPD treatment moves toward a LABA/LAMA combination, Novartis could benefit from its expanding portfolio of drugs in this space. The first five studies in the QVA149 Phase III clinical trial program all met their primary endpoints and showed that QVA149 significantly improved lung function compared with other COPD therapies (QVA149 Phase III study meets primary endpoint in reducing exacerbations in COPD patients). We estimate that QVA149's approval could generate $300M in first year (2014) and grow to $900M in 2017.

Based on our estimation of the probability of approval, the market size, and competition for the above new drugs, we project that these drugs will generate aggregate revenues of $1.4B, $2.2B, $3.1B, and $4.3B from 2014 to 2017, representing an annual growth rate of 46%. These new products will have a more meaningful impact on revenue growth after 2014. It is important to mention that, if approved, some of these drugs have the potential to become blockbuster drugs for Novartis in the future.

Conclusion

We project that NVS' total revenues will decrease to $56.6B in 2013 from $57.6B in 2012, but could grow to $62B in 2017. The estimated adjusted earnings per share (EPS) for NVS are: $6.0 (2013), $6.5 (2014), $6.9 (2015), $7.3 (2016), and $7.8 (2017).

Using our projected free cash flow numbers, we derived an estimated fair value for NVS at $76. Thus, with the stock currently at $72, it is trading at 5% discount of its intrinsic value. The stock currently has a 3.5% dividend yield.

In the next report, we will integrate estimated revenues from existing drugs and new drugs into financial analysis and stock valuation.

References:

NVS 2012 annual report

NVS drug pipeline 2013

Novartis: 5-Year Revenue Outlook

RLX030 improved symptoms and reduced deaths in patients with acute heart failure

QVA149 Phase III study meets primary endpoint in reducing exacerbations in COPD patients

Source: Novartis: Drug Pipeline And New Drug Applications