Myelofibrosis Battle: Novartis Vs. Sanofi

Sep.10.13 | About: Novartis AG (NVS)

Myelofibrosis, or MF, is a bone marrow cancer that causes a disorder in red blood cells growth. It damages the tissues in bone marrow, hampering the formation of healthy blood cells. This disease is usually diagnosed in both men and women who are around 50 years old, although it can happen at any age. This cancer is found in every 1 out of 500,000 people globally, but these patients have very limited treatment options. Currently there is only one FDA approved drug, Jakafi, developed by Novartis (NVS). This drug is being used for the treatment of MF cancer, and the combination of this drug with others will be able to treat other types of cancers.

Expanding one drug's market for growth

In late 2011, Jakafi aka Jakavi was approved in the U.S., and in 2012 it was accepted as an MF drug as well as a polycythemia vera drug, or PV, in Europe. PV is similar to MF, causing a blood disorder that results in the thickening of blood and causing gouty arthritis, a painful inflammation and swelling in joints.

It was co-developed by Novartis and Incyte (INCY) for the treatment of immediate or high-risk MF. Patients suffering from high-risk MF have only a few months to a year of life left after infection. Jakafi reduces the symptoms such as bone pain, night sweats and abdominal discomfort associated with this disease. It also restricts the abnormal growth of the liver and spleen, which stores blood and disintegrates old blood cells.

Incyte has rights to market Jakafi in the U.S., whereas Novartis received the whole-sole rights to develop and co-market this drug outside the U.S. under the trade name of "Jakavi." Jakavi showed improvement in the overall survival ratio of MF patients after its phase III trial. This three-year trial reported 52% reduction in the death ratio from intake of this drug compared to conventional therapy.

The MF cancer market is expected to grow at a CAGR of 34% from 2011 to 2019, reaching $1.1 billion by 2019 in the U.S. and five countries in Europe. As this is the only approved drug for MF, we expect this will provide a considerable growth opportunity to both companies in the future.

On other hand, Sanofi, (SNY) one of the new entrants in the MF market, is planning to enter the market with its MF drug "SAR302503." This drug showed positive results in its JAKARTA study. In a 24 week study, SAR302503 was successful in reducing the disorder of liver and spleen in more than 35% of patients. After looking at its phase III trial results, the FDA agreed to provide acceptance to the uncompleted phase III trial design or special protocol assessment, or SPA, for the JAKARTA study, which will be supporting the product's applications in the authorized markets of the U.S. Further Sanofi is also evaluating the effects of SAR302503 in returning the fibrosis in bone marrow as well as improving its functionality. We expect that once Sanofi receives FDA approval, it may also stretch for the European Commission's approval, which may become a threat for Novartis in the future.

Combining Jakafi with other drugs to treat other cancers

Jakafi received approval from the European Commission for the treatment of PV in 2012. To further enhance its sales in Europe, Novartis is focusing on improving Jakafi's capabilities by running several trial phases. In its recent trial, the combination of Jakafi with Roche's chemotherapy drug "capecitabine" showed positive results in improving the survival rate by six months in 42% of patients suffering from recurrent or refractory Pancreatic Cancer that can't be treated surgically. Currently Novartis is gauging Jakafi in two phase III clinical trial, "Response and Relief," on PV patients. Based on the success of the Response trial, Novartis is looking to submit a new supplemental drug application for the treatment of PV in early 2014.

It is estimated that pancreatic cancer is one of the leading causes, in fact the fourth cause, of cancer-related death in the U.S. Men are 30% more likely to suffer from pancreatic cancer than women. It is expected that the pancreatic cancer market will exceed $1.2 billion by 2015, and this success generates the opportunity for the companies to tap this market.

By evaluating Jakafi's capabilities, both companies are planning to expand this drug's label in other oncology indications as well, which will enhance Jakafi's market drastically in the next few years. We expect the continuous success in Jakafi's trial phase and combination with other drugs will drive both the companies' future earnings.

The fundamental side

Novartis posted Jakavi sales of $68 million in the first half of 2013, compared to just $4 million in same period last year. We expect this drug will provide higher growth opportunities for the company and enable it to grow with at the same pace in the future too. Analyzing fundamentals, Novartis is trailing at a PE of 19.34 and its forward PE is 13.91, representing the potential for future growth in its earnings.

Moving on to Incyte, in second quarter, it reported year-over-year Jakafi revenue growth of 82% to $54.1 million. Strong growth in its demand drove revenue. Looking at this growth, the company raised Jakafi's revenue guidance to $220 million-$230 million from the previous $210 million-$225 million for 2013, backed by its success in the trial phases. We expect Jakafi's further success will enable Incyte to achieve its guidance comfortably. In the first-half of 2013, Incyte showed improvement of $0.19 in its EPS, to negative EPS of $0.13, compared to negative EPS of $0.32 in the same period last year. These signs of improvement are expected to drive investors' confidence.

By looking at the potential of Sanofi's SAR302503 and assessment by the FDA, we expect there is a strong probability for Sanofi to grow in the future and give Jakafi strong competition. Sanofi's trailing-twelve-month PE is at 28.42 compared to the industry's PE of 15.8. This shows the company's price is not in line with its earnings, however its forward PE of 12.03 represents the future growth of the company. But, we think it can be held for now until and unless its new drugs like SAR302503 enable it to generate higher earnings in the future.

Introducing a drug for chronic obstructive pulmonary diseases

There is also a good opportunity for Novartis in Chronic obstructive pulmonary disease, or COPD, the respiratory disease that can even cause lung cancer. There are around 210 million people globally affected by COPD. It is expected to be the third leading cause of death by 2020. Further it is estimated that the COPD market, including Asthma, will reach $47.1 billion in 2017 from $38 billion 2012.

To tap the growth opportunities in the COPD market, Novartis is developing a once-daily bronchodilator inhaler, "Ultibro Breezhaler." This inhaler is developed by combining two drugs, "indacaterol" and "glycopyrronium bromide". Ultibro Breezhaler will reduce the symptoms of COPD, and it showed positive signs in trial phase by reducing the problems related to respiration and improving lung functionality.

Moving ahead, this inhaler received a positive recommendation from the Committee for Medicinal Products for Human Use, and Novartis is planning to file with the FDA for Ultibro Breezhaler in 2014. The approved version of this inhaler will be available by next year, and we expect this drug could give strong competition to Pfizer's "Spiriva" and other companies' drugs, enabling Novartis to deepen its foothold in the COPD market.

Conclusion

Novartis's MF drug Jakavi, and its combination with other drugs, is proving to be a great innovation in cancer treatment. Its ability to treat blood and pancreatic cancer complications provides a solid opportunity for the company. Meanwhile, Novartis' COPD inhale Ultibro Breezhaler is expected to perform well in the future. With the positive response in their trial phases and the solid performance by its drugs in second quarter coupled with its strong drugs pipeline, we expect its stock will move upwards.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.